Regulation of the Financial Components of the Crypto-Economy

SIPA’s Entrepreneurship & Policy Initiative Working Paper Series, 2019

100 Pages Posted: 12 Dec 2019

See all articles by Leon Perlman

Leon Perlman

Columbia Business School, Columbia Institute for Tele-Information

Date Written: November 18, 2019

Abstract

The emergence into the public discourse in 2009 of the novel peer-to-peer Bitcoin crypto-currency phenomenon caught many regulators unawares. We now know that Bitcoin and its underlying ‘blockchain’ technology represented a transformational vanguard of a new ‘trustless’ method of sharing data and processes and contracting in a decentralized, traceable and secure manner and, in many cases, without the need for intermediaries. The family of blockchains and its analogues are now known as distributed ledger technologies (DLTs).

Whatever their form or function, ‘crypto’-derived and focused products and services based on DLT are here to stay. They are transformational not just of their utilitarian function in making data transfer and storage more efficient, but notably we argue also in their potential to democratize access to financial products and services, a change not seen the dawn of the commercial Internet in the 1990s. There are still many hurdles and risks to overcome though before they become mainstream, not least of which is regulatory certainty.

The ‘crypto-economy’, as we dub it, has many avenues for transformation by DLTs. This may be through DLT’s novel utilitarian function of new data sharing and storage techniques that are secure, tamper-evident and distributed. Or the introduction of new financial products and trading techniques through the production and use of new ‘crypto-assets’ that feature at their core malleable crypto ‘tokens’ used as ‘programmable money.’ The financial sector in particular is seeing the release of these new asset classes that democratize access to financial products through tokenization, catalyzing and enabling fractional ownership of legacy and new crypto-inspired asset classes. Some of these crypto-assets have attached profit or governance rights, others providing some consumption value. They may also act as payment tool as a crypto-currency, enabling the buying and selling of goods and services. The crypto-economy may also support capital raising through a now controversial method called an Initial Coin Offering.

Suggested Citation

Perlman, Leon, Regulation of the Financial Components of the Crypto-Economy (November 18, 2019). SIPA’s Entrepreneurship & Policy Initiative Working Paper Series, 2019, Available at SSRN: https://ssrn.com/abstract=3493342 or http://dx.doi.org/10.2139/ssrn.3493342

Leon Perlman (Contact Author)

Columbia Business School, Columbia Institute for Tele-Information

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