Crypto Exchanges Research Articles

SURVIVAL OF THE FITTEST: A NATURAL EXPERIMENT FROM CRYPTO EXCHANGES

This paper explores the applicability of universal cryptocurrency exchange by analyzing crypto exchanges of Binance, Latoken, Kucoin and Qash, which also have their own cryptocurrencies in the crypto market. Results of the recursive Johansen cointegration test proved that even though all of the cryptocurrencies have cointegration among each other, Binance positively disassociated itself from the others after it moved to Malta on 23 March 2018. Based on the daily prices of cryptocurrencies over the period from 6 November 2017 to 10 November 2019, taken from coinmarketcap, we conclude that Binance can be considered as a survival of the fittest among all of the crypto exchanges in this natural experiment.

INTERNATIONAL MEASURES TO COUNTERACT THE LAUNDERING OF ILLEGAL INCOME OF THE FIFTH GENERATION – LEGAL CONDITIONS FOR STRENGTHENING THE SECURITY OF THE FINANCIAL MARKET

The article analyses the development of international agreements on the means of controlling financial activities, concluded to counteract the laundering of proceeds from crime and the financing of terrorism. The study was carried out by analytical methods based on domestic legislation, international agreements and regulations. As a result of thirty years of work on organizing interaction in the developing three-level financial monitoring system, a whole set of measures has developed, the main development trend of which is to reduce information uncertainty. In this regard, the fifth generation of agreements on the limitation of potentially illegal activities in the financial sector, introduced in 2020, is acquiring special importance. The legal entities covered by the restrictive and control measures now include crypto exchange platforms, virtual wallet providers, as well as firms that provide currency exchange services. In a number of areas, information is automatically exchanged about ongoing transactions, as well as about their participants – clients of banks, insurance and brokerage companies, investment funds, in order to prevent aggressive tax planning and make it difficult to access unjustified tax breaks. The paper presents the economic and organizational results of the introduced legal measures.

A Fight-to-Safety from Bitcoin to Stock Markets:Evidence from Cyber Attacks

We discover a novel flight-to-safety effect from cryptocurrency markets to stock markets. It occurs after a series of hacking attacks on crypto exchanges as greater uncertainty heightens investors' risk awareness and perception, which, in turn, induces herd-like behaviour in favor of safer stock markets over riskier cryptocurrency markets. We extensively examine this effect worldwide across 39 countries and confirm this novelty. This effect is amplified when investors' risk awareness is strengthened by frequent attacks. Intriguingly, the sentiment elicited from the attacks discussed on social media not only serves as a timely warning indicator for the forthcoming attack events but also measures the flight-to-safety pressure after attack events. We conclude that the collapse of investors’ confidence is the primary cause of such an effect. Through the lens of cyber attacks, we document how a shock in crypto markets is transmitted into stock markets through investors' flight-to-safety behavior.

Is It Time for Nigeria To Regulate Cryptocurrency?

The digital and tech industry of Nigeria woke up to what could be better termed 'nightmare at dawn' in the early hours of Friday 5 February 2021 following the letter from the Central Bank of Nigeria (CBN) to all deposit money banks, non-bank financial institutions and other financial institutions in which the CBN referred them to the CBN circular of 12 January 2017 wherein the CBN cautioned all deposit money banks (DMB), non-bank financial institutions (NBFIs), other financial institutions (OFIs) and members of the public on the risk associated with transactions in crypto currency. In the letter, the CBN further to the directive on the circular, called the attention of regulated institutions that dealing in crypto currencies and facilitating payments for cryptocurrency exchanges is prohibited in Nigeria. Flowing from the above, CBN directed regulated institutions listed above to identify persons and or entities transacting in or operating crypto currency exchange within their systems and ensure that such accounts are closed immediately. News of the CBN's decision to prohibit banks from facilitating crypto-related transactions through the banking system has since gotten very harsh reactions on social media, the tech and digital market with many condemning the policy as a deliberate attempt by the government to impoverish young Nigerians who have been able to create wealth for themselves through crypto trading. Following the outburst on social media, the CBN did a press release on 7 February 2021 therein they stated that they are not an outlier in its decision and further listed countries and prominent investors who share the same opinion on crypto currency. In the press release, the CBN announced that the major reasons backing up their decision on banning transaction on cryptocurrencies are potential risk of loss of investments, money laundering, terrorism financing, illicit fund flows and criminal activities. These reasons are only reasonable as the crypto currency market is not regulated and can be manipulated in many ways. Some have also noted the lack of policy cooperation between financial regulators in Nigeria due to the fact that the SEC had only a few months ago proposed a new set of rules that will regulate crypto-token or Crypto-coin investments when the character of the investment qualifies as securities transactions. Flowing from this, SEC did a press release clarifying that they are not in any contradiction with CBN and are currently engaged with the CBN and agreed to work together to further analyze, and better understand the identified risks to ensure that appropriate and adequate mitigants are put in place, should such securities be allowed in the future. SEC has also by the press release stated that they have put on hold assessment of all persons (and products) seeking admittance into the SEC Regulatory Incubation Framework who are affected by the CBN letter of 05 February 2021. The entire situation has gotten the attention of the Nigerian Senate who has mandated its Committees on Banking, Insurance and Other Financial Institutions, ICT and Cybercrimes and Capital Market to invite the Governor of CBN as well as the Director General of SEC to brief it on the recent ban on cryptocurrency in the country. It explained that the information that would emanate from the briefings from the two regulatory bodies would assist the Senate to determine the opportunities and threats of the cryptocurrency on the nation's economy and security. Crypto exchange, Binance had taken to Twitter to urge their Nigerian customers to “Withdraw your NGN as early as possible to avoid potential channel issues,” while also noting that the new CBN law is a “one step back” on crypto adoption in Nigeria. Cambridge dictionary defined cryptocurrency as a digital currency produced by a public network, rather than any government, that uses cryptography ro make sure payments are sent and received safely. QUARTZ AFRICA listed Nigeria as the second highest market of crypto in the world. This article intends to discuss issues that bother Nigerians as it relates to the CBN circular and cryptocurrency in general such as where trading of crypto currency occurs (whether multi-jurisdictional or jurisdictional), whether cryptocurrency is a property, the outlook of other countries to cryptocurrency, etc.

When Early Adopters Learn From the Followers: The Cryptocurrency Return Predictability of GBTC Discount and Premium

We show that change in Grayscale Bitcoin Trust premium is the single most significant predictor of Bitcoin daily return. This sentiment measure is similar to the closed-end fund discount measure as in Baker and Wurgler (2006), but more likely to reflect the excess demand from traditional investors than from blockchain specialists. Although there is a substantial variation in Bitcoin price quotes worldwide, this Grayscale premium and discount predict Bitcoin daily return for the most liquid Bitcoin exchanges. Using K-means clustering and LDA analysis, we find that this predictability is especially significant when there is a large variation in bullish and bearish market sentiment, innovation regarding CBDC, regulations on crypto exchanges, but not when there is innovation regarding blockchain technology or bitcoin mining. A simple long and short strategy based on this signal generates a daily alpha of 40 bps. These findings suggest that Bitcoin prices react with a delay to the information contained in the sentiment of traditional investors and investors who are constrained from directly holding Bitcoin.

On The Quality Of Cryptocurrency Markets: Centralized Versus Decentralized Exchanges

Despite the growing adoption of decentralized exchanges, not much is yet known about their market quality. To shed light on this issue, we compare decentralized blockchain-based venues (DEX) to centralized crypto exchanges (CEX) by assessing two key aspects of market quality: price efficiency and market liquidity. Using a novel and comprehensive data set, we find that overall CEX provide better market quality but DEX become competitive for transactions exceeding \$ 100,000. Further, the main determinant of the lower price-efficiency of DEX is the high gas price stemming from proof-of-work blockchains. We propose and empirically validate a stylized theory of DEX liquidity provision, which links trading volumes, protocol fees, and liquidity in equilibrium. Our model identifies quantitative conditions for DEX to overtake CEX in the future.

Манипулирование рынком цифровых активов: проблемы установления режима уголовно-правовой защиты

The growth of the digital asset ecosystem has led to the emergence of hundreds of crypto exchanges that facilitate the trade of digital assets. This phenomenon did not remain without the attention of malefactors. Today, we can talk about an independent type of “cryptocurrency exchange crime”. The article analyzes the key criminal trends and formulates the main recommendations for the prevention of criminal encroachments in the cryptocurrency market. At the moment, one of the most common manipulative schemes is “pump and dump”, which became notorious at the turn of the 90s and 2000s. To date, no jurisdiction has created an effective protection regime against such fraud. The authors highlight the main reasons for the low efficiency of the measures taken: the presence of digital assets on the Internet led to the online nature of all stages of manipulations coordinated by anonymous groups in social networks; wide availability and lack of restrictions on the placement of tokens predetermined their regular and widespread placement (as opposed to an IPO); selfish interest of crypto-exchange sites that receive a commission from a transaction. It is emphasized that regulators’ search for a balance between innovation and investor protection is driving the reluctance of many jurisdictions to introduce proper criminal law protection regimes.

Comparative and informative characteristic of the legal regulation of the blockchain and cryptocurrency: state and prospects

The authors analyzed the market of cryptocurrency goods, considered the essence of cryptocurrency and proposed the definition of their legal status, studied the experience of some jurisdictions regarding the possibilities and threats of the use and regulation of cryptocurrency. In the process of analyzing the experience of regulating cryptocurrency, we have found similar and distinctive features in some jurisdictions. First, each country, in view of the great potential of the blockchain technology, is trying in one way or another to create a favorable climate for its development. Secondly, the use of cryptocurrency goods is rapidly developing, and their impact on economic processes, both at the international and national levels is increasing, while states are faced with the problem of adapting their tax legislation to the current challenges of the digital economy, since the definition of the status of cryptocurrency does not directly lead to lack of funds to the state budget from operations with these assets. Thirdly, today there are more than 2,000 cryptocurrency is traded through various trading platforms - stock exchanges and can be used to launder proceeds from crime. Thus, it is necessary to develop common standards for the regulation of cryptocurrency and the requirements for such crypto exchange counterparts, through the licensing of operations with cryptocurrencies. At the same time, the important question is what government bodies should exercise such control.

Potential of Cryptocurrency as Global Money of the Sixth Technological Mode Based on the Global Financial System

The change in technological modes is accompanied by financial crises that lead to changes in the global financial system. For a long period, gold played the role of world money. However, the development of technology required the transition to more flexible forms of world money, the basis of which is the national currency of the most industrialized countries. Currently, the transition to the technologies of the Sixth technological mode is accompanied by a global financial crisis. The US dollar does not cope with the functions that the latest technologies present to monetary systems. They are being replaced by a new generation of cryptocurrency-based monetary systems. Cryptocurrencies and blockchain offer new forms of investing, calculating, storing, and saving money. Such financial instruments as various types of cryptocurrencies, tokens, smart contracts, and crypto exchanges offer new opportunities for effective investment in technologies of the Sixth technological mode.

Crypto Covered Interest Parity Deviations

Studying deviations from covered interest rate parity (CIP) in the Bitcoin/US-Dollar (BTC/USD) market, we find large CIP deviations of up to 15% until Q1/2018. Afterwards, CIP deviations have been subdued, which we attribute to the market entry of high-frequency traders (HFTs). We argue that these market entries have increased efficiency of cryptocurrency markets with respect to CIP as well as liquidity, volatility, and bid-ask spreads. Remarkably, these efficiency gains are larger for the less liquid cryptocurrency Litecoin. Employing a difference-in-differences design, we show that the launch of the BTC/USD future at the Chicago Mercantile Exchange (CME) did not affect market efficiency. Finally, remaining CIP deviations after Q1/2018 seem mostly related to increased credit risk of certain crypto exchanges.

The Size of the Crypto Economy: Calculating Market Shares of Cryptoassets, Exchanges and Mining Pools

Abstract Cryptoassets and related actors such as crypto exchanges and mining pools are now fully integrated into mainstream economic activity. A necessary corollary is that they have attracted heightened regulatory and investor scrutiny. Although some rules and obligations apply uniformly across all economic actors in a given sector, many others, such as antitrust laws and some financial regulations as well as investor decisions are informed by actors’ relative economic size—meaning that those with larger market shares can become more attractive regulatory or investing targets. It is therefore a foundational issue to properly measure the economic footprint of economic actors in the crypto economy, for otherwise regulatory oversight and investor decisions risk being misled. This has proven a remarkably difficult exercise for multiple reasons including unfamiliarity with the underlying technology and role of involved actors, lack of understanding of the applicable metrics’ economic significance, and the unreliability of self-reported statistics, partly enabled by lack of regulation. Acknowledging the centrality of cryptoasset size in a number of regulatory and policymaking areas and the fact that previous attempts have been incomplete, simplistic, or even plainly wrong, this paper presents the first systematic examination of the economic footprint of cryptoassets and their constituent actors—mining pools and crypto exchanges. We aim to achieve a number of objectives: to introduce, identify, and organize all relevant and meaningful metrics of crypto economic actors market share calculation; to develop associations between metrics, and to explain their meaning, application, and limitations so that it becomes obvious in which context metrics can be useful or not, and what the potential caveats are; and to present rich, curated, and vetted data to illustrate metrics and their use in measuring the shares of crypto economic actors in their respective markets. The result is a comprehensive guidance into the size of the crypto economy.

Directional Movement Distribution in the Bitcoin Markets

The crypto exchanges operate primarily on the internet, where the speed of information spreading is significant. Therefore, it is expected that there should be no significant differences among the individual exchanges concerning the same asset being traded. Prices should quickly reach comparable values on all stock exchanges, and they should return to equilibrium in a relative time frame. Hence, the investors, while making decisions on the selection of a cryptocurrency market, should be guided primarily by the exchange security considerations, its flexibility, availability of a product offer, and costs of order processing. The work aims to check whether virtual currency exchanges differ from each other in the context of directional movement, both in an upward and downward trend. To achieve the objective of the paper, we used Directional Movement Index, supported by the Directional Indicators, to compare the distribution of the strength of the directional movement across three different cryptocurrency exchanges (Bitstamp, Coinbase, Kraken) within the up and the downward price movement phase. The comparison is made based on the results of the non-parametrical tests such as Wilcoxon test, Hodges Lehmann test, Ansari-Bradley test, and Conover test. The results show that theoretically, the choice of a cryptocurrency exchange in an upward trend will cause no significant difference for an investor and its strategy. However, the choice of a stock exchange in a downward trend may have a substantial impact on the rates of return.

Serial and large investors in initial coin offerings

This study is the first to provide systematic evidence regarding investor behaviour in initial coin offerings (ICOs), their investment patterns and their role in the success of campaigns. Using hand-collected data on 472 public token sales over the period of 2013–2017, we advance the ICO literature by demonstrating that some contributors often invest in more than one campaign, and such serial investors contribute earlier. However, they are not more informed and fail to pick better-quality ICOs. Only large serial investors invest more in campaigns that raise more funds, attract more contributors, are more likely to reach their hard caps, and distribute tokens that are listed on crypto exchange. Our findings raise the question of whether regulatory or industry self-regulation agreements on information provision measures are needed to protect smaller retail ICO investors that exhibit naïve reinforcement learning behaviour.

Crypto Governance: Analysing and Comparing Platforms for Crypto Assets Trading

The annualised volume of Crypto Exchange markets reaches the trillion dollars threshold. Due to the disperse and decentralised nature of this market, in which each Crypto Asset Trading Platform works as an independent darkpool, official statistics unavailable and there is little private research data. The objective of this paper is to present a brief overview of the global Crypto Exchanges market, providing an inventory of the available Crypto Exchanges, as of the end of 2018, and compare the most relevant in both quantitative and qualitative terms. From a sample representing 99% of a daily global market share, measured by trading volume, a Key Performance Indicator system is proposed and tested to evaluate the level of corporate governance (or ‘crypto governance’) observed at each Crypto Exchange. The outputs are compared with average fees and individual market shares. The results obtained from current market data provide evidence that most of the volume is traded at Crypto Exchanges with lower governance scores, while those ranked with higher governance scores charge, on average, higher trading fees.

Competition and Product Quality: Fake Trading on Crypto Exchanges

How competition affects product quality and how product quality choices impact firms' operating performance are open empirical questions. We use a setting that is especially suitable to answering these questions: cryptographic exchanges, on which product quality is inversely related to fake (inflated) trading volume. We examine the effects of competition among crypto exchanges on their trading volume inflation and the impact of fake trading on exchanges' operating performance. We develop statistical measures to detect fake trading, which we validate in several ways and use in analyzing determinants and consequences of trading volume inflation. Various static and dynamic competition measures are positively associated with measures of fake trading at both the exchange and exchange-currency pair levels. Exchanges that inflate trading volume tend to succeed in misleading investors in the short run but are punished in the long run, consistent with the tradeoff between short-lived increases in rents and future losses due to damaged reputation.

Blockchain Startups and Prospectus Regulation

Initial coin offerings are a new way for blockchain startups to finance project development by issuing coins or tokens in exchange for fiat money or Bitcoin or other cryptocurrencies. In this article, we start from the current distinction between different types of tokens and argue that it can create confusion and should be at least partially abandoned. We believe that the conceptual difference between a currency token and a tradable utility token is just the dimension of the crypto environment in which the token is spent. More specifically, ‘utility tokens’ combine the customer payment mechanism with the utility component and, when tradable on a secondary market, the investment one. We argue that they blur the traditional distinctions between currencies, financial assets and consumption goods. Moreover, we stress the increasing importance of online crypto exchanges. Recently some exchanges have also taken up the role of trusted intermediaries and staked their reputation on token offerings, which are termed initial exchange offerings and have gained in popularity. We therefore argue that the crypto market increasingly looks like a segment of the capital market and behaves as such. Given that tokens have a clear investment component, we show that they are tradable securities under the Prospectus Regulation. We compare the European securities regulation with its US counterpart and focus on prospectus exemptions, highlighting the great differences between Europe and the US which make Europe less amicable to blockchain startups.

Legal Challenges of Cryptocurrencies: Isn’t It Time to Regulate the Intermediaries?

In only one decade, cryptocurrencies have witnessed significant growth, with Bitcoin being the most dominant one. They are not efficient payment methods, although they bring some benefits linked to the underlying technology they use (Blockchain). In reality, they function more as investment assets than as payment instruments and pose various risks, which are very similar to those encountered on capital markets (price volatility, fraud, market manipulation). In order to deal with these risks, regulation should apply to intermediaries who provide services in relation to cryptocurrencies, such as crypto wallets, operation of crypto exchanges and brokerage. To this end, the European legislator should consider two options. It could, on the one hand, bring cryptocurrency service providers within the scope of the existing financial services regime and thus modify MIFID II in order to include cryptocurrencies in the list of financial instruments. The European legislator could also, on the other hand, aim at creating a new appropriate and proportionate regime that draws on the existing one. Insofar as the existing regulatory framework was not designed with cryptocurrencies in mind and as some of the current rules may not be tailored to the specificities of these assets, the second option is preferable.

Bitcoin Futures and Option Markets: Searching for Completeness

Cryptocurrencies have emerged in the last decade as a new asset class unlikely to disappear despite its extraordinary volatility. Futures contracts on Bitcoins were introduced in December 2017 by the Chicago Mercantile Exchange and options are being traded on crypto exchanges. Our goal in this paper is threefold: i) present the main features of cryptocurrency spot and derivative markets; ii) argue that storability of Bitcoins implies the existence of a convenience yield and infer from traded Future prices the risk neutral drift of the Bitcoin price in the continuous time Black-Scholes setting quite appropriate to continuously traded bitcoins. We use the prices of options traded on the Deribit Exchange to build the volatility smiles and skews observed at different dates of 2019 for short and long dated maturities and compare them to forward curves. Lastly, the robustness of the Black-Scholes formula allows capturing in our approach the stochastic volatility displayed by price trajectories and provides some answers to the incompleteness of the bitcoin market.

A Global Guide to a Crypto Exchange Regulatory Framework

The emergence of bitcoin in 2008 led to the growth and widespread use of cryptos and crypto exchanges. Unfortunately, crypto exchanges have been subject to hacks among other problems causing investors to lose billions of dollars. These problems are attributed to a lack of comprehensive regulatory framework for crypto exchanges. To address them, the paper seeks to provide guidelines on core issues that a comprehensive regulatory framework should address such as licences, minimum capital requirements, regulatory security standards, among others, by drawing experiences across various jurisdictions. The paper thereafter concludes by suggesting ways through which such regulation could be properly implemented and implores co-operation from both the exchanges and regulators to ensure regulatory efficiency. Keywords: crypto, regulation, crypto exchange, initial coin offerings. DOI : 10.7176/JLPG/90-02 Publication date :October 31 st 2019

Cryptocurrency and Blockchains: Retail to Institutional

A reduction in cost of traditional financial intermediation was one of the main motivations cited by Satoshi Nakamoto in his/her/their 2008 proposal for: “… an electronic payment system based on cryptographic proof instead of trust.” We begin here with some back-of-the-envelope calculations of these potential cost savings and benefits from the customer perspective. We then discuss the public blockchain ledger and various solutions to two important problems that are constraints on the public blockchain’s trustless consensus, viz. “mining” costs in proof-of-work and governance issues. We speculate that foreseeable institutional implementations will often involve integration of permissioned blockchains with public blockchains. We then discuss exchanges for trading cryptocurrencies, the second component of the crypto blockchains, and in particular their “teething problems” along with the evolution of a subset of them into increasingly “industrial strength” entities. We suggest that with a more industrial strength infrastructure in place, self-executing smart contracts are virtually natural counterparts for more traditional passive investment products. We end with a discussion of Security Token Offerings (STOs) and the newer Initial Coin Offerings (ICOs): STOs are an interesting hybrid between the ICOs and traditional IPOs; they could conceivably pave the way to a long-time-coming “direct electronic IPO” market. TOPICS:Currency, exchanges/markets/clearinghouses, exchange-traded funds and applications Key Findings • A set of crypto exchanges are evolving into institutional-strength entities with law-of-one-price, clearing and settlement, custody services, and user algorithms to deal with fake inflated trade volumes. • Pure public blockchains with well-known “blockchain trilemma” problems like high energy consumption, low performance, governance shortcomings, and no clear “how-to-pay” mechanism for ledger-updating in non-crypto applications, are inexorably leading towards hybrid public/permissioned blockchain networks. • Despite their rocky start, STOs and ICOs are leading to direct or electronic IPO markets, while smart contracts running on blockchains with securities trading identifiers and data seem ideal vehicles for administering passive investment products.