A data platform that its creators believe has potential to improve regulators’ ability to track ‘vast and complex’ global cryptoasset and decentralised finance (‘DeFi’) flows has been developed as a proof-of-concept by the Bank for International Settlements (BIS) Innovation Hub and two European central banks.
The initiative – dubbed ‘Project Atlas’ and involving the Deutsche Bundesbank and De Nederlandsche Bank – is needed because crypto and DeFi markets ‘often lack transparency and potentially present risks to financial stability’, with data scattered over many protocols, market actors and jurisdictions, and reporting often neither regulated nor standardised, according to a project report.
‘Regulators are becoming increasingly apprehensive about the scale of crypto markets and their integration with traditional finance,’ the introduction to the 40-page ‘Project Atlas: Mapping the world of decentralised finance’ report warns, adding that despite banks’ ‘minimal exposure’ to crypto markets to date, financial stability concerns are ‘intensifying’.
‘The question then becomes: do central banks have the data and tools to effectively measure the evolution of crypto and DeFi markets?’, the report asks. ‘Crypto markets are highly dynamic, and while policymakers need reliable statistics on these markets, they are often elusive. Surprisingly, even calculations of basic indicators, such as on-chain transaction volumes [transactions carried out on a blockchain network], frequently differ across sources due to different methodologies.’
The proof-of-concept is described in the report’s conclusion as offering a ‘starting point for building a comprehensive cryptoasset analytics environment for regulators and the central banking community that is expandable to new data sources and analytical methods’.
Tracking down geographic footprints
The platform fuses data gathered from public blockchains (‘on-chain’ data) with data gathered from crypto exchanges (‘off-chain’ data). A crypto exchange is similar to a stock exchange, helping people to to buy and sell in digital currencies such as Bitcoin, Ethereum or Tether.
The proof-of-concept specifically uses transactions attributed to crypto exchanges in the Bitcoin network, along with the location of those exchanges, as a proxy for cross-border capital flows.
‘The country location is not always discernible for crypto exchanges, and attribution data are naturally incomplete and possibly not perfectly accurate,’ the report notes, adding that ‘therefore, the flows should be regarded as a lower-bound estimate of the actual size.’
‘Initial findings indicate that, although relatively small compared with total on-chain network traffic, identified flows between crypto exchanges are significant and substantial economically,’ it continues. ‘Attributing geographical areas to exchanges (where possible) lays out the structure of cross-border flows. Thus, Project Atlas provides a starting point for structural analysis across jurisdictions.’
The platform operates in what the report refers to as a ‘cloud sandbox’ and is able to integrate new data sources over time. Policymakers will be able to evaluate developments via dashboards, while analysts and researchers can ‘delve into specific research questions’ using the analytics platform, the report states.
‘New and important public good’
‘Several centralised crypto exchanges today make information on the cryptoasset addresses they control public – under the label “proof of reserves” – for transparency purposes. In the future, such disclosures could be used for novel approaches to data-driven supervision,’ the report concludes in a short section on ‘next steps’.
‘Incorporating further data sources will be a crucial priority in the next phase,’ it continues. ‘Extracting and analysing data from a blockchain node in the Ethereum network is envisaged. As DeFi markets expand, this is a natural step for further analysis. Furthermore, the project team will seek feedback from the central banking community on which statistics help them fulfil their mandates.’
The broader aim is for the platform to evolve into an ‘insightful public good as the data platform and outputs will be openly available to central banks.’
“Working in the intersection of economics, finance and computer engineering, we are developing a new and important public good for central banks globally,” said BIS Innovation Hub head Cecilia Skingsley this week in a quote on a project page on the BIS website. “The data on cross-border flows are relevant for areas like payments and macroeconomic analysis.”
BIS Innovation Hub Eurosystem centre head Raphael Auer and Eurosystem centre adviser Jan Paulick (as project lead) have been among the central bankers driving the project. Banque de France had two team members involved as observers, a status also held by European Central Bank international innovation manager Sjoerd Van der Vaart (who formerly worked at De Nederlandsche Bank). Austria-headquartered company Iknaio Crypto Analytics is named as the project’s private-sector partner.
RELATED ARTICLE European Parliament backs crypto rules to put EU ‘at forefront of token economy’ – a news story (25 April 2023) on European parliamentarians voting overwhelmingly to approve the high-profile Markets in Crypto Assets (MiCA) regulation, making the European Union the world’s first major jurisdiction to establish a comprehensive regulatory framework for cryptoassets
DG Fisma ‘crypto environmental impact’ tender
In a separate European crypto-related development, the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG Fisma) has published a tender notice as it looks to boost the European Union (EU)’s capacity ‘to assess and mitigate the impact of crypto-mining and develop specific sustainability standards’.
The ‘Developing a Methodology and Sustainability Standards for Mitigating the Environmental Impact of Crypto-Assets’ notice, which carries a value of €800,000 (about £692,000/$843,000), states that the ‘preparatory action intends to develop a methodology to measure the climate and environmental impact of the consensus mechanisms used by crypto-assets and assess the feasibility of establishing environmental sustainability standards for crypto-assets with a view to the adoption of future legislative action in the area of crypto-asset financial regulation.’
‘There is evidence that crypto-assets can cause significant harm on the climate and environment and generate negative economic and social externalities, depending on the consensus mechanism used to validate transactions,’ it explains. ‘The increasing demand for crypto-assets and expansion of crypto-mining, including within the EU, could undermine EU’s efforts to achieve its climate and sustainability goals, in line with the Paris Agreement [adopted in 2015].’
The notice, which carries a value of €800,000 (about £692,000/$843,000), has an application deadline of 10 November and contract-award length of 13 months.
*** The BIS Innovation Hub Singapore centre – alongside the Reserve Bank of Australia, Bank of Korea, Central Bank of Malaysia and Monetary Authority of Singapore, as well as financial institutions – have this week launched ‘Project Mandala’, which explores the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a common protocol for cross-border use cases such as foreign direct investment, borrowing and payments. ‘The envisioned compliance-by-design architecture could enable a more efficient cross-border transfer of any digital assets including CBDCs [central bank digital currencies] and tokenised deposits. It could also serve as the foundational compliance layer for legacy and nascent wholesale or retail payment systems,’ BIS states in a project webpage.