Old Finance in New Cryptos: The Pesky Persistence of Structure and Geography

Authors: Matthew Zook*, University of Kentucky, Michael Grote*, Frankfurt School of Finance & Management
Topics: Economic Geography, Cyberinfrastructure
Keywords: Fintech, Bockchain, Bitcoin, Financial Geography
Session Type: Virtual Paper
Day: 4/9/2021
Start / End Time: 1:30 PM / 2:45 PM
Room: Virtual 47
Presentation File: No File Uploaded

When Satoshi Nakamoto proposed Bitcoin in February 2009, their fundamental contribution was to center cryptographic proofs within financial transactions, without trusting a centralized structure such as settlement banks or other human-intervenable systems. Ten-plus years later, the crypto / blockchain community is facing somewhat of a watershed. Pressure against the envisioned utopia of a self-governed, free-market space is exerted from three parties and their related geographies: (1) blockchain-based actors clustered and dispersed according to business incentives and requirement; (2) state regulators implementing a range of country and regional rules and (3) central banks overseeing national currencies. First, blockchain firms are actively building new systems and institutions, many of which resemble old-school, real-world institutions to surprisingly great extent, such as quality stock exchanges that have similar signalling functions as rating agencies. Second, several countries have begun to regulate blockchain-based financial activities, e.g. the proposed EU framework on ‘Markets In Crypto-Assets’ (MiCA) in 2020. In direction and in structure it follows conventional regulation, requiring blockchain firms to comply and to adapt more conventional (and costly) structures. Third, central banks are contemplating to issue digital -- probably blockchain-based -- versions of their own currencies; most recently the ECB has issued plans for a pilot in October 2020.
We document this power struggle between the blockchain innovators and the incumbent financial players, regulators and the state. We conclude that to shake the system, innovations need either be really big, or deliver advantages to powerful incumbents, otherwise innovations get eaten up and digested without structural change.

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