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A report by the Bank of International Settlements (BIS) investigated the correlation between cryptocurrency prices and news events across the globe, concluding a stark similarity between the two factors and making suggestions for mitigating the unstable crypto market.
BIS Explores Impact of News
BIS notes that cryptocurrencies like Bitcoin and Ethereum have created both panic and excitement for retail investors due to both their sudden price swings and innovative model of decentralized financial trust.
Interestingly, while cryptocurrencies were created to evade national sanctions and financial events, the bank noted that regulatory events across the globe change market cap valuations, transaction volumes, and even divide communities of a particular coin.
The worst effects were observed when superpowers like the U.S. or China passed laws to curb the trading of cryptocurrencies, followed by news on money laundering and terrorist financing via Bitcoin. Similarly, reports of countries not recognizing cryptocurrencies as legal tender – as in India – led to immediate plunges.
However, reports suggesting an establishment of legal frameworks to support crypto-trading and token issuances coincided with the most substantial market gains. Also, general news reports, unspecific regulatory warnings, and intentions to introduce state-backed digital tokens had no significant effect on the crypto trading market.
Importantly, the BIS stated that cryptocurrencies rely heavily on local regulators to operate seamlessly, meaning they fall under the purview of regional financial watchdogs until a global body is created to govern the rising asset class.
No Need for Central Governing Body
Despite the above points in mind, the BIS acknowledges that cryptocurrencies can function without the need of authorities or institutional backing. This begs the question if national regulations would particularly be useful for the asset’s future being.
The BIS used an “event study” approach to study how regulatory actions affect the prices of major cryptocurrencies. The test’s primary motive was to conclude if cryptocurrencies were indeed borderless and unaffected by government regulation or the contrary.
For tackling regulatory concerns, the watchdog believes crypto-regulations must be based on economic implications of digital assets on the local economy, rather than contesting for their technological prowess. However, states may need to introduce refined regulations and department responsibilities to create clarity for crypto investors.
The bank noted that global authorities are vigilantly monitoring regulatory developments for cryptocurrencies. However, for policies to remain effective, agencies across the globe must coordinate legal enforcement, rules, and the implementation of financial judgments. More so – with the increase in regulatory and retail interest – the market is expected to develop substantially, and international arbitraging may become a more prominent feature of the crypto trading market.
No Financial Stability Issues
Explaining the economic goals of curbing cryptocurrencies, the BIS believes regulatory concerns are similar to those instilled on traditional financial assets. These issues include combating the use of illicit funding, protecting investors and amateur traders against fraud, and ensuring the integrity of global financial markets and payment systems.
Another critical legal status issue is whether cryptocurrencies are treated as securities, which are tradable instruments used to raise funds by representing a promise to pay in the future. Thus, it would come under heightened regulation and oversight.
The BIS interpreted that cryptocurrencies rely heavily on established financial institutions to convert fiat money into digital tokens. Furthermore, investors cannot efficiently transact with, or access cryptocurrency markets in overseas locations. This inefficiency suggests a significant level of market fragmentation exists, which add to national regulatory actions being binding to some degree.
In conclusion, the BIS noted that cryptocurrencies are at a nascent stage of market development, and “do not appear to present macroeconomic or financial stability issues.” Market conditions from international borders also make it hard to utilize the asset class for large capital transfers, at least for now.
With the report’s takeaways in mind, a loss of trust in cryptocurrencies would reflect a distrust in the broader financial system. While the asset class does not pose a threat to the stability of global markets, for now, it is essential for governments and citizens alike to monitor developments and respond to potential risks.