Titolo della tesi: Trading and Post-Trading in Crypto-Markets: Regulatory Issues
The thesis aims to analyse trading, clearing and settlement systems and how they are developing in the world of crypto-assets. In principle, when the new blockchain technology began to take hold, it was accompanied by a huge hype about the incoming demise of traditional financial market infrastructures. The idea was that the blockchain would have rendered traditional financial intermediaries useless, as investors would have negotiated in a brand-new technological space, with no exchanges, no broker-dealers, no central counterparties, no central securities depositories. In short, investors would no longer have to rely on trading, clearing and settlement infrastructures and intermediaries.
In this disintermediated futuristic world, trades would have involved cryptocurrencies such as Bitcoin and Ether, new crypto-assets such as tokens issued by blockchain startups in initial coin offerings (ICO) and also traditional securities would have been issued in the form of blockchain tokens, transforming the way traditional corporate instruments such as shares and bonds are held and transferred.
Even though Bitcoin, Ether and some other cryptocurrencies have become significant assets for investors, the bold vision according to which traditional financial markets would have been radically transformed by the blockchain revolution has not been realised so far. Blockchain disruptive promises have not been fulfilled mainly for three reasons: (i) the blockchain does not overcome the need for a firm to organise the exchanges and provide the market with prices and quotes; (ii) the blockchain does not solve the collateralization problem of leveraged transactions and, therefore, the need for an intermediary to be entrusted with the task of collecting and eventually liquidating the assets posted as collateral for the fulfilment of the obligations undertaken by trading parties; and (iii) it does not solve the issue of custody of crypto-assets and investors’ preference to hold their portfolios of crypto-assets with a (single) intermediary.
To sort out these issues the crypto-market has modelled itself on the current market infrastructures and has replicated their systems. Indeed, the necessity to get information about prices and quotes brought crypto-exchanges. The market’s push towards more and riskier crypto-asset transactions have led crypto-exchanges to provide the full range of post-trading services and also engage in risk-taking activities such as lending and proprietary trading. The complexity in dealing with “ownership” of crypto-assets fuelled investors’ demand for custody services, which are offered both by crypto-exchanges and by specialised crypto-custodians. These old systems in disguise are exposed to risks familiar to traditional financial markets, such as leverage and liquidity, and raise age-old problems, such as those of excessive risk-taking and the consequences of intermediaries’ insolvency. While in traditional financial markets these risks and problems are addressed by the mighty financial regulation, in the crypto-world the absence of regulation has led to major bankruptcies in recent years, of which FTX is the most renowned.
No research to date has been devoted to a comprehensive comparison between the market infrastructures that exist today in traditional financial markets (legacy systems) and the infrastructures that are developing in crypto-markets. The aim is to identify similarities, the emergence of problems already known, and areas where regulation may or may not be needed.
In light of this analysis, the thesis will discuss how regulators approached the crypto-market. It will analyse the newly adopted EU Regulation on a Pilot Regime for market infrastructures based on Distributed Ledger Technology (DLT Pilot Regime) and the Regulation on Markets in Crypto-assets (MiCAR) to highlight merits and shortcomings.
The thesis will proceed as follows.
Chapter I will deal with legacy systems (current market infrastructures in financial instruments) and their regulatory framework (trading venues, central counterparties, and central securities depositories). The aim is to analyse the functions performed by the market infrastructures involved to provide the basis for the comparison between traditional financial markets and crypto-markets.
Chapter II will deal with the current structure and operativity of crypto-exchanges. It will explore the reasons why intermediaries are still needed in the crypto-world and the areas where regulation is needed to overcome market failures. The FTX collapse will be analysed as an example of the consequences of those failures.
Chapter III will explore the EU regulatory response to the market failures showed by crypto-markets. It will analyse first the contents of the MiCA Regulation and the EU Pilot Regime Regulation to then focus on their critiques. In a comparative approach, the Chapter will conclude looking at the US, where in the absence of a federal legislation on crypto-assets the regulatory agencies, primarily the Securities Exchange Commission, have chosen to regulate the industry by enforcement.