Despite the popular idea that cryptocurrencies work outside the reach of regulators, regulatory actions still have a major impact on the price and the crypto markets in general, according to new research.

Bank of International Settlements (BIS), an organization that is owned by 60 of the worlds largest central banks, from countries that cumulative making up 95 percent of global GDP, has presented a new report about how the cryptocurrency market reacts to the news.

The BIS study suggests that cryptocurrency markets rely on regulated financial institutions to operate, bringing cryptocurrencies within reach of national regulation. However, there is news that the market reacts more to than others. The impact depends on the specific regulatory category to which the news relates, and events related to general bans on cryptocurrencies or their treatment under securities law have the greatest effect, followed by other news:

“The market also reacts to the news, combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. 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”.

According to the report, four major parts where found. Firstly, the market responds most strongly to news regarding the legal status of cryptocurrencies, such as bans and ICOs. Secondly, regulatory news regarding AML/CFT measures and restrictions on crypto’s ability to work with traditional financial systems had a great impact. For example when the CBOE files an application for a Bitcoin ETF license. Interestingly, the authorities’ unspecific general warnings do not affect, nor does news regarding the likelihood of central bank digital currency (CBDC) issuance. Last, large price differences sometimes prevail across jurisdictions, suggesting some market segmentation.

Authorities will need to monitor developments vigilantly and address regulatory issues arising from the global dimension of cryptocurrencies. For policies to remain effective, and especially in case the market further develops and international arbitrage increases, rules and enforcement will need to be coordinated and enforced across the globe. But the absence of such coordination need not impede effective intervention.

Many of the concerns regarding cryptocurrencies would also apply to other asset classes and emerging technologies, but what makes this asset class different is that they function without institutional backing and are borderless. This raises the question if we can expect regulations and in particular national regulation, to be effective.

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