Recently, the Bank for International Settlements [BIS] published a Quarterly review. In the document, authors Raphael Auer, Principal Economist in the Monetary Policy unit [BIS], and Stijn Claessens, Head of Financial Stability Policy department [BIS] discussed the impact of national regulatory news on cryptocurrencies.
According to the report, despite crypto-assets having no formal legal homes and being traded internationally, news events about national regulations have a notable impact on them. The report stated:
“Part of our interpretation is that cryptocurrencies rely on regulated institutions to convert regular currency into cryptocurrencies.”
Furthermore, the report stated that the international arbitrage can be limited. Explaining in brief, the report stated that agents will not be able to easily access cryptocurrencies’ markets offshore due to the need of having a bank account in a foreign jurisdiction.
The report suggests that factors such as the above create market segmentation and fragmentation across jurisdictions, which binds national market regulation to a certain extent. As an example, BSI spoke about a market segmentation called “Kimchi Premium”.
Kimchi Premium indicates that the price of Bitcoin in Korea regularly exceeds that of the U.S at certain times by over 50%. BIS stated that this trend suggests limitations in cross-border trading.
However, the BSI stated that it was possible for regulatory measures to be flexible across borders. Giving an example it said, Bitcoin trading shifted massively toward Asian countries when China spoke about possible strict regulatory framework on Bitcoin, in January last year.
Concluding the analysis, BIS stated that despite the borderless and entity-free nature of cryptocurrencies, regulatory actions and news regarding regulatory actions have a deep impact on the cryptocurrency markets in terms of valuations and transaction volumes. It stated that in the current scenario, authorities around the globe have a scope to make regulation effective.
Author Raphael Auer stated:
“Overall we find that there is scope to apply regulation, should authorities decide to do so. and we also find that regulation is not necessarily bad news for the cryptocurrency industry. Many cases of fraud and theft, be a hacking, document that it could benefit from a well defined legal status.”
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