In a paper published by the Federal Reserve of Dallas, the cryptocurrency market has been described as being heavily influenced by regulatory actions.
Regulatory Actions Move Crypto Markets
The Federal Reserve of Dallas looked into the effects of regulatory actions on the cryptocurrency markets. According to their findings, which the Fed published in a paper, regulatory actions evidently move the cryptocurrency market extensively. They also looked into whether the authorities have some scope to aid the effectiveness of cryptocurrency regulation.
The 18-page report, titled “Cryptocurrency Market Reactions to Regulatory News,” is an updated paper, by the same authors, that was published by the Bank of International Settlements (BIS). The researchers looked into the effects of regulatory actions on the cryptocurrency market.
In their research, Raphael Auer and Stijn Claessen found that the cryptocurrency markets respond to influential news events regarding the legal status of digital currencies. The report added that any news on the general bans of crypto use, or whether cryptos will be recognized as securities or treated as a currency, as well as any strict AML/CFT measures, clearly has strong adverse impacts on the value of digital currencies. On the flip side, any news indicating possible legal frameworks for cryptocurrencies or initial coin offerings (ICOs), is strongly correlated with strong market gains.
Despite their assumptions, the researchers found out that some regulatory announcements do not affect the cryptocurrency markets at all. The report pointed out that unspecified warnings about cryptocurrencies by authorities do not impact the prices of these assets. News regarding possible central bank digital currency (CBDC) issuance also does not move the cryptocurrency market in any way.
There is Room For Effective Regulation
The researchers were able to identify 151 regulatory news events, mostly from China, the U.S, the U.K, Japan, and India. They looked at the intraday impact of these events on the price of Bitcoin and other leading cryptocurrencies.
After analyzing the news events and their impacts on the crypto market, the researchers highlighted that there is a scope to applicable regulations, thus, indicating that regulation does not necessarily have to be bad news for the crypto markets. The price responses from regulatory news suggest that investors clearly prefer a well-defined legal status for cryptocurrencies. “At the moment, authorities all over the world do have some scope to make regulation effective,” the researchers concluded.
The lack of clear regulation for the cryptocurrency sector in several countries around the world continues to affect the growth of the industry. News regarding positive regulation and adoption of cryptos have always pushed prices higher, while reports about banning cryptocurrencies or crypto service providers in a country usually drag the prices of the digital currencies lower.
Based on these findings, it is evident that regulatory agencies around the world can play a role in developing the cryptocurrency sector by discussing and tolling out positive regulations for the market. In this way, more investors would feel more confident, coming into an environment that is regulated.
Raphael Auer and Stijn Claessen advised authorities regarding the regulation of cryptocurrencies. They stated that for authorities to tackle regulatory issues, they have to start by clarifying the regulatory classification of all crypto-related activities. To do so, they have to use criteria based on economic functions instead of on the technology the cryptocurrencies deploy.
Furthermore, authorities will have to vigilantly monitor developments and tackle regulatory issues that arise from the global dimension of digital currencies. Based on this, before policies can remain effective, rules and enforcement will have to be coordinated and enforced all over the world.