Reflection on MFRI’s conference on Cryptocurrencies and Blockchains

The Macro Financial Research Initiative (MFRI) co-hosted a conference on, “Cryptocurrencies and Blockchains” with conference architects Eric Budish, Zhiguo He, Jacob Leshno and Harald Uhlig. While the topics covered at the conference have received major public attention, the aim of it was to explore what new special modeling challenges are posed by the introduction of cryptocurrencies and what economic and social consequences to expect with the technological advances associated with distributed ledgers for reducing transactions costs and enhancing social welfare. To address these issues, the conference brought together experts in asset pricing, monetary economics, market design and computer science to engage in productive exchanges.

During the conference I was reminded of the commonly used slogan: “evidence-based policy.” Except for pure marketing purposes, I find this terminology to be a misnomer, a misleading portrayal of academic discourse and the advancement of understanding. While we want to embrace evidence, this evidence seldom speaks for itself and typically requires a modeling or conceptual framework for interpretation. Of course, observed phenomena, including say the behavior of cryptocurrencies, motivate and influence how we structure alternative modeling frameworks. But our interpretations of the data and its implications are through the lens’ of models. Essential to this conference and to this new area of research are the modeling challenges for this exciting new area of research. At the conference, formal models were continually featured throughout the presentations and discussions as a way to enhance our understanding of the crypto-blockchain phenomenon and to guide our thinking about the potential for socially productive outcomes. The models were sometimes used to frame empirical measurement, but they also played preeminent roles in the presentations and captured much of the discussion.

Research presented at this conference, including papers by the four co-organizers, provided formal modeling efforts that addressed central questions pertaining to cryptocurrency and distributed ledgers including:

    • What underlies the potential fragile cryptocurrency valuation?
    • Under what circumstances could a cryptocurrency such as bitcoin be exposed to broad-based attacks or be vulnerable for crashes in valuation?
    • How do we better understand the current blockchain constructions, and what institutional changes might lead to better outcomes?
    • How do features of centralized and decentralized distributed ledgers impact the outcomes of competition?

View the conference schedule and posted slides here.

As this is a relatively new literature, the “output” of the conference did not include final and settled answers to these questions but instead productive starts to producing such answers. Progress was evident both in terms of the actual papers, but just as importantly, in terms of the informal conversations that occurred between sessions, at coffee breaks and over dinner. It was fascinating to see how earlier insights from monetary economics, asset pricing and market design were used and modified to shed light on the adoption of distributed ledgers and the behavior of cryptocurrencies.

In alternative contexts, Don Wilson, University of Chicago alumnus of University of Chicago and founder and CEO of the highly successful DRW, Robert Townsend, MIT and Richard Sandor, chairman and CEO of the American Financial Exchange, reminded us of the varied and intriguing uses of blockchains and, more generally, distributed ledgers. After listening to Don Wilson, I was led to consider more fully the possibility that blockchain-type distributed ledgers could in the future engender private sector trust and reduce the overall fragility of the financial system. This point was reinforced later in remarks by Richard Sandor.

Rob Townsend was a long-time colleague, first at Carnegie-Mellon and then at the University of Chicago and is an old friend of mine. He has done innovate work in monetary economics, contract theory and development. He gave a thought-provoking dinner discussion that suggested ways to use some of the existing tools of economic analysis to understand the economic value of distributed ledgers. Along with others, he gave an optimistic assessment, but from the vantage point of an “applied theorist” suggesting formalisms that we could draw upon to understand better an economic rationale for this optimism.

I had the opportunity to structure a lunch-time conversation related to the conference theme. I used it to engage two very thoughtful people, Richard Sandor and Neil Wallace, with substantively different backgrounds and perspectives. Richard has been a pioneer in the creation of financial markets and recently completed a book entitled, “Electronic Trading and Blockchain: Yesterday, Today and Tomorrow.” An important lesson from the book was recently captured by J. Christopher Giancarlo, the current head of the CFTC:

What I found fascinating in Dr. Sandor’s recounting of this five-decade long evolution from trading pits to electronic trading of futures was the absence of any grand plan behind the transformation. … Market evolution happened because a good idea was coupled with capable technology and mutual commercial interest with enough time to catch on and gain traction.

It is good to be reminded of this past dynamism in the creation and evolution of financial markets and the adoption of innovative financial technologies.

I have known Neil Wallace since I was a graduate student at the University of Minnesota. He even served on my dissertation committee. Neil emerged as a young scholar in the 1960s after receiving his PhD from the University of Chicago to become an intellectual leader in monetary economics. Although Neil was undoubtedly exposed to Friedman’s well-known monetarism as a graduate student, he pushed the economics community to probe much more deeply by opening the hood of money demand and exploring the productive role of money in more fundamental terms. Throughout the conference, there were repeated references to some of Neil’s important contributions and insights.

Together, Neil and Richard provided a fascinating dialogue as they offered valuable back-and-forth perspectives of technological and modeling advances and challenges for the future. Richard reminded us of the long history of the blockchain and distributed ledgers and of their promise to reduce substantially financial transactions costs. Throughout the conference, Neil gave his perspective on conference papers discussing connections to previous research as well as new challenges for future advances. The dialogue really set the stage nicely for this blossoming area of academic endeavor.

Interestingly, the program included a financial forensic paper entitled, “Is Bitcoin Really Un-Tethered?” by Griffin and Shams. The authors looked across multiple blockchains to detect potential price manipulation in observed trading patterns. As an academic, I view the value of such detections less in terms of pinpointing the specific bad behavior and more as a way to detect flaws in existing trading protocols. We should not be surprised that market participants push the boundaries of trading opportunities. In other contexts, I am sometimes confused as to how “bad behavior” on the part of traders is even defined, and when it justifiably results in formal accusations. Instead, for me, this forensic work is vital as a way to reassess the existing rules in place that traders confront that could engender the suspicious market outcomes.

Unfortunately, I missed the lunchtime address of Hyun Shin who is a distinguished academic and now has a front row seat on policy challenges in his capacity as Head of Research and Economic Adviser at the Bank of International Settlements. His combined academic and policy perspectives were a welcome addition to the conference.

This event offered a terrific opportunity for an external scholar like me to witness a fascinating new area of research, and I was pleased that the Macro Financial Research Initiative, which I lead, could serve as a co-sponsor of this conference.

– Lars Peter Hansen