IPCIDE BLOG
June, 2023 [Link]/ipcide 2
Do Crypto Specific Regulations Work?
Contributed by Devashish Sharma, dsharma@[Link]
Summary
Regulations against cryptocurrencies have globally in volume in a period of 24 hours after a regulatory
increased since 2018. Existing evidence suggests change). Shanaev et al (2019) examine movement
that geopolitical events, the Covid-19 pandemic and of prices for 120 different policy events. The results
changes in monetary policy are amongst the most again are mixed with only anti-money laundering
significant factors affecting overall price movements policies seen to have an effect.
for cryptocurrencies. Econometric tests conducted
in the blog find a relation between cryptocurrency Five episode breaks across crypto
prices and prices of other equity assets but not
between crypto prices and crypto specific regulation. Regulatory action on cryptocurrencies has
The tests also show that cryptocurrencies behave like significantly increased since the time covered in
equity. There are some considerations related to this existing literature. This blog analyses the closing
analysis which are not covered in this blog and will be prices of the three most popular cryptocurrencies
followed up later with a detailed analysis. They are all namely Bitcoin, Ethereum and XRP from May 2019
addressed in Appendix 4. to September 20221. The average price of these
cryptocurrencies vary significantly. The average price
Survey of existing literature since May 2022 until February 2023 hovered around
USD 24675.33 for Bitcoins, USD 1655 for Ethereum
Governments across the world have viewed and USD 0.39 for XRP.
cryptocurrencies and their impact on traditional
financial systems with suspicion. Since 2018, The time series data are presented in Figure 1. A
many governments have announced policies to structural break-test analysis2, shows partitions of
check the misuse of cryptocurrencies. The crash in five segments across four break dates, represented by
cryptocurrency prices and collapse of exchanges have yellow vertical lines in each of the graphs. The break
reinforced regulatory concerns. Research, however, dates and segmentation are fairly uniform across the
finds little evidence of policies and regulatory events three cryptocurrencies. While segments 1 and 2 show
affecting the price of cryptocurrencies. Feinstein and a flat trend, 3 and 4 are periods of high growth and 5
Werbach (2021) have surveyed a number of policies is the period of decline. For XRP, most of the growth
during the period 2013 to 2019 and concluded is in a narrower period over segment 4. Average price
that policy regulations do not have lasting effects. levels increased by 2.8, 7.9 and 1.5 times for Bitcoin,
Auer and Claessens (2018) also found evidence of a Ethereum and XRP, respectively between period
reactionary and unsustained change in returns (1.52 1 and period 5. Appendix 1 provides details of the
per cent increase in prices and 3.13 per cent decline break dates and average price.
1 Daily data for structural break test taken from [Link]. [Link]
2 Bai Perron (2003) break test.
The time series for total volume traded follows the form of acts, regulations and bans. Appendix 2
a slightly different pattern. Growth is steepest in provides a more detailed explanation of the types of
the second segment and volumes are much more policies taken into account (summary of policies).
volatile with several peaks, instead of the clear humps This is not an exhaustive list of policy changes, but it
observed in the case of prices. is indicative of strict regulations that can potentially
affect crypto trading. In line with findings from the
The major policy regulation3 taken into account for literature, we observe no significant impact of crypto
econometric tests do not coincide with the break specific regulatory/policy events on crypto prices
dates in price changes in countries that see active (refer to methodology section in Appendix 3 for
crypto trading. Fifteen such regulations have been elaboration).
taken into account. All changes considered are in
Figure 1: Price Movements for Bitcoin, Ethereum and XRP
3 Refer to table in appendix 2
Figure 2: Total Volume of Cryptocurrency Traded (USD Billion)
Traditional policy regulations work better than to changes in interest rates. They add that economic
crypto specific regulations factors affect cryptocurrencies as much as they affect
fiat currency.
The price breaks registered from segments 4 to 5
can be explained by China’s outright ban on crypto, It is noticeable that cryptocurrency price
global inflation, increase in interest rates, the effects movements are not affected much by crypto specific
of the Russo-Ukraine war, etc.4 There is evidence to regulations. Literature suggests that the traditional
show that geopolitical fluctuations and monetary tools of monetary policy work as effectively for
policies determine the concurrent movement cryptocurrencies as well. More importantly, the
of cryptocurrency prices. In a study on prices of econometric tests in this blog show a significant
Bitcoins, Aysan et al(2018) conclude that geopolitical positive impact of equity on crypto prices.
and economic policy uncertainty indices have a Cryptocurrencies exhibit the properties of equity
significant impact on the same. Kyriazis (2020) also which make them susceptible to similar fluctuations.
concludes that geopolitical fluctuations cause major The similarity between these two assets explains why
changes in returns of cryptocurrencies. Corbet et al traditional policy tools affect cryptocurrencies more
(2017) conclude that cryptocurrencies are susceptible than crypto specific policies.
4 Rise and fall of cryptocurrencies; looking at the cryptocurrency crash in 2022. [Link]
looking-at-the-cryptocurrency-crash-in-2022/2628151/.
References
Auer, R., & Claessens, S. (2020). Cryptocurrency Market Reactions to Regulatory News. Federal Reserve Bank of
Dallas, Globalization Institute Working Paper 381, 2-16.
Aysan, A. F., Demir, E., Gozgor, G., & Lau, C. K. (2018). Effects of the Geopolitical Risks on Bitcoin Returns and
Volatility. Research in International Business and Finance, Volume 47(C), 511-518.
Bai, J., & Perron, P. (2003). Computation and Analysis of Multiple Structural Breaks. Journal of Applied
Econometrics,18(1), 1-22.
Corbet, S., McHugh, G., & Meegan, A. (2017). The Influence of Central Bank Monetary Policy announcements
on Cryptocurrency return volatility. Investment Management and Financial Innovations, Volume 14 (4),
60-72 .
Feinstein, B. D., & Werbach, K. (2021). The Impact of Cryptocurrency Regulation on trading Markets. Journal of
Financial Regulation, 7(1), 48–99.
Kyriazis, Ν. (2021). The efects of geopolitical uncertainty on cryptocurrencies and other fnancial assets. SN
Business and Economics, Volume 1 (1), 1-14.
Shanaev, S., Sharma, S., Ghimire, B., & Shuraeva, A. (2019). Taming the Blockchain Beast? Regulatory Implications
for the Cryptocurrency Market. Research in International Business and Finance, Volume 51 (C), 1-23.
Appendix 1
Summary of structural break tests
Cryptocurrency Break Dates Average price in USD (Ppre )5 Average price (Ppost)6
Bitcoin • June, 2020 8798.045 24675.33
• December, 2020
• July, 2021
• March, 2022
Ethereum • July, 2020 207.096 1655.425
• January, 2021
• July, 2021
• March, 2022
XRP • November, 2019 0.260655 0.39
• October, 2020
• April, 2021
• January, 2022
Appendix 2
Summary of policies
Country Date Policy Type of policy
Singapore January 2020 Payment services act Act
Netherlands May 2020 Amendment to Dutch implementation act Act
UAE November 2020 SCA decision for regulation of crypto Act
Switzerland February 2021 DLT act Act
UK June 2021 FCA banning sale of crypto derivatives to retail consumers Ban
India March 2022 Finance bill 2022 Act
Mexico March 2018 New set of fintech laws. Regulation
France April 2019 PACTE, AMF Act
Italy April 2018 EBP Act
Spain March 2021 Royal decree law 5/2021 Act
Indonesia February 2019 Bapebbti regulation Regulation
Indonesia July 2019 Bapebbti amendment Regulation
China September 2017 PRC ban Ban
Japan April 2017 Allowing digital currency to be used as a mode of payment Regulation
Japan December 2017 National tax agency Act
Appendix 3
Methodology :
We use a generalised least squares MLE approach to the period of March 2017 to November 2022. This
model three equations of cryptocurrency prices. The was the period in which there were large variations
primary variable of concern is the dummy variable. in cryptocurrency prices. Given the fairly recent rise
We assign dummy values for each month that policy in the popularity of cryptocurrencies, most of the
(given in the table in Appendix 2) was implemented. policies implemented globally also lie within this
The model estimated is of a monthly frequency for time frame. The data specifics are as follows.
5 Average price before Covid (May 2019- July 2020)
6 Average price after Covid (March 2022-February 2023)
Variable Unit transformation source
Bitcoin (bit) USD Growth rate [Link]
[Link]
Ethereum (eth) USD Growth rate [Link]
[Link]
XRP (xrp) USD Growth rate [Link]
[Link]
MSCI (Morgan Stanley Capital Index Growth rate [Link]
International) world index (msci)1 [Link]
Geopolitical risk index (gpr)2 Index Growth rate Caldara and Iacoviello
[Link]
Economic policy uncertainty index Index Growth rate Caldara and Iacoviello
(epu)3 [Link]
Global price of crude oil APSP index Index Growth rate [Link] Fred
(oil)4 [Link]
Notes:
1. msci respresents the performance of selected global stock markets. An increase in the index value implies
better stock market performance in selected countries
2. gpr refers to the geopolitical risk index. An increase in the value of the index indicates an increase in global
geopolitical risks.
3. epu refers to economic policy uncertainty. An increase in the value of the index indicates an increase in global
economic uncertainties.
4. APSP crude oil index refers to the benchmark prices of oil globally. An increase in the value of the index
would indicates an increase in global prices of crude oil
Our objective is to analyse if policy regulations have prices are considered in the literature for modelling.
an impact on the considered cryptocurrency prices Such variables can be expected to affect the prices
along with a set of control variables. Various aspects of cryptocurrencies. We estimate the following
such as geopolitical risks, policy uncertainties, equations separately.
global stock market performance and crude oil
𝑏𝑏𝑏𝑏𝑡𝑡𝑡𝑡 = 𝛽𝛽𝑜𝑜 + ∅1 𝑏𝑏𝑏𝑏𝑡𝑡𝑡𝑡−1 + ∅2 𝑏𝑏𝑏𝑏𝑡𝑡𝑡𝑡−2 + 𝛽𝛽1 𝑒𝑒𝑒𝑒𝑢𝑢𝑡𝑡 + 𝛽𝛽2 𝑔𝑔𝑔𝑔𝑟𝑟𝑡𝑡 + 𝛽𝛽3 𝑚𝑚𝑚𝑚𝑚𝑚𝑖𝑖𝑡𝑡 + 𝛽𝛽4 𝑜𝑜𝑜𝑜𝑙𝑙𝑡𝑡 + 𝐷𝐷 + 𝑒𝑒𝑡𝑡1
𝑒𝑒𝑒𝑒ℎ𝑡𝑡 = 𝛽𝛽𝑜𝑜 + ∅1 𝑒𝑒𝑒𝑒ℎ𝑡𝑡−1 + ∅2 𝑒𝑒𝑒𝑒ℎ𝑡𝑡−2 + 𝛽𝛽1 𝑒𝑒𝑒𝑒𝑢𝑢𝑡𝑡 + 𝛽𝛽2 𝑔𝑔𝑔𝑔𝑟𝑟𝑡𝑡 + 𝛽𝛽3 𝑚𝑚𝑚𝑚𝑚𝑚𝑖𝑖𝑡𝑡 + 𝛽𝛽4 𝑜𝑜𝑜𝑜𝑙𝑙𝑡𝑡 + 𝐷𝐷 + 𝑒𝑒𝑡𝑡2
𝑥𝑥𝑥𝑥𝑝𝑝𝑡𝑡 = 𝛽𝛽𝑜𝑜 + ∅1 𝑥𝑥𝑥𝑥𝑝𝑝𝑡𝑡−1 + ∅2 𝑥𝑥𝑥𝑥𝑝𝑝𝑡𝑡−2 + 𝛽𝛽1 𝑒𝑒𝑒𝑒𝑢𝑢𝑡𝑡 + 𝛽𝛽2 𝑔𝑔𝑔𝑔𝑟𝑟𝑡𝑡 + 𝛽𝛽3 𝑚𝑚𝑚𝑚𝑚𝑚𝑖𝑖𝑡𝑡 + 𝛽𝛽4 𝑜𝑜𝑜𝑜𝑙𝑙𝑡𝑡 + 𝐷𝐷 + 𝑒𝑒𝑡𝑡3
We include two autoregressive components till order coefficient of the policy implementation dummy
2 to avoid endogeneity/ spurious results. These variable. are the error components for
components are denoted by ∅. For the stability the corresponding equations. The results show that
and stationarity of the model, the condition is that none of the policies resulted in a change in prices.
│∅│< 1. All the three models show stable results While the impact of implementing crypto regulatory
for autoregressive components ∅ which implies policies is insignificant, there were some interesting
that the gls estimation is also stable. The β’s denote results.
the coefficients of each variable while D denotes the
equation intercept ∅1 ∅2 Epu (β1) Gpr (β2) Msci (β3) Oil (β4) Policy dummy (D)
Bitcoin 1.87 0.11** 0.12** -0.12 0.13 1.39** 0.07 3.78
Ethereum 6.42 0.15** 0.14** -0.04 0.26 2.44*** 0.01 -6
XRP 1.26 -0.08** 0.06** -0.12 0.17 0.92 -0.57 21.8
*, **, *** represent
statistical significance at 10%, 5% and 1% respectively.
The above table gives the coefficients of the GLS indicates that if global stock markets perform better,
estimation. It can be seen that the policy dummy then it effectively increases the growth rates of changes
is statistically insignificant, indicating that policy in the prices of the two dominant cryptocurrencies.
interventions had no effects globally. The growth This is not true for XRP. This can ascribed to the
rates of the prices of Bitcoins and Ethereum show stable nature of the currency because it is pegged to
a positive significant relation with the MSCI. This the dollar.
Technical appendix:
Some methodological issues need to be addressed. monthly data with 70 observations. A GLS estimation
There is abundant data available for cryptocurrencies using MLE has been employed. GLS controls for
on a daily basis. This is not true for other indicators. heteroscedasticity, resulting in coefficients with less
To build a comparable and consistent econometric variance. The estimation is as follows.
model across the three cryptocurrencies, we use
where corresponds to the coefficient estimates. x is fitted values while the upper panels show a polynomial
an NxK dimensional matrix (for N observations and local regression (loess). It can be seen that while there
K parameters) of the explanatory variables and y is is some degree of correlation between the actual and
the dependent variable of dimensions Nx1. Ω here fitted lines, it is not very strong for any of the equations.
is the variance covariance matrix of errors (Ω=ee’) In fact, a more non linear fit on the top panel is a more
accounting for shifts in heteroscedasticity. accurate fit. This implies that there is some degree of
non linearity that needs to be accounted for in the
There are some methodological issues that need to be modelling approach. Such issues could be tackled by
addressed. Figure 3 shows the plots of the fitted lines including more data and variables by utilising other
from the model and actual lines for each equations methods and models. The specifics of a more detailed
(Bitcoin, Ethereum and XRP). Of the panels shown modelling can be explored in a more extensive study.
below, the lower panel shows that linear regression
Figure 3
Appendix 4
The caveats listed below lie beyond the scope of this • There was no global crackdown on crypto-
blog. While these problems need to be addressed, currencies before 2017. It was only after 2017 that
it would require a more rigorous methodological/ policy interventions started globally. This makes
econometric approach. it a little harder to model the effects of policy on
crypto-currencies.
• An important point of discussion is the nature
of causation of policy. The direction of effects • While data on cryptocurrency prices are available
between crypto price fluctuations and policy – on a daily basis, the data for covariates are not
whether there is a unidirectional relationship, available with as much frequency. This makes it
a simultaneity or reverse causality must be harder to fit models for more robust inferences.
determined. This would reveal more information More importantly, Covid seems to have largely
that policy makers can work upon. inflated the value of crypto-currencies. This has
caused larger deviations from expected trends for
• It is suspected that crypto prices share a long term the considered cryptocurrencies. The inherent
relation with USD. Changes in the strength of the trends for each currency have not been captured. It
dollar causes changes in crypto-currency prices. is only the average prices that have shifted pre and
Inferences from a study on cointegration would post Covid. Hence, it is thus equally important to
provide policy implications. Furthermore, one can look at more natural trends of such currencies as
also analyse different kinds of volatility. This again opposed to the ones fuelled by Covid.
has not been explored in the blog.