The Digital Currency Revolution

Elvira Sojli, Head of CMCRC-SIRCA’s Digital Finance Research Centre explains how the world of finance is being reshaped

Back in the 18th century the renowned Scottish economist and philosopher Adam Smith declared: “All money is a matter of belief.” 

First we believed money was equivalent to gold and precious metals and stones. Then we converted to tangible coins and notes. Lately, we have accepted our hard-earned money could be stored electronically in banks and be used to pay for things without us ever setting eyes on it. 

Now our belief system is being tested again with the dawning of the age of digital money. 

Bitcoin, Ethereum, ERC20 tokens, blockchain and distributed ledger technology, smart contracts, digital certificates and other crypto instruments have created unregulated markets open to anyone – not just the traditional players such as banks and institutional investors.

Associate Professor Elvira Sojli is Head of the CMCRC-SIRCA Group Digital Finance Research Centre, which examines the fairness and efficiency of these new and emerging markets. Elvira leads a team with expertise in international economics and finance, market microstructure and financial econometrics. 

“We investigate various issues spanning the effect of digital currencies as a new money on the money-supply infrastructure to the efficiency and integrity of cryptocurrency markets,” says Elvira. 

Democratising financial markets 

The digital currency space today “is definitely very nascent”, says Elvira, and comprises “a very different group of market participants from those in traditional and regulated markets”.

“The first challenge is trying to understand this particular type of market –a lot of the people involved are very antiestablishment-type individuals who to a certain extent normally wouldn’t have access to the financial markets,” she says.

“In that regard this is a democratisation of financial markets – because anyone can trade and you don’t need a broker to participate in this market.”

Another challenge is “knowing who is on the other side of the trade and if trading in this market is subject to any kind of manipulation”.

“What happens inside each exchange is a black box. All the transactions remain anonymous – nobody has an overview of who is trading with who and how. 

“Without collaboration from Crypto Exchanges, the only thing you can do is to use available data to discern movements when people put money into that market and when they take it out.”

Security, manipulation and counter-party risk

All this uncertainty raises issues around security, manipulation and counter-party risk – “whether participants’ accounts can get hacked, prices are subject to wash trading, pump and dump, etc., and whether money can ever be taken out”. 

Traders need to know “if the game is fair”. However, there is no central regulator “and hence no authoritative information”. 

Elvira notes that with the recent sharp fall in Bitcoin “the new token market has been slowing down and there’s been a lot more engagement with institutional investors, which has increased the quality of new issuances (initial coin offerings)”.

“But it’s slow because obviously no large bank or institutional investor wants to participate in an unregulated market and investment. 

“Institutional investors aren’t covered by their insurance in these particular markets, so that’s problematic and it’s very hard for them to sell it to their clients because it is an unregulated market.”

The CMCRC-SIRCA advantage

Elvira says the Digital Finance Research Centre has a major advantage in understanding and advising on the new market “because we have access to the best available data on these markets and the ability to analyse, interpret and understand it”. 

For example, the Centre has collected information on all transactions and counter parties on Bitcoin, Ethereum and ERC20 Tokens, as well as data on intra-day trades and quotes across different exchanges and currencies.

“We know what’s going on and we understand what it means,” she says. 

“We are part of an organisation that has a long tradition in understanding market manipulation and a proven track record in building global solutions leveraging data, analytics and technology – all of which can be applied to blockchain technology or digital certificates.” 

Transformational technologies 

CMCRC-SIRCA researchers are also developing transformational technologies that will shape the future financial system, as well as building bespoke products for individual companies. 

Our world-leading Industrial PhD program delivers the human capital – backed by state-of-the-art infrastructure – to deliver permanent change to an organisation’s R&D capability.

The Digital Finance Research Centre can help: 

• Regulators interested in understanding how this market functions and the extent to which they need to regulate 
• Institutions interested in participating in this new market
• Institutions seeking to transition from traditional markets to the new markets
• Businesses interested in facilitating clearing and settlement through blockchain technology or digital certificates 
• Currency exchanges
• Crypto exchanges and currencies.