BIS Report Finds Significant Correlation Between Regulatory Action and Cryptocurrency Prices

  • Research by BIS finds that contrary to crypto’s reputation for being unaffected by regulatory jurisdictions due to its trans-national nature, crypto prices are in fact very responsive to actions and announcements by regulators around the world.
  • Research also shows that central bank plans for state-backed digital assets have little market impact

 A new report by the Bank for International Settlements (BIS) has revealed that actions and pronouncements by regulators have a very significant bearing on cryptocurrency market prices, despite the popularly-held assumption that crypto asset prices have no real fundamental basis, and that governments cannot control crypto.

The BIS is an institution that is owned by 60 of the world’s largest central banks from a group of countries totalling 95 percent of global GDP figures. Aiming to establish what if any relationship crypto prices have with regulatory action, the report throws up five main insights.

Crypto’s Legal Status and AML Regulations Have Huge Impact

The first insight presented by the report is that of all categories of regulatory announcements or actions, crypto markets respond most markedly to news about the legal status of cryptocurrencies and ICOs, especially as relates to securities regulation, possible bans, restrictions, or legal permission issues, such as the ongoing wait for the SEC to reach a decision regarding vanEck’s proposed bitcoin exchange-traded fund (ETF).

As a corollary to that, the BIS report’s second key insight is that news about regulatory action regarding anti-money laundering (AML), Know Your Customer (KYC) and Countering the funding of terrorism (CTF) rules for crypto exchanges and platforms also has a hugely significant effect on prices, which generally is a negative correlation when the news is about enhanced regulatory processes.

In both cases, the market generally responds well to news that indicates enhanced legal status of cryptocurrencies and reduced regulation or restrictions for exchange and trading activities. The reverse is the case when cryptos and ICOs are threatened with restrictions or hit with more stringent AML, KYC and CFT measures.

Market Ignores non-Specific Warnings and Central Bank-launched Tokens

The third key finding in the BIS report is that general warnings about crypto investments and trading which do not go into specifics like naming certain companies or platforms are typically ignored by the market.

This is also the case with announcements by financial regulators and central banks announcing plans to launch their own Central Bank Digital Currency (CBFC) schemes, which incidentally is the report’s penultimate insight.

Earlier in the year, Estonia was censured by the EU over its plans to launch a national cryptocurrency, leading to the country quietly dropping the idea. Markets generally ignored the story, as they did news about Venezuela’s much-touted ‘Petro’ ICO.

The final insight presented in the report is that crypto is still very much affected by local jurisdiction around the world, which is why there is substantial potential for arbitrage trading across markets. China for example, reports significantly higher crypto asset prices that in other countries because cryptocurrencies are banned in the country, making them relatively difficult to access.

Speaking about this point the report states:

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. […] Because they rely on regulated financial institutions to operate and markets are (still) segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.

The full BIS report is available for download on the BIS website.