Crypto market sentiment deeply influenced by regulatory news, says BIS analysis

Europe Regulations Switzerland
Established in 1930, the Bank of International Settlement (BIS) is owned by 60 central banks, representing countries from around the world that together account for about 95% of world GDP. Photo: Ismail Soytekınoglu

Regulatory news has a strong influence on cryptocurrency prices, according to an analysis published by the Bank of International Settlement (BIS) last Sunday, September 23.

The report attributes this influential relationship to the fact that virtual coins are typically governed by national laws, due to their reliance on existing financial institutions already overseen by various regulatory bodies.

The analysis was co-authored by Raphael Auer, an economist at the Monetary and Economic Department, and Stijn Claessens, head of the Financial Stability Policy Division at the Swiss-based BIS. Established in 1930, the BIS is owned by 60 central banks, representing countries from around the world, that together account for about 95% of world GDP.

It describes its mission as “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks”. Its head office is in Basel, Switzerland and it has two representative offices in Hong Kong SAR and in Mexico City.

Auer and Claessens analyzed 151 regulatory events and surmised that news about general cryptocurrency bans and their treatment under existing securities laws had a negative impact on prices. They further noted that reports about money laundering and terrorist financing concerns linked to cryptos also led to price plunges.

Here are the key takeaways from the detailed report which is available here:

Cryptocurrencies such as Bitcoin have attracted much attention because of their meteoric price swings, but have also raised concerns for regulatory authorities.

• While cryptocurrencies are often thought to operate out of the reach of national regulation, in fact, their valuations, transaction volumes and user bases react substantially to news about regulatory actions.

• News events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect on valuations, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains.

• Because they rely on regulated financial institutions to operate and markets are (still) segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.

The authors gave two key examples to illustrate their conclusions, the first being the March decision of the US Securities and Exchange Commission to stymie the Winklevoss twins’ exchange-traded Bitcoin fund.

“In the five minutes around the announcement, the price of bitcoin dropped by 16%. Another event is the Japanese Financial Services Agency (FSA) ordering six cryptocurrency exchanges to improve their money laundering procedures (June 2018). Again, prices tanked – although it seems to have taken several hours, until the start of the US trading day, for this measure to have its full effect,” the report noted.

Meanwhile, it also noted that news about the potential creation and adoption of non-securities legislation had a positive impact, on both bitcoin (BTC) and altcoin prices, as investors view this framework more favorably. News reports on the possible introduction of central bank-backed digital currencies appeared to have little or no impact on market sentiment.

On a positive note, the authors said that clear legal frameworks, albeit with a light touch, were very beneficial to crypto-market sentiment.

“Overall, our analysis suggests that, at the current juncture, there is scope to apply regulations, if so decided. And it also indicates that regulation need not be bad news for the markets, with price responses notably signaling a clear preference for a defined legal status, albeit a light regulatory regime,” they wrote.

They also urged that “internationally consistent approaches should be used for cryptocurrencies” because their research showed that regulatory activity in one country can affect the entire crypto market.

“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,” they added.

About the author

Mark Knowles

Mark Knowles

Coinlaw Multi-Jurisdiction Blockchain News
Mark Knowles is the Executive Editor of coinlaw.io
With more than a decade of experience as a journalist and editor, Mark has now turned his focus to the blockchain and cryptocurrency revolution that is currently reshaping the global economy. As Executive Editor at Coinlaw Mark is working to create a website that is a hub for the international crypto community to find the latest legal news, legislative changes and expert opinion from across the industry. Contact him at [email protected] or through mobile on +66 (0) 98 705 2716.

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