On Risks Of Cryptocurrencies

Cryptocurrencies like bitcoin,which is viewed as a kind of digital money,are characterized by unsecured credit,decentralized trust,and based information.They establish trust by encryption algorithm via a peer-to-peer network instead of the traditional structure of the central bank and commercial banks,ending up with an efficient payment system.Besides the blockchain behind bitcoin is expected to be widely used,thus potential to reform the whole world in the future.As cryptocurrencies get better known,they become a boom on the internet and gain great strength,as well as huge risk.The paper analyzes risk management in three chapters in order of risk identifications,assessments and regulations.And in the last but one chapter building legal digital money is analyzed.The paper starts from dual properties of cryptocurrencies: in the perspective of financial assets the paper aims to help improve regulations,and in the perspective of currency the paper tries to come up with some suggestions to the building of own legal digital money.In the risk identification chapter,at first currency risk is analyzed theoretically.the paper finds that cryptocurrencies attempt to overcome the credit crisis of legal tender but end up in partial failure through theory reviews of Denationalization of Money.Because(1)their decentralized network turns to be recentralized,slipping to private privilege.(2)cryptocurrencies are copied without limit,resulting in overissuing.(3)network effect will destroy competition between cryptocurrencies,not good for the violating currency value.The paper analyzes financial risk.Inspired by banks,the paper classes risk points into 5 parts: the polarized market risk,the revival in credit risk,the hanging liquidity risk,the inherent operating risk and the disaster compliance risk.The paper thus reveals the risk point of the risky cryptocurrencies.In the risk assessment chapter,the paper adopts a daily transection data of bitcoin from 2014 to 2017 and tries different GARCH family models.Result shows that bitcoin return has a high peak and a fat tail and shows a volatility cluster but no leverage effect.The paper also makes a comparation in volatility and finds that bitcoin is lower than ripple and ether,but much higher than gold &silver and major currencies and market indexes.Then the paper gives some suggestions about China's one-size-fits-all ban on ICO with reference to international regulations.Regulators are supposed to recognize cryptocurrencies as asset in law and contain them in financial regulation and improve the framework under principles of penetrated,classified & hierarchical and intelligent regulation.It is suggested to classes blockchain companies into investing and application and establish market access with investing companies restricted.It is also suggested to include cryptocurrencies into Anti-laundry law and force users to register with real names.By Imposing a tax on token activity users will be punished for tax evasion.Regulator needs to educate investors and protects customers' legal rights.An international coordination is also necessary for countries.China is building its own legal digital money.The paper concludes that legal digital money has more advantage and is likely to be the next generation of currency.It is also suggested that the experiment of cryptocurrencies will help promote what is beneficial and abolish what is harmful.In the legal digital money era,more attention should be paid to internet security and changes of policy effects.And new technology could be employed for MPA(Macro Prudential Assessment).