Kiffmeister’s #Fintech Daily Digest (11/24/2020)

Dissecting a Bitcoin Bull Market

CoinMetrics analysis of miner behavior coupled with custody data on Huobi showed no evidence to suggest this rally is being predominantly driven by a regulatory crackdown in China. The downward trend in assets under custody (AuC) by retail exchanges may be an indication that this rally is being driven by increased institutional adoption. Given the use of over-the counter (OTC) on-ramps, an increase in institutional participation would result in positive price action, but limited on-chain footprint, which is what we might be witnessing in this bull market. 

Bitcoin finally finds a rationale in doomsday scenarios

“For some, government responses to the Covid-19 pandemic have provoked nightmarish imaginings of a future in which the world slips towards authoritarianism and civil liberties cannot be taken for granted. For those of such bent, bitcoin’s anonymous security acts as a hedge against the worst of dystopian realities. It might be an extremely expensive and energy-intensive solution, but at least it provides a rationale for bitcoin’s existence. As a doomsday contingency system, I am glad someone created bitcoin just in case.” 

Ethereum 2.0 Deposit Contract Secures Enough Funds to Launch

The smart contract required for triggering the first phase of Ethereum 2.0 has enough funds to begin activation of Ethereum’s most ambitious upgrade yet, which will radically shift Ethereum’s economic model, resource usage and governance. To be clear, the network itself isn’t launching just yet. The launch of Ethereum 2.0 will activate a parallel proof-of-stake blockchain dubbed “the beacon chain” to run in parallel alongside the existing Ethereum network. The initial phases of its development will not impact existing users and decentralized applications on Ethereum. 

Ethereum ‘Killer’ Avalanche Is Building an ETH Bridge to Liquidity

Avalanche, one of the many blockchain networks that claim to be faster, cheaper and more capable than Ethereum, announced the “Avalanche-Ethereum Bridge,” a way to transfer Ethereum tokens to the Avalanche blockchain and vice versa. Avalanche’s bridge is powered by ChainSafe, a blockchain interoperability protocol produced by ChainBridge. ChainBridge built Avalanche’s bridge using funds from the Avalanche-X grants program. Avalanche’s mainnet launched in September after raising $60 million, $42.5 million of which came from a public token sale.  

Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics

This paper analyzes policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. It maps the framework into a baseline business cycle model with “pseudo wedges” and derives optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. It generalizes the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but shows that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017. 

CBDC: Can central banks succeed in the marketplace for digital monies?

This paper provides an overview of the existing payment ecosystem and derives a systemic taxonomy of CBDCs that distinguishes between new payment objects and new payment systems. Using this systemic taxonomy, it is able to categorize different CBDC proposals. In order to discuss and evaluate the different CBDC design options, it develops two criteria: allocative efficiency, i.e. whether a market failure can be diagnosed that justifies a government intervention, and attractiveness for users, i.e. whether CBDC proposals constitute attractive alternatives for users compared to existing payment objects and payment systems. The analysis shows that there is no justification for digital cash substitutes from the point of view of allocative efficiency and the user perspective. Instead, the analysis opens the perspective for a retail payment system organized or orchestrated by the central bank without a new, independent payment object.