The Impact of Transparency on Investor Reactions to Crypto Token Regulation

Abstract

Despite some efforts to regulate cryptocurrencies, these assets are mostly issued and traded outside traditional regulated financial markets due to their ambiguous nature. We empirically examine if crypto token investors perceive regulation as net beneficial or costly, and whether cross-sectional differences in crypto token characteristics and transparency affect this reaction. Using a sample of around 1,300 crypto tokens and 145 regulation news events, we find that on average, investors react negatively to news that increases the perceived likelihood of regulation. We find that the negative reaction is mainly driven by news about securities regulation of ICOs and crypto exchanges. However, the negative reaction is less pronounced for crypto tokens with higher expert ratings for transparency, management competence and the underlying business idea, and for crypto token issuers that engage more with followers on social media. We conclude that crypto token investors expect regulation to be net costly on average, but less so for tokens with a better information environment or that are better positioned to deal with changes in regulatory requirements.

Keywords: Regulation, Transparency, Cryptocurrencies, Financial Markets

JEL Classification: G10, G18, M41