Addressing the Dark Side of the Crypto World | IMF Blog

Indeed, the same innovations that power crypto-assets can also help us regulate them.

To put it another way, we can fight fire with fire.

Regulatory technology and supervisory technology can help shut criminals out of the crypto world. More broadly, we are seeing crypto-asset exchanges in some countries that are subject to know-your-customer requirements.

https://blogs.imf.org/2018/03/13/addressing-the-dark-side-of-the-crypto-world/

Ignorance, Debt and Cryptocurrencies: The Old and the New in the Law and Economics of Concurrent Currencies by Hossein Nabilou, André Prüm :: SSRN

The main contribution of this paper lies in the synthesis of information economics in finance – as related to the mechanisms of money and quasi-money creation in the banking and shadow banking sector – and the mechanism of money creation in cryptocurrency ecosystem. In particular, drawing lessons from the literature on ‘safe assets’ and building on Holmstrom’s seminal work (2015), this paper highlights striking differences in the basic information economics of cryptocurrencies as opposed to fiat currencies (including the monetary aggregates). The main finding of this paper is that, Bitcoin trumps central bank money and private and quasi-private money – created by the banking and shadow banking system – on account of its informational foundations. The superior information economics of Bitcoin, which is built on symmetric (common) knowledge as to the inner workings of Bitcoin Blockchain, as opposed to that of fiat currencies, which is built on symmetric ignorance as to the underlying collateral, would make Bitcoin a new ‘safe’ asset holding the promise of maturing into a viable store of value, a potential medium of exchange, and a unit of account. By comparing the information economics of central, commercial and shadow bank money with that of Bitcoin, we highlight important aspects of information economics of Bitcoin that would inform any pending regulatory intervention in the cryptocurrency ecosystem.

Source: Ignorance, Debt and Cryptocurrencies: The Old and the New in the Law and Economics of Concurrent Currencies by Hossein Nabilou, André Prüm :: SSRN

The Regulation of Cryptocurrencies – between a Currency and a Financial Product by Hadar Yoana Jabotinsky :: SSRN

As cryptocurrencies gain popularity, the issue of how to regulate them becomes more pressing. The attractiveness of cryptocurrencies is due in part to their decentralized, peer-to-peer structure. This makes them an alternative to national currencies which are controlled by central banks. Given that these cryptocurrencies are already replacing some of the “regular” national currencies and financial products, the question then arises: should they be regulated? And if so, how? This paper draws the legal distinction between cryptocurrencies which are in fact currency and those which are securities disguised as currency. It further suggests that in cases where a token is indeed a security, regular securities regulation should apply. In all other cases anti-fraud measures should be in place in order to protect investors. Further regulation should only be put in place if the cryptocurrency starts increasing systemic risk in the general financial system.

Source: The Regulation of Cryptocurrencies – between a Currency and a Financial Product by Hadar Yoana Jabotinsky :: SSRN

Legislative Regulations to Prevent Terrorism and Organized Crime from Using Cryptocurrencies and Its Effect on the Economy and Society by Stephan Breu, Theodor G. Seitz :: SSRN

First it has to be stated that Cryptocurrencies are mostly used for legal transfers between legitimate partners and are becoming more and more popular in our society. Any heavy regime of new regulations would make all transactions costlier and less convenient. Such negative economic impact is opposing the need of monitoring the financing structures of organized criminal and terrorist organisations. With the increasing importance of cryptocurrencies, a completely new field of complex problems is arising through the implied anonymity and complexity or sheer impossibility to track transfers in the dark net. As regulations in this new financial market will be difficult to enforce, it is necessary to establish international cooperation and capacity building to implement some possibilities for law-enforcement and intelligence entities to monitor the illegal parts of the capital flowing in these systems. To solve this situation, the focus should lie on the attempts to make the risk of detection of such transfers higher for the parties involved. Without interfering too strongly with the new financing system developing, this process asks for improved compliance and cooperation on all levels and capacities.

Source: Legislative Regulations to Prevent Terrorism and Organized Crime from Using Cryptocurrencies and Its Effect on the Economy and Society by Stephan Breu, Theodor G. Seitz :: SSRN

A Fistful of Bitcoins: Characterizing Payments Among Men with No Names | April 2016 | Communications of the ACM

Bitcoin is a purely online virtual currency, unbacked by either physical commodities or sovereign obligation; instead, it relies on a combination of cryptographic protection and a peer-to-peer protocol for witnessing settlements. Consequently, Bitcoin has the unintuitive property that while the ownership of money is implicitly anonymous, its flow is globally visible. In this paper we explore this unique characteristic further, using heuristic clustering to group Bitcoin wallets based on evidence of shared authority, and then using re-identification attacks (i.e., empirical purchasing of goods and services) to classify the operators of those clusters. From this analysis, we consider the challenges for those seeking to use Bitcoin for criminal or fraudulent purposes at scale.

Source: A Fistful of Bitcoins: Characterizing Payments Among Men with No Names | April 2016 | Communications of the ACM

Buzz Factor or Innovation Potential: What Explains Cryptocurrencies’ Returns?

Abstract

Cryptocurrencies have become increasingly popular since the introduction of bitcoin in 2009. In this paper, we identify factors associated with variations in cryptocurrencies’ market values. In the past, researchers argued that the “buzz” surrounding cryptocurrencies in online media explained their price variations. But this observation obfuscates the notion that cryptocurrencies, unlike fiat currencies, are technologies entailing a true innovation potential. By using, for the first time, a unique measure of innovation potential, we find that the latter is in fact the most important factor associated with increases in cryptocurrency returns. By contrast, we find that the buzz surrounding cryptocurrencies is negatively associated with returns after controlling for a variety of factors, such as supply growth and liquidity. Also interesting is our finding that a cryptocurrency’s association with fraudulent activity is not negatively associated with weekly returns—a result that further qualifies the media’s influence on cryptocurrencies. Finally, we find that an increase in supply is positively associated with weekly returns. Taken together, our findings show that cryptocurrencies do not behave like traditional currencies or commodities—unlike what most prior research has assumed—and depict an industry that is much more mature, and much less speculative, than has been implied by previous accounts.

Source: Buzz Factor or Innovation Potential: What Explains Cryptocurrencies’ Returns?

The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy | Journal of The Royal Society Interface

Abstract

What is the role of social interactions in the creation of price bubbles? Answering this question requires obtaining collective behavioural traces generated by the activity of a large number of actors. Digital currencies offer a unique possibility to measure socio-economic signals from such digital traces. Here, we focus on Bitcoin, the most popular cryptocurrency. Bitcoin has experienced periods of rapid increase in exchange rates (price) followed by sharp decline; we hypothesize that these fluctuations are largely driven by the interplay between different social phenomena. We thus quantify four socio-economic signals about Bitcoin from large datasets: price on online exchanges, volume of word-of-mouth communication in online social media, volume of information search and user base growth. By using vector autoregression, we identify two positive feedback loops that lead to price bubbles in the absence of exogenous stimuli: one driven by word of mouth, and the other by new Bitcoin adopters. We also observe that spikes in information search, presumably linked to external events, precede drastic price declines. Understanding the interplay between the socio-economic signals we measured can lead to applications beyond cryptocurrencies to other phenomena that leave digital footprints, such as online social network usage.

Source: The digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy | Journal of The Royal Society Interface