Efstathios Panayi

Gareth William Peters, Efstathios Panayi

In this chapter we provide an overview of the concept of blockchain technology and its potential to disrupt the world of banking through facilitating global money remittance, smart contracts, automated banking ledgers and digital assets. In this regard, we first provide a brief overview of the core aspects of this technology, as well as the second-generation contract-based developments. From there we discuss key issues that must be considered in developing such ledger based technologies in a banking context.

Gareth W. Peters, Efstathios Panayi, Ariane Chapelle

The internet era has generated a requirement for low cost, anonymous and rapidly verifiable transactions to be used for online barter, and fast settling money have emerged as a consequence. For the most part, e-money has fulfilled this role, but the last few years have seen two new types of money emerge. Centralised virtual currencies, usually for the purpose of transacting in social and gaming economies, and crypto-currencies, which aim to eliminate the need for financial intermediaries by offering direct peer-to-peer online payments. We describe the historical context which led to the development of these currencies and some modern and recent trends in their uptake, in terms of both usage in the real economy and as investment products. As these currencies are purely digital constructs, with no government or local authority backing, we then discuss them in the context of monetary theory, in order to determine how they may be have value under each. Finally, we provide an overview of the state of regulatory readiness in terms of dealing with transactions in these currencies in various regions of the world.

Gareth W. Peters, Ariane Chapelle, Efstathios Panayi

We develop the first basic Operational Risk perspective on key risk management issues associated with the development of new forms of electronic currency in the real economy. In particular, we focus on understanding the development of new risks types and the evolution of current risk types as new components of financial institutions arise to cater for an increasing demand for electronic money, micro-payment systems, Virtual money and cryptographic (Crypto) currencies. In particular, this paper proposes a framework of risk identification and assessment applied to Virtual and Crypto currencies from a banking regulation perspective. In doing so, it addresses the topical issues of understanding important key Operational Risk vulnerabilities and exposure risk drivers under the framework of the Basel II/III banking regulation, specifically associated with Virtual and Crypto currencies. This is critical to consider should such alternative currencies continue to grow in utilisation to the point that they enter into the banking sector, through commercial banks and financial institutions who are beginning to contemplate their recognition in terms of deposits, transactions and exchangeability for fiat currencies. We highlight how some of the features of Virtual and Crypto currencies are important drivers of Operational Risk, posing both management and regulatory challenges that must start to be considered and addressed both by regulators, central banks and security exchanges. In this paper we focus purely on the Operational Risk perspective of banks operating in an environment where such electronic Virtual currencies are available. Some aspects of this discussion are directly relevant now, whilst others can be understood as discussions to raise awareness of issues in Operational Risk that will arise as Virtual currency start to interact more widely in the real economy.