Monthly Archives: February 2025

Preventing the Next Cryptocurrency Crash: A Recent Study Reveals the Causes of Crypto Exchange Failures

Imagine opening your cryptocurrency exchange platform one morning to discover the site unavailable, your funds missing, and no one available to address your concerns. This scenario, which sounds like a nightmare, has become a stark reality for thousands of investors, with nearly 500 cryptocurrency exchanges collapsing. A new study by the University of Vaasa in Finland sheds light on the risk factors associated with cryptocurrency exchanges.

In his research, which has been published in the esteemed Journal of International Financial Markets, Institutions & Money, Assistant Professor Niranjan Sapkota examines data from 845 cryptocurrency exchanges to explore the reasons behind the failure of nearly half of these platforms since 2014 and how to foresee such defaults. He points out several critical indicators, such as transparency, centralisation, geographical access, fee structures, cryptocurrency offerings, and referral programs, providing crucial insights into mitigating risks in this rapidly evolving sector.

The study delves into the paradox of transparency. While centralised exchanges in advanced, well-regulated jurisdictions like the United States and Singapore are often viewed as the most secure, they are surprisingly vulnerable. This vulnerability stems from various pressures, including strict regulatory requirements, high compliance costs, and sophisticated infrastructures that can be manipulated for malicious purposes. Conversely, such pressures are significantly lower in developing countries where cryptocurrency adoption is still under discussion.

Interestingly, the study reveals that exchanges that permit U.S. customers to trade are more likely to fail than those that do not allow U.S. clients. This insight underscores the unique risks associated with operating in the U.S. market.

Regarding exchange models, centralised exchanges, which manage wallet custody for users like banks manage accounts, exhibit a higher default risk than decentralised exchanges (DEXs). DEXs, where users maintain control over their assets and transactions occur directly on the blockchain, have a 31.2% lower chance of failure. This reduced risk is attributed to the distributed nature of DEXs, which helps avoid issues related to fraud, operational mismanagement, and liquidity crises.

The research also identifies warning signs of potential exchange failures: high withdrawal fees, limited cryptocurrency offerings, and poor user ratings. Exchanges that have defaulted in the past tended to charge withdrawal fees that were, on average, 1.5 times higher than those still operational. Furthermore, platforms offering a diverse array of cryptocurrencies and maintaining high user ratings were more robust due to their ability to attract a more extensive user base and generate stable revenue streams. Additionally, exchanges offering referral incentives were found to be less likely to fail.

Assistant Professor Sapkota highlights the practical applications of his findings, advising policymakers to utilise this knowledge to formulate policies that enhance user protection and market stability. Meanwhile, investors and traders can use these insights to identify critical warning signs—poor ratings, excessive withdrawal fees, limited coin offerings, reliance on centralised systems, and accessibility to U.S. clients—to avoid unreliable platforms and secure their investments.

The robust nature of this research not only fills a crucial gap in understanding cryptocurrency exchange risks but also offers actionable solutions to navigate the market with greater confidence and establish more secure digital asset trading platforms. The study further underscores the effectiveness of traditional statistical methods like logit and probit models, which achieved an accuracy rate of about 81% in predicting exchange bankruptcies. Advanced machine learning techniques such as Random Forest, Support Vector Machine, and Stacked Ensemble were used to validate these findings, highlighting the value of combining classical and modern analytical methods in this field.

More information: Niranjan Sapkota, The crypto collapse chronicles: Decoding cryptocurrency exchange defaults, Journal of International Financial Markets Institutions and Money. DOI: 10.1016/j.intfin.2024.102093

Journal information: Journal of International Financial Markets Institutions and Money Provided by University of Vaasa

Study Reveals Politically Linked Corporations Gained More US Tariff Exemptions on Chinese Goods

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A recent publication in The Journal of Financial and Quantitative Analysis unveiled that companies with political ties were more likely to be exempted from tariffs on imports from China during the Trump era. The study conducted by Veljko Fotak from SUNY Buffalo, Grace Lee from Fordham University, William Megginson from the University of Oklahoma, and Jesus Salas from Lehigh University highlights that firms with significant Republican connections before and during Trump’s presidency were more likely to receive tariff waivers on certain products.

The research also discovered a negative correlation between companies that donated to Democratic politicians and their chances of getting tariff exemptions approved. Jesus Salas commented on the findings, suggesting that tariff exemptions were used strategically to reward political allies and penalize opposition supporters, effectively turning the exemption process into a tool for political favouritism.

Introduced in 2018, the Section 301 tariffs were designed as a countermeasure against Chinese trade policies deemed harmful to U.S. businesses. Initially targeting $34 billion worth of imports, the tariffs expanded to cover around $550 billion over 14 months. The U.S. government established a process for companies to apply for exemptions, considering factors like potential harm to American business interests, availability of substitute products outside China, and the strategic importance of the products to China.

The exemption process, exclusively managed by the Office of the U.S. Trade Representative (USTR) without Congressional oversight or an appeals process, stands in contrast to other tariff regimes, such as those for steel and aluminium, which are overseen more transparently. Interestingly, the study found no significant link between political activity and exemption outcomes for steel and aluminium tariffs.

The study examined 7,015 exemption applications, correlating the outcomes with political activity data from OpenSecrets and business data from Compustat. It became evident that investing in political connections benefited companies, mainly when those connections were with the ruling party. Notably, firms that had lobbied or contributed to Republican candidates saw a higher probability of approval for exemptions.

This pattern of political influence and potential quid pro quo suggests a complex landscape where political donations and lobbying serve dual purposes: helping companies navigate regulatory environments and securing tangible rewards for political support. The study’s findings are particularly significant as they document the punitive measures against companies supporting opposition parties, marking a novel discovery in political-economic research.

Moreover, these findings have profound economic implications. Economists from both sides of the political spectrum generally oppose tariffs due to their propensity to provoke retaliatory actions and economic downturns. However, the study found that companies benefiting from exemptions experienced notable increases in stock prices, highlighting the substantial economic stakes involved.

This study’s revelations offer critical insight into the intersection of business and politics in the U.S., demonstrating how political connections can dramatically influence regulatory outcomes and economic fortunes. This research contributes to our understanding of political influence on monetary policy and underscores the broader implications of such dynamics on market behaviour and democratic processes.

More information: Veljko Fotak et al, The Political Economy of Tariff Exemption Grants, Journal of Financial and Quantitative Analysis. DOI: 10.1017/S0022109024000437

Journal information: Journal of Financial and Quantitative Analysis Provided by Lehigh University

Study Connects India’s Nutritional Programme to Improved Health and Higher Earnings

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Despite our world’s scientific advances and interconnected economies, malnutrition remains a persistent global issue. The United Nations reported that in 2023, an estimated 2.33 billion people were moderately or severely food insecure.

Researchers from UC Santa Barbara, the Indian Institute of Management, and the University of Calgary embarked on a study to explore the efficacy of the most extensive food aid programme globally. Their findings, published in the American Economic Journal, illustrated that this initiative’s health and economic benefits extend well beyond the nutritional value of the food provided at a subsidy.

Kathy Baylis, a co-author of the study and a professor in UCSB’s Geography Department and the Environmental Markets Lab (emLab), commented on the nutritional challenges in India, stating, “Malnutrition in India has been a long-standing problem.” She highlighted that despite India’s relative wealth, stunting rates among children are comparable to those in some of the poorest regions of sub-Saharan Africa. India implemented the Public Distribution System (PDS), the world’s most extensive food transfer programme and a significant component of the country’s social safety net to address this.

The PDS is akin to the food stamp programmes in the United States in previous decades. It allows eligible individuals and families to purchase staples like rice and wheat at significantly reduced prices. Serving about 800 million people, the PDS accounted for 60% of India’s social assistance budget from 2019 to 2020.

The paper also details changes made to the food assistance programme. Historically managed at a state level, the PDS transformed in 2013 when the federal government of India set minimum standards for the programme, compelling many states to enhance their support by increasing grain allotments or reducing prices.

To assess the impact of these changes, the researchers utilised data from a comprehensive five-year survey conducted by the International Crops Research Institute for the Semi-Arid Tropics. This survey, which the Gates Foundation supported, included 30 villages across eight states. The researchers focused on tracking children’s height for age. This metric indicates long-term nutritional status better than body mass index and is linked to various adverse health and cognitive development outcomes affecting education and income levels.

The expansion of the PDS led to a notable reduction in stunting rates, from 36% to 28.8%. This significant decrease was especially prominent in children between zero and two years old, a critical period for child development where nutritional intake is crucial.

The PDS’s benefits were more evident during times of poor rainfall, underscoring its role as a nutrition-sensitive safety net that buffers childhood nutrition from local climatic disturbances. The researchers aim to explore this aspect of the programme further.

Despite some criticisms that subsidised grains might replace more nutritious options, leading to diets rich in empty calories, the study found that participants in the PDS had more diverse diets. Families could allocate more of their budget to nutrient-rich foods like meat and dairy by lowering the cost of basic staples. This shift was significant enough to contribute to the observed increase in children’s heights.

The study also revealed broader impacts on household finances. The researchers observed an increase in household expenditure that exceeded what could be attributed to the savings on food alone. They theorised that well-nourished individuals might work additional hours, thus increasing their wages. Moreover, the security provided by the programme allowed people to be more selective in their job choices, a trend notably observed among hourly wage earners.

These findings underscore that the benefits of food transfer programmes extend well beyond mere caloric intake. They contribute significantly to income, health, and human capital development. Kathy Baylis remarked on the broader implications, suggesting that even modest social safety nets can have substantial and far-reaching benefits, influencing aspects of life beyond basic nutritional needs. This insight is particularly relevant as economists and policymakers deliberate on various strategies, including direct cash transfers, which have been shown to increase food prices in areas where they are implemented. Conversely, subsidised food can lead to lower food prices, reinforcing the focus on nutritional security within budget allocations.

More information: Kathy Baylis et al, Food Transfers and Child Nutrition: Evidence from India’s Public Distribution System, American Economic Journal: Applied Economics. https://www.aeaweb.org/articles?id=10.1257/app.20220505

Journal information: American Economic Journal: Applied Economics Provided by University of California – Santa Barbara

16-Year Analysis of US-Canada Free Trade Agreement Shows Workers Unaffected by Increased Trade Freedom

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In a contemporary study amidst ongoing and occasionally contentious discussions on U.S.-Canada trade policies, researchers analysed the enduring impacts of the 1989 Canada-U.S. Free Trade Agreement (FTA) on the Canadian workforce, leveraging data from the mid-1980s to the early 2000s. Their findings indicated that the significant escalation in trade between the two nations did not detrimentally affect Canadian workers.

The research, conducted jointly by experts from Carnegie Mellon University and the University of Toronto, has been published in the Review of Economic Studies. Brian K. Kovak, a professor of economics and public policy at Carnegie Mellon’s Heinz College and one of the study’s coauthors, elucidated that the bilateral framework of the FTA enabled a thorough examination of both the competitive pressures from imports and the opportunities arising from increased exports following the policy shift. He highlighted that the results carry valuable practical implications, notably that Canadian workers face fewer disruptions when engaging in trade with the United States than with China.

The team employed longitudinal administrative records from Statistics Canada, covering the period from 1984 to 2004, to probe the employment impacts spurred by heightened export activities and intensified import competition in Canada. The study meticulously tracked the career paths of individuals initially employed in sectors that later experienced varying Canadian and U.S. tariff adjustments under the FTA.

Although the research identified some negative impacts from Canadian tariff reductions and positive impacts from U.S. tariff reductions on Canadian workers, these effects were minimal and transient. Workers swiftly regained any lost income by moving to different companies, industries, or sectors.

The study revealed that Canadian tariff reductions neither reduced the total years worked nor the cumulative earnings of workers over the 16 years following the implementation of the FTA. Even in cases where Canadian tariff reductions led to decreased employment and wages, the corresponding U.S. tariff reductions generally balanced out these adverse effects. In essence, while the tariff adjustments had the anticipated impacts, workers adapted quickly and effectively to the shifting demands in the labour market. This suggests that the bilateral nature of the FTA played a crucial role in facilitating these transitions.

Moreover, the study found that Canadian tariff reductions predominantly slowed industry employment growth through reduced hiring rather than increased layoffs, thereby protecting existing workers in the impacted sectors. This finding starkly contrasts the effects of the so-called China Shock, which resulted in significant layoffs and reduced incomes for incumbent workers and newcomers.

The study’s authors, including Peter Morrow, an associate professor of economics at the University of Toronto, remarked that their findings were comparatively optimistic and contradicted those of several other studies. They observed that Canadian workers swiftly exited affected industries, finding new opportunities in different manufacturing sectors, construction, and services. The bilateral nature of the FTA provided those competing with imports alternative employment prospects in manufacturing sectors that benefitted from more considerable U.S. tariff reductions. These comprehensive insights challenge prevailing narratives and underscore workers’ adaptive capacity within the context of bilateral trade agreements.

More information: Brian K Kovak et al, The Long-Run Labour Market Effects of the Canada-U.S. Free Trade Agreement, The Review of Economic Studies. DOI: 10.1093/restud/rdae113

Journal information: The Review of Economic Studies Provided by Carnegie Mellon University