On 23rd September, the Bank for International Settlements [BIS], released its quarterly review for 2018, on cryptocurrencies. In the document, authors Raphael Auer, Principal Economist in the Monetary Policy unit [BIS], and Stijn Claessens, Head of Financial Stability Policy department [BIS], discuss the market behavior of Bitcoin [BTC] and other cryptocurrencies.
The report stated that cryptocurrencies are considered to be “out of reach” of the national regulation. The document stated that the notion seems to be wrong. The report revealed that the valuation of cryptocurrencies, transaction volumes and user bases react notably to news about the “regulatory actions”.
According to BIS, cryptocurrencies like Bitcoin [BTC] and Ethereum [ETH] have received a greater response and attention from the audience due to its “meteoric price swings”. However, it stated that the same has raised many concerns among the regulatory bodies.
The BIS draws a distinct line between regulatory concerns regarding cryptocurrencies and other digital asset classes and emerging technologies. It stated:
“But what sets cryptocurrencies apart is that they can function without institutional backing and are intrinsically borderless. This raises the question of whether one can expect regulation – in particular, national regulation – to be effective.”
To answer those concerns, the BIS tries to evaluate the effects of several regulatory actions or news of such actions on the cryptocurrency market. Raphael Auer said:
“To answer this question, we built a dataset of regulatory news events and systematically value whether the cryptocurrency markets react to the regulatory news. we do find that there is a strong reaction of prices and transaction volumes.”
The document stated that BIS first assessed the impact of regulatory news on the number one cryptocurrency, Bitcoin [BTC]. It added that the analysis was later conducted on other cryptocurrencies and other elements of the cryptocurrency market.
Exemplifying the same, the document stated that the price of BTC dropped by 16% within 5 minutes of the Securities and Exchange Commission [SEC] announcing the rejection of “a proposal to alter stock exchange rules so as to allow the creation of an ETF for Bitcoin,” in March 2017.
The document notes that a similar event occurred when the Japanese Financial Services Agency [FSA] issued an order to six cryptocurrency exchanges to improve their money laundering procedures in June 2018.
The document also pointed out that reports that talk about an “outright ban and non-recognition of instruments as currencies,” are related to negative returns.
The BIS also examined news reports that fall under the category of AML [Anti Money Laundering]/CFT [Countering Financing of Terrorism Act 2009] and cryptocurrency-related infrastructure regulations. It stated that some news under this category had a positive effect whereas some news had an adverse effect.
Assessing other cryptocurrencies through a global index by name, Cryptocurrency Regulatory News Index [CRNI], BSI was able to compare the responsiveness of those with respect to Bitcoin. It stated:
“We find that both “Bitcoin clones” – Bitcoin Cash and Litecoin – as well as the second largest cryptocurrency by valuation, Ethereum, react significantly to CRNI.”
Examinations conducted on “dark coins” such as Monero [XMR] and Zcash [ZEC], revealed that Monero reacts more strongly than Bitcoin does, whereas Zcash reacts less. Speaking about XRP, it stated:
“The XRP token also react less, which may reflect that its network of trusted nodes is centrally controlled by its issuer Ripple, making the XRP token distinct from other, permissionless, cryptocurrencies.”
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