Financial and payment innovations: cryptoassets, instant payments and Central Bank digital currencies

Abstract

A wide variety of digital transaction modes has supplanted traditional currency and changed the nature of money over the past 30 years. The main objective of this study is to point out how some financial innovations have been transformative for the international flow of resources since the 2008 crisis: cryptocurrencies, instant payment technologies and central bank digital currencies. Before entering the analysis made in each paper, the introduction provides a brief theoretical overview of different lines of economic thought on the nature of Bitcoin. The first article addresses the change in the Bitcoin ecosystem with the growing presence of institutional players. With daily data from Glassnode Studio, the wavelet coherence methodology was applied in three different time intervals (BTC halvings) decomposing price (in USD) and transactions. Showing stronger correlation at lower frequencies, estimates indicate institutional investor’s market movement. Co-movement at higher frequencies are credited to small and medium investors via transaction count decomposition. To understand how large investors present themselves in the crypto market, Autoregressive Distributed Lag models and Non-Linear Autoregressive Distributed Lag Models were used in the second paper. Both internal and external Blockchain variables demonstrate excessive changes in price and volume of actual BTC return. Asymmetry calculations pointed to a greater presence of these players, through the number of transactions carried out on exchanges and in the North American asset market. The novelty proposed in the third article is, through time series methodology, extract lessons from the recent Indian experience with the Unified Payments Interface for the Brazilian Pix. Macro variables, payment substitutes and measure of relative popularity of banking applications were chosen to understand UPI volumes. Substitutes for the volume of instant payments (UPI) revealed a complementary nature, while the degree of sophistication of the financial system had both short-term and long-term effects. Short-term asymmetric shocks would produce greater negative impacts on UPI transactions. In the last article, Central Bank Digital Currencies (CBDCs) were studied from the perspective of emerging markets. Physical currency usage indices (Khianarong & Humphrey, 2019) were calculated with annual data from the BIS, applying a forecasting algorithm with the best estimate found. The decreasing trends in the use of money in Brazil and India corroborate that digital currencies issued by central banks could become an alternative payment instrument. The general conclusion of the thesis is that institutional investors have started to benefit from the halving dynamics in Bitcoin, to generate speculative profits in an environment of international liquidity. This set of factors changed not only the volume of BTC traded, but also its price, transforming the cryptocurrency’s relationship with the traditional asset market. The concern of Central Banks in this new innovative era is that payments may migrate to large private platforms, unregulated digital currency markets such as international stablecoins. With their institutionality being increasingly contested, in light of risks regarding monetary sovereignty of emerging countries, central banks began to propose new instruments such as instant payments and CBDCs.