Bank for International Settlements: Crypto-prices fluctuate with regulations
The Bank for International Settlements (BIS) has recently released a study around the movement of several cryptocurrencies’ prices and co-related it with regulatory actions by respective central banks. Cryptocurrencies are often touted for their decentralized nature which allows them to break free from the shackles of domestic and international regulations, however, these guidelines still have an effect on them.
BIS called the “bank of central banks” comprises of 60 of the world’s central banks from countries that contribute over 95% of global GDP. Titled “Regulating cryptocurrencies: assessing market reactions” the report acknowledges the popularity of Bitcoin and Ethereum and further goes on to emphasize, “what sets cryptocurrencies apart is that they can function without institutional backing and are intrinsically borderless.”
The report presented by BIS states that when central banks make announcements about launching their own digital currency or they issue warnings around the same, the market does not react in a very volatile manner. However, when regulatory guidelines relating to initial coin offerings (ICOs), money laundering, know-your-customer, terrorism financing are to be announced that will have a significant effect on trading norms and legal status of cryptos, they exhibit a drastic response.
Four major findings from the research were emphasized by BIS. Firstly, the most significant driver for external market deviation was reported surrounding bans and restrictions on cryptocurrencies and ICOs. The markets react the most when news reports directly relate to the legal status of the crypto, like asset classification of tokens.
A recent example of the above concern is the market fluctuation that was caused by the American Securities and Exchange Commission’s (SEC) decision regarding Bitcoin exchange-traded fund (ETF). The market reacts positively when favorable regulations are on the horizon.
The second prominent findings are centered around the anti-money laundering/combating financial terrorism (AML/CTF) measures. In order to prevent the use of crypto for money laundering there exists a need to distance digital currencies from the larger financial system. Cryptos are denied access to banking functions within the aforementioned system and hence the crypto-market suffers. Positive integration news will reverse this trend and show positive signs.
General warnings that often hover around the cryptocurrency industry do not have a significant impact on market movements, as presented in the third set of findings. This effect is also exhibited when central banks and other financial institutions put forth their plans for a central banks digital currency (CBDC). The sovereign announcements by Estonia and their national cryptocurrency, the Estcoin and also Venezuela’s Petro reiterate the above point.
Market segmentation is the final finding of the report, wherein they state that price disparity is also present across geographies despite crypto’s ubiquitous approach.
The report reads, “These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions, bringing cryptocurrencies within reach of national regulation. […] Because they rely on regulated financial institutions to operate and markets are segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.”
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