Legal challenges of cryptocurrencies and DLTs on banking and finance
Decentralized, permissionless and blockchain-based cryptocurrencies and their underlying technology are said to have as transformative an impact on value as the invention of the internet had on information. In addition to the political and ideological motivations and the specific economic and financial backdrop against which bitcoin was born, cryptocurrencies have emerged to address frictions in the financial markets. The most important of these frictions has been the absence of an uncensorable global peer-to-peer (decentralized) virtual payment rail, store of value and medium of exchange that could eventually replace trust in third parties with cryptographic proof. Prior to bitcoin (BTC), addressing the double-spending problem was delegated to the trusted third parties having control of centralized ledgers. Bitcoin eventually solved this problem in a secure, decentralized, consensus-based and censorship-resistant manner, without relying on centralized third parties. The proof of work (PoW) algorithm used in the Bitcoin Blockchain, despite being energy intensive, appears to be a secure technique which provides a decentralized and incentive-compatible mechanism for verifying and confirming transactions, as well as securing the Bitcoin Blockchain.
However, despite their promises, cryptocurrencies can pose risks to monetary and financial systems. Some of these risks include concerns about financial crime, fraud, market manipulation, consumer protection, the development of large closed networks that can potentially become barriers to entry, concerns about data protection, taxation policy for cryptocurrencies, monetary policy, and financial stability. Further future challenges may include the lack of common standards and interoperability, privacy concerns, scalability, potential risks in the issuance of central bank digital currency (CBDC) or digital base money (DBM), and last but not least, challenges to the governance of money.
In the banking and financial Law section of the LuxLi, our aim is to analyse the impact of cryptocurrencies, the blockchain and distributed ledger technologies (DLTs) on banking and finance and study their legal challenges. We have an ongoing workstream on cryptocurrencies that includes: conceptualizing bitcoin, cryptocurrencies & central banking, cryptocurrencies & commercial banking, the quest for stablecoins or shadow banking in cryptocurrency ecosystem?, and rethinking the governance of money in the age of decentralized cryptocurrencies.
The cryptocurrency ecosystem brings together many seemingly separate disciplines from computer sciences to law, finance and economics. We embrace interdisciplinary research on cryptocurrencies and are open to new ideas and opportunities for interdisciplinary collaboration.