Cross-Country Distribution of Power and Exposure in the Crypto-Market Despite the size and global reach of crypto-markets we don’t know how much individual countries have invested in cryptos (market exposure), what share of the market individual countries account for (market power), or how those two measures are related. Movements originating in high market power countries will impact high exposure countries, representing a new channel for financial contagion. Given that cryptos can be used to purchase other cryptos, I consider multiple measures of crypto-market share. All measures find that while cryptos are traded in many currencies, the market is highly concentrated in just three---the US dollar, the South Korean Won, and the Japanese Yen account for over 90% of all crypto transactions. The exposure of a country does not correlate with its power in the crypto-market: many high exposure countries have low market power. Market exposure and market power cannot be explained by economic size, income, financial openness, domestic stock market size, or internet access. This analysis also reveals that a country's Bitcoin market share is not representative of a country's crypto-market share: a warning for regulators or researchers focused exclusively on Bitcoin markets. Bitcoin Reveals Exchange Rate Manipulation and Detects Capital Controls.
Abstract: Many countries manipulate the value of their currency or use some form of capital control, yet the data usually used to detect these manipulations are low frequency, expensive, lagged, and potentially mis-measured. I demonstrate that the price data of the internationally traded cryptocurrency Bitcoin can approximate unofficial exchange rates which, in turn, can be used to detect both the existence and the magnitude of the distortion caused by capital controls and exchange rate manipulations. However, I document that bitcoin exchange rates contain problematic bitcoin-market-specific elements and must be adjusted before being used for this purpose. As bitcoin exchange rates exist at a daily frequency, they reveal transitory interventions that would otherwise go undetected. This result also serves as verification that Bitcoin is used to circumvent capital controls and manipulated exchange rates.
How does Income Inequality Affect Import Prices? [Working Paper] I study the effect of income inequality on trade flows. Prior papers examining trade on inequality assume that all income groups face identical prices, and that income inequality has no effect on prices of traded goods. I document that higher income inequality increases the value and quantity of imported consumption goods, but lowers the average price. I introduce non-homothetic preferences into a standard monopolistic competition model of trade to generate income-group specific mark-ups and consumption patterns. The model can explain 28% of the observed relationship between inequality dependence and prices, and suggests that the degree of price discrimination between income groups in a country is approximately 5.5%.
Financial Regulations and Price Inconsistencies across Bitcoin Markets.
Abstract: We document systematic differences in bitcoin prices across 11 different markets representing 26% of global bitcoin trade volume. These differences must --- due to the identical nature of all bitcoin--- result from characteristics of markets themselves. We examine differences across the markets and find that those which do not require customer identification for establishing an account are more likely to deviate from representative market prices than those which do. This implies that standard financial regulations, specifically know-your-customer regulations, can have a non-negligible impact on the bitcoin market. The Potential Impact of Decentralized Virtual Currency on Monetary Policy
Abstract: The border-free nature of decentralized, virtual currencies --- Bitcoin is only one example --- presents an interesting challenge for monetary policy which assumes some amount of government control over cross-border financial flows and exchange rates. At the extreme, decentralized virtual currencies systems may force all countries to accept floating exchange rates and unrestricted financial flows.
Blockchain Technology Disrupting Traditional Records Systems
Abstract: This article gives a very general introduction to the technology, promises and limitations of blockchain technology --- popularized by the digital currency Bitcoin and a key force behind the surge of cryptocurrencies. Blockchain acts as a distributed database or joint global register of all transactions --- a decentralized digital ledger --- and has the potential to become a disruptive force in the financial industry and elsewhere, bypassing traditional, centralized channels such as banks.