Bitcoin Mining and Its Cost
9 Pages Posted: 5 Dec 2017
Date Written: November 24, 2017
As cryptocurrencies make a bid to become more mainstream, we investigate the resources needed to operationalize these at scales comparable to the traditional monetary system. As a first step, we study Bitcoin system, its mining process, and its resource requirements. Mining is a necessary process for the creation of bitcoins and verification of transactions. The process also makes the system decentralized and maintains security and trust in the system. Mining, which is tied to the solution of a complex crypto-puzzle, requires significant computing power. This resource demanding process has a significant impact on energy consumption. Our research looks at how the complexity of the problem to commit a transaction to the blockchain and the transaction volume impact computing capacity and energy consumption. We use data from January 2009 to October 2017 to analyze the problem. We highlight how the complexity, transaction volume, and price of bitcoins affect the mining capacity of miners. We find that the energy demand from mining activities will exceed 30,582 MW per month at 400 transactions/second. Our findings suggest that Bitcoin’s protocol induces competition among miners and computational power race, which may not be sustainable for future growth of the Bitcoin network.
Metcalfe’s Law as a Model for Bitcoin’s Value
23 Pages Posted: 2 Dec 2017 Last revised: 21 Dec 2017
Date Written: October 9, 2017
This paper demonstrates that bitcoin’s medium- to long-term price follows Metcalfe’s law. Bitcoin is modeled as a token digital currency, a medium of exchange with no intrinsic value that is transacted within a defined electronic network. Per Metcalfe’s law, the value of a network is a function of the number of pairs transactions possible, and is proportional to n-squared. A Gompertz curve is used to model the inflationary effects associated with the creation of new bitcoin. The result is a parsimonious model of supply (number of bitcoins) and demand (number of bitcoin wallets), with the conclusion bitcoin’s price fits Metcalfe’s law exceptionally well. Metcalfe’s law is used to investigate Gandal’s et.al  assertion of price manipulation in the Bitcoin ecosystem during 2013-2014.
Keywords: Bitcoin, Metcalfe, Finance, Investment, Economics, Network Economics, Currency
Cryptocurrencies as an Asset Class: An Empirical Assessment
59 Pages Posted: 30 Nov 2017 Last revised: 6 Dec 2017
Date Written: December 5, 2017
It has long been debated whether cryptocurrencies are just a passing fad, a disruptive innovation, or simply share features with standard securities. In this paper, I use a novel data set of prices, traded volumes, and market capitalization for a large set of cryptocurrencies to empirically investigate both their relationship with standard asset classes and the main driving factors behind market activity. The main empirical results suggest that there is a significant relationship between returns on cryptocurrencies and commodities such as gold and energy. Also, while volatility correlates with traded volume, the latter is primarily driven by past returns and by a short-lived effect of aggregate market uncertainty. This is consistent with existing theoretical models in which trading activity is primarily driven by investors’ sentiment. Finally, impulse-response functions from a panel Vector Autoregressive (VAR) model show that macroeconomic factors do not significantly drive trading activity in cryptocurrency markets.
The Blockchain for Creative Industries cluster comprises staff from the Faculty of Arts and Creative Industries, as well as from Science and Technology. We explore the disruptive, and enabling potential of blockchain technology for music, photography, art, fashion, film, journalism and gaming. As well as high-quality research outputs, the cluster is committed to teaching at both undergraduate and postgraduate levels.
Areas of interest include new business and economic models; creative entrepreneurship and artistic identity; copyright; visual analytics; and digital forensics. As well as exploring the considerable potential for innovation, we also look at barriers to adoption and possible disadvantages of this new technology – one some have suggested could be as significant as the World Wide Web.
Members of the cluster have been interviewed on behalf of the French Intellectual Property Office, and have taken part in round-table events alongside representatives of the Department of Work & Pensions and the Government Office for Science.
Cluster members have spoken at events organised by Blockchain Storm and the Bitcoin and Blockchain Leadership Forum, and at festivals including the Great Escape and Wilderness. We have also spoken internationally, at events including Distributed: Music in Nashville, USA, and as part of Global Entrepreneurship Week in Bergen, Norway. Cluster members have been interviewed on the BBC and written articles for publications including the Guardian, the Conversation and Distributed magazine.
Our Music on the Blockchain report, published in 2016, received extensive media coverage from publications including Music Week, Music 4.5, International Business Times, Tech City News, Cryptocoin News, City A.M., Fortune magazine, Huffington Post and Record of the Day. The report was launched at Sonos Studios in London, with leading figures in academia and industry.
The cluster is part of the Open Music Initiative, alongside Berklee, MIT, Harvard and UCL.
- Blockchain for Creative Industries Cluster (2016), Music on the Blockchain: Blockchain For Creative Industries Research Cluster, Middlesex University
- O’Dair, M (2016). The networked record industry: How blockchain technology could transform the consumption and monetisation of recorded music. New Economic Models in the Digital Economy, March 2016.
Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law
44 Pages Posted: 30 Nov 2017 Last revised: 13 Dec 2017
Date Written: November 22, 2017
Cryptocurrencies, such as bitcoin and ethereum, have not only risen to public attention as novel means of payments. Rather, the current hype is fueled by financial applications built on top of these currencies that stand to potentially upend consumer and investment markets. The most remarkable and economically relevant of these applications are tokens sold via initial coin offerings (ICOs, also called token sales). In 2017 alone, the equivalent of more than $ 3 billion have been raised through ICOs. In these entirely online-mediated offerings, startup entrepreneurs sell tokens registered on a blockchain in exchange for cryptocoins traded on that blockchain (typically bitcoins or ethers). Investors receive tokens that can be understood as cryptographically-secured coupons which embody a bundle of rights and obligations.
In July 2017, the SEC released an investigative report that highlighted that such tokens can be subject to the full scope of US securities regulation. As a result, issuers increasingly structure ICOs such as to prevent US citizens and residents from obtaining tokens in order to exclude the reach of US securities regulation. However, for the time being, EU citizens and residents are free to invest in tokens. This raises the question to what extent EU securities regulation is applicable to ICOs and, particularly, whether issuers have to publish and register a prospectus in order to avoid criminal and civil prospectus liability in the EU. In conceptual terms, this depends on whether tokens are considered “securities” under the EU prospectus regulation regime. The question is of great practical relevance since, despite the high stakes involving more than $100 million in some ICOs, to our knowledge, up to now not a single token issuer has published or registered any such prospectus.
Against this background, this paper develops a nuanced approach that distinguishes between three archetypes of tokens: currency, investment, and utility tokens. It analyzes the differential implications of each of these types, and their hybrid forms, for EU securities regulation. While the variety of tokens offered necessitates a case-by-case analysis, the discussion reveals that at least some types and hybrid forms of tokens are subject to EU securities regulation. By and large, pure investment tokens typically must be considered securities, while pure currency and utility tokens are exempted from securities regulation in the EU. In identifying these archetypes, regulation and market oversight will have to put substance over form. Finally, we spell out criteria for the application of EU securities regulation to hybrid token types.
The paper closes by offering two policy proposals to mitigate legal uncertainty concerning token sales. First, we suggest tailoring disclosure requirements to the code-driven nature of token sales. Such an ICO-specific safe harbor would offer a clear and less burdensome path to EU law compliance for token sellers who suspect that their tokens may qualify as securities. This only requires the Commission to amend its delegated 2004 Commission Prospectus Regulation. Second, we propose that, on an international level, governments form a compact to bestow certainty about the application of their respective securities regulation regimes to token sales. This is, first, to avoid regulatory overkill on the one and regulatory lacunae on the other hand in online-mediated, global token sales. Second, overlapping, and partially contradicting, securities regulation regimes can nullify each other. In the end, only a joint international regulatory regime can efficiently balance investor protection and investor access in the face of the novel generation of decentralized blockchain applications.
Keywords: blockchain, ICO, token sale, initial coin offering, bitcoin, ethereum, prospectus, EU law, smart contracts, DAO, utility token, investment token, safe harbor, cryptocurrencies
Blockchains and Data Protection in the European Union
31 Pages Posted: 6 Dec 2017 Last revised: 16 Dec 2017
Date Written: November 30, 2017
This paper examines data protection on blockchains and other forms of distributed ledger technology (‘DLT’). Transactional data stored on a blockchain, whether in plain text, encrypted form or after having undergone a hashing process, constitutes personal data for the purposes of the GDPR. Public keys equally qualify as personal data as a matter of EU data protection law. We examine the consequences flowing from that state of affairs and suggest that in interpreting the GDPR with respect to blockchains, fundamental rights protection and the promotion of innovation, two normative objectives of the European legal order, must be reconciled. This is even more so given that, where designed appropriately, distributed ledgers have the potential to further the GDPR’s objective of data sovereignty.
Blockchain and the European Union’s General Data Protection Regulation: A Chance to Harmonize International Data Flows
40 Pages Posted: 6 Dec 2017
Date Written: November 6, 2017
Future economic growth is dependent on global data sharing. With the EU’s GDPR going into effect May 25, 2018, data privacy law in the EU will be uniform in text. The GDPR applies extraterritorially to any organization that can reach the EU market in terms of access by an EU citizen. While a consistent and coordinated interpretation of the GDPR provides organizations with the requisite assurances needed when operating in an international environment, stricter standards and higher fines require the organizations to rethink their international privacy compliance protocols. Trust-failures in society are the driving force behind such comprehensive regulatory frameworks, but emerging technology like blockchain can aid in minimizing these privacy concerns. Among other things, blockchain properties include decentralization, authentication, confidentiality, accountability, and access control management. By treating data flows as transactions, blockchain applications can work with regulations to facilitate the secure transfer of information. The purpose of this paper is to begin a conversation around utilizing blockchain technology and reducing harmonizing regulations like the GDPR to an automated protocol.
Max Planck Institute for Innovation and Competition; University of Oxford
Date Written: August 7, 2017
Abstract: This paper examines the emergence of blockchain technology and evaluates regulatory techniques designed to regulate the technology in its early stages.
Keywords: Blockchain, Distributed Ledger, Smart Contract, Law, Regulation, Co-Regulation, Law & Technology, Innovation
This paper is intended to contribute to the debate on blockchain’s financial regulation. First and foremost, it provides through the example of securities law an introductory overview of how American and French legal systems fail to properly handle the existing reality of blockchain. It subsequently identifies some of the peculiar issues that blockchain raises from a financial point of view and that justify a tailored legal regime. Finally, it examines the efforts made by blockchain’s stakeholders to compensate the lack of regulation and discusses how those efforts may fall within a broader reform movement. For the sake of clarity, this last section will focus on the French example.
While blockchain technology is commonly considered potentially disruptive in various regards, there is a lack of understanding where and how blockchain technology is effectively applicable and where it has mentionable practical effects. This issue has given rise to critical voices that judge the technology as over-hyped. Against this backdrop, this study adapts an established research framework to structure the insights of the current body of research on blockchain technology, outline the present research scope as well as disregarded topics, and sketch out multidisciplinary research approaches. The framework differentiates three groups of activities (design and features, measurement and value, management and organization) at four levels of analysis (users and society, intermediaries, platforms, firms and industry). The review shows that research has predominantly focused on technological questions of design and features, while neglecting application, value creation, and governance. In order to foster substantial blockchain research that addresses meaningful questions, this study identifies several avenues for future studies. Given the breadth of open questions, it shows where research can benefit from multidisciplinary collaborations and presents data sources as starting points for empirical investigations.