 Okay, hello everyone and welcome or welcome back to our virtual seminar series on central banking and digital currencies. So after taking a break for the holidays and the job market season, we're excited to be back to our usual schedule meeting once a month on a Friday. So I think we have a really exciting lineup for the next few months which I'll advertise at the end of our session today. But without any further ado, I'll now turn things over to our moderator for today, James Chapman from the Bank of Canada. Thanks Todd. So before we start the presentation, let me just give a few housekeeping notes. For the presentation, we've allotted 25 minutes for the presentation, 10 minutes for the discussion, and then we'll have a Q&A session afterwards which I'll have about 20 minutes allotted to it. During the Q&A session, panelists can unmute themselves to ask questions or make comments. Other attendees, please use the Q&A area to ask any questions and I'll select questions from that box as opposed to the presenter. I should also note that as you notice, this conference is being recorded and the video will be posted on the CBNDC website. So with that, I'll introduce the presenter today, Professor Antoinette Schor, who is the Stuart C. Myers-Horn Family Professor of Finance and Entrepreneurship at MIT Sloan School of Management, who will be presenting her joint work with Igor Makarov, who's also in attendance, titled The Blockchain Analysis of the Bitcoin Market. And with that, I'll turn it over to you, Antoinette. Great. Thank you very much, James, and good morning, everyone. I'm delighted to be here. This is joint work indeed with Igor Makarov and LSE, and we have titled this Blockchain Analysis of the Bitcoin Market. What I want to show you and what motivates this work is that obviously over the last decade, cryptocurrencies have grown significantly and have attracted a lot of attention. And we are currently basically in a transition period where there's a lot of, on the one hand, interest and excitement about cryptocurrency, but also a lot of questions from regulators, from policymakers and the wider public about how to incorporate these new technologies, these cryptocurrencies into the traditional financial system, what kind of risks and danger it might have and what type of opportunities they might represent. And I will show you some work that Igor and I have been doing using the Bitcoin Blockchain and we chose to start basically with that particular cryptocurrency because as you know, it's the oldest and still, if you want, most valuable and largest cryptocurrency. And in particular, what we want to understand is how the promise or premise of the cryptocurrency revolution, if you so want, lives up to its reality. And just at a very high level, many of you obviously are aware of this, one of the central and key promises of cryptocurrencies is what is often called the trustless trust architecture. This idea that the distributed ledger technology that the blockchain embraces will replace our traditional financial architecture. And so the big difference here, right, is that traditionally and typically, the way financial systems keep ledgers is that they rely on a central node like a bank or other financial institution that does the record keeping and the accounting plus many other services for its customers and counterparties. And the danger, of course, is that such a central node can be corrupted or maybe even attacked and kind of even the insiders can potentially front run the data, et cetera. And so the promise of the blockchain then is to do away with these central nodes and have a distributed ledger where many different nodes are holding replicated copies of the ledger and are verifying the integrity of the ledger if more than 50% or 51%, right, of the different validators or the Bitcoin environment is called miners, if they agree on the integrity of the ledger. And of course, right, this whole infrastructure relies on this idea that if miners and validators are decentralized enough that they are democratized, that there are many, if you want, competing miners that ensure the integrity of the blockchain. If they were to actually become very concentrated or if a significant part of them was to be corrupted, then of course, like this could undermine the integrity of the blockchain. And so with this idea, right, what we want to do in this paper is to understand how do these important participants on the blockchain, on the Bitcoin blockchain, how have they evolved over the last decade and what can we say about their structure, right? And so we're gonna use the Bitcoin blockchain to do a systematic analysis of this market and its main participants. And we have a lot of results in this paper but I will show you three important pieces and then kind of I would encourage you if you're interested to look at the details in the paper. So the three things I will focus on is, number one, we're gonna look at the network structure and I'll show you not just that the transaction volume and the network structure is very centralized around the largest exchanges. About 75% of the volume is linked to exchanges and they are also very interconnected to each other. And I will show you at the end that this actually has implications for how we want to think about the transparency of that network. On second, I want to show you how ownership is concentrated in the Bitcoin universe right now. In particular, I will show you the ownership concentration of the largest Bitcoin investors. And here in particular, we see that there's very high concentration about 3 million Bitcoin, around 20% of all Bitcoin is held by a thousand accounts if you want, a thousand investors. This is kind of these individual investors are not somehow intermediaries that are holding Bitcoin on behalf of other people. And then finally, I will also show you that actually mining capacity, which we study at the level of individual miners is very concentrated across a few miners. There's also a lot of regional composition of miners. And in particular, I will also show you that the concentration of mining capacity varies with the price of Bitcoin. And this might have implications for the integrity of the Bitcoin blockchain. All right, so kind of just as a quick reminder, what is data when we look at the blockchain? So every transaction on the blockchain actually has a digital footprint given the pseudonymous nature of the blockchain. So everything can be traced. So an account is called also an address on the blockchain and you can see, if you want, every transaction on the blockchain. Meaning, say this string here, 17A, blah, blah, blah, is one address that controls 1,300 and more Bitcoin and is sending it to another address. This is all visual, visible on the blockchain. Now, the complication is that on the, and that's true for most people currencies, that addresses are freely, they can be freely opened. And in fact, most people have many, many addresses, through which they are trading or making transactions. And so one complexity that we face when analyzing, you know, kind of economically meaningful transaction on the blockchain is that we need to tie all these addresses together to what is often called a wallet, meaning, you know, transactions that are controlled by one entity. And so we do this using cluster analysis that has been developed, you know, by computer scientists and we're using very conservative approaches to cluster these pseudonymous addresses together, which then means, you should keep in mind that everything I'm showing you today is basically a lower bound of concentration because, you know, if somebody is using her or his addresses in a way that prevents cluster analysis to cluster these things together, they can actually hide, if you want, all the addresses that one party controls. Now, this is the first challenge, right? And then the second challenge we've won faces is that we want to link these anonymous Bitcoin addresses to real life entities. And so this is where, you know, a lot of work, we had to do a lot of work, which I will not bore you here about all the details, but, you know, just to give you a sense, rightly obtained this blockchain data using open source software of Bitcoin Core and then block the block site program to convert the raw block data into a database. And what I'm gonna show you today is data as of the middle of 2021. We have about 650 million Bitcoin transaction and 850 million unique addresses. And then we link those addresses to real life entities using public and proprietary sources. So we scraped lots of blogs, websites, but we also worked with a provider of Bitcoin data, I mean, blockchain data, Bitfury crystal blockchain that uses state-of-the-art, you know, kind of tracing of crypto entities. And they work, for example, for, you know, state departments and banks and so on for the purpose of anti-money laundering, providing anti-money laundering tools. All right, so putting all of this together, you know, we believe we have one of the most complete data sets of crypto entities behind those different addresses and we cover more than 1,000 of the largest entities. So when I say entities, I mean, right, as you see, we have almost 400 crypto exchanges, gambling sites, online wallets, right, these are basically fiduciary or these are providers of fiduciary services that hold wallets, payment processors, mining pools, and then scams ransomware, attackers, and so on. Okay, so with this, let me show you basically those three main pieces of evidence or descriptions of the main participants in the Bitcoin universe. So first I want to show you how ownership concentration of Bitcoin looks and has evolved over the last decade. We believe this is really important to understand because ultimately, right, the ownership concentration determines who will benefit most from wider adoption if Bitcoin were to become even more widely traded or if public institutions were allowed to actually use them or trade in them. And what I want to show you is that despite its promise of democratizing finance and providing widespread access, actually it's still very concentrated how this ownership looks like. Now you could say, right, why is this challenging task given that I just told you that all addresses are available to be viewed on the blockchain and indeed there's something called the rich list of Bitcoin that many people are tracing actually in kind of with crypto and through the earth and kind of if you can look it up on the web, right? But the difficulty is that a large address doesn't necessarily mean that it is one owner holding it. As I already showed you before, there are lots of intermediaries these days such as exchanges, OTC brokers and others that are holding Bitcoin on behalf of other people. And so the, and then, right, if all the big addresses were actually say the cold wallets or hot wallets of say Coinbase or Binance or other exchanges, right? It would be very misleading to say ownership is concentrated. And so we go through a very in-depth analysis using graph analysis to examine the utilization patterns of different addresses for in the cases where we don't know who these owners ultimately are to differentiate what looks like intermediary holdings from individual accounts. Because we want to be as careful as possible when showing you the potential concentration patterns. And so I encourage you to look in the paper how exactly we do this, but let me show you the high level results. So if we look at the evolution of intermediary ownership over the last decade and a bit, what you see is not surprisingly maybe at all, right? Is that the holdings of Bitcoin in the wallets of what we identified as intermediaries has grown significantly. And in particular, right? You see that starting in the 2014 and after really, you know, this has been picking up. And this is completely also in line, right? With what you would expect given that this is the time period when exchanges grew and there has been wider participation, maybe of the public. But this is right. So then as of the middle of 2021, we have about 5.5 million BTCs held in these intermediary accounts. Now, look at now, right? I'm showing you basically the concentration of, sorry, and I should say, right? This is just to show you how much is in the intermediaries. This is not a sign at all of concentration because as I said before, right? This could be many, many small investors holding these accounts. But when we look at what we can identify as individual owners, meaning addresses that either we identify the holder behind or the trading pattern allows us to confirm that this is an intermediary holder. You see that actually concentration is very high among those individual owners. So if you look on the left here, I'm basically plotting for you the when these large holder balances were basically established. So you see, for example, also that it's not just that all the original large holders are maybe, the original Satoshi Nakamoto, whoever that is, right? But that actually over time, a lot has come online. And then if I look at say, even as of the end of 2020, this is not time, right? This is just to show your ownership concentration as of say, kind of December of 2020, you see that there is still very significant concentration among large individual owners. In fact, the top thousand investors here control about 3 million VTC. The top 10,000 control 5 million VTC. Basically the top 10,000 control as much as all the intermediaries roughly, right? That I showed you together. So this is really very significant concentration. Again, why should we care about it? We should care about it because this actually will tells us that any increase in the price of Bitcoin due to say wider adoption or price pressure from wider adoption goes to a very select few set of people and we don't all entities and we don't even know who they are, right? Because they are anonymous and are also not somehow responsible to any public good. In addition, some of the work that Egon and I have done before shows that because there's still a lot of price pressure impact from order flow, right? These people or these entity also have a lot of possibility of actually creating price impacts for trading on Bitcoin. So this is in a way the first piece of information I wanted to share with you. The second, again, kind of looking at how concentrated versus how decentralized participation in the Bitcoin universe is. Here I now focus on miners as miners are basically those validators that ensure the integrity and the integrity of the blockchain and verify transactions. Now we know from prior work, from public sources that mining pools are very concentrated. So this is even just from data from kind of a coin market cap and we know this that mining pools are so concentrated because mining pools in a way publicize what are the blocks that they verify in order also to document how important they are in that universe. But it's important to understand that mining pools are not necessarily miners and in particular it might not be the case that mining pools even when they're concentrated hold most of the power. As some research has suggested, say for example there's a nice paper by Kong Hei and Horthus that points out that if actually it's easy for miners to switch between mining pools and if actually the underlying miners potentially are very concentrated it could be that it's the miners that hold the control in power on the blockchain and that the mining pools in some sense are just the past. Now, the other thing that has also been pointed out is that we have those mining pools because for many, for miners it is preferential to sell to co-insure within a mining pool because whether you succeed in hashing a particular block has a lot of stochasticity but if you can co-insure with other miners in terms of your payment then it's a benefit to the miners. And so what we do to figure out whether the miners themselves are similarly concentrated as the mining pool what we do is actually we are able to trace coin-based rewards meaning kind of the reward you get when you mine a particular block down to the miners. This is again actually quite complex I will spare you kind of the details but we are able then to trace rewards down to the level of from the 18 I think largest block mining pools to more than 250,000 miners. And what we find is actually that even at the level of the miners we see very large concentration of mining capacity. So if you focus here say on the right graph you see that say the blue line here plots for you the number of miners that are needed at a given point in time to cover 50% of mining capacity. And as you know, right, 51% attack the famous or infamous 51% is that when 51% of the hashing capacities under control of one body or one collusion of miners if it was to happen they could have the power to basically undermine the integrity of the blockchain. And what you see is that basically they have been several time periods especially also in 2021 where the number of miners that controlled 50% of mining capacity dropped below 50 miners. And remember again, this is a lower bound because if some miners control several of these addresses that we can identify it could be even fewer. So this is actually even at the level of miners very high concentration. In addition, I want to point out that the concentration also co-varies with the price of Bitcoin. So each time the dotted line here is the log of BTC to USD and what you see is right each time the price drops precipitously so does mining concentration go up which in total right should make us quite worried that they can be in a way unwanted or unfortunate cycles where the price drops concentration goes up and therefore the likelihood or the fear of an attack becomes even bigger which would make the blockchain then very prone to attacks. Let me skip this part kind of we also show that basically especially as of the middle of 2021 there was a lot of capacity in one location in China while some of this has now moved actually to places like Canada, Kazakhstan and so on. It's just also important to understand that even malvolunt actors even if the miners themselves don't necessarily are malvolunt right if somebody ceases control of the equipment right that is in itself also a danger for mining capacity for the integrity of the blockchain. And then finally given that I'm basically out of time I just want to at a high level say we are then also able to decompose the volume that is moving across the blockchain and we first find that about 75% of the blockchain volume is currently for trading activity. A much smaller fraction of the transactions are for illegal activities like ransomware kind of sale of guns and drugs and other unpleasant things right. But an end that kind of a lot of the central nodes which I exchanged is a heavily interconnected. I just want to say at a very high level and I will stop with it. This is your three minute warning. Oh, I still have three minutes. Okay, so kind of thank you. So let me say that finally right. So as I had already mentioned the largest nodes are the largest, are large exchanges and OTC brokers such as you know, Coinbase, Binance, Itum right the names that you're probably very familiar with. What I show you here in graph analysis is also that those large exchanges are very interconnected even across jurisdictions, geographies, et cetera. And there's a lot of Bitcoin floors from the wallet of one exchange to another. We think a lot of it might be actually due to taking advantage of arbitrage opportunities but you know, kind of in between different locations and jurisdictions but it shows you how interconnected that network currently is. Now, the final thing I want to mention is that this interconnectedness potentially can also prove actually quite problematic. Why am I saying this? Because actually what I want to show you now is that you know, on the one hand you might say, oh look, if the largest exchanges are the biggest nodes and hubs on that ecosystem right now, if we just regulate those largest exchanges, maybe then we will actually create a very benign environment for the Bitcoin ecosystem. But actually or unfortunately, that is not as easy as that. And the reason that is what I want to leave you with is that we do, for example, one application where we take flows from the largest dark net market, which is Hydra market, where you can buy and sell all the unpleasant things you can imagine from guns and drugs to people and so on. And it's well known, right, this Hydra market and it's also well known what are some of the addresses that are trading through that market. And what we can do is to trace those flows that come out of Hydra. Where do they go? And so the first thing that you see, so the size of these bubbles here is the direct connections of where do the, where do people who traded on Hydra market, where do they send their BTC or where do they come from? So what you see is that the exchanges that they come from are actually exchanges that do not either do not do any KYC enforcement or very lax ones like that slot or total coin, local Bitcoin, but also Binance. And you see some of the US exchanges like Coinbase or Gemini are much smaller here. And you could say, aha, you see, when you do KYC as Coinbase, for example, does, then I'm protected. But unfortunately, that's not the full story because what you see is that a lot of money from Hydra market flows into those, what we call mixing addresses. So these are these talk wise notes where the money flows directly from Hydra gets mixed with other flows of BTC or sometimes not even. It just sits there for a little while. But of course, when then this money flows back to Coinbase or Gemini, they don't do KYC up to the last owner, right? Who might have been somebody interacting with the Hydra market, they just do it up to the talk wise note. And so therefore, a lot of the money actually seems to enter back even on exchanges that do do KYC norm enforcement, right? And so what this basically tells us is that if... Antoinette, I think we're at the time now. And so, right? So what we want to then basically show you is that ensuring the integrity of the block chain kind of currently, there's still a lot of concentration at the level of owners and miners. And at the same time, we need to be aware that our current KYC regulation has only limited in fact of preventing tainted or maybe kind of unwanted flows entering into circulation even on regulated exchanges. Thank you very much and very sorry for running over. It's a very interesting presentation. Thank you for giving it. Now, I guess I'll turn the floor over to Christine Parler who's graciously agreed to give, discuss the paper. Christine is the Sylvan C. Coleman Chair in Finance Accounting at Berkeley Haas. Christine, I'll turn it over to you. Hope you're on mute. Okay, good morning, everyone. So first, I just want to emphasize how extremely difficult it is to parse the data on the blockchain even though it is publicly available and everyone says, oh, everyone can download nodes actually figuring out what is happening. It is extremely difficult to assemble and parse. And so this paper is great in the fact that they've assembled and sort of carefully thought through all the implications of the data and it's kind of important. And I think, I mean, there's a huge barrier to entry because the data is so difficult. And I think it's important for all of us to sort of understand how the system works because it's not going away. So, okay, so my comments are just basically around interpretation and potential other follow-up things that you can do with your fantastic data now that you've assembled it. So my first comment is essentially about economic value. So everything in the paper is around a number of Bitcoin. So that's the numerator. And that makes sense to keep track of things. If in fact, the Bitcoin is being used as both a store of value and a medium of exchange. So in which case one Bitcoin is equal to one Bitcoin because that's the numerator. If you're thinking about Bitcoin actually as a protocol that allows people to transfer information, then the flow of one Bitcoin doesn't equal to the economic value because the flow of Bitcoin is just the marginal cost of transferring information, not the value added of the information. So in particular, I'm talking about the specific data insertion flag up return that was introduced in 2014. So when these data insertions happen in the Bitcoin blockchain, very few Bitcoin are moved. It's just kind of like a throwaway to get the thing incorporated into a block. What is important and the value is in fact, the data, not the Bitcoin. So the data may or may not be illegal, but just to give you a sense of how big this potentially is Tether, which was initially issued on the Bitcoin, the omnilayer of the Bitcoin blockchain basically used this op-ret flag. This was the Tether protocol was built on the back of this flag. So potentially there's a huge economic value associated with a very, very small flow of Bitcoin. So this might be just sort of useful to think through. And just to give you some sense of how large these op-ret transactions or data insertion transactions are, this just looks at sort of block by block number of transactions and aggregates them across days. So the Bitcoin prices in gray, the blue is the data insertion. Obviously people are more likely to use data insertions when the value of Bitcoin is low, that's the marginal cost, but these are a non-trivial percentage of the transactions. And it might be useful just to flag them and sort of to think them through in the paper that I think would be very helpful to people. The other thing that is much more sort of up my alley and that I really like is this provides an unbelievable economic environment to understand contracts. So this is the first time that I've seen really, really detailed information on miners. Everyone just goes with the mining pools, but of course that's not the sort of where the action is. And the identification, Antoinette didn't have a chance to go through of the cashouts and the individual miners. It's all very carefully done and they use this exogenous coal mining shock in Jiangyang and so forth. So this is really, really solid. So what I would love to see is basically an analysis at the minor level of the different contracts and how they relate to stickiness to individual mining pools. So in the computer science literature, we have a whole bunch of sort of documentation on the different contracts that are used by the different mining pools. So this is just one that I grabbed and it's just because it's got nice pictures, I like the colors. And basically what it does is over time it specifies the type of contracts that the specific mining pools offered to miners, payment per share and so forth. And they're very different and rich. And so, they're designed to stop, to make people sticky to mining pools. So this is just a fantastic environment to think about competition between contractual forms. And you know when contracts work and when they don't and what the opportunity cost is, it's just a goldmine. So I would really encourage you to sort of think along those directions. The final comment. Christine, this is your three minute warning. Oh, thank you. So the final comment is just even though Bitcoin has been around for over 10 years, over a decade, the system is evolving and I would. So in particular, because I'm very, very interested in things that are running on the Ethereum virtual machine, you know, there are multiple bridges between the Bitcoin blockchain to other chains. So, you know, this is just from DeFi Lama. So there's at least 150 billion in HBTC, there's another bridge in the RAP Bitcoin. So it would be very, very useful to break down the intermediaries into those that are intermediaries, either cold wallets or whatever, that where the value resides on the Bitcoin blockchain and the intermediaries that are actually bridges to other chains and who the heck knows what's happening on the other chains. But certainly they could be generating economic value that increases the value of the Bitcoin protocol completely, right, it sort of just lifts it up. But I think that would just be very, very useful to the reader just to sort of understand how the use value of these things is developing. So just very, very careful examination of the flows and this is such a heavy lift. I mean, I cannot emphasize enough how much of a lift this is, just trying to parse what's going on. And the detailed breakdown of the individual miners is this is the most detailed I've seen anywhere in computer science anywhere. And just potentially this is just an absolute goldmine and there are lots and lots of interesting economic questions that can be answered. So yeah, those are my comments, thank you. Thank you for that discussion. Before we move on to Q&A, I'll give Antoinette a chance to give any comments. I can only say thank you so much, Christian. This is super helpful. And it's an interesting point about the data and certainly we should kind of look at this more. On the mining side, you are completely right. I mean, we've started to do in a way what you want, which is we've looked also at mining pools have given different incentive schemes, right? And have been trying to compete, especially early on by changing incentive schemes to then see which type of miners they are attracting to each other and which type of miners, like you said, stay sticky versus are shopping around. We can actually already see that some miners, which we were very surprised is actually the largest miners tend to already, even at a point in time, diversify across mining pools. But kind of why the smaller miners tend to be the one sticky, so to speak, with the mining pool. The difficulty, unfortunately, right in all this is that kind of we want to be really careful of tying all the addresses that a miner can use to that miner. And we are finding that these guys are very kind of smarty. In a way of also changing in a way the addresses that they're using. So kind of that makes it more difficult to actually have a longitudinal data set, right? Where we completely catch all the rewards that a given miner gets over time. But kind of I completely agree with you, right? Those are some of the really interesting things to do. And then as you said, at your third point, the bridges to multiple chains are super interesting because now Bitcoin is almost the collateral or the security level for many other applications. And we would love to know more about it, but kind of of course every lift is another lift. And so this will take a bit of time, but thank you so much. This is extremely helpful. Okay, excellent. So now I guess it's time to move on to the Q&A part of the discussion. We have a few questions in the chat and the Q&A and maybe I'll start off with one of those and then we can maybe move on to, if any panelists have questions. So one of the first questions that came up was about the concentration of Bitcoin holdings. And Martin Van Wurt asked, in the data, if you consider Bitcoins held by an ETF as a single investor or multiple investors, since for example in Canada, there are some Bitcoin ETFs. And would such a situation conceptually be considered as somewhat similar to the situation where Bitcoin exchange holds Bitcoin? It's for many investors. Right. Igor, do you want to? Can you hear me? Yeah? Yes. So we consider all ETFs, et cetera, as intermediaries. So they are not part of individual holder. So they are in part like Antoine has showed you that intermediaries hold 5.5 million Bitcoin, so they are in that bidder. So it's for us, it's difficult to say because you need to know the ownership within the exchange, that's usually, we don't have those data, maybe some regulators have. And then we can see what's the concentration within the exchange or within the ETF, but that's limitation of what we do. Excellent. Maybe one other point, this was also implied in the question, right? It is the case that for most of these intermediaries, as an owner, you forfeit your Bitcoin when you send it to the exchange. The same is true when you trade through these type of ETFs. On other blockchains, as Christine was already alluding to, right? There's now more DeFi, decentralized finance, where you might not have to do this, but the intermediaries we're looking at are centralized intermediaries. Okay, excellent. Thanks. So I'm gonna actually use my moderator's progative to ask a question before I go on to the rest. One question looking at the presentation and in the paper that I came back to is you mentioned, you talked about the concentration of the concentration in these markets in terms of Bitcoin, have you ever calculated like a Gini coefficient or something to compare it to traditional finance, traditional wealth measures of inequality? Because it's hard for me to understand if it's concentrated or is it concentrated relative to the real world, quote unquote? I think it's a good suggestion, but we did not compute the Gini coefficient. So we have the data so we can do that. I think that was again, because there are so many pieces in the paper, so we just reported maybe the most basic statistics and then in such a different work we're doing. Okay. The other way, I think maybe our prior had been that it would be very decentralized. And so we were, and it was closer to more uniformly distributed, but it's not. But you're right, kind of as a baseline, we could look at ownership concentration across in wealth holding or kind of basically other platforms. Thanks. Maybe now I see Michael Lee has his hand up. Maybe I'll let him ask the next question. Yeah, it's actually related to Jane's your question. So one thing I think about particularly in the analysis looking at the legal transactions is, admittedly even the traditional financial system has this kind of behavior and a lot of the exchanges are housed in regions or jurisdictions where those advantages arise. So there is a conceptual issue with kind of concentration and particularly in Bitcoin mining and ownership. But in terms of the regulatory aspects, do you, are there certain concerns or aspects that you think are unique to the Bitcoin and cryptocurrency environment? I think it's a question that invites a very long answer. I may not be just in this section, right? Because Bitcoin is just one ecosystem, but now we have lots of different cryptocurrencies. We have also decentralized finance and the whole ecosystem, I think it actually brings lots of challenges to regulation, right? And if we start thinking and comparing these type of systems with say traditional finance where we have some centralized nodes that usually guard for example, access to the system, right? So this way we try to limit how kind of much of illegal flows enter the system and we can, if necessary, see for example, what happens with transactions to build tax, et cetera, et cetera. So this new architecture actually makes those kind of operations quite challenging, right? Because if you think especially with the decentralized finance, we don't know how essentially who is behind the coins. If somebody trades on some exchanges and realizes capital gains, how do we impute this capital gains, right? So if especially it will be wide adoption and stable coins, we can play with stable coins again. How do you trace all these transactions, right? If we don't have the nodes that say, oh, okay, these are, I would say legal kind of money and say here legal money. And how do we impute, for example, how do we compute the tax, right? If there is almost in the normal system, centralized exchanges can say, oh, okay. So that's the account, that's how many capital gains were realized, but in the centralized it's completely there. So again, maybe Antonette can also add to my answer, but it's really opens up a very large area and it can be discussed along many dimensions. I think it's very interesting. Yeah, maybe let me also add to this. I think, because I saw also another comment in the chat. So number one, we are not trying to say that illegal transactions are not a problem because they are a small fraction of the flows on the Bitcoin, right? It's just because trading flows between exchanges is currently so big, it just dwarfs the others, but that's still illegal transaction you worry about. Now, I think Michael, maybe what you were also implying is it could be that there are illegal transactions or maybe tax evasion and so on facilitated by exchanges that do not do KYC enforcement or even other enforcement. It could be bigger than what we are calculating as illegal transaction per se, but what we are relying on are, because again, remember we wanted to be conservative in everything we're doing, right? We're using identified transactions to illegal nodes, so ransomware and all this. And I think just conceptually in what Igor said, it's just kind of, I didn't have so much time to show this, but if you look at this example of the Hydra network, the difficulty here really is that unless every node does KYC enforcement or every important node is forced to do KYC enforcement or tax enforcement up to the last node that did a KYC enforcement, right? We are basically toast because then you can hide a lot of things and hide your capital gains, et cetera. And then we are basically providing one set of system, massive advantage, right? Because in every other transaction and asset class we are enforcing taxes. And here we don't enforce taxes, we don't enforce KYC norms, et cetera. That would not be very palatable for kind of what we normally think is a well-functioning financial system. Excellent. Hopefully that answered your question, Michael. I know Russell has his hand up, but I think since we've been talking a little bit about concentration, I wanna go to maybe one question in the Q&A to continue this concentration discussion. So Lukas Herron-Rook in the Q&A mentioned, is there any indication that miners voluntarily hold back from further concentrating? After all, they don't generally want to undermine the trust in Bitcoin. Well, I think it's difficult to answer this question precisely with our data, right? Because we, well, we don't know if they hold back, right? We know that there is a high concentration in Pulse power and until at least recently, Pulse also linked, most of them were in China and linked to the user of the Bitcoin hardware, right? So that was a very tightly integrated system that potentially had some power. And I think here the concern might be not necessarily as they would engage in undermining some transactions like double spending, et cetera, but there are many ways how this power can manifest itself even to the benefit of miners, right? For example, it could be that they try to maintain high fees in the system or they might resist some maybe changes to the protocols that would undermine the current trend, but that would otherwise made the protocol more efficient. Another dimension where maybe concentration is important, but so far Bitcoin and Ethereum, they benefited from the regime where prices increased quite a lot over time. And so there was no free utilization capacity. So miners with investors almost had the capacity, right? So, but what we actually show in some other paper, some negative effect of this mining capacity for the smaller chains, right? Once we have this extra capacity, we can attack smaller chains and also if somehow at some point, for example, Bitcoin price will decline a lot, right? We might have a lot of this extra capacity to mine and then some people might use this capacity to launch some attacks on the Bitcoin network, just maybe because they kind of want to promote some other cryptocurrency and networks. And that's also where this concentration is important because it depends who is going to drop from the system with transitive price or the small price again. So it's an important issue. Excellent, thank you. I see, Bresli, put your hand down so maybe we'll turn to Huberto who has his hand up. Hi, that was really interesting. I'm kind of, I'm sort of not a big expert on this, but I was wondering, you know, what's the, what are we trying to sort of understand here is in the sense of it looks to me like you can't really regulate some of these things, but maybe by design, you know, sort of like they design so that you cannot regulate them. And I was wondering, for example, these multiple addresses, is that fulfilling a function or is that just so that Antony and Igor cannot track who's doing what, you know, I'm just not sure. And then sort of, I mean, it's super fascinating, but it's like I'm kind of stepping, taking a step back. What is it that we could sort of learn or think about doing or I don't know. Anyway, if you have thoughts about that. Sure. First of all, I think it depends what you mean by regulate, right, as Russia or China example show, it's possible to effectively almost ban cryptocurrencies or essentially prohibit or introduce a regime where everyone will be identified from the blockchain, right? So it's definitely regulators have a lot of, if they want to, tools how to bring the system in line with what we think the financial system should look like. Yeah, it would probably involve some restrictions on the design, I mean, you can always enforce it not to be legal tender. And so, you know, once you make sure it's not legal tender, you know, kind of it actually does reduce its attractiveness. And it does still give regulators the chance to regulate it. What I think we are trying to say is if you allow it to continue the way it is right now, it's very difficult to enforce unilaterally KYC norms or, you know, kind of basically do tax compliance and all that. So, sorry, I didn't mean to interrupt. I just want to make clear. Yeah, what I tried to say is that in a way it's a current design and it imposes some restriction but also, right? Because everything is on the blockchain. That's one, at least if we're talking about Bitcoin and some other cryptocurrencies. And then of course, if there was no, if all addresses were known to everyone, et cetera, that would probably mean that too much information is available to everyone and everyone can trace all the transactions. So, as a fix for this kind of feature what cryptocurrencies do, right? They introduce pseudonymous addresses so that it's difficult to link the identity behind these addresses and transaction and that's how they protect the data. Again, it's an interesting discussion whether the shortcomings of the system, right? And whether, and that's what we also try to point out in our papers that it's even though everything comes on the blockchain but because it's difficult to link these addresses to real entities, in some cases we can but in some cases we cannot. Then it does create some externalities too for the rest of the economies that operate, right? Because now we meet some specialized firms like Chainalysis or the Fury, Crystal, Blockchains that try to do some, or provide some services to separate legal or those legal transactions and the flow of funds. But overall, again, it's an interesting question. So maybe I'll stop right here. Okay, thanks. I see Ricardo has his hand up and then. Yeah, thanks. Since at the moment I put up the hand Igor can close to answering the question. So at the beginning I thought that you were able to match some of these transactions with offline identities. I mean, I want to ask you in the cases when you can how do you do it? Are you able to do it only based on publicly available data? Or, yeah. So in large part we rely on the Fury, Crystal data, so and And public. Yeah, my understanding is that they work with many exchanges, right? The way it's usually done is that you transact with an entity, you learn a particular address of this entity and then you use some type of clustering algorithms to group together addresses that belong to this entity. And through that, we have a fairly complete list of, I would say public entities such as centralized exchanges, online bullets, et cetera. So I think, and this list is actually because we just said, oh, 400 exchanges that was at that particular point in time, this list is growing as new exchanges appear and then again, they appear on the blockchain. So now I think the number of exchanges is around 700. So, and the same goes with dark net marketplaces, for example, so I think here again, we rely in large part on Crystal Bit Fury who try to detect. So addresses and I was, we talked in the past with some reporters from some newspapers, they also tried to even in to transact with those entities and kind of again, so this, that's how this addresses get to the system and we know, can identify those entities. But the real challenge of course to link, for example, we talked about individuals, right? That's unless it's individual post and a kind of a particular address and says, oh, I hold this address. We, there is no way to link this address to an individual who did not have a contact with some Q and A entities. Thank you. Thanks. Okay, so we have one more question for the, before we end this Q and A and this was from the Q and A chat where Samuel Hempel asked, what does it mean when Bitcoin is sent from one exchange to another? Is it the exchanges acting for themselves or on behalf of the clients? And how much discretion do they have in these flows? We suspect that most flows are driven by customers' flows in the sense that we try to identify, say, old bullets of exchanges, right? So that's usually how the exchanges save or kind of all the bitcoins of their customers when the customer sends bitcoins to an exchange, the exchange takes control of these bitcoins and then it stores in separate addresses. Again, usually a detached from the internet so called old bullets. And we know, again, using our tracing algorithms, we can identify those addresses and we can see. So when we talk about movements between exchanges, that's usually maybe some of the drawers or some firms that initiate those transfers and then they withdraw that roughly 30% of these exchange transactions are inter-exchange transactions. So I think because, again, this space is not integrated, that's one way how to align prices on different exchanges with each other. So I think that's the activity that we see. Okay, excellent. Thank you. So we're a couple of minutes over time. So I guess I don't see any hands up or any questions anymore. I don't know if Russell, you still have your question. Otherwise, I can turn it back over to the organizers to close out the session. Yeah, so it's something quick. So I was wondering, so can we have some economic sense of how concentrated the market is compared to traditional financial market like, for example, we know that the Tri-Party Rebo is concentrated in BMY metal, for example. So it is a super concentrated market or not. And maybe in the end of the day, people may push back, okay, why, maybe we may not need to worry about concentration if, okay, it's concentrated on some very effective, productive, safe mine or counterparty, right? So it is actually a efficient allocation, highly concentration. So can we have some sense about, okay, content about some characteristics of the people or miner who are holding a loss of Bitcoin or holding the inventory, maybe we can say something about the efficient allocation as well. I think it's actually you're pointing to a thing. You see, there's actually a real tension here, right? Because while on the one hand, you might say, typically we might think concentration, at least on the highest productivity and most efficient providers can be a good thing here, of course, but as soon as you have concentration, you also have more fragility to the blockchain. Because then those particular miners become or are very powerful in the system. And then kind of either they can be collusive or can be corrupt the system or they can be taken over by a malevolent actor. And so this kind of points to the fact, this is not the typical thing where you can say, yeah, maybe concentration along with a few very productive miners will actually be the solution to the problem. I guess maybe it's a very fantastic data work, maybe can we have some sense about how they become concentrated, maybe they become concentrated because they are more productive or maybe there's some network event, they have more concentrated transition, but it's very fantastic work, but you know more. Thank you. I think it is kind of, it is probably true and that's something that is interesting to look at. But it's probably a combination of high fixed cost in setting up a mining farm. And it's not just the equipment cost, but also some people have access to subsidized or really cheap energy, while the rest of the world might not. And then maybe also human capital fixed cost, right? That not everybody actually knows how to set up a mining farm. Okay, excellent. I think I'll turn it over to Todd to close up the session. Great, thanks very much, James and a big thank you to Antoinette, Igor and Christine for a very interesting session. Before we leave real quickly, I just wanted to advertise our session next month because we're gonna try out a new format, a panel discussion. So as you can see, we're gonna have Chris Waller, governor of the Federal Reserve System, Hyun Shin from the BIS and Gary Gorton from Yale, discussing the broad question of should central banks issue digital currencies? Katrin Azenacher from the ECB is gonna be our moderator. I think it's gonna be an interesting discussion. One note, this session falls in the time period when North America has shifted to daylight savings time and Europe has not. So we're starting an hour later than our usual time in North America. So it'll be noon on the East Coast and in our usual time in Europe. And you can translate that to wherever you are. So I hope to see you all next month. Thanks again, everybody. Until then. Thanks.