Model Risk in Cryptocurrency Governance Reliability Assessments

Abstract

Cryptocurrencies have entered the economy as alternative money, as speculation objects, and as utility tokens for innovative service-platforms. Cryptocurrencies are based on cryptography-based asset disposals validated by decentralized operators of distributed ledgers according to consented protocols. The integrity of the decentralized operations – that is, the operators’ compliance with the protocol – relies on checks and balances based on, inter alia, insight from game theory. Models are often used to inform the reliability of the governance structures. This paper addresses model risk associated with these models. As the role of cryptocurrencies in the economy increases, such model risk is likely to be a concern for regulators. The regulatory implications of model risk are also discussed in this paper.