Monday, December 18, 2017 Expert commentary, School
The powers of sovereign currencies will diminish as cryptocurrencies are increasingly used by financial markets, says a leading academic in the field.
Ser-Huang Poon, Professor of Finance at Alliance MBS, says there are “clear benefits” for the financial services industry of using Blockchain or other distributed ledger systems in order to make efficiencies and cut costs.
“Using cryptocurrencies and distributed ledger systems means being able to cut out middlemen, and also means transactions can be completed extremely quickly and easily across jurisdictions.”
Potential
Prof Poon says the financial services industry is belatedly waking up to the full potential of new fintech (financial technology) developments which, in the past, have often been regarded with some suspicion.
“Banks, in particular, are beginning to really start thinking about the impact this could have across their operations, especially on their staffing levels. The rise of these currencies also has enormous consequences for central banks too which will inevitably see the power of their own sovereign currencies erode,” says Prof Poon.
However, she concedes that there remain many unanswered questions about how far-reaching cryptocurrencies will become.
“Their rise begs a number of questions, especially for central banks. For instance, how will they manage inflation? How will funds be delivered when people trade cryptocurrencies cross-border? And how do you ensure the whole system stays afloat if there is a sudden rush on withdrawals?”
Chinese concerns
Such concerns have been played out in recent months in China, which has the world’s fastest-growing fintech industry and biggest bitcoin market.
Earlier in 2017, the Chinese central bank ordered exchanges to halt virtual currency withdrawals until they could identify their customers. Then in September 2017, the government banned Initial Coin Offerings (ICOs) and also ordered all virtual currency exchanges to shut.
There is now heated debate as to whether other countries could follow suit as the market becomes far more tightly regulated.
Prof Poon recently attended a fintech conference in Shanghai where these regulatory concerns were high up the agenda. At the conference, Prof Poon presented a paper she had co-authored on estimating ultra-high frequency cost of carrying and interest rates for Blockchain trading and settlement.
Huge financial power
She argued that ICOs, when properly executed, can unleash huge financing power to help to develop many economies and markets that currently face externality in seeking financial support. She adds: “If ICOs can survive and thrive they will rewrite corporate finance textbooks.”
Prof Poon adds that despite increasing regulatory concerns cryptocurrencies are definitely here to stay, driven by consumer trends.
“Consumers are increasingly paying for goods in online currencies and the speed with which these technologies take hold in the financial services sector will, to an extent, also be driven by how fast consumers catch up with fintech.”
Data-driven research
Prof Poon’s work on cryptocurrencies is one of a number of her research areas which are heavily data-driven.
For instance, another project she is working on is whether companies are being honest about their true commitment to Corporate Social Responsibility (CSR). In particular, she has been looking at the monthly asset holding of a database of 15,000 US equity mutual funds and analysing their investment habits.
“We have also then been looking at the companies these funds invest in, drilling down further to ask whether these mutual funds are actually being socially responsible in their investment decisions as they claim.”
Prof Poon’s research on exchange-traded funds (ETFs) was also recently featured in an article on Citywire/New Model Adviser.