Research Paper: Mitigating Digital Asset Risks
Our COST FinAI paper is now available as preprint on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4594467
With more than 30 authors from our COST Action CA19130, this is a truly European Research Effort.
Thanks to all the authors:
Teng, Huei-Wen and Härdle, Wolfgang Karl and Osterrieder, Joerg and Baals, Lennart John and Papavassiliou, Vassilios G. and Bolesta, Karolina and Kabasinskas, Audrius and Filipovska, Olivija and Thomaidis, Nikolaos S. and Moukas, Alexios Ioannis and Goundar, Sam and Nasir, Jamal Abdul and Weinberg, Abraham Itzhak and Arakelian, Veni and Truică, Ciprian-Octavian and Akar, Mutlu and kabaklarli, esra and Apostol, Elena-Simona and Iannario, Maria and Bedowska-Sojka, Barbara and Skaftadottir, Hanna Kristin and Schwendner, Peter and Yıldırım, Özgür and Shala, Albulena and Pisoni, Galena and Coita, Ioana Florina and Korba, Szabolcs and Hafner, Christian M. and Molnár, Bálint and Xhumari, Elda and Pele, Daniel Traian
Here is the abstract:
The rapid emergence of digital assets, underpinned by technological advancements such as blockchain, distributed ledger technology (DLT), and smart contracts, has triggered a paradigm shift in the global financial ecosystem. These digital assets, which encompass cryptocurrencies, tokenized securities, stablecoins, non-fungible tokens (NFTs), and central bank digital currencies (CBDCs), hold the potential to transform financial markets by enabling new business models, investment opportunities, and efficient transaction mechanisms. However, their accelerated growth also introduces a unique set of challenges and risks, such as fraud, market manipulation, cybersecurity threats, and regulatory uncertainties.
This position paper presents an interdisciplinary, empirical analysis of the digital asset landscape, focusing on the definition and classification of digital assets, their evolution from novelty to necessity, and the current state of adoption and regulation. We explore the various types of digital assets, their unique characteristics and use cases, and the technological innovations that have shaped their development, such as the advent of blockchain technology and the rise of decentralized finance (DeFi) and NFTs. Moreover, we examine the regulatory landscape surrounding digital assets, highlighting jurisdictional approaches, regulatory classifications, and key developments in the space, as well as the challenges and opportunities that regulators face in devising effective regulatory frameworks.
To address the risks associated with the proliferation of digital assets, we outline several mitigation strategies and recommendations for regulators, market participants, and stakeholders based on quantitative analysis and empirical findings. These include balancing innovation and risk, by formulating regulations that safeguard the interests of consumers and investors while fostering an environment conducive to innovation; promoting global regulatory coordination and harmonization, to reduce the potential for regulatory arbitrage and enhance cross-border cooperation; and leveraging regulatory sandboxes and innovation hubs, to support the growth of digital asset businesses and facilitate continuous learning and adaptation.
By adopting a forward-looking and flexible approach to regulation and engaging in ongoing dialogue with market participants and stakeholders, regulators can ensure that the benefits of digital assets are realized while mitigating the associated risks.
Professor of Sustainable Finance
Action Chair of the COST Action Fintech and Artificial Intelligence in Finance
Nominated Coordinator MSCA Doctoral Network on Digital Finance
Bern Business School | Institute of Applied Data Science and Finance |
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