First-of-its-kind research on cryptocurrency finds that the most regulated coins create the most efficient markets.
That crypto regulation, often provided by cryptocurrency exchanges like Binance, can also help protect investors by providing reliable, public information.
“Both small and institutional investors should know, if they invest in coins without any regulation, they may suffer from price manipulation or a severe lack of insider information,” said Liangfei Qiu, a University of Florida professor of business and one of the authors of the new study.
“Instead, they may want to invest in coins listed with platforms that provide some vetted information, which serves as a kind of minimal regulation that protects investors and makes markets more efficient,” he said.
The study is the first to look at how regulation affects the efficiency of cryptocurrency markets. Researchers analyzed a suite of cryptocurrency offerings – from essentially unregulated ICOs, or initial coin offerings, to exchanges setting and enforcing their own rules – and compared the digital currencies to traditional stock exchanges, which are highly regulated by government.
Unregulated ICOs were the least efficient. But initial exchange offerings, another crypto offering known as IEOs, were nearly as efficient as traditional stock initial public offerings, or IPOs. In IEOs, the exchanges set minimum standards and rules and commit to providing investors with trustworthy information about the value of the cryptocurrency.
The exchange-based regulation is entirely voluntary, but could provide guidance to lawmakers who are increasingly interested in providing some crypto regulation to the still-emerging markets.
“If policymakers want to make sure that the market runs well, they need to provide some structure to promote regulation,” Qiu said.
To assess the efficiency of the stocks and cryptocurrencies, Qiu’s team analyzed their variance ratios, a measure of how predictable the future price of an asset is. Economists have long held that future prices of assets are essentially unpredictable – so long as everyone has the same information about the underlying value of those assets. Market inefficiencies, such as insider knowledge, can start to distort the prices, usually at the expense of investors who are out of the loop.
Qiu collaborated with fellow UF Warrington College of Business professors Mahendrarajah Nimalendran and Praveen Pathak and his former doctoral student Mariia Petryk, now a professor of business at George Mason University. Their study is forthcoming in the Journal of Financial and Quantitative Analysis.
Eric Hamilton February 1, 2024
FAQs
First-of-its-kind research on cryptocurrency finds that the most regulated coins create the most efficient markets. That crypto regulation, often provided by cryptocurrency exchanges like Binance, can also help protect investors by providing reliable, public information.
What role does regulation play in the cryptocurrency market? ›
Regulations are often designed with the protection of consumers in mind, aiming to safeguard users from fraud, market manipulation, and other risks associated with crypto trading. Crypto exchanges play a vital role in this ecosystem, implementing measures that align with regulatory standards to protect their users.
Is regulation good for crypto? ›
Regulation improves the efficiency of virtual asset trading
Regulated crypto markets will future-proof compliant virtual asset transmittals and allow it to be sent to almost any regulatory-compliant destination in the world.
Why cryptocurrency regulation is actually a good thing for investors according to these experts? ›
This regulatory framework is intended to protect investors and preserve financial stability while allowing innovation and fostering the attractiveness of the crypto asset sector.
How efficient is the cryptocurrency market? ›
The cryptocurrency market, and in particular the market for Bitcoin, is found to be largely inefficient, see, for example, Urquhart (2016); Vidal-Tomás and Ibañez (2018); Jiang et al. (2018); Wei (2018); Hu et al. (2019); Caporale et al. (2018); Zargar and Kumar (2019); Al-Yahyaee et al.
Does regulating cryptocurrency stifle innovation? ›
Foster innovation and responsible growth: Regulations should not stifle innovation but rather provide a framework within which the cryptocurrency industry can grow responsibly and sustainably.
Why can't crypto be regulated? ›
By their very nature, cryptocurrencies are freewheeling, not beholden to country borders or specific agencies within a government. However, this nature presents a problem to policymakers who are used to dealing with clear-cut definitions for assets.
Which crypto will survive regulation? ›
Held also stated that only Bitcoin (BTC) and a few other decentralized cryptocurrencies would survive in the long run, as they are the only ones that can endure an all-out government attack.
Who controls the crypto market? ›
Cryptocurrencies are usually not issued or controlled by any government or other central authority. They're managed by peer-to-peer networks of computers running free, open-source software. Generally, anyone who wants to participate is able to.
What led to the collapse of FTX? ›
What Happened to FTX? FTX was a leading cryptocurrency exchange that went bankrupt in November 2022 amid allegations that its owners had embezzled and misused customer funds. Sam Bankman-Fried, the CEO of the exchange, was sentenced to 25 years in prison and ordered to repay $11 billion.
Freedom of Exchange
The main reason why Bitcoin should be legal is because Bitcoin existance has yet to break any serious laws. Bitcoin is just an alternative economy and ideally people should be able to exchange goods in alternative economy if they so choose.
Which organization should regulate the cryptocurrency market? ›
Currently, at least four federal regulatory authorities are involved in managing cryptocurrency risks. This includes the Securities and Exchange Commission (SEC), the Commodity Features Trading Commission (CFTC), the Department of Justice (DoJ) and the Department of the Treasury.
Why is everyone investing in cryptocurrency? ›
Why do people invest in cryptocurrencies? People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit. If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value.
Does cryptocurrency benefit the economy? ›
Financial Inclusion: Cryptocurrencies can provide financial services to the unbanked and underbanked populations worldwide. This increased access to financial tools and services can promote economic participation and growth in underserved regions.
Why is crypto better than real money? ›
The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.
What does regulation mean in crypto? ›
Cryptocurrency regulations across jurisdictions can range from detailed rules designed to support blockchain users to outright bans on the trading or use of cryptocurrencies. Digital asset regulations may address how digital money is created, bought, sold, and traded.
What is government's role in regulating cryptocurrencies? ›
Currently, at least four federal regulatory authorities are involved in managing cryptocurrency risks. This includes the Securities and Exchange Commission (SEC), the Commodity Features Trading Commission (CFTC), the Department of Justice (DoJ) and the Department of the Treasury.
What is the regulation on crypto exchanges? ›
At the federal level, the following bodies are responsible for making the required cryptocurrency regulation in the US – the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Treasury Department, through the Internal Revenue Service (IRS), ...
Does regulation E apply to cryptocurrency? ›
In Rider, the court concluded that virtual currency platform operators may be subject to the Electronic Fund Transfer Act (EFTA) and Regulation E.
