Working Groups 2019-2020

Executive Summary: Blockchain consortium has become more popular among businesses. The number of consortia increased from 1 in 2014 to 231 in 2020. Firms are interested in staying close to technology and leveraging it to improve operational efficiency gains. It is a hybrid of public and private blockchain where it keeps the decentralized structure while it is less resource-intensive.

Despite the rising interests and potential benefits, there is not a killer case yet. Most of the existing blockchain consortium has not been able to scale. Many more have died. It takes us to the question of what the success factors are for blockchain consortium. There have been several reports and op-eds discuss the success factors and challenges facing blockchain consortium. Our study provides insights by drawing lessons from literature, expert interviews, case studies, and survey. The success factors are discussed in depth. The findings are intended to inform industry, academia, and government to promote sustainable development of blockchain consortium.

Our findings include the following:

Success factors by rank

• We identified five success factors: business use case, governance, operation, data privacy, and regulation.

• The business use case is the most crucial success factor for blockchain consortium. This will become even more prominent during the post-COVID as firms are cutting capital investment. Governance is another critical factor, although less so than the business use case. Data privacy and regulation are less a challenge for blockchain consortium because methods have been developed to mitigate the constraints, such as private chain, sharding.

Relationships among success factors

• Blockchain is necessary for the success of a business use case. It also improves trust among members. However, it seems to be independent of governance.

• Trust can be improved through well-managed competition dynamics, blockchain technology, and governance. Trust turns out to be higher among horizontal players, and lower among vertical players. Blockchain technology appears to be promising in enhancing trust. Governance is the hardest way to improve trust. It needs to incentivize commitment from members or increase transparency to achieve greater trust. Otherwise, governance is independent of trust.

Introduction of Executive Summary:

Financial institutions (FIs) in Singapore have highlighted that a key pain point in on-boarding small and medium sized enterprises (SMEs) for a new banking relationship or for a new product is a long and onerous ‘Know-Your-Customer’ (KYC) process. The KYC process on average takes 1 month and involves tasks that may have been completed by another entity or by the same FI such as verifying the validity of on average 5 documents having a length of 250 pages each1. FIs in Singapore on average spend $60 million on manual KYC processes1.

In this report, we explore a high-level framework for a blockchain based solution that is based on a solution proposed by Parra-Moyano, Thoroddsen and Ross in 20182. Our framework enables FIs to share the outcomes of validity checks on documents submitted by an SME -

● To establish a new relationship.

● To communicate that there is a change/s in the information contained in their documents, or that they are submitting a new document/s altogether.

Abstract:

This paper focuses on assessing the Flow-back Impact on a small country, from the Central Bank Digital Currency (CBDC) implemented by a large country.

A large or small country is defined by its influence in global economics, measured by its global trade value, currency dominance and gross domestic product. Examples of a large country include great powers like China, US, UK or the European Union. Examples of small country include Singapore, Denmark, Israel, New Zealand. A flow-back impact is the effect on the small country, when a large country implements a CBDC.

We will assume that the CBDC implemented by the large country is one which retail consumers can directly access to, and also available to retail consumers in other countries. We will not worry about how the large country implements or operates such a CBDC, but will instead focus on how such a CBDC will impact a small country. Within the context of a small country, we will look at the impacts on:

1. Individual retail consumers

2. Small businesses

3. Large corporations

4. Commercial Banks

5. The Central Bank

We will further assume that the small country has not implemented a CBDC.

Executive Summary:

The purpose of this study is to determine the relationship between unregulated spot and derivatives Bitcoin markets, and which market leads the other in pricing. The conclusions from our study showed that derivatives market more frequently lead price discovery of Bitcoin. However, further analyses showed the spot market is more likely to indicate the direction of price movement while the derivatives market indicates the magnitude of the price movement. Since these may seem contradictory on the surface, we discuss areas for further study later in the paper. In an effort to expand upon the initial question and study the relationships between the spot and derivatives markets, we completed several arbitrage studies and concluded that frequent arbitrage opportunities exist both within and across markets. In order to reach these conclusions, we performed field research with individuals both in traditional financial markets and in crypto markets, as well as studied tick-by-tick data from unregulated exchanges for the period of one year. The overarching opinion of our interviewees is that derivatives lead pricing during periods of high optimism, but that the relationship does not hold true during downturns. Most of our traders operate in the derivative space. Derivatives offer the opportunity to take a view on the asset class in a capital-efficient manner (high leverage), thereby inviting mostly retail investors to speculate on the price of Bitcoin and generating greater liquidity for the spot markets. On the data analysis side, we obtained tick level trading data from Kaiko, a digital assets provider. In total, we analyzed data from 25 spot exchanges and 10 derivative exchanges, 2 of which are futures exchanges and 8 of which are perpetual swaps. We performed several analyses on this data including summary statistics, lead-lag analysis, a deep dive into May 17, 2019, arbitrage index within markets, arbitrage profits within markets, and arbitrage profits across markets.

Continued…

Project problem:

o What is / where is the nexus of price discovery in these markets – derivatives vs cash markets. In essence how do these markets influence each other and which has the more dominant influence on price discovery? Which markets have greater liquidity and why? How linked are the markets?

o What are the mechanics connecting the markets? In essence what are the costs and mechanisms of arbitraging between the derivatives and cash markets? What are the spreads between the markets?

Scope of the project:

In this report, we will give an overview of bitcoin derivatives market and then, we will introduce the mechanism of the most popular bitcoin derivative: BitMEX Perpetual Swap Last, we will take a close look of what happened on March 12, and provide our hypothesis of relationship between derivative market and spot market

Our Conclusion: The whole market is a net, derivatives and spot market are nodes on the net. The spot market will define the prices in derivative market. The derivative market movements could also affect the spot market.