Kiffmeister’s #Fintech Daily Digest (12/29/2020)

The price of XRP continued to plummet in the wake of the U.S. Securities Exchange Commission lawsuit alleging that Ripple sold over $1.3 billion of XRP through an unregistered, ongoing digital asset securities offering. When I posted this, XRP is off about 40% on the day at about $0.18, and off 75% from its recent (November 24) peak of about $0.72. Today’s down gap was fueled by the decisions by Coinbase and to delist and suspend trading of XRP, joining OKCoin.

2020: The year bitcoin went institutional

In 2020, bitcoin finally got the attention of institutional investors. The broad financial markets have been volatile amid the COVID-pandemic, but the central banks have intervened pushing monetary stimulus and governments have launched large fiscal stimulus packages. The backdrop of the intervention has been a sharp increase in M2 (+25%) and looming fears of inflation. This in turn brought institutional attention to Bitcoin, due to its store of value properties. The increased institutional presence is clear. Both in terms of esteemed investors publicly commenting on bitcoin allocations to hedge against inflation, but also in terms of market data, most notably the rise of CME’s Bitcoin futures. As of December 29th, CME is now the largest contributor to the open interest in the BTC futures market. (Click here for the Arcane Research report and a nice graphic illustrating all of this.) 

The Problem with Calling Bitcoin a “Ponzi Scheme

Neither “ponzi” nor “pyramid” are perfectly accurate descriptions for how crypto-asset systems like Bitcoin and Ethereum actually work. Ponzi schemes are usually administered by a central operator, and they fall apart when demands exceed deposits and the scheme promoter is unable to satisfy investor requests, causing a loss in confidence or a run which first ruins the scheme’s liquidity. In contrast, pyramid schemes are more decentralized in character. Each victim of the scheme, to recoup their funds, is required to become a principal in the scheme and recruit further victims, who then pay the principal and earlier principals above him. The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has the strengths of both and (currently) the weaknesses of neither. 

Losing Contact: The Impact of Contactless Payments on Cash Usage

This study investigates whether contactless credit cards are an important contributor to the decline in cash transactions, based on Canadian panel data from 2010 to 2017. It shows that unobserved factors influence cash use, and these must be controlled for when estimating the impact of contactless credit cards on cash use. It also shows the different effects that contactless credit cards have on the choice to pay with cash (the extensive margin) and on how much cash is used (the intensive margin). The study finds that the use of contactless credit cards negatively influences how much cash is spent but not whether to pay in cash. Overall, the impact of contactless credit cards on the transactional demand for cash in Canada is small over the 2010–17 period, at about 3 percent. These results are in line with previous findings for Canada and elsewhere. 

Markets for Crypto Tokens, and Security under Proof of Stake

(Co-written by Christian Catalini, Chief Economist of Diem.) Cryptocurrency systems based on proof of stake (PoS) grant governance rights to the holders of currency tokens and therefore are vulnerable to attack by adversaries who buy tokens in order to gain control. To evaluate the robustness of PoS cryptocurrencies to such attacks, we model the market for tokens and determine how the cost of attacking the system depends on the level and shape of token supply and demand. We show that, contrary to popular belief, the appreciation of tokens in response to demand by attackers plays a small role in securing the system. In particular, stablecoins can be less vulnerable to attack than cryptocurrencies that are freely floating. Moreover, PoS cryptocurrencies that primarily function as mediums of exchange are vulnerable to attack if the velocity of money is high.