According to a new study by the Bank for International Settlements (BIS), the cryptocurrency markets react negatively to news asserting bans or restrictive regulations, and positively to news announcing “possible novel” legal frameworks.
Authors Raphael Auer and Stijn Claessens analyzed a data set of news events regarding “policy statements made by regulatory bodies, central banks and relevant international institutions and standard-setting bodies related to cryptocurrencies markets over the past years.”
After identifying 151 regulatory news events, they concluded the following:
- Most news events are in China, India, Japan, the UK and the US.
- News events have increased over time.
- The market responds most strongly to news events regarding the legal status of cryptocurrencies.
- News events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect on valuations.
- Significant news events by major regulatory bodies, such as the U.S. Securities and Exchange Commission and its decision to reject the Bitcoin ETF proposal, and Japan’s Financial Services Agency and its decision to order six crypto exchanges to improve procedures, tanked the markets.
- Methodology allows analysts to make precise predictions on price fluctuations, according to news events.
“Using the same methodology, we can assess how prices on average adjust across news events, differentiating between favourable and unfavourable ones. We find that favourable events coincide on average with a 0.33% return in the 120 minutes around the events, and a 1.52% return in the 24-hour window around them. Unfavourable events are associated with a 0.32% and 3.12% lower return over similar windows, respectively. Events appear to already affect prices several hours before the news release, suggesting the news is in fact released gradually and information flows via other channels.”
Given the impact of regulatory news on the markets, the authors also concluded that governments can have a profound impact on shaping the history of cryptocurrencies, despite their technological aims to exist beyond borders and governments.
Moving forward, they suggest that regulators should address friction and challenges “according to economic purpose rather than technology used.”
They warn that while cryptocurrencies are currently not a threat to the financial system as a whole, they run the risk of “spillover”, affecting trust in traditional markets as they become more integrated through crypto derivatives.
“Finally, while we did not analyse this in the current study, a number of observers have concluded that at the current stage of market development, cryptocurrencies do not appear to present macroeconomic or financial stability issues. And while illicit uses of course transcend borders, it seems hard to use cryptocurrencies to circumvent capital controls on a large scale.
That said, new types of crypto-products, such as crypto-funds and derivatives on cryptocurrencies and cryptoassets, create additional linkages with the financial system. And cryptocurrencies and other cryptoassets can piggyback on the conventional financial system. A loss of public trust in cryptoasset markets could translate into distrust in the broader financial system and its regulators. While cryptoassets thus do not, at this point, pose a global financial stability risk, it is important to remain vigilant, monitor developments and respond to potential threats.”
Regarding altcoins, the research indicates the following responses to regulatory news events:
- Bitcoin Cash, Litecoin, Ethereum – relatively the same as Bitcoin
- Monero – significantly and more strongly than Bitcoin
- Zcash – less strongly than Bitcoin
- XRP – less strongly than Bitcoin
The authors note that XRP may be less impacted than other cryptocurrencies because of the nature of its infrastructure.
“The XRP token also react less, which may reflect that its network of trusted nodes is centrally controlled by its issuer Ripple, making the XRP token distinct from other, permissionless, cryptocurrencies.”
Despite the decentralized ethos of cryptocurrencies, the authors believe that regulatory news rattles the markets because the cryptocurrency ecosystem doesn’t exist in a vacuum. Consumers convert crypto assets to and from local currencies, and are reliant on money transmitter services, banks and financial platforms that are subject to regulations.
Given the risk of “leakage” from one jurisdiction to the next, and from one platform to another, cryptocurrencies require a coordinated and consistent regulatory approach across borders, creating an effective way to guide consumers, minimize friction and maximize impact.
Headquartered in Basel, Switzerland, the BIS, which is owned by 60 central banks, promotes global monetary and financial stability through international cooperation.
You can read the full study here.