Quantifying the Benefits of Regulatory Clarity
by Greg Cipolaro, Global Head of Research and Ethan Kochav, Research Analyst
Executive Summary
Regulatory clarity is often cited as a hurdle for broad institutional adoption of the cryptocurrency asset class. After all, investors are not accustomed to questioning whether their investment might be deemed a regulated security or how that might change in the future. While it is our belief that Bitcoin’s regulatory distinction is well understood in the US, the same cannot be said for the thousands of other digital assets or the myriad of services provided across the landscape. We have long held the opinion that increased regulatory clarity, provided it does not prove to be an existential threat, would be supportive for adoption and therefore prices. The theory is that once investors know the rules of the road, they can safely adhere to those guidelines, whatever they may be. We look at the concept that increasing regulatory clarity is supportive of price, and finds that across geographies this relationship holds true. In the case of China, where regulation has been existential in nature, as the country banned both mining and trading of digital assets, we find that regulation has had a deleterious impact on prices. Given that it is increasingly clear that most countries around the world, including the US, appear to be taking an approach that we categorize as “supportive but with guardrails,” this analysis furthers our belief that increasing regulatory clarity will be beneficial to price and adoption. And given that there is a lot of regulatory clarity left on the table, this could provide a tailwind to bitcoin prices going forward.
Study Design
We look at historical events that encompass digital asset regulation across a variety of countries. These events cover issues such as tax, accounting, payment, mining, the legality of exchanges and other service providers, or even the legality of digital assets themselves. We track the subsequent price returns of bitcoin in the following day, week, month, six months, and year. These returns are evaluated both in absolute terms and versus the long-term average returns of bitcoin. We aggregate and average returns across four regions: the Americas, China, Asia Ex. China, and Europe. While we show returns across a series of windows, we believe the longer-term windows contain more information. There are a couple of reasons for this. First, while we have plotted the exact timing of events, it is not always clear when information reaches or is processed by markets. Second, the immediate price reaction can sometimes mask the longer-term trends in price that follow as markets digest the news. Thus, looking at 1-day returns (or even 1-week) can be misleading as to the true price impact. In addition to focusing on longer windows, we also concentrate on returns relative to long-term averages rather than absolute returns. A 1-year bitcoin return of, say, 50% may look high in most contexts, but it is low compared to the historical average annual return.
Results Show Investors Prefer Regulatory Clarity
The results of the study are clear. Both on an absolute basis as well as relative basis, increasing regulatory clarity is advantageous for the price of bitcoin. The benefit of regulatory clarity is more evident as we move further from the event. Apart from in China, returns following events have positive returns against bitcoin averages in the six-month and one-year windows, while returns over shorter windows are more mixed. The implication is that regulatory clarity, while not always perfect, is appreciated by investors. It is worth noting that it is impossible to directly observe the effect of regulation as there are myriad factors impacting price at any given time. However, we believe that with the large number of events we have captured, the effects of this noise are somewhat cancelled out.
As mentioned above, the big exception has been China, which has been outright hostile to the digital asset ecosystem. Starting in 2013 up through the ban of trading and mining in 2021, each successive regulation had further constricted cryptocurrencies until all but peer-to-peer activity — something that would be exceedingly difficult to outlaw — was snuffed out. China’s actions may have technically brought regulatory clarity, but its regulatory environment is a worst-case scenario. In China’s case, our data shows that their actions have not been supportive of prices, as one might guess.
Looking Ahead
The good news is that very few countries around the world have expressed such outright hostility towards digital assets as China. Recent examples of regulatory pushes, like the White House’s Executive Order on Ensuring the Responsible Development of Digital Assets and the proposed Responsible Financial Innovation Act by Senators Lummis and Gillibrand strike a much more balanced tone. But while not every regulatory development will be as positive, we think that as long as investors know the rules of the road, even if they are far from ideal, that should be supportive of price and adoption going forward.
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