Regulating Bitcoin Exchanges: A Risk-Based Approach

292 Pages Posted: 4 Apr 2019

See all articles by Eric Brouwer

Eric Brouwer

Queen's University Belfast, Faculty of Legal, Social and Educational Sciences, School of Law, Students

Date Written: January 1, 2019

Abstract

Bitcoin, the decentralised peer-to-peer payment system equips us with a new revolutionary financial tool to send codified value across the globe. As a peer-to-peer payment network, however, bitcoin’s decentralised characteristics make it significantly challenging for regulators to influence bitcoin governance. With legacy regulation insufficiently commanding control over the bitcoin network, regulatory debate has shifted towards finding appropriate regulatory solutions for mitigating bitcoin risk crystallisation.

Stark academic regulatory analysis on bitcoin exchange risk has created a profound gap in the literature and sets a logical starting point for this thesis. Using a technical risk-based methodology, I analyse bitcoin exchange risk under three broad headings: consumer protection, financial stability, and anti-money laundering and terrorist financing. Assessing objective empirical evidence, I argue that contrary to mainstream regulatory opinion, the most salient bitcoin exchange risk pertains to consumer protection. From theft, fraud, embezzlement, hacking, and various other scandals, the bitcoin exchange marketplace, for the most part, constitutes as a 'wild west' environment. Inadequate wallet storage mechanisms, insecure cyber security, and deficient capital adequacy requirements, to name but a few, consistently engender risk and harm consumers. As a result, I argue that the slow response from European regulators to address these issues calls for a reevaluation of risk appraisal and a need for a more robust consumer oriented regulatory structure.

In that manner, I posit for a 'consumer by design' regulatory framework that inter alia emphasises cold wallet infrastructure, holistic cyber security measures, and capital adequacy requirements. The focal point of this approach centers on changing predominantly malevolent and negligent bitcoin exchange behaviors to that of a prudentially minded entity. Hard targeted risk-based rules fabricate this change, which coincides with post 2008 crises consensus for more financial regulation and the proposition that markets benefit from effective regulatory architecture.

Keywords: bitcoin, regulation, risk, exchanges, virtual currencies, risk-based approach

Suggested Citation

Brouwer, Eric, Regulating Bitcoin Exchanges: A Risk-Based Approach (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3354023 or http://dx.doi.org/10.2139/ssrn.3354023

Eric Brouwer (Contact Author)

Queen's University Belfast, Faculty of Legal, Social and Educational Sciences, School of Law, Students ( email )

Belfast, BT7 1NN
Ireland

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