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on Payment Systems and Financial Technology |
| By: | Leon Kempen; Johan Pouwelse |
| Abstract: | Current digital payment solutions are fragile and offer less privacy than traditional cash. Their critical dependency on an online service used to perform and validate transactions makes them void if this service is unreachable. Moreover, no transaction can be executed during server malfunctions or power outages. Due to climate change, the likelihood of extreme weather increases. As extreme weather is a major cause of power outages, the frequency of power outages is expected to increase. The lack of privacy is an inherent result of their account-based design or the use of a public ledger. The critical dependency and lack of privacy can be resolved with a Central Bank Digital Currency that can be used offline. This thesis proposes a design and a first implementation for an offline-first digital euro. The protocol offers complete privacy during transactions using zero-knowledge proofs. Furthermore, transactions can be executed offline without third parties and retroactive double-spending detection is facilitated. To protect the users' privacy, but also guard against money laundering, we have added the following privacy-guarding mechanism. The bank and trusted third parties for law enforcement must collaborate to decrypt transactions, revealing the digital pseudonym used in the transaction. Importantly, the transaction can be decrypted without decrypting prior transactions attached to the digital euro. The protocol has a working initial implementation showcasing its usability and demonstrating functionality. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.13776 |
| By: | Alan Chernoff; Julapa Jagtiani |
| Abstract: | Cryptocurrency markets are often characterized by market manipulation or, at the very least, by a sharp distinction between large and sophisticated investors and small retail investors. While traditional assets often see a divergence in the success of institutional traders and retail traders, we find an even more pronounced difference regarding the holders of Ethereum (ETH), the second-largest cryptocurrency by volume. We see a significant difference in how large holders of ETH behave compared with smaller holders of ETH relative to price movements and the volatility of the cryptocurrency. We find that large ETH holders tend to increase their ETH holdings prior to a price increase, while small ETH holders tend to reduce their ETH holdings prior to a price increase. In other words, ETH returns tend to move in the direction that benefits crypto “whales” while reducing returns (or increasing loss) to “minnows.” Additionally, we find that the volatility of ETH returns seems to be driven by small retail investors rather than by the crypto whales. |
| Keywords: | Cryptocurrency; Ethereum; ETH; crypto whales; blockchain; pump-and-dump |
| JEL: | G14 G23 G28 G41 |
| Date: | 2024–08–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:98653 |
| By: | Josep Gisbert (IE UNIVERSITY); José E. Gutiérrez (BANCO DE ESPAÑA) |
| Abstract: | The rise of FinTech lenders offers an opportunity to promote financial access but may disrupt banks’ banking efforts. This paper presents a banking model where an incumbent bank specializes in certain niche markets. When a FinTech lender enters, competition intensifies, reducing the bank’s gains from serving some of its niches. Although FinTech lending can help serve certain unattended niches, the bank may abandon others, creating an ambiguous impact on financial inclusion. Financial inclusion may even decline when the FinTech lender is less efficient at serving new niches and better able to compete with the bank for its customers. |
| Keywords: | FinTech, financial inclusion, soft information, regulatory arbitrage, economic growth |
| JEL: | G21 G23 G28 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2426 |
| By: | Yihang Fu; Mingwei Jing; Jiaolun Zhou; Peilin Wu; Ye Wang; Luyao Zhang; Chuang Hu |
| Abstract: | Blockchain technology is essential for the digital economy and metaverse, supporting applications from decentralized finance to virtual assets. However, its potential is constrained by the "Blockchain Trilemma, " which necessitates balancing decentralization, security, and scalability. This study evaluates and compares two leading proof-of-stake (PoS) systems, Algorand and Ethereum 2.0, against these critical metrics. Our research interprets existing indices to measure decentralization, evaluates scalability through transactional data, and assesses security by identifying potential vulnerabilities. Utilizing real-world data, we analyze each platform's strategies in a structured manner to understand their effectiveness in addressing trilemma challenges. The findings highlight each platform's strengths and propose general methodologies for evaluating key blockchain characteristics applicable to other systems. This research advances the understanding of blockchain technologies and their implications for the future digital economy. Data and code are available on GitHub as open source. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.14335 |
| By: | Welker, Carl B. |
| Abstract: | Since the first bitcoins were mined in 2009, a large number of blockchains and a vast number of different tokens have been created on the basis of distributed ledger technologies (DLT). The Web3 ecotope, with its essential characteristics such as decentralized transactions and anonymity, is functioning and is preparing to attract billions of dollars in further demand and absorb investor funds. For companies that want to become active on the web3, there is also the question of a generally applicable and enforceable legal framework that covers the most diverse fields of application of the token economy, blockchains with their smart contracts, tokens as universally usable economic objects, token emissions and token trading. A DLT Act was enacted for the first time in the Principality of Liechtenstein in 2019: The "Token- und VTDienstleister-Gesetz" (TVTG, Token and DLT Service Provider Act). In 2023, the EU followed suit with Regulation (EU) 2023/1114 "Markets in Crypto-Assets Regulation, MiCAR" as a template for legislative amendments in all EEA countries. This discussion paper examines the aforementioned laws in terms of how they reflect new Web3 realities, whether they are suitable in terms of their objectives and approach to promote new digital markets and how tokens are understood as legal objects. |
| Keywords: | Web3, Distributed Ledger Technologies, Blockchain, Tokenization, Regulation |
| JEL: | G18 G20 K22 K23 K24 L26 M13 O32 O33 O35 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iubhbm:301160 |
| By: | Riccardo De Blasis; Luca Galati; Rosanna Grassi; Giorgio Rizzini |
| Abstract: | This paper investigates the cryptocurrency network of the FTX exchange during the collapse of its native token, FTT, to understand how network structures adapt to significant financial disruptions, by exploiting vertex centrality measures. Using proprietary data on the transactional relationships between various cryptocurrencies, we construct the filtered correlation matrix to identify the most significant relations in the FTX and Binance markets. By using suitable centrality measures - closeness and information centrality - we assess network stability during FTX's bankruptcy. The findings document the appropriateness of such vertex centralities in understanding the resilience and vulnerabilities of financial networks. By tracking the changes in centrality values before and during the FTX crisis, this study provides useful insights into the structural dynamics of the cryptocurrency market. Results reveal how different cryptocurrencies experienced shifts in their network roles due to the crisis. Moreover, our findings highlight the interconnectedness of cryptocurrency markets and how the failure of a single entity can lead to widespread repercussions that destabilize other nodes of the network. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.12683 |
| By: | Ozili, Peterson K |
| Abstract: | This article presents a concise review of the existing financial inclusion research in India. We use a thematic literature review methodology. We show that the Reserve Bank of India (RBI) has been at the forefront of financial inclusion in India and has used collaborative efforts to deepen financial inclusion in India. The review of existing literature shows that the major determinants of financial inclusion in India are income, age, gender, education, employment, ICT, bank branch network and nearness to a bank. The common theories used to analyse financial inclusion in India are the finance-growth theory, the diffusion of innovations theory, development economics and modernization theory, the vulnerable group theory of financial inclusion and the dissatisfaction theory of financial inclusion. The common methodologies used in the literature are surveys, questionnaires, financial inclusion index, regression estimations and causality tests. Existing studies also show that financial inclusion in India affects the level of poverty, human development, financial stability, monetary policy, and income level. Some criticisms of the financial inclusion efforts in India include the inability to meet the specific needs of the poor, poor geographical access, excessive transaction cost, inappropriate banking products, financial illiteracy and a large digital divide between tech savvy and non-tech savvy people. We also suggest some areas for future research. |
| Keywords: | ICT, Internet, financial inclusion, literature review, access to finance, causality tests, regression, India, index, theory. |
| JEL: | G20 G21 O31 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121526 |
| By: | Pierre Nguimkeu; Cedric I Okou |
| Abstract: | This paper analyzes the drivers of digital technologies adoption and how it affects the productivity of small scale businesses in Africa. We use data collected from two semi-rural markets in Benin, where grains and legumes are key staple foods and one-third of the population has internet access. We develop a structural model to rationalize digital technologies adoption—defined as the use of mobile broadband internet connection through smartphones—as well as usage patterns and outcomes observed in the data. The model’s implications are empirically tested using both reduced-form and structural maximum likelihood estimations. We find that younger, wealthier, more educated grains and legumes suppliers and those closely surrounded by other users are more likely to adopt digital technologies. Adopters perform 4-5 more business transactions each month than non-adopters on average, suggesting that digital technologies adoption could raise the monthly frequency and amounts of trades by up to 50%. Most adopters are women, but their productivity gains are lower than their male counterparts. Counterfactual policy simulations with the estimated model suggest that upgrading the broadband internet quality yields the largest improvement in adoption rate and productivity gains, while reducing its cost for a given connection quality only has a moderate effect. Improving access to credit only increases the adoption rate of constrained suppliers. |
| Keywords: | Digital Technology Adoption; Food Supply; Counterfactual Analysis |
| Date: | 2024–07–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/163 |
| By: | Braithwaite, Jo |
| Abstract: | Authorised Push Payment (APP) fraud occurs where bank customers are tricked into transferring money from their account. As this article shows, this type of fraud is a growing threat, catalysed by the rise of remote banking. However, long-standing legal and regulatory rules leave most victims without a route to redress, as recently confirmed by the UK Supreme Court’s 2023 decision in Philipp v Barclays. Through this lens, the article examines a new and ‘world first’ UK regulatory response, which includes a mandatory reimbursement scheme for APP fraud victims in certain circumstances. The article finds that the UK’s new loss allocation scheme is valuable, but also that its specific coverage is problematic given the broad nature of this threat. Overall, the article argues that the priority for UK regulators should be to develop a more ‘joined-up’ response to APP fraud, and it offers generally applicable insights into effective regulatory responses to this evolving threat. |
| Keywords: | APP fraud; banks; banking; Quincecare; payments; payment infrastructure; OUP deal |
| JEL: | K22 G28 G21 |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123798 |
| By: | Ferreira, Daniel; Li, Jin; Nikolowa, Radoslawa |
| Abstract: | We develop a theory of blockchain governance. In our model, the proof-of-work system, the most common set of rules for validating transactions in blockchains, creates an industrial ecosystem with specialized suppliers of goods and services. We analyze the interactions between blockchain governance and the market structure of the industries in the blockchain ecosystem. We show that the proof-of-work system may lead to a situation in which some large firms in the blockchain industrial ecosystem—blockchain conglomerates—capture the governance of the blockchain. |
| Keywords: | governance; blockchain conglomerates; industrial ecosystem; proof-of-work |
| JEL: | G30 L13 M20 |
| Date: | 2023–04–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:115618 |
| By: | Tara Merk |
| Abstract: | This paper asks why startups in the blockchain industry are exiting to Decentralized Autonomous Organizations (DAOs), an outstanding phenomena in the wider digital economy which has tended to retain centralized ownership and governance rights of many platforms, products and protocols. Drawing on a narrative analysis of three case studies, I find three possible drivers: (1) exit to DAO is motivated by both financial and stewardship goals which it simultaneously promises to realize via the issuance of tokens; (2) exit to DAO adds an additional layer of ownership and governance rights via tokens, without requiring existing rights to be relinquished, thus making it a lucrative strategy; and (3) markets, laws and social norms underpinning the broader environment in which exits to DAO occur, seem to play an important role in driving the decision. This paper contributes to the academic literature by situating DAOs as a hybrid (and perhaps incomplete) entrepreneurial exit strategy and identifying plausible drivers of the phenomenon which warrant further dedicated research. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.14327 |
| By: | Navarra, Federico; Pino, Flavio; Sandrini, Luca |
| Abstract: | We study a hybrid marketplace where a vertically integrated platform competes with a seller in a horizontally differentiated downstream market. The platform has a data advantage and can price discriminate consumers, whereas the seller cannot. Our analysis shows that, by properly setting the per-unit transaction fee, the platform can always avoid head-to-head competition with the seller, regardless of the level of horizontal differentiation. Mandating data-sharing, which allows the seller to also price discriminate, does not seem to solve this problem and, in fact, aggravates it further, generally benefiting the platform. The seller is better off only if it is less efficient than the platform, whereas consumers are worse off. We propose that preventing the platform from adjusting the fee after the data-sharing mandate is not enough to reinstate competition in the downstream market. We then show that banning the hybrid business model and forbidding the use of data for price discrimination increase consumer surplus, even if the seller becomes a monopolist. In other words, we propose that the harm to competition comes from the platform's business model rather than from its information advantage. |
| Keywords: | hybrid platforms, data-sharing, vertical integration, price discrimination |
| JEL: | D42 L12 L41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:300680 |
| By: | Ra\'ul M\'inguez; Asier Minondo |
| Abstract: | This paper documents a new feature of international trade: the increase in the number of low-value transactions. Using Spanish data, we show that the share of low-value transactions in the total number of transactions increased from 9% to 61% in exports and from 14% to 54% in imports between 1997 and 2023. The increase in the number of low-value trade transactions is related to the rise in e-commerce and direct-to-customer sales facilitated by online retail platforms. In the case of exports, the increase in the number of low-value transactions is also explained by the fast-fashion strategy followed by clothing firms. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.15509 |
| By: | Hannes Ullrich; Jonas Hannane; Christian Peukert; Luis Aguiar; Tomaso Duso |
| Abstract: | Tracking online user behavior is essential for targeted advertising and is at the heart of the business model of major online platforms. We analyze tracker-specific web browsing data to show how the prediction quality of consumer profiles varies with data size and scope. We find decreasing returns to the number of observed users and tracked websites. However, prediction quality increases considerably when web browsing data can be combined with demographic data. We show that Google, Facebook, and Amazon, which can combine such data at scale via their digital ecosystems, may thus attenuate the impact of regulatory interventions such as the GDPR. In this light, even with decreasing returns to data small firms can be prevented from catching up with these large incumbents. We document that proposed data-sharing provisions may level the playing field concerning the prediction quality of consumer profiles. |
| Keywords: | prediction quality, web tracking, cookies, data protection, competition policy, internet regulation, GDPR |
| JEL: | C53 D22 D43 K21 L13 L40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11240 |
| By: | Herr, Hansjörg |
| Abstract: | Today all countries have fiat money issued by a central bank. There is no obligation by a central bank to exchange its money for gold or any other good. Central banks have the monopoly to issue central bank money and have the power to create their money out of nothing. Creating such a monetary system is functional for a capitalist economy and must be regarded as a major feat of civilization, which could only be completed after around 200 years of capitalist development. This article traces the painful farewell from gold from the Classical Gold Standard in the early 19th century up to the end of the Bretton Woods system in the mid-20th century. |
| Keywords: | money, gold standard, currency systems |
| JEL: | E40 N20 P20 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:300844 |
| By: | Yuan Li; Bingqiao Luo; Qian Wang; Nuo Chen; Xu Liu; Bingsheng He |
| Abstract: | The utilization of Large Language Models (LLMs) in financial trading has primarily been concentrated within the stock market, aiding in economic and financial decisions. Yet, the unique opportunities presented by the cryptocurrency market, noted for its on-chain data's transparency and the critical influence of off-chain signals like news, remain largely untapped by LLMs. This work aims to bridge the gap by developing an LLM-based trading agent, CryptoTrade, which uniquely combines the analysis of on-chain and off-chain data. This approach leverages the transparency and immutability of on-chain data, as well as the timeliness and influence of off-chain signals, providing a comprehensive overview of the cryptocurrency market. CryptoTrade incorporates a reflective mechanism specifically engineered to refine its daily trading decisions by analyzing the outcomes of prior trading decisions. This research makes two significant contributions. Firstly, it broadens the applicability of LLMs to the domain of cryptocurrency trading. Secondly, it establishes a benchmark for cryptocurrency trading strategies. Through extensive experiments, CryptoTrade has demonstrated superior performance in maximizing returns compared to traditional trading strategies and time-series baselines across various cryptocurrencies and market conditions. Our code and data are available at \url{https://anonymous.4open.science/r/C ryptoTrade-Public-92FC/}. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.09546 |
| By: | Nidhaleddine Ben Cheikh; Christophe Rault |
| Abstract: | While the financial inclusion would induce greater pollutant emissions through its impact of economic activity, the increased access to financial services may unleash investments in green technologies. This papier investigates whether the financial inclusion influences the dynamic of carbon dioxide (CO2) emissions in a sample of 70 countries during the last decade. We implement panel threshold techniques to explore the possible regime shifts in the environmental quality. Our results reveal that an increased financial access impacts air pollution depending on the level of economic development. While financial inclusion would increase CO2 emissions under lower-income regimes, the environment quality seems to be enhanced with more inclusiveness at later stages of development. Sounder environmental policies are needed for less developed countries to align financial inclusion initiatives with sustainable economic development. |
| Keywords: | financial inclusion, carbon emissions, panel threshold modelling |
| JEL: | C23 O16 O44 Q53 Q56 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11237 |
| By: | Ozili, Peterson K |
| Abstract: | This study investigates the effect of CBDC issuance on economic growth rate and inflation rate in Nigeria. We are interested in determining whether the rate of economic growth and inflation changed significantly after the issuance of a non-interest bearing CBDC in Nigeria. Two-stage least square regression and granger causality test were used to analyse the data. Inflation significantly increased in the CBDC period, implying that CBDC issuance did not decrease the rate of inflation in Nigeria. Economic growth rate significantly increased in the CBDC period, implying that CBDC issuance improved economic growth in Nigeria. The financial sector, agricultural sector and the manufacturing sector witnessed a much stronger contribution to gross domestic product (GDP) after CBDC issuance. There is one-way granger causality between CBDC issuance and monthly inflation, implying that CBDC issuance causes a significant change in monthly inflation in Nigeria. The implication of the result is that the non-interest bearing eNaira CBDC is not able to solve the twin economic problem of “controlling inflation which stifles economic growth” and “stimulating economic growth which leads to more inflation.” Policy makers should therefore use the eNaira CBDC alongside other monetary policy tools at their disposal to control inflation while stimulating growth in the economy. There are no empirical studies on the effect of CBDC issuance on economic growth or inflation using real-world data. We add to the monetary economics literature by analyzing the effect of CBDC issuance on economic growth and inflation. |
| Keywords: | central bank digital currency, CBDC, inflation, economic growth, Nigeria |
| JEL: | E31 E32 E42 E52 E58 O43 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121524 |
| By: | Yuval Boneh |
| Abstract: | Decentralized Finance (DeFi) has reshaped the possibilities of reserve banking in the form of the Collateralized Debt Position (CDP). Key to the safety of CDPs is the money supply architecture that enables issued debt to maintain its value. In traditional markets, and with respect to the United States Dollar system, interest rates are set by the Federal Reserve in an attempt to influence the effects of excessive inflation. DeFi enables a more transparent approach that typically relies on interest rates or other debt recovery mechanisms being directly informed by asset price. This research investigates contemporary DeFi money supply and debt management strategies and their limitations. Furthermore, this paper introduces a time-weighted approach to interest rate management that implements a Proportional-Integral-Derivative control system to constantly adapt to market activities and protect the value of issued currency, while addressing observed limitations. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.13232 |
| By: | Leo Röhlke |
| Abstract: | This study empirically tests the displacement hypothesis, examining whether adolescents' mobile phone use displaces time spent on activities that benefit cognitive development and academic performance. Longitudinal time-use data from a sample of Australian early adolescents (ages 10-13) and a difference-in-differences design are used to model the effect of first mobile phone acquisition on allocation of time to various activities. The results challenge the displacement hypothesis, providing no evidence that mobile phone acquisition displaces enrichment, physical activity or sleep time in early adolescence. However, acquiring a mobile phone is associated with a significant reduction in time spent watching TV, movies, or videos. This suggests the rise in adolescent mobile phone use may partly represent shifting away from traditional screen activities rather than displacing cognitively beneficial activities. Guidelines for parents recommending later ages of mobile phone acquisition are unlikely to affect early adolescents' time spent on non-screen activities. |
| Keywords: | academic performance, early adolescents, difference-in-differences, displacement hypothesis, educational outcomes, enrichment activities, longitudinal data, mobile phones, parental mediation, time use |
| JEL: | J13 O33 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:bss:wpaper:49 |
| By: | Ravi Kashyap |
| Abstract: | We engineer blockchain based risk managed portfolios by creating three funds with distinct risk and return profiles: 1) Alpha - high risk portfolio; 2) Beta - mimics the wider market; and 3) Gamma - represents the risk free rate adjusted to beat inflation. Each of the sub-funds (Alpha, Beta and Gamma) provides risk parity because the weight of each asset in the corresponding portfolio is set to be inversely proportional to the risk derived from investing in that asset. This can be equivalently stated as equal risk contributions from each asset towards the overall portfolio risk. We provide detailed mechanics of combining assets - including mathematical formulations - to obtain better risk managed portfolios. The descriptions are intended to show how a risk parity based efficient frontier portfolio management engine - that caters to different risk appetites of investors by letting each individual investor select their preferred risk-return combination - can be created seamlessly on blockchain. Any Investor - using decentralized ledger technology - can select their desired level of risk, or return, and allocate their wealth accordingly among the sub funds, which balance one another under different market conditions. This evolution of the risk parity principle - resulting in a mechanism that is geared to do well under all market cycles - brings more robust performance and can be termed as conceptual parity. We have given several numerical examples that illustrate the various scenarios that arise when combining Alpha, Beta and Gamma to obtain Parity. The final investment frontier is now possible - a modification to the efficient frontier, thus becoming more than a mere theoretical construct - on blockchain since anyone from anywhere can participate at anytime to obtain wealth appreciation based on their financial goals. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.09536 |
| By: | Kensuke Ito |
| Abstract: | This paper surveys products and studies on cryptoeconomics and tokenomics from an economic perspective, as these terms are still (i) ill-defined and (ii) disconnected from economic disciplines. We first suggest that they can be novel when integrated; we then conduct a literature review and case study following consensus-building for decentralization and token value for autonomy. Integration requires simultaneous consideration of strategic behavior, spamming, Sybil attacks, free-riding, marginal cost, marginal utility and stabilizers. This survey is the first systematization of knowledge on cryptoeconomics and tokenomics, aiming to bridge the contexts of economics and blockchain. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.15715 |