Came across this paper published by the BIS titled “Distrust or speculation? The socioeconomic drivers of US cryptocurrency investments” authored by Raphael Auer and David Tercero-Lucas. The paper makes clear that its conclusions are not necessarily endorsed by the BIS but it is interesting none the less.
The authors downplay the idea that cryptocurrencies are all about opting out of fiat currencies and cite evidence that investors are treating crypto as just another asset class.
From a policy perspective, the overall takeaway of our analysis is that as the objectives of investors are the same as those for other asset classes, so should be the regulation. Cryptocurrencies are not sought as an alternative to fiat currencies or regulated finance, but instead are a niche digital speculation object.
From this perspective, increased regulation is actually a good thing for crypto
A clarifying regulatory and supervisory framework for cryptocurrency markets may be beneficial for the industry. In fact, regulatory announcements have had a strong impact on cryptocurrency prices and transaction volumes (Auer and Claessens, 2019, 2020), and those pointing to the establishment of specific regulations tailored to cryptocurrencies and initial coin offerings are strongly correlated with relevant market gains.
They go so far as arguing that regulation may actually improve the long term viability of the asset class by addressing the problems associated with the energy consumption of the “proof of work” model.
Better regulation may also be beneficial – quintessential in fact – for the industry when it comes to the basic security model of many cryptocurrencies. This is so as the long-term viability of cryptocurrencies based on proof-of-work is questionable. Auer (2019a) shows that proof-of-work can only achieve payment security (i.e., finality) if the income of miners is high, and it is questionable whether transaction fees will always be high enough to generate an adequate level of income to guarantee save transactions and rule out majority attacks. In the particular for the case of Bitcoin, the security of payments will decrease each time the “block subsidy” declines (Auer, 2020). Potential solutions often involve some degree of institutionalisation, which in the long-run may require regulation or supervision.
I have to confess that I skimmed over the middle section of the paper that documented the modelling the authors used so I can’t attest to the reliability of the research. I read it mostly from the perspective of gaining a perspective on how the regulatory community is thinking about cryptocurrency.
Tony – From the Outside