On March 9, 2022, President Biden signed an executive order (“the Order”) requiring federal agencies to submit reports on how cryptocurrencies relate to various issues, including money laundering, investor protection, international cooperation, central bank digital currencies (“CBDC”), and systemic risk. Here, we offer some perspective and suggestions on those issues.
First, consider money laundering. Typically, anti-money-laundering regulation aims to block money received from crime or terrorism from flowing into traditional financial institutions. Cryptocurrencies create concerns because they can be purchased (more or less) anonymously and without intermediaries. That raises two questions: (1) who should regulation target in the absence of … Read more
Cryptocurrencies are by now widely known as electronically generated and stored currencies that enable users to trade tokens. The tokens are exchanged anonymously through a decentralized payment system: the blockchain. To further anonymity, the parties to cryptocurrency transactions are identified by a unique string of random numbers rather than by a name or other personal information.
There is however a dark side to this anonymity. It makes it easier for criminals and terrorists to launder money and otherwise transact illegal business. For example, anonymous tokens provide terrorists with access to cash that is essential to organizing attacks without dependency on … Read more
In our recent paper, we conducted an empirical analysis to test how the outbreak of the Covid-19 pandemic affected the market for cryptocurrencies (“cryptomarket”). One year into the pandemic, this market seems to have boomed. For instance, when the pandemic erupted, Bitcoin – the world’s first cryptocurrency – could be purchased for about $7,300. Today, the very same token costs more than $46,800 – a staggering 640 percent rise. Other leading cryptocurrencies (e.g. Ether), showed similar (or even greater) increases. However, this upward trend is not necessarily obvious from a theoretical standpoint, as there are several forces that might drive … Read more
New technologies are being introduced in markets around the globe. Disruptive innovations such as blockchain, cryptocurrencies, the Internet of things, automated cars and other products that support decision-making based on artificial intelligence (AI) are offering a creative take on traditional markets. Yet these technologies frequently require regulatory intervention to protect consumers or prevent systemic risks. One of the main challenges for regulating new technologies is insufficient technological knowledge by the regulators. The industry is invariably more informed about the subject matter than the regulators and is more likely to tailor regulation by private ordering. In these circumstances, we argue, “nudge” … Read more
Cryptocurrencies like Ether, DAO, Bitcoin and Facebook’s Libra are electronically generated and stored currencies by which users can trade real or virtual objects with one another, bypassing traditional central clearinghouses. Given that these cryptocurrencies are starting to replace some national currencies and financial products, should they be regulated? And, if so, how? Some countries, such as China and Russia, prohibit Initial Coin Offerings (ICOs) altogether, while others strive to reach an understanding of the currencies in order to come up with coherent regulation. As for the U.S., in April 2019 the Securities and Exchange Commission (SEC) finally issued its framework … Read more
Financial regulatory institutions are at the center of intense debates over how to supervise financial firms and markets. They are also the focus of an important and growing body of literature that is mainly concerned with the question, “Who should regulate the regulators.” Financial regulatory institutions are usually audited as part of the review of a particular country by international organizations such as the International Monetary Fund, the World Bank, or the OECD. In practice, this means that the structure of financial regulatory institutions and the conduct of financial regulators are not regularly and consistently monitored.
In our recent … Read more