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Bitcoin is the oldest and most widely established cryptocurrency network with the highest market capitalization among all cryptocurrencies. Although bitcoin (with lowercase b) is increasingly viewed as a digital asset belonging to a new asset class, the Bitcoin network (with uppercase B) is a decentralized financial market infrastructure (dFMI) that clears and settles transactions in its native asset without relying on the conventional financial market infrastructures (FMIs). To be a reliable asset class as well as a dFMI, however, Bitcoin needs to have robust governance arrangements; whether such arrangements are built into the protocol (i.e., on-chain governance mechanisms) or relegated to the participants in the Bitcoin network (i.e., off-chain governance mechanisms), or are composed of a combination of both mechanisms (i.e., a hybrid form of governance). This paper studies Bitcoin governance with a focus on its alleged shortcomings. In so doing, after defining Bitcoin governance and its objectives, the paper puts forward an idiosyncratic governance model whose main objective is to preserve and maximize the main value proposition of Bitcoin, i.e., its censorship-resistant property, which allows participants to transact in an environment with minimum social trust. Therefore, Bitcoin governance, including the processes through which Bitcoin governance crises have been resolved and the standards against which the Bitcoin Improvement Proposals (BIPs) are examined, should be analyzed in light of the prevailing narrative of Bitcoin as a censorship-resistant store of value and payment infrastructure. Within such a special governance model, this paper seeks to identify the potential shortcomings in Bitcoin governance by reference to the major governance crises that posed serious threats to Bitcoin in the last decade. It concludes that the existing governance arrangements in the Bitcoin network have been largely successful in dealing with Bitcoin's major crises that would have otherwise become existential threats to the Bitcoin network.

Bitcoin is the oldest and most widely established cryptocurrency network with the highest market capitalization among all cryptocurrencies. Although bitcoin (with lowercase b) is increasingly viewed as a digital asset belonging to a new asset class, the Bitcoin network (with uppercase B) is a decentralized financial market infrastructure (dFMI) that clears and settles transactions in its native asset without relying on the conventional financial market infrastructures (FMIs). To be a reliable asset class as well as a dFMI, however, Bitcoin needs to have robust governance arrangements; whether such arrangements are built into the protocol (i.e., on-chain governance mechanisms) or relegated to the participants in the Bitcoin network (i.e., off-chain governance mechanisms), or are composed of a combination of both mechanisms (i.e., a hybrid form of governance). This paper studies Bitcoin governance with a focus on its alleged shortcomings. In so doing, after defining Bitcoin governance and its objectives, the paper puts forward an idiosyncratic governance model whose main objective is to preserve and maximize the main value proposition of Bitcoin, i.e., its censorship-resistant property, which allows participants to transact in an environment with minimum social trust. Therefore, Bitcoin governance, including the processes through which Bitcoin governance crises have been resolved and the standards against which the Bitcoin Improvement Proposals (BIPs) are examined, should be analyzed in light of the prevailing narrative of Bitcoin as a censorship-resistant store of value and payment infrastructure. Within such a special governance model, this paper seeks to identify the potential shortcomings in Bitcoin governance by reference to the major governance crises that posed serious threats to Bitcoin in the last decade. It concludes that the existing governance arrangements in the Bitcoin network have been largely successful in dealing with Bitcoin's major crises that would have otherwise become existential threats to ...

The ultimate objective of cryptocurrencies is to become a payment system substituting, complementing, or competing with the existing conventional fiat-based payment systems. Irrespective of whether such an objective could be accomplished, the functional similarities between certain cryptocurrencies and fiat money has persuaded competent authorities of certain EU Member States to grant payment institution licenses to cryptocurrency exchanges. At first blush, granting such an authorization would seem to be a step forward as it would bring otherwise unregulated cryptocurrency exchanges within the scope of the existing payment regulatory framework. However, such authorization not only faces major legal challenges related to the definition of a payment institution but also introduces new lesser-known risks. Aside from the semantic and definitional issues, authorizing cryptocurrency exchanges as payment institutions can bring activities and instruments - with a different risk profile than that of conventional payment instruments - within the scope of payment systems. It appears that such risks embedded in those instruments cannot be fully addressed under the existing payment laws. This paper studies two examples of unattended risks under the cryptocurrency-exchange-as-payment institution regime. The first risk concerns the use of untethered, non-convertible, illiquid and volatile settlement assets for settlement purposes in cryptocurrency exchanges. The second risk concerns the risks associated with the finality of settlements arising from the use of probabilistic finality in some of the most popular cryptocurrency blockchains. Given that in the conventional payment institutions central bank money or commercial bank money is primarily used as the settlement asset, such risks have already been addressed or otherwise taken for granted, however, in cryptocurrency exchanges, the risks involved in the settlement of liabilities with an illiquid and volatile asset relying on probabilistically final settlement mechanism cannot be dealt with by the existing applicable regulations. As the risks cannot be addressed within the current European payment regulation framework, an alternative policy option would be granting a special license to cryptocurrency businesses or introducing ring-fencing mechanism to protect the conventional payment systems from the risks of cryptocurrency payments.

Bitcoin is a distributed system. The greatest dilemma it poses to the current legal and regulatory systems is that it is hardly possible to regulate a distributed network in a centralized fashion as decentralized permissionless blockchain-based cryptocurrencies are antithetical to the existing centralized structure of monetary and financial regulation. By shifting the policy debate from whether to regulate bitcoin and other decentralized cryptocurrencies to how to regulate them, this paper proposes a more nuanced policy recommendation for regulatory intervention in the cryptocurrency ecosystem. This policy approach relies on a decentralized regulatory architecture that is built upon the existing regulatory infrastructure and makes use of the existing as well as the emerging middlemen in the industry. It argues that instead of regulating the technology or the cryptocurrencies at the code or protocol layer, which might not be desirable, even if feasible, the regulation should target the applications and use-cases of cryptocurrencies. Such a regulatory strategy can best be implemented through directing the edicts and interdictions of regulation towards the middlemen, and can be enforced by the existing financial market participants and traditional gatekeepers such as banks, payment service providers and exchanges, as well as new emerging participants, such as large and centralized node operators and miners that are likely to replicate the functions of the traditional gatekeepers.

Breakthroughs in financial technology (fintech), ranging from early coins and banknotes to card payments, e-money, mobile payments, and more recently, cryptocurrencies portend transformative changes to the financial and monetary systems. Bitcoin (BTC) and cryptocurrencies bear a significant resemblance to base money or central bank money (CeBM). This functional similarity can potentially pose several challenges to central banks in various dimensions. It may pose risks to central banks' monopoly over issuing base money, to price stability, to the smooth operation of payment systems, to the conduct of monetary policy, and to the stability of credit institutions and the financial system. From among several potential policy responses, central banks have been investigating and experimenting with issuing central bank digital currency (CBDC). This paper investigates CBDC from a legal perspective and sheds lights on the legal challenges of introducing CBDC in the euro area. Having studied the potential impact of issuing CBDC by the European Central Bank (ECB), particularly on the banking and financial stability, on the efficient allocation of resources (i.e., credit), as well as on the conduct of monetary policy, the paper concludes that issuing CBDC by the ECB would face a set of legal challenges that need to be resolved before its launch at the euro area level. Resolving such legal challenges may prove to be an arduous task as it may ultimately need amendments to the Treaty on the Functioning of the European Union (TFEU).

This article analyzes the regulatory measures adopted to address the potential contribution of hedge funds to financial instability in the U.S. and the EU in the wake of the Global Financial Crisis. The relevant provisions of the Dodd-Frank Act include two sets of direct regulatory measures. The first set of these measures addresses information problems, whereas the second set is intended to address potential too-big-to-fail problems by imposing prudential regulation on systemically important nonbank financial companies. The article then studies the Volcker Rule, as an indirect regulatory measure intended to address the potential systemic risk of hedge funds originating from their interconnectedness with Large Complex Financial Institutions (LCFIs). The second part of this article analyzes the European Directive on Alternative Investment Fund Managers and its attempt to address the potential contribution of hedge funds to financial instability. Despite the common driving forces of hedge fund regulation across the Atlantic, ultimate policy outcomes were significantly divergent. Primarily concerned with creating a single market for Alternative Investment Funds, EU regulators prioritized the EU passport mechanism, which engendered demand for investor protection and more stringent and direct regulatory measures. In contrast, the main concern in the U.S. remained to be addressing potential systemic risk of hedge funds. Such differential regulatory objectives gave birth to indirect regulation of hedge funds with a focus on their interconnectedness with LCFIs. This is mainly embedded in the provisions of the Volcker Rule; a rule whose absence is significantly palpable in the EU regime for regulating hedge funds.