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- Crypto and Digital Assets
- Venture capital investment in Crypto, Web 3 start-ups soars
- 15 Bitcoin ETFs and Cryptocurrency Funds You Should Know
- Why Donate Bitcoin, Ethereum, NFTs and other Cryptocurrencies to Charity this Holiday
- Crypto collapse sheds new light on loyalty to digital assets
- Tax treatment of cryptocurrencies
- No S-Corp for You? – New Proposed Carried Interest Regulations that May Affect Crypto Fund Managers
- The rise of using cryptocurrency in business
The BIS hosts nine international organisations engaged in standard setting and the pursuit of financial stability through the Basel Process.
Decentralised finance DeFi is touted as a new form of intermediation in crypto markets. The key elements of this ecosystem are novel automated protocols on blockchains — to support trading, lending and investment of cryptoassets — and stablecoins that facilitate fund transfers.
There is a "decentralisation illusion" in DeFi since the need for governance makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power. If DeFi were to become widespread, its vulnerabilities might undermine financial stability. These can be severe because of high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers such as banks. Existing governance mechanisms in DeFi would provide natural reference points for authorities in addressing issues related to financial stability, investor protection and illicit activities.
Crypto markets are underpinned by various forms of intermediation. While some forms of crypto intermediation have direct analogues in traditional finance, others — known as decentralised finance, or "DeFi" — are fundamentally new and have recently gained more traction. DeFi provides financial services without centralised intermediaries, by operating through automated protocols on blockchains.
While the main vision of DeFi's proponents is intermediation without centralised entities, we argue that some form of centralisation is inevitable.
As such, there is a "decentralisation illusion". First and foremost, centralised governance is needed to take strategic and operational decisions. In addition, some features in DeFi, notably the consensus mechanism, favour a concentration of power. In principle, DeFi has the potential to complement traditional financial activities. At present, however, it has few real-economy uses and, for the most part, supports speculation and arbitrage across multiple cryptoassets.
Given this self-contained nature, the potential for DeFi-driven disruptions in the broader financial system and the real economy seems limited for now. DeFi would need to satisfy a number of conditions if it is to become a widely used form of financial intermediation. For one, blockchain scalability and large-scale tokenisation of traditional securities would need to be improved.
No less importantly, DeFi will need to be properly regulated. Public authorities would need to interface with DeFi's inherent governance structures, so as to ensure sufficient financial stability safeguards as well as to enhance trust by addressing investor protection issues and illegal activities.
This special feature examines DeFi mainly from a financial stability perspective, drawing attention to vulnerabilities that stem from leverage and liquidity mismatches. As a key attribute of crypto markets, leverage amplifies their volatility and procyclicality. In addition, the crypto ecosystem lacks internal shock absorbers, such as banks, that can provide liquidity at times of stress. This increases the potential for stablecoin runs that could sever links across investors and platforms, eroding the "networked liquidity" that is a defining feature of DeFi.
The rest of this special feature is organised as follows. The first section provides an overview, focusing on the building blocks of the DeFi ecosystem. The second outlines the decentralisation illusion.
The third discusses key vulnerabilities from a financial stability perspective. The final section concludes with policy considerations. Decentralised finance DeFi is a fast-growing part of the crypto financial system. The rise of cryptoassets can be traced back to a whitepaper Nakamoto outlining a peer-to-peer transaction mechanism — blockchain — and the creation in of the first consequential cryptoasset — Bitcoin BTC.
Numerous blockchain technologies, as well as the respective cryptoassets that serve as mediums of exchange, have mushroomed since then.
This technology supports automated contracts with pre-defined protocols hosted on blockchains, commonly referred to as "smart contracts", 2 and was instrumental to spurring on the DeFi ecosystem. The term DeFi refers to the financial applications run by smart contracts on a blockchain, typically a permissionless ie public chain.
The key difference between DeFi and CeFi lies in whether the financial service is automated via smart contracts on a blockchain or is provided by centralised intermediaries. While DeFi records all the contractual and transaction details on the blockchain ie on-chain , CeFi relies on the private records of intermediaries, such as centralised exchanges and other platforms ie off-chain. DeFi aims to provide financial services without using centralised entities. Namely, it digitises and automates the contracting processes, which — according to its proponents — could in the future improve efficiency by reducing intermediation layers.
Importantly, it also provides users with much greater anonymity than transactions in CeFi or traditional finance. Such propositions have been key drivers of the heightened interest in DeFi platforms and the strong price rises of the attendant cryptoassets Graph 1 left-hand panel. The expansion of DeFi in turn has hastened the emergence of alternative blockchain designs that host smart contracts and seek to rival Ethereum.
DeFi differs from traditional finance not so much in terms of the types of service it seeks to provide, but rather in how it performs them. Each row in Table 1 represents a specific service, grouped under three broad functions: trading, lending and investment. This section analyses the main building blocks of these services, and how the underlying mechanisms compare with those in CeFi and traditional finance.
Stablecoins are cryptoassets that strive to tie their values to fiat currencies, such as the US dollar. They play an important role in the DeFi ecosystem, facilitating fund transfers across platforms and between users. Stablecoins allow DeFi market participants to avoid converting to and from fiat money at every turn. They also act as a bridge between the crypto and the traditional financial systems, which share a common numeraire — ie fiat currencies.
The growth of stablecoins has been exponential since mid, when DeFi activities started to take off. In particular, USD Tether has gained substantial scale as a "vehicle currency" for investors who seek to trade in and out of cryptoassets right-hand panel. Being the first stablecoin, its growth has benefited from a user base built up early on, which has attracted new adopters seeking ease of trading network externalities.
The mechanism for assuring a stable value varies across different designs. In the case of CeFi stablecoins, a designated intermediary manages issuance and redemption as well as the reserve assets backing the stablecoins.
Some of these assets are bank deposits or their close substitutes. Other assets may comprise short-term securities — such as Treasury bills, certificates of deposit and commercial paper — as well as cryptoassets themselves. To the extent that DeFi relies on such stablecoins, it remains dependent on CeFi and traditional finance. DeFi stablecoins record all transacting histories directly on-chain, without the involvement of centralised intermediaries. They rely on an overcollateralised pool of cryptoassets, ie the underlying assets are worth more than the stablecoins in circulation.
Since crypto collateral has a very high price volatility, as measured in the reference fiat currency, DeFi stablecoins incentivise users to actively monitor the collateralisation ratio.
They do so by adjusting the supply of stablecoins to match their demand. So far, no purely algorithmic stablecoin has been widely adopted. In sum, stablecoin issuers receive assets collateral in exchange for their own liabilities stablecoins. While this mechanism looks superficially similar to how banks operate, there are fundamental differences.
Issuers lack public backstops, such as deposit insurance, and rely on private backstops collateral to ensure that stablecoins maintain a steady value and are suitable as mediums of exchange. As such, the expansion of the balance sheets of stablecoin issuers, at least currently, is driven more by the appetite of investors to hold the stablecoins than by any desire of the issuers to acquire more assets.
In other words, this growth is liability-driven, while the expansion of bank balance sheets is commonly asset-driven McLeay et al The former are structured around the same principles as their conventional counterparts. CEXs maintain off-chain records of outstanding orders posted by traders — known as limit order books.
By contrast, DEXs work in substantially different ways, by matching the counterparties in a transaction through so-called automated market-maker AMM protocols. AMMs follow mathematical formulas to determine prices based on transaction volumes. Box A discusses how AMMs incentivise liquidity provision; it also looks at their susceptibility to market manipulation. In addition, trading on DEXs incurs execution costs when transactions are validated on the blockchain. These stem from so-called gas fees, which are designed to compensate validators.
Gas fees increased markedly as cryptoassets gained popularity and blockchains such as Ethereum became more congested compare left- and right-hand panels.
Although transaction costs are higher in DEXs, some traders still prefer these platforms, in part due to their greater anonymity and interoperability with other DeFi applications the so-called "DeFi Lego".
Lending in DeFi tends to be overcollateralised. The reason is similar to that underpinning the overcollateralisation of DeFi stablecoins — the inherent lack of trust in anonymous transactions, together with the high volatility of the cryptoassets used as collateral. To protect the lender, loans can be automatically liquidated when the collateralisation ratio falls below a threshold. At present, the need for crypto collateral stands in the way of lending to households and businesses, eg for house purchases or productive investment.
Rudimentary forms of unsecured lending, known as "credit delegation", are available on some platforms. This often involves entities with established off-blockchain relationships, making collateral unnecessary. DeFi lending platforms also offer a unique financial instrument, typically referred to as flash loans. These allow arbitrageurs to act without their own capital by taking out a loan for the entire arbitrage trade and then repaying the loan.
Such loans are of zero duration and are essentially risk-free requiring no collateral , as they are granted only if the arbitrage trade ensures the repayment of both principal and interest. Crucially, this is possible as all legs of the transaction can be attached to the same block ie settled simultaneously on the blockchain.
The growth of DeFi lending platforms has also encouraged the development of applications similar to investment funds in traditional finance. These decentralised portfolios follow pre-determined investing strategies, eg aggregating funds from investors and automatically shifting them across crypto lending platforms to profit from the best yields. DeFi purports to be decentralised. This is the case for both blockchains and the applications they support, which are designed to run autonomously — to the extent that outcomes cannot be altered, even if erroneous.
But full decentralisation in DeFi is illusory. A key tenet of economic analysis is that enterprises are unable to devise contracts that cover all possible eventualities, eg in terms of interactions with staff or suppliers. Centralisation allows firms to deal with this "contract incompleteness" Coase and Grossman and Hart In DeFi, the equivalent concept is "algorithm incompleteness", whereby it is impossible to write code spelling out what actions to take in all contingencies.
This first-principles argument has crucial practical implications. All DeFi platforms have central governance frameworks outlining how to set strategic and operational priorities, eg as regards new business lines. This element of centralisation can serve as the basis for recognising DeFi platforms as legal entities similar to corporations. While legal systems are in the early stages of adapting, decentralised autonomous organisations DAOs , which govern many DeFi applications, have been allowed to register as limited liability companies in the US state of Wyoming since mid In addition, certain features of DeFi blockchains favour the concentration of decision power in the hands of large coin-holders.
Crypto and Digital Assets
A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology. The onus is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence of which there is no shortage. Base cost adjustments can also be made if falling within the CGT paradigm. Gains or losses in relation to crypto assets can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:. Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act, including a requirement for third-party service providers to submit financial data.
Venture capital investment in Crypto, Web 3 start-ups soars
District Judge Valerie E. Since its creation, Virgil Sigma purported to employ a strategy to earn profits from arbitrage opportunities in the cryptocurrency market. According to its public marketing materials, Virgil Sigma has been profitable in every month from August to the present, with the sole exception of March QIN also regularly participated in calls with Virgil Sigma investors and other forms of public communication where he touted the growth and success of Virgil Sigma. VQR employed a variety of trading strategies and was poised to make or lose money based on the fluctuations in the value of cryptocurrency and was not market neutral. For example, in or about , QIN invested funds from Virgil Sigma into certain initial coin offerings, a speculative form of investing in new issues of cryptocurrency. As a result of these and other fraudulent activities, QIN dissipated nearly all of the investor capital in Virgil Sigma. The Virgil Sigma fund and VQR have ceased operations and the liquidation and distribution of assets is being handled by a court-appointed receiver in the matter of S. Qin , 20 Civ. She further thanked the Securities and Exchange Commission for its cooperation and assistance in this investigation.
15 Bitcoin ETFs and Cryptocurrency Funds You Should Know
Download a PDF of this article. For charitably minded individuals, cryptocurrency investments—such as Bitcoin and Ethereum—held more than one year may provide a unique opportunity to leverage highly appreciated assets to achieve maximum impact with charitable giving. Donating long-term held cryptocurrency investments can unlock additional funds for charity in two ways. Second, if you itemize deductions on your tax return instead of taking the standard deduction, you may claim a fair market value charitable deduction for the tax year in which the gift is made and may choose to pass on that savings in the form of more giving. Donor-advised funds, which are c 3 public charities, can be a tax-efficient solution for accepting contributions of cryptocurrency, as the funds typically have the resources and expertise for evaluating, receiving, processing, and liquidating non-cash assets.
Why Donate Bitcoin, Ethereum, NFTs and other Cryptocurrencies to Charity this Holiday
A CoinShares report states that 37 investment products were launched in versus 24 in , making a total of products at present, indicative of the demand and popularity of digital assets. It said the total number of crypto assets or coins in investment product form expanded from nine to 15 during the year. Additionally, 37 investment products were launched in versus 24 in , making a total of products, indicative of the demand and popularity of digital assets. Never miss a story! Stay connected and informed with Mint.
Crypto collapse sheds new light on loyalty to digital assets
The much-celebrated launch of a few cryptocurrency funds and platforms late last year has turned into a test of wills, as digital currencies have been falling in stride with the financial markets so far this year. In early December, Ritholtz launched a platform along with WisdomTree to offer access to a diversified cryptocurrency index in the form of a separately managed account on the Onramp Invest platform. But the current pullback can be traced, coincidentally, to the timing of the first exchange-traded fund offering exposure to Bitcoin futures contracts. But as the first to market, BITO set the bar high and continues to gain appeal among some investors. Following its Oct.
Tax treatment of cryptocurrencies
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The reference to an ICO in this information sheet includes any other form or method of distributing new crypto-assets irrespective of what it is called. Australian laws apply where the crypto-asset is promoted or sold in Australia, including from offshore. The use of offshore or decentralised structures does not mean that key obligations under Australian laws do not apply or can be ignored. We encourage entities to use their innovative technology to build their products and services in a way that complies with the intention of the laws in place to safeguard consumers and the integrity of financial markets in Australia. Figure 1 provides high-level regulatory signposts for crypto-asset participants as a starting point. If you are giving advice, dealing, providing insurance, or providing other intermediary services for crypto-assets that are financial products a range of Australian laws apply, including the requirement to hold an AFS licence: see Part C and for more information Regulatory Guide 36 Licensing: Financial product advice and dealing RG
The rise of using cryptocurrency in business
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