Crypto prices strongly correlated with regulatory actions, study finds

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The Bank for International Settlements (BIS) has published a report showing a significant correlation between the trade of cryptocurrencies and industry regulations discussed in the news.

“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,” read the report by the BIS, the Swiss-based organization owned by 60 central banks.

The report noted the relationship between pronouncements by regulatory bodies and the prices of cryptocurrencies. It cited the U.S. Securities and Exchange Commission’s (SEC’s) March 17 decision to deny a proposal for a BTC exchange-traded fund (ETF), wherein the price of BTC dropped by 16% within five minutes of the SEC’s announcement on the matter.

More recently, last June, after the Japanese Financial Services Agency (FSA) called on six exchanges to improve their anti-money laundering (AML) compliance, prices dropped, although not as dramatically, and over several hours.

“Using the same methodology, we can assess how prices on average adjust across news events… differentiating between favourable and unfavourable ones,” the report read. Data showed that favorable events made for a 0.33% return within 120 minutes, while unfavorable events resulted in a 0.32% decline. Over a 24-hour span, favorable events made for a 1.52% return, while unfavorable events led to a 3.12% decline. The BIS also pointed out that price changes occurred even prior to official media announcements, “suggesting the news is in fact released gradually and information flows via other channels.”

The particular type of news mattered as well. News regarding bans or non-recognition of cryptocurrencies were adverse to prices, whereas news on the establishment of regulatory frameworks had a positive effect.

“The introduction of a specific, non-security legal framework generates positive returns, most likely as those frameworks generally come with oversight rules that are milder than those under securities law,” the report read.

News involving more stringent AML practices were associated with mostly negative market responses. However, news on central banks issuing their digital currency was not seen as relevant to private cryptocurrencies.

The news events affected not just BTC prices, but other cryptocurrencies’ prices, as well as their transaction volume, the number of addresses being used, and profitability of mining operations. Bitcoin Cash (BCH) was found to react significantly to the news items as categorized by the BIS.

“Despite the entity-free and borderless nature of cryptocurrencies, regulatory actions as well as news regarding potential regulatory actions can have a strong impact on cryptocurrency markets, at least in terms of valuations and transaction volumes,” the report read.

The BIS suggested for regulators to clarify cryptocurrency-related activities “from legal and securities market perspectives, and to do so according to economic purpose rather than technology used.”

In addition, due to the cross-border nature of transactions, “internationally consistent approaches” for cryptocurrency-related products should be used. “While cryptoassets… do not, at this point, pose a global financial stability risk, it is important to remain vigilant, monitor developments and respond to potential threats,” the BIS added.