IDEAS home Printed from
   My bibliography  Save this paper

Embedded supervision: how to build regulation into blockchain finance


  • Raphael Auer


The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in tokenised markets to be automatically monitored by reading the market's ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralised market is modelled that replaces today's intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market's economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger's data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.

Suggested Citation

  • Raphael Auer, 2019. "Embedded supervision: how to build regulation into blockchain finance," BIS Working Papers 811, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:811

    Download full text from publisher

    File URL:
    File Function: Full PDF document
    Download Restriction: no

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    2. Benos, Evangelos & Garratt, Rodney & Gurrola-Perez, Pedro, 2017. "The economics of distributed ledger technology for securities settlement," Bank of England working papers 670, Bank of England.
    3. Bullmann, Dirk & Klemm, Jonas & Pinna, Andrea, 2019. "In search for stability in crypto-assets: are stablecoins the solution?," Occasional Paper Series 230, European Central Bank.
    4. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    5. Jon Frost & Leonardo Gambacorta & Yi Huang & Hyun Song Shin & Pablo Zbinden, 2019. "BigTech and the changing structure of financial intermediation," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 34(100), pages 761-799.
    6. Anton Badev & Maria Baird & Timothy Brezinski & Clinton Chen & Max Ellithorpe & Linda Fahy & Vanessa Kargenian & Kimberley Liao & Brendan Malone & Jeffrey C. Marquardt & David C. Mills & Wendy Ng & An, 2016. "Distributed Ledger Technology in Payments, Clearing, and Settlement," Finance and Economics Discussion Series 2016-095, Board of Governors of the Federal Reserve System (U.S.).
    7. Morten Linnemann Bech & Rodney Garratt, 2017. "Central bank cryptocurrencies," BIS Quarterly Review, Bank for International Settlements, September.
    8. repec:zbw:bofrdp:2017_027 is not listed on IDEAS
    9. Eric Budish, 2018. "The Economic Limits of Bitcoin and the Blockchain," NBER Working Papers 24717, National Bureau of Economic Research, Inc.
    10. Raphael Auer & Stijn Claessens, 2018. "Regulating cryptocurrencies: assessing market reactions," BIS Quarterly Review, Bank for International Settlements, September.
    11. Saifedean Ammous, 2015. "Economics beyond Financial Intermediation: Digital Currencies' Possibilities for Growth, Poverty Alleviation, and International Development," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Fall 2015), pages 19-50.
    12. Bruno Biais & Christophe Bisière & Matthieu Bouvard & Catherine Casamatta, 2019. "The Blockchain Folk Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1662-1715.
    13. David Yermack, 2015. "Corporate Governance and Blockchains," NBER Working Papers 21802, National Bureau of Economic Research, Inc.
    14. Sean Foley & Jonathan R Karlsen & Tālis J Putniņš, 2019. "Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies?," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1798-1853.
    15. Drew Dahl & Andrew P. Meyer & Michelle Clark Neely, 2016. "Scale Matters: Community Banks and Compliance Costs," The Regional Economist, Federal Reserve Bank of St. Louis, issue July.
    16. Guillaume Bazot, 2018. "Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950–2007)," Journal of the European Economic Association, European Economic Association, vol. 16(1), pages 123-160.
    17. Tri Vi Dang & Gary Gorton & Bengt Holmström & Guillermo Ordoñez, 2017. "Banks as Secret Keepers," American Economic Review, American Economic Association, vol. 107(4), pages 1005-1029, April.
    18. Huberman, Gur & Leshno, Jacob & Moallemi, Ciamac C., 2017. "Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin Payment System," CEPR Discussion Papers 12322, C.E.P.R. Discussion Papers.
    19. Iñaki Aldasoro & Torsten Ehlers & Egemen Eren, 2018. "Business models and dollar funding of global banks," BIS Working Papers 708, Bank for International Settlements.
    20. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, volume 1, number 9929.
    21. Kevin X. D. Huang & Lei Ning & Guoqiang Tian, 2018. "Conquering China¡¯s Unbalanced and Inadequate Development: Macroeconomic Outlook, Policy Simulations, and Reform Implementation¡ªA Summary of Annual SUFE Macroeconomic Report (2017¨C2018)," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 13(2), pages 147-170, June.
    22. Darolles, S., 2016. "The rise of fintechs and their regulation," Financial Stability Review, Banque de France, issue 20, pages 85-92, April.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Auer, Raphael & Tercero-Lucas, David, 2022. "Distrust or speculation? The socioeconomic drivers of U.S. cryptocurrency investments," Journal of Financial Stability, Elsevier, vol. 62(C).
    2. Giulio Cornelli & Sebastian Doerr & Leonardo Gambacorta & Ouarda Merrouche, 2020. "Inside the regulatory sandbox: effects on fintech funding," BIS Working Papers 901, Bank for International Settlements.
    3. Raphael Auer & Stijn Claessens, 2020. "Cryptocurrency Market Reactions to Regulatory News," Globalization Institute Working Papers 381, Federal Reserve Bank of Dallas.
    4. Luz Parrondo, 2023. "Cryptoassets: Definitions and accounting treatment under the current International Financial Reporting Standards framework," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 30(4), pages 208-227, October.
    5. Stefan Vachkov & Nedyalko Valkanov, 2021. "Regulation, Competition and Partnership in the Financial Sector," Business & Management Compass, University of Economics Varna, issue 3, pages 259-276.
    6. Stefan Vachkov & Nedyalko Valkanov, 2021. "Some Aspects Of Regulatory Optimizations In The Financial Sector," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 18(1), pages 1-18.
    7. Stolbov, Mikhail & Shchepeleva, Maria, 2020. "What predicts the legal status of cryptocurrencies?," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 273-291.
    8. Nedyalko Valkanov, 2022. "Alternative Finance in the New Digital World - Some Regulatory Challenges," Izvestia Journal of the Union of Scientists - Varna. Economic Sciences Series, Union of Scientists - Varna, Economic Sciences Section, vol. 11(2), pages 29-38, August.
    9. Johnson Fejoh & Michael Ayodeji Boyede & Abiola Olawale Sanusi, 2021. "Industrial Actors` Perceptions of Industrial Disputes in Public Universities," Business & Management Compass, University of Economics Varna, issue 3, pages 344-359.
    10. Ojo/Roedl, Marianne, 2021. "Decentralized finance and regulation : enhancing the role of innovative techniques through regulation," MPRA Paper 107717, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Raphael A. Auer, 2022. "Embedded Supervision: How to Build Regulation into Decentralised Finance," CESifo Working Paper Series 9771, CESifo.
    2. Raphael Auer, 2019. "Beyond the doomsday economics of "proof-of-work" in cryptocurrencies," BIS Working Papers 765, Bank for International Settlements.
    3. Anil Savio Kavuri & Alistair Milne, 2019. "FinTech and the future of financial services: What are the research gaps?," CAMA Working Papers 2019-18, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: potential, risks and regulation," BIS Working Papers 905, Bank for International Settlements.
    5. Carlo Gola & Andrea Caponera, 2019. "Policy issues on crypto-assets," LIUC Papers in Economics 2019-7, Cattaneo University (LIUC).
    6. Ye Li & Simon Mayer & Simon Mayer, 2021. "Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking," CESifo Working Paper Series 9260, CESifo.
    7. Zimmerman, Peter, 2020. "Blockchain structure and cryptocurrency prices," Bank of England working papers 855, Bank of England.
    8. Philippon, Thomas, 2016. "The FinTech Opportunity," CEPR Discussion Papers 11409, C.E.P.R. Discussion Papers.
    9. Wolfgang Karl Härdle & Campbell R Harvey & Raphael C G Reule, 2020. "Understanding Cryptocurrencies," Journal of Financial Econometrics, Oxford University Press, vol. 18(2), pages 181-208.
    10. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro & Giovanno Rabitti, 2018. "Cryptocurrencies, central bank digital cash, traditional money: does privacy matter?," BAFFI CAREFIN Working Papers 1895, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    11. Romi Kher & Siri Terjesen & Chen Liu, 2021. "Blockchain, Bitcoin, and ICOs: a review and research agenda," Small Business Economics, Springer, vol. 56(4), pages 1699-1720, April.
    12. Raphael Auer & Stijn Claessens, 2018. "Regulating cryptocurrencies: assessing market reactions," BIS Quarterly Review, Bank for International Settlements, September.
    13. Jorge Padilla, 2020. "Big Tech “banks”, financial stability and regulation," Revista de Estabilidad Financiera, Banco de España, issue Spring.
    14. Hanna Halaburda & Guillaume Haeringer & Joshua Gans & Neil Gandal, 2022. "The Microeconomics of Cryptocurrencies," Journal of Economic Literature, American Economic Association, vol. 60(3), pages 971-1013, September.
    15. Lin William Cong & Zhiguo He & Jiasun Li & Wei Jiang, 2021. "Decentralized Mining in Centralized Pools [Concentrating on the fall of the labor share]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1191-1235.
    16. Yukun Liu & Aleh Tsyvinski, 2018. "Risks and Returns of Cryptocurrency," NBER Working Papers 24877, National Bureau of Economic Research, Inc.
    17. Brunnermeier, Markus & Abadi, Joseph, 2018. "Blockchain Economics," CEPR Discussion Papers 13420, C.E.P.R. Discussion Papers.
    18. Jonathan Chiu & Thorsten V Koeppl, 2019. "Blockchain-Based Settlement for Asset Trading," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1716-1753.
    19. Lambrecht, Marco & Sofianos, Andis & Xu, Yilong, 2020. "Does mining fuel bubbles? An experimental study on cryptocurrency markets," Working Papers 0690, University of Heidelberg, Department of Economics.
    20. Ferreira, Daniel & Li, Jin & Nikolowa, Radoslawa, 2019. "Corporate Capture of Blockchain Governance," CEPR Discussion Papers 13493, C.E.P.R. Discussion Papers.

    More about this item


    tokenisation; asset-backed tokens; stablecoins; cryptoassets; cryptocurrencies; regtech; suptech; regulation; supervision; Basel III; proportionality; blockchain; distributed ledger technology; digital currencies; proof-of-work; proof-of-stake; permissioned DLT; economic consensus; economic finality; fintech; compliance; auditing; accounting; privacy; digitalisation; finance; banking;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D20 - Microeconomics - - Production and Organizations - - - General
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K24 - Law and Economics - - Regulation and Business Law - - - Cyber Law
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:811. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Beslmeisl (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.