tag:www.jura.uni-hamburg.de,2005:/forschung/institute-forschungsstellen-und-zentren/institut-recht-oekonomik/news-und-events/lft/research-lftResearch2022-06-15T12:01:05ZNAGR-fakrw-10906223-production2022-06-15T10:00:00ZLFT Research: "AI trading and the limits of EU law enforcement in deterring market manipulation"<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/10906320/cslr2-4a95cd9e253813071931ca5c9ac334eb77fa212a.png" /><p>The LFT research team is proud to announce that a new Article by Alessio Azzutti, titled "AI trading and the limits of EU law enforcement in deterring market manipulation" has been published in Computer Law & Security Review, Volume 45 (2022). The study is part of the PhD project on 'The Impact of Artificial Intelligence and Machine Learning Techniques in the Financial Sector'.</p>
<p>You can access the Article at the following link.</p>
<p>Happy reading.</p><p>Foto: Elsevier</p>NAGR-fakrw-10285056-production2022-01-11T11:00:00ZLFT Research: "Machine Learning and Market Manipulation on Capital Markets"<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/10285104/upennlft-6ca416b160001de0b77cdf2344e30ff57a327475.png" /><p>The LFT research team is proud to announce that the Article "Machine Learning, Market Manipulation, and Collusion on Capital Markets: Why the "Black Box" Matters", as part of the project on 'The Impact of Artificial Intelligence and Machine Learning Techniques in the Financial Sector', has been published in The University of Pennsylvania Journal of International Law, Volume 73, Issue 1 (2021).</p>
<p>The piece is the fruit of a collaboration between Alessio Azzutti, Professor Georg Ringe and Professor Siegfried Stiehl.</p>
<p>You can download it directly from the UPenn website at this link.</p><p>Foto: UPenn</p>NAGR-fakrw-9148284-production2021-06-04T10:00:00ZSelected Publications: Big techs in finance<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/9196933/anniespratt-f7d78562a38928f82cc25754f501db73a42836c3.jpg" /><p>Juan Carlos Crisanto, Johannes Ehrentraud and Marcos Fabian have a great new FSI Brief titled "Big techs in finance: regulatory approaches and policy options". As big techs are increasingly joining the financial sector, public authorities have been studying if current financial regulation, as applied to banking and payments, is sufficient to minimise emerging risks brought by big techs participation. After beginning in the payments sector, big techs are also now migrating to credit, banking, crowdfunding, asset management and insurance, especially in developing nations, sometimes as competitors, but many others as partners with financial institutions. Big tech's competitive advantage stems from the authors' name as a "DNA loop": data analytics, network externalities, and interwoven activities. As big tech attracts more users to their platforms, network effects accelerate its growth and return to scale, and every new consumer brings value to all others. The more data collected, the better provision of analytics and thereby increased consumer welfare. These network effects turn big tech into gatekeepers enabling them to leverage their dominant position to control who enters the market, data availability and market operation.</p>
<p>While big techs bring many benefits to consumer welfare and financial inclusion, they also may create systemic risks and challenge consumer protection and competition, data privacy, and cybersecurity policies. Another interesting observation by the authors is how big tech partnerships with financial institutions might be problematic. They point to how the unbundling of financial services across diverse players can reduce the clarity on accountability and how this diffusion can lower the incentives to the monitoring of clients' activities and increase excessive risk-taking, thereby leading to higher financial risks. The regulatory limitations stem from two main sources, the complexity of understanding bit tech business models and assessing risk profiles and transmission channels. Finally, the authors propose some guidelines to update the current regulatory framework: i. recalibrate the mix of entity-based and activity-based rules; ii. introduce a bespoke policy approach for big techs; and iii. enhance local and international supervisory cooperation.</p><p>Foto: Annie Spratt</p>NAGR-fakrw-9003566-production2021-05-04T10:00:00ZSelected Publications: The Complex Implications of FinTech for Financial Inclusion<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/9103445/jeffrey-blum-7-gapkhigqs-unsplash-733x414-a9e06a51bd621c98610ae28bb2c8f839e4c42be7.jpg" /><p>While FinTech might increase financial inclusion, some of these new technologies can also aggravate systemic risk. In "The Complex Implications of FinTech for Financial Inclusion," Professor Heather Hughes tackles how blockchain-based market activities can elevate systemic risk and how private-law doctrines and concepts should be applied to monitor the evolution of blockchain-based finance. These challenges emerge because of the facilitation of blockchain-based finance to synthesize financial assets in more complex and obtuse ways. At the same time, it also enables self-executing transactions to emerge, which challenges private law doctrines and are complicated to be reverted. <br>According to Professor Hughes, the New Deal settlement, which placed the public responsibility to maintain the overall stability of the financial system while private actors retain the control of financial capital allocation, now faces a significant challenge because of the complexity of the blockchain-based platforms. Moreover, blockchain-based smart contracts challenge legal frameworks as they conflate "contract and property law devices, and mimics both security interests and entities." This would allow such contracts to "side-step statutory boundaries that reflect longstanding political choices." Complementing other proposals that focus more on the reconfiguration of federal regulatory bodies to solve this challenge, Professor Hughes makes a case for "the regulatory potential of state laws, especially the common law and commercial laws."</p><p>Foto: Jeffrey Blum</p>NAGR-fakrw-8980200-production2021-04-27T10:00:00ZSelected Publications: Algorithms in Future Capital Markets and Towards Algorithm Auditing.<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8980591/possessed-photography-e801d1031b1c36bfe53e46f5a740d1bb5869a787.jpg" /><p>Only in the last few decades, global capital markets have undergone profound transformations. Unlike the times when the traditional open outcry model had characterized the quite chaotic functioning of financial markets, global capital markets are today (almost) entirely electronic marketplaces. In the new market reality, financial decision-making and other trading tasks are continuously more - if not almost entirely - delegated to algorithms. In addition, thanks to continuous and spectacular progress in the artificial intelligence (AI) subfield of machine learning (ML) methods, increasingly capable and autonomous algorithmic trading systems can be expected to enter and even dominate the market scene anytime soon. </p>
<p>In “Algorithms in Future Capital Markets”, Adriano Koshiyama et al. introduce us to the fascinating world of trading algorithms and their possible developments in future markets. The authors overview state-of-the-art AI applications in algorithmic trading as real game-changers in financial trading strategies and techniques by emphasizing the most innovative ML methods as new computational finance paradigms. While AI technology can generally lead to several efficiency gains for businesses and consumers alike, its adoption and use can also have some drawbacks. For instance, given the autonomous and opaque nature of specific ML methods (e.g. deep reinforcement learning), several ethical and legal questions can arise whenever AI trading results in unlawful market behaviours. Thus, Koshiyama et al. review the priorities in terms of AI trading systems governance (e.g., interpretability, explainability, robustness) for investment firms to achieve conscious AI development and implementation and ultimately guarantee full compliance with security laws.</p>
<p>In “Towards Algorithm Auditing”, Koshiyama et al. allow us to disentangle many of these open issues related to the governance of AI systems, which can be frustrated by the presence of the so-called ‘black box’ problem. Hence, the authors define the concept of algorithmic auditing as “the research and practice of assessing, mitigating, and assuring an algorithm’s safety, legality, and ethics.” Indeed, with an increasing number of (trading) algorithms operating with increased autonomy vis-à-vis human experts, the authors envisage the emergence of a new tech-legal industry, which owns the premise to “professionalize and industrialize” AI and ML methods. Under this lens, the report examines the four key components in the process of algorithmic auditing (i.e. ‘development’; ‘assessment’; ‘mitigation’; and ‘assurance’), and particularly emphasizes the several trade-off and interactions between the four main auditing dimensions such as ‘privacy’, ‘fairness’, ‘explainability’, and ‘robustness’. Overall, the report has the merit of introducing the emerging field of algorithmic law from a high-level standpoint. It represents a must-read for anyone interested in the interplay between algorithms and the law, as a high-level introduction to the emerging field of algorithmic law. </p>
<p>Please, to know more on these topics, you can watch our past LFT workshop on “Algorithms and Digital Legal Services” by Professor Philip Treleaven on our YT channel by following this link.</p>
<p> </p><p>Foto: Possessed Photography</p>NAGR-fakrw-8678573-production2021-03-03T11:00:00ZSelected Publications: Regulation as Partnership<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8678608/kurt-cotoaga-js3p00yttou-unsplash-733x414-29853aac39fa683580a7c774b12e7384fed7faaa.jpg" /><p>Justin (Gus) Hurwitz explores a new approach to regulation in one of his latest projects, "Regulation as Partnership," at the Journal of Law & Innovation. According to Hurwitz, the history of regulation in the last century can be understood as a pendulum that continuously bounces from reliance on market-based forces to reliance on regulatory oversight. However, "neither of these approaches to regulation, especially in dynamic or fast-moving industries, has proven to be an entirely satisfactory approach to facilitating the growth of socially important industries while maximizing the social benefits of those industries." Critical to the traditional adversarial approach we use to understand the regulation, Hurwitz explores examples in which better dynamics to align public and private interests were found through partnership. While public-private partnerships evolved from more traditional government contracting, they have later developed their own governance practices. The author better explores the formation of those governance norms in industries such as communication and cybersecurity. Building upon Ostrom's work on governing the commons and Hart's work on incomplete contracts, Hurwitz proposes that perceiving and exploring regulation as a partnership has many advantages: governments can leverage on private partners' efficiency and knowledge, build relational contracts and reduce agency problems, and better align private and public interests.</p><p>Foto: Kurt Cotoaga</p>NAGR-fakrw-8666811-production2021-02-23T11:00:00ZSelected Publications: Unbundling Banking, Money, and Payments<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8666840/erol-ahmed-9zwtkocmxbm-unsplash-733x414-b0d13338cc30234051102a4b18dc6ff0b313bd00.jpg" /><p>In "Unbundling Banking, Money, and Payments," Professor Dan Awrey diagnoses the origins and problems of banks' central position in our modern economy. According to Awrey, banks' bundling of banking, money, and payments is a product of historical accidents, political machinations, rent-seeking, and technological limitations that are still found in the current legal architecture and serve as barriers to entry, limiting financial innovation and inclusion, and turning us, and even banks' competitors, into their dependents. The working paper is also motivated by the Office of the Comptroller of the Currency proposal to create fintech charters, which in Awrey's view would further solidify the bank's centrality (Check our short review of Charles Calomiris's proposal here), lacking the courage to imagine a world in which banking, money, and payments are "unbundled" and open to entrepreneurial exploration.</p>
<p>The first part of Awrey's piece describes the history and politics that led banks to combine their lending activities with money and payments and how needed interventions to ameliorate society's dependence on these institutions, systemic risk, turned into privileges protecting them from the competition. Then, in the second part, he presents three ways the law further solidifies such bundling and dependence: (i) the financial safety net granted to banks (access to the Fed's emergency lending facilities, federal deposit insurance, and special bankruptcy regime); (ii) restrictions on infrastructure access to the US payment system (§ 13.1 of the Federal Reserve Act); and (iii) brokered deposit rules that "further entrench banks as the gatekeepers of the US payment system." According to the author, "bank regulation is constantly changing in response to new technological, financial, and other developments that threaten the dominant position of banks at the apex of our intertwined systems of money and payments."</p>
<p>The distortions created by the law are explored in the third part: (i) the provision of a robust financial safety net to banks and the exclusive access to the Federal Reserve's master accounts alter the legal level playing field, harming competition and thereby leading to lower financial innovation and inclusion; (ii) the costly financial regulation incentivizes new competitors to explore regulatory arbitrage in through a destabilizing dynamic; (iii) and by preventing such competitors from offering alternative for the conventional banking system, the law exacerbates banking dependence fueling the "too-big-to-fail" problem. In its fourth and last part, Awrey analyses the technocratic limitations regulators face when trying to address these distortions, but how new technologies managed to do so. In this view, Awrey's paper could also be read as a celebration of how certain innovations finally started to free us from banking dependence.</p>
<p>Moreover, to further the unbundling of banking, money, and payments that certain innovations have started to promote, Awrey proposes three legal changes. Firstly, to amend the Federal Reserve Act allowing financial institutions other than banks to open and maintain master accounts. Secondly, non-banks holding a master account must hold 100 percent of customer deposits in these accounts, limiting platforms operating money and payments to engage in banking activity. And, thirdly, to alter the definition of banking itself: to move away from the circular definition of banks to a functional one in which bank is "any financial institution that combines lending with the creation of monetary liabilities." Awrey's paper is mandatory reading for all of us thinking about the law's role in creating an open environment for entrepreneurial discovery.</p><p>Foto: Erol Ahmed</p>NAGR-fakrw-8456472-production2021-02-19T11:00:00ZSelected Publications: Fostering Innovation and Competitiveness with FinTech, RegTech, and SupTech<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8652091/osman-rana-g7vn8nadjo0-unsplash-733x414-6955647fc684f570480400a0175b77b3f6011e66.jpg" /><p>Iustina Alina Boitan (Bucharest University of Economic Studies) and Kamilla Marchewka-Bartkowiak (Poznan University of Economics and Business) have recently edited "Fostering Innovation and Competitiveness with FinTech, RegTech and SupTech." The publication covers diverse topics related to new technologies and financial markets, such as artificial intelligence, big data, blockchain, crowdfunding, crypto-assets, and cybersecurity. Professor Georg Ringe is also a member of the Editorial Advisory Board. If you are more curious about it, take a look at it here.</p>
<p>Description: Due to the emergence of innovative technologies, various professional fields are transforming their traditional business practices. Specifically, the financial and legal markets are experiencing this digital transformation as professionals and researchers are finding ways to improve efficiency, personalization, and security in these economic sectors. Significant research is needed to keep pace with the continuous advancements that are taking place in finance. Fostering Innovation and Competitiveness with FinTech, RegTech, and SupTech provides emerging research exploring the theoretical and practical aspects of technologically innovative mechanisms and applications within the financial, economic, and legal markets. Featuring coverage on a broad range of topics such as crowdfunding platforms, crypto-assets, and blockchain technology, this book is ideally designed for researchers, economists, practitioners, policymakers, analysts, managers, executives, educators, and students seeking current research on the strategic role of technology in the future development of the financial and economic activity.</p><p>Foto: Osman Rana</p>NAGR-fakrw-8640712-production2021-02-17T11:00:00ZSelected Publications: FinTech and International Financial Regulation<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8640786/tomoe-steineck-07yvhdv21q4-unsplash-733x414-4dc5ac691899cd0e1130d0b50d6acde7a25b8041.jpg" /><p>Professor Yesha Yadav further develops her thesis on the challenges that FinTech presents to financial regulation in a recent publication, "FinTech and International Financial Regulation." As pointed out in her previous work with Chris Brummer, FinTech complicates the traditional trade-off of balancing incentives to innovation, ensuring market integrity, and establishing simpler, fairer rules for new entrants. While this trilemma is constantly present in financial regulators' decision-making, professor Yadav argues that this is even a greater challenge when considering international financial governance. The complex analysis of the trade-offs is intensified when considering the diversity of national legal systems and legislative and administrative processes. A major cause for this complexity is the information deficits among diverse jurisdictions that must analyze how adaptable financial innovations are to their national financial infrastructures, how FinTech developed in other nations are being supervised overseas, and how the FinTech disintermediation trend might further complexify interconnections which are hard to be fully understood. All this prompts enhanced information sharing and coordination among national regulations on how to better deal with such cross-border interdependencies.</p>
<p>Moreover, FinTech has different dynamics between developed and developing nations, sometimes holding higher value where traditional financial institutions fail to deliver efficient products and services. Thereby, a greater diversity of standard setters also emerges. This phenomenon increases negotiation costs as international regulation now has to attend to new players' interests. In this sense, with more diverse economic and social interests in consideration, regulators end up facing costlier bargaining when developing new rules and standards. The outcome doesn't look quite positive for fintech as imposing complex rules to ensure financial innovation and market integrity might hurt those lacking the expertise to internalize compliance costs. Finally, among the proposals Professor Yadav puts forward to counter the challenge of conciliating the new agenda setters' diverse interests, minilateral approaches seem quite promising. Such an approach could facilitate the finding of common interests among jurisdictions facing similar risks from FinTech while not imposing high costs in those jurisdictions with other priorities. Balancing the trade-offs of the regulatory trilemma is not only an economic exercise but a political one.</p>
<p>Don't forget to join us tomorrow, Thursday, February 18, at our next LFT workshop. We will welcome Professor Yadav to discuss "FinTech and the Innovation Trilemma." Register here.</p><p>Foto: Tomoe Steineck</p>NAGR-fakrw-8608488-production2021-02-10T11:00:00ZSelected Publications: FinTech and the Innovation Trilemma<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8608578/miltiadis-fragkidis-tjrvjr-mucq-unsplash-733x414-afa93d7e2fc9aede94135e039bbd22b837e38d24.jpg" /><p>In a recent article, "FinTech and the Innovation Trilemma," Chris Brummer and Yesha Yadav discuss the challenges brought by financial technology and innovation for financial regulators worldwide when dealing with regulating new business models and financial services to achieve broader financial law goals of market integrity, legal simplicity, and financial innovation. The authors develop a novel theoretical framework to assist financial regulators in understanding the emerging FinTech industry, their peculiarities and specific risks, for ensuring better regulation. Specifically, they argue that in striving to achieve effective supervision of FinTech by relying upon traditional regulatory approaches (e.g. ‘command-and-control’), financial law and regulation frequently fall short. Indeed, whenever policymakers have attempted to achieve both market integrity and legal simplicity, while also fostering competition, they have only reached two out of three policy goals at best (i.e. FinTech policy trilemma). </p>
<p>The challenges of regulating FinTech are undoubtedly unique, e.g. the governance of new technology (e.g. ‘machine learning’, Big Data) considering its vast and diverse application scope and new and emerging risks both in terms of consumer protection, competition, and financial stability. While regulators are exploring the merits of innovative regulatory solutions (e.g. sandboxes), which aim at reducing their knowledge gap, there is still room for improving the regulation of FinTech. Specifically, to further tackle the FinTech knowledge problem, Brummer and Yadav call for increased cooperation at both national and supranational level among public authorities to promote greater information generation and sharing mechanisms. Moreover, they also argue for delegating more supervisory responsibilities directly to private actors, by enhanced self-regulation that can complement public oversight, thus leading to a new culture of public-private partnerships.</p>
<p>By the way, next week, Thursday, February 18, Professor Yesha Yadav will join us for our next LFT workshop. If you want to debate these ideas with her and us, don't forget to register here.</p><p>Foto: Miltiadis Fragkidis</p>NAGR-fakrw-8513104-production2021-01-20T11:00:00ZSelected Publications: Demystifying the role of data interoperability in the access and sharing debate<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8513131/matty-lynn-barnes-kx-n8jq7cag-unsplash-733x414-2fbe7d345cfdd1215cd361ace7e4dd3b00cf78a4.jpg" /><p>Jörg Hoffmann and Begoña Otero tackle the value, costs, and challenges for interoperability in their recent Max Planck Institute for Innovation and Competition Research Paper, "Demystifying the role of data interoperability in the access and sharing debate." While many have claimed data interoperability as the better path towards data access, quality, and (re)use, the authors point that much is left unsaid about when and how interoperability should proceed. </p>
<p>Their paper initially addresses the many uses, sometimes conflicting, of the term interoperability by the literature and policy-makers and the emerging new firms focused on data transformation. Many also ignore the challenges present in its two major facilitators, application programming interfaces (APIs) and data standardization. For instance, many questions are still open about the extent to which intellectual property rights might cover APIs and the economic and legal implications. In this regard, the authors point out that mandatory opening-up can negate potential utilitarian incentives created by information exclusivity, trade secrets, and firms' investment protection. According to the authors, "too much interoperability may have hidden costs and challenges for society that need to be thoroughly assessed and addressed." Such a policy might also impact innovation as data exclusivity, aggregation, and application through machine learning techniques confer considerable competitive advantages. </p>
<p>On the other side, data interoperability might be essential to counter some market failures, such as the lack of efficient data use or potential lock-ins. The authors also point a possible way to solve this trade-off by including asymmetrical interoperability obligations for dominant players - those that end up becoming gatekeepers - such as the big digital platforms. Nevertheless, it is not enough to outline such an obligation; data interoperability clarification, a common understanding in the specific legal context, is also required. Furthermore, according to the authors, this should be achieved by a public law approach that gives a consistent answer to conflicting IP, database sui generis, and trade secrets protection in data, which will require the balance of positive effects of exclusivity and excludability against the costs incurred by the limitation of data (re)use and lock-ins.</p><p>Foto: Matty Lynn Barnes</p>NAGR-fakrw-8508022-production2021-01-18T11:00:00ZSelected Publications: Crypto Wash Trading<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8509177/austin-distel-2091062a9189b11c0466ad16a344a9e654a51ad1.jpg" /><p>In their new working paper, "Crypto Wash Trading," Lin William Cong, Xi Li, Ke Tang, and Yang Yang analyze the pervasiveness of wash trade in crypto exchanges. With the growth of the crypto industry, crypto exchanges have been playing an ever-increasing critical role. While wash trading is illegal and harmful - distorting prices, volume, and volatility - exchanges have an economic incentive to inflate their trading volume and increase their visibility. This paper is the first academic study to systematically analyze crypto wash trading - through the use of innovative techniques, such as Benford's law, trade-size clustering, and power law.</p>
<p>According to the authors, wash trading permeate broadly unregulated exchanges. In contrast, wash trading is virtually absent on regulated ones: "wash trading volume on average is as high as 77.5% of the total trading volume on the unregulated exchanges, with a median of 79.1%." This percentage amounts to over 4.5 Trillion USD in spot markets and over 1.5 Trilling USD in derivatives markets only in the first quarter of 2020. However, the more extended establishment history and larger userbase of crypto exchanges lead to a lower wash trade presence, which is "fuelled by current business incentives and ranking systems." Finally, the authors make a positive case for the regulation of crypto exchanges: "Our systematic demonstration of the direct or screening effects of regulation in the cryptocurrency markets has implications for investor protection and financial stability."</p><p>Foto: Austin Distel</p>NAGR-fakrw-8479343-production2021-01-15T11:00:00ZSelected Publications: FinTech and the Law & Economics of Disintermediation<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8496486/stijn-te-strake-d7mkqgfyvhy-unsplash-733x414-6135594096defd0a511660ed27cb0a1252ccb56b.jpg" /><p>"Will technology-enabled financial innovations generate market failures or worsen existing ones?" This is the question Fatjon Kaja, Edoardo Martino, and Alessio Pacces attempt to answer in their last working paper, "FinTech and The Law & Economics of Disintermediation." And if yes, "is the current regulatory framework efficient?" The authors point that although the competition brought by FinTech to the financial and banking industries is positive to foster innovation, quality, and lower prices, it might also affect financial stability and investor protection. Their paper brings a theoretical framework built on the Law & Economics literature, especially related to negative externalities and asymmetries of information.</p>
<p>On the disintermediation of banking, the authors debate the impact of P2P lending and cryptocurrencies. Although P2P doesn't operate in the same fashion as banks through asset transformation, which can lead to systemic risk - part of the current justification for their regulation -, P2P could also lead to systemic risk through their fee-based compensation schemes, which can incentivize riskier lending. On the disintermediation of money and payments through cryptocurrencies, the authors point cybersecurity risks and the poor monetary qualities of current projects. Although they also caution about Facebook's Libra project, which faces threats from monetary authorities. Investment services are also pervaded by information asymmetries, which justifies appropriate regulation. Here, according to the authors, technology also plays a role: "algorithmic-based financial services and the use of big data can decrease the asymmetric information that is inherent in financial services." However, investor protection remains a challenge and might now be further obscured behind these new technologies: "algorithms do not solve the older investor protection issues, but rather bring new issues of investor protection." </p>
<p>The authors point out how technology-enabled financial services exploit a regulatory vacuum to become more competitive. When this vacuum is challenged by regulation, they might migrate into the blockchain through smart contracts and cryptocurrencies. While the first challenge is a common one related to financial innovations and could be ameliorated through new approaches, such as regulatory sandboxes and mentoring arrangements (if you are curious about these proposals, take a look at Ringe and Ruof, 2020, and Enriques and Ringe, 2020), the second challenge might be more complex. The authors point out that these FinTechs might threaten financial stability only when they start operating as shadow banks, offering safe assets. Controversially, they propose a way to curb such a threat: "to make blockchain-operated financial services emerge from darkness, financial regulation could restrict the conversion of cryptocurrencies into fiat money."</p><p>Foto: Stijn te Strake</p>NAGR-fakrw-8456443-production2021-01-11T11:00:00ZSelected Publications: Assessing the Impact of Central Bank Digital Currency on Private Banks<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8456504/paul-fiedler-8vc-ruzgsq0-unsplash-733x414-12dd058bc410d355880776042aa004ec4a80926c.jpg" /><p>David Andolfatto has a great publication in the Economic Journal, "Assessing the Impact of Central Bank Digital Currency on Private Banks." The author challenges fears over CDBC's impact on the cost of bank funding and the volume of bank lending. Developing a new monetary model based on Diamond's 1965 model of government debt and Klein's 1971 and Monti's 1972 models of the monopolistic banking sector, Andolfatto argues that the proposal to turn available to everyone central bank deposit accounts won't lead to the pessimist scenarios presented by some critics, especially regarding overall financial stability if well designed.</p>
<p>Andolfatto's model leads to several interesting remarks: i. because the opportunity cost of bank lending is set by interest-on-reserves (IOR), if the interest rate on CBDC is set independently of the IOR rate, CBDC will not discourage bank lending; ii. if the CBDC rate is set below the IOR rate, private banks will have incentives to match the CBDC rate to retain deposits as banks lend to the central bank at IOR and will only pay depositors the CBDC rate; iii. in this sense, CBDC induces the private banks to offer more favorable contractual terms to depositors, increasing their attractiveness and the supply of deposits - existing depositors will save more and unbanked individuals might now access the banking infrastructure; iv. higher CBDC rates might lead to an increase in deposit rates leading to an increase in the supply of deposits which will permit constrained banks due to regulatory liquidity requirements to expand their lending activity, only accomplished by lowering market lending rates; v. finally, CBDC competition might also reduce private banks' profitability and market power.</p>
<p>The paper also briefly addresses the possibility of bank runs presented by Cecchetti and Schoenholtz (2017) and Kumhof and Noone (2019) which claims that running towards CBDC will be easier than the current option of running towards cash, thereby, possibly leading to self-fulfilling bank crises. Andolfatto concludes by pointing that his analysis suggests that "the main benefit of CBDC will accrue to depositors in jurisdictions where banks (and other money services businesses) use their market power to keep deposit rates depressed (or service fees elevated) relative to what would prevail in a more competitive setting."</p><p>Foto: Paul Fiedler</p>NAGR-fakrw-8456373-production2021-01-07T11:00:00ZSelected Publications: Deep Learning and Financial Stability<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8456408/jan-vlacuha-c0a35nxs6mu-unsplash-733x414-19969478df74428220f6fb61e82f14dee1ad0179.jpg" /><p>Gary Gensler and Lily Bailey have a new working paper, "Deep Learning and Financial Stability." Deep learning represents a discontinuity from prior analytical tools. It is already used for regulatory compliance and market surveillance, but it is also starting to be implemented for trading and asset management, and risk management and underwriting. Coupled with natural language processing, its utility is further extended. However, the authors point that beyond its efficiency gains and higher financial inclusion, deep learning may lead to increased systemic risk after broader adoption. The paper starts by bringing us the key characteristics that turn deep learning a unique development. Then, they present us how such development interacts with systemic risk - how the failure of one node may propagate negatively through the network.</p>
<p>According to the authors, systemic risk occurs especially through three channels, monocultures, network interconnectedness, and regulatory gaps. And deep learning can accentuate these limitations through five possible pathways, data, model design, regulation, algorithmic coordination, and user interference. Finally, the authors suggest that to mitigate these challenges, we need to rethink the financial system and a mix of micro- and macro-prudential policies are required. Among micro policies, they suggest internal mapping of institution-wide dependencies on data, model hygiene, firm buffers, and regulatory diversity - regulators, to address the tradeoff between the need of explainability and the incentives towards uniformity, should propose multiple ways to internalize regulations. Among the macro policies, external mapping - such as stress testing -, material external dependencies, horizontal reviews, network buffers, and ex-post interventions should be considered.</p><p>Foto: JanVlacuna</p>NAGR-fakrw-8456287-production2021-01-06T11:00:00ZSelected Publications: Big data and big techs<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8456331/ev-gpjvrzyavzc-unsplash-733x414-38e1d177fca3322008f37c8b9755257efa612ea9.jpg" /><p>The European Journal of Law and Economics published a special issue this last December on Big Data. One of the contributions comes from Alain Marciano, Antonio Nicita, and Giovanni Battista Ramello, "Big data and big techs: understanding the value of information in platform capitalism." The authors introduce us to the major aspects of platform capitalism's dilemma between decentralization and concentration and how such dilemma impacts the organization and regulation of the economy. While we might expect that big data would reduce transaction costs leading to a preference for higher market transactions relative to hierarchical transactions - decentralization -, network effects and algorithms' efficiency improving the value of collected data might amplify platforms' efficiency - concentration.</p>
<p>A major contribution is the embeddedness of the law & economics rationale to analyse the challenge of "how to provide good and efficient governance of the transition between the old and the new world." The authors help us better understand two paradoxes that explain how the platform's efficiency might conflict with the market's efficiency. These efficiency paradoxes are the privatization of public good information by big data extraction and the platform's capacity to discriminate strategies - e.g., price and non-price - by algorithmic profiling, leading to a weakening of consumers' freedom to choose and higher exit costs. Finally, the authors also debate recent policies' role and value to counter these paradoxes, such as data portability and antitrust policy.</p><p>Foto: EV</p>NAGR-fakrw-8452237-production2021-01-04T11:00:00ZSelected Publications: Digital Capital and Superstar Firms<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8452270/nitish-meena-1lokff930e4-unsplash-733x414-f85cf21359915ba7667c58414ebb5dea8912243d.jpg" /><p>Prasanna Tambe, Lorin M. Hitt, Daniel Rock, and Erik Brynjolfsson have a new NBER Working Paper, “Digital Capital and Superstar Firms.” The authors develop a new methodology to evaluate the complementary investments necessary to extract value from acquired general purpose technologies. In this sense, the authors separate the expenses in regular IT from other investments needed to explore the IT, which they call digital capital. Using data collected from LinkedIn, they can observe that digital capital prices vary significantly over time. The prices peaked around the dot-com boom in 2000 and that after the bust, firms kept accumulating digital capital while prices varied minimally. Moreover, the recent technology-related increases in firms’ market value are mostly related to quantity changes than changes in prices. By the end of their panel, 2016, digital capital accounted for at least 25% of firms’ assets.</p>
<p>According to the authors, a small subset of “superstar” firms with market values in the top decile disproportionately accumulates digital capital. Interestingly, the concentration of digital assets is much greater than observed in other assets. The authors also point that “inequality in digital capital among firms is growing as the top firms pull further away from the rest.” They also conclude that “the higher values the financial markets have assigned to firms with large digital investments in recent years reflect greater digital capital quantities, rather than simply higher prices for existing assets.” According to their research, this valuation reflects genuine improvements to the firm’s productivity as digital capital accumulation predicts firm-level productivity about three years in the future.</p><p>Foto: Nitish Meena</p>NAGR-fakrw-8444205-production2021-01-02T11:00:00ZSelected Publications: Chartering the FinTech Future<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8444235/abel-perez-jj8ldrbrppw-unsplash-733x414-9646ffff9451ae1ad1379641f4c5aa574d3110cb.jpg" /><p>In a recent paper, "Chartering the FinTech Future," Charles Calomiris shows how chartering FinTech shadow banks as national banks could be favourable for economic development. Calomiris argues that FinTech unbundled bank activities through novel providers of payments and lending services. FinTech and their consumers could benefit from coming out of the shadows by enhancing their geographic reach and market credibility through the OCC examination.</p>
<p>It is essential to clarify that Calomiris does not advocate that all FinTech offering quasi-banking activities should be required to obtain national charters. For some, the regulatory burden would impede them to meet customers needs. To others, however, chartering fintech banks would allow them to reap higher net gains. And more interestingly, allowing FinTech to obtain charters while not requiring them to do so would enable policymakers to evaluate specific regulations' value better.</p>
<p>Another question Calomiris addresses is if there is a rationale for extending the national bank charter to stablecoins providers. Such a possibility could ensure reduced transaction costs for payment services, reduce the risk of hacking, and new payment services, while blockchain-based payments would reduce systemic risk and criminal activities. Calomiris also foresees the possibility that such permission could be blocked by vested interests and points out how bank charters' future is a political question as much as an economic one.</p><p>Foto: CC</p>NAGR-fakrw-8408964-production2020-12-23T11:00:00ZSelected Publications: From data reporting to data-sharing<img width="293" height="165" style="float:left" src="https://assets.rrz.uni-hamburg.de/instance_assets/fakrw/8409000/nasa-q1p7bh3shj8-unsplash-733x414-dd0ef4c94033e679355a4c60c48ce44188e2e11e.jpg" /><p>The Financial Stability Institute at the Bank for International Settlements has a new report on the implementation of new technologies for regulatory reporting and supervision. The FSI Insights on policy implementation No 29, "From data reporting to data-sharing: How far can suptech and other innovations challenge the status quo of regulatory reporting?" by Juan Carlos Crisanto, Katharina Kienecker, Jermy Prenio, and Eileen Tan, presents a comprehensive analysis of regulatory reporting initiatives implemented in 10 financial authorities worldwide. The report makes a case for using new technologies to solve the uncertainty about data accuracy and completeness and the complexity in transforming internal firm's data into required reporting data. According to the report, most financial authorities implement these innovations to facilitate data standardisation and granularity while half are also focusing on data transformation and transformation rules.</p>
<p>However, according to the authors, the ultimate goal of moving from regulatory data reporting to data-sharing is pursued by only a few authorities. Such a move would allow financial authorities to access information directly from the financial institutions' databases and assisting on-demand supervision and more effective and timely reactions from the financial authorities. The barriers to achieving this reality are replacing legacy systems, especially from smaller financial institutions, and reconciling the multitude of conflicting stakeholders' interests. Finally, from the study of the current initiatives in place in such authorities, for these innovations to succeed will be required strong commitment from financial authorities and institutions, an alignment of vision by major stakeholders, a culture of innovation and experimentation, centralised data governance, and effective management of the transition to these new reporting practices.</p><p>Foto: CC</p>