The Journal of FinTech

We propose a framework for regulating stablecoins as a new asset class. We define stablecoins as those digital currencies which are centrally managed and backed by other assets. We compare stablecoins and ETFs under the principle that similar risks should be treated in a similar fashion. Hence, we argue that locking stablecoins into an ETF-like structure, along with restrictions on the basket composition, would significantly reduce the regulatory concerns. Stablecoin providers would be functionally similar to ETF sponsors, and stablecoins would be a new vehicle for traditional fiat currencies. Finally, we address common macroeconomic concerns in light of our proposed framework.

Financial market infrastructures (FMIs) have evolved as core elements of highly intermediated financial markets partly due to the technological limitations of the time when they were first designed. Organizations and firms were unable to share records without having to entrust a single party to manage them; hence this phenomenon of intermediation has led to significant information silos. Simultaneously, it has driven the structure of business models, as well as regulatory supervision and oversight, in ways that furthered intermediation and also created a misalignment of incentives and risk taking between entities now categorized as systemically important financial institutions (SIFIs) and systemically important financial market infrastructures. Over time, this consolidation has led to highly concentrated FMIs and with it, concentrated risks. Some of these risks go beyond the credit risks of just one or two institutions, becoming instead systemic risks that are continuously monitored by regulatory bodies. Over the past decade, advances in public key cryptography, hash functions, virtualization, distributed consensus, multiparty computation, and peer-to-peer networking have led to experimentation around record sharing between erstwhile competitive firms. Over the past five years, a series of independent efforts has chaperoned regulatory requirements into a digital, automated state that enables secure information sharing in full compliance with the law, while simultaneously enabling market participants to mutualize infrastructure that would otherwise be run by a single trusted party. With these developments, many of the services that centralized intermediaries currently provide could potentially be replaced by decentralized infrastructures or decentralized financial market infrastructure (dFMI). dFMI also enables a change in business structure, where a re-alignment of incentives can take place such that those firms taking risks can fully bear the consequences of these risks.

This study investigates whether cryptocurrencies can be considered a viable addition to pension funds. Using the regulatory setting of Switzerland, it is assessed whether adding crypto-components to a standard pension fund portfolio has positive effects on the fund’s risk and return figures. The empirical data supports the notion that cryptocurrency components may well increase the yield of a pension fund portfolio, yet this enhancement of yield comes at slightly higher risk levels. This increase in risk can be mitigated by adding an actively managed crypto-component to the portfolio rather than a passive investment product. The paper contributes to the ongoing debate in the area of financial innovations on the purpose and solidity of cryptocurrencies as an asset class.

With the recent rise in the cost of transactions on blockchain platforms, there is a need to explore other service models that may provide a more predictable cost to customers and end-users. We discuss the Contract Service Provider (CSP) model as a counterpart of the successful Internet Service Provider (ISP) model. Similar to the ISP business model based on peered routing-networks, the CSP business model is based on multiple CSP entities forming a CSP Community or group offering a contract service for specific types of virtual assets. We discuss the contract domain construct which encapsulates well-defined smart contract primitives, policies and contract-ledger. We offer a number of design principles borrowed from the design principles of the Internet architecture.

Bitcoin usage has grown from zero to hundreds of billions of dollars in just over a decade. However, the research and studies of bitcoin usage fall short. This is mainly due to the nature of bitcoin, but also the myths of the early days. In this study, we go through the user data from LocalBitcoins, the largest peer-to-peer bitcoin marketplace in the world to study the bitcoin usage and needs. By analyzing and classifying major use cases for bitcoin through surveys and statistical analysis, this study will bring a better understanding of the different use cases for bitcoin and the role they play in bitcoin adoption. This research shows that the scope of bitcoin usage is noticeably more diverse and not merely limited to illegal usage or speculation.