Bitcoin enthusiasts will tell you that bitcoin is great because it lies outside of the regulatory control of centralized corporations, banks, and governments. A new report from BIS, however, shows that governments have substantial control over the price of bitcoin because crypto markets “react substantially” to regulatory news.
The report comes from the Bank of International Settlement, often referred to as the “central bank’s central bank.” You can view the full report, entitled, “Regulating cryptocurrencies: assessing market reactions,” here.
Here’s how the report begins:
“Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions.”
Cryptocurrency advocates frequently praise the industry for being an investment safe from government decision-making and regulatory policy. The BIS report, however, suggests otherwise.
The report also found that certain types of regulatory decisions had a particularly devastating impact on market prices:
“The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets.”
All three of these news topics push the price of cryptocurrency downward.
Meanwhile, other news stories push the price upward:
“News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains.”
In other words, regulatory decisions and governmental institutions can have a profound impact on cryptocurrency markets, even though crypto advocates claim that their coins are out of the reach of government authorities:
“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.”
Why This is a Problem for Crypto Advocates
The BIS report may be a problem for crypto advocates.
It’s often argued that bitcoin is better than gold as a store of value because the government can’t just seize gold – something it famously did in the 1930s. The government can’t seize your bitcoin the same way, could it? Well, the government wouldn’t have to seize your bitcoin: they could just make policy decisions that ban bitcoin or restrict its use, causing prices to plummet and destroying your store of value.
Of course, optimists will see this report as more FUD: it doesn’t tell us anything we don’t know. It’s obvious that government decisions – like the SEC’s rejection of a bitcoin ETF or the Chinese government’s decision to ban bitcoin – will affect crypto markets.
Regardless of government decisions, one thing will always remain true: 1 BTC will always equal 1 BTC. You will always be able to store BTC with private keys. You’ll always be able to transfer BTC without the need for a centralized institution. This is the core value of bitcoin that allows it to continue to have value regardless of centralized policymaking.
The Report Discusses Four Main Findings on Regulatory News and Cryptocurrency Prices
BIS came to four main conclusions about cryptocurrency markets and how they react to regulatory news:
- First, markets respond most strongly to news events regarding the legal status of cryptocurrencies
- Second, regulatory news regarding anti-money laundering/combating the financing of terrorism measures and limits on the interoperability of cryptocurrencies with the regulated financial system “adversely impacts cryptocurrency markets”
- Third, authorities’ unspecific general warnings about crypto “have no effect, nor does news regarding the likelihood of central bank digital currency (CBDC) issuance)
- Fourth, large price differences sometimes prevail across jurisdictions, suggesting market segmentation across the crypto industry.
“Overall, 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 notable signaling a clear preference for a defined legal status, albeit a light regulatory regime.”
Proof that Crypto Prices Are Affected by Regulatory News
BIS backs up its statements with facts. BIS mentions, for example, a number of news stories that significantly affected crypto prices.
In March 2017 the SEC rejected a bitcoin ETF proposal from Cameron and Tyler Winklevoss. That proposal would have created the first US-based exchange traded fund for bitcoin. In the five minutes surrounding the announcement by the SEC, the price of bitcoin dropped an incredible 16%.
A similar drop was seen in June 2018 when Japan’s Financial Services Agency (FSA) ordered six cryptocurrency exchanges to improve their money laundering procedures. Prices tanked shortly thereafter.
The BIS report publishes graphs showing the price drops surrounding each announcement.
Conclusion: Cryptocurrencies Aren’t As Fully Decentralized As We Think
Ultimately, crypto critics are taking the BIS repot to suggest that cryptocurrencies aren’t as decentralized as we think: cryptocurrencies are affected by centralized decision makers. Cryptocurrencies need to move through regulatory pathways in order to reach the market. We rely on exchanges to move cryptocurrencies, and those exchanges need to abide by certain regulations.
As BIS concludes:
“Our analysis shows that 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.”