The Impact of Governance on Fraud in Cryptocurrencies: A Comparison between Ethereum an Bitcoin

The pertinence of cryptocurrencies in the past few years cannot be underestimated and still continues to play a vital role in existing economic systems on a global scale. Having significantly impacted institutions and the financial sector worldwide. The revolutionary blockchain technology employed by cryptocurrencies introduces a decentralized ledger rendering traditional institutions involved in peer-to-peer transactions irrelevant. Efficiency gains and the borderless characteristics are just two of the numerous advantages of the blockchain based currencies. Nevertheless, the application of new technologies does not only result in beneficial outcomes. Cryptocurrencies have increasingly been used in a variety of criminal activities causing scepticism and criticisms across the public. Governance, internal institutions, and relevant external factors are key components when analysing characteristics of cryptocurrencies. This study analyses the influence these components have on criminal activity in cryptocurrencies. By focusing on two of the largest digital currencies, BTC and ETH, this paper aims to analyse the influence of governance and internal institutions on criminal activity within cryptocurrencies. The key research question posed is whether the degree of centralisation of the governance within the institutions of cryptocurrencies is an explanatory variable for the probability of scams. To achieve this, a scam data set is combined with a calculated governance score for the two cryptocurrencies. The findings demonstrate that BTC and ETH display a differing implication for the influence of centralisation of governance. BTC demonstrated that a higher degree of centralisation resulted in a lower probability of scams, whilst the opposite is true for ETH. Possible explanations for the above findings are presented as well as proposed future research and relevant limitations of the data analysis.