A new study suggests that introducing crypto regulation usually drives the price of BTC down. The study, which was published in January 2020, looked at five categories of regulation. When they examined these categories, they found that regulation in all these areas usually drove down the price of BTC.
The Five Categories
The five categories that were looked at were:
- Exchange controls
- Anti-money laundering
- Securities regulation
- State-issued cryptocurrencies
To conduct the study, the researchers collected data manually from 120 news events related to regulation in the crypto sector. They sourced their news articles from major news sources such as the BBC, Financial Times, Reuters, and Bloomberg. The study was conducted for the period between January 1, 2017, up to March 18, 2019.
To analyze the news articles, the researchers used keywords analysis and collocations. They then estimated the impact that these five categories have on the price of 300 cryptocurrencies. Their study concluded that four of the five categories they investigated had a huge impact on the price of crypto.
Results of the Study
For AML policies, the researchers found that the implementation of tougher AML rules affecting the crypto sector led to a negative abnormal return of –2.46% on average.
In terms of exchange regulation, whenever a regulator approves a new crypto exchange it leads to a positive price impact. However, active intervention such as legal investigations, closures, and improvement orders led to a reduced price by –1.78% on average.
Securities regulation such as blanket bans on ICOs, reclassification of cryptocurrencies as securities, and rejection of crypto ETFs, led to a negative price impact of about –2.67% on average. However, positive securities regulation actions such as approval of crypto-related instruments, relaxation of rules governing ICOs, and crypto being recognized as not subject to SEC regulation led to positive price movements.
Risk concerns are public sentiments expressed by authority figures. It was found that whether their sentiments were positive or negative, they had no impact on the price of crypto coins.
The news of the potential launch of state-backed digital currencies was found to have a negative price impact on cryptocurrencies by about –1.82% on average. This may have been attributed to the negative publicity that accompanies such events such as the launch of the Venezuelan Petro. However, the announcements that governments were discontinuing state-backed digital currency projects tended to have a positive impact on crypto prices.
In general, the study found that the crypto industry was averse to government regulation of any kind. Most in the crypto sector find regulation to cause a loss in efficiency, which is higher than the potential reduction in risk that would come with regulation. Thus, it would appear the crypto sector find regulating the sector, which is based on decentralization and being resistant to centralized control, as being counterproductive.
It is safe to conclude that the crypto sector would prefer a hands-off approach by regulators for it to develop. This sentiment is unlikely to change given that most of the regulation announced in the crypto sector has been extremely harsh and unsupportive of the development of this nascent sector.
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