The Impact of Cryptocurrency Regulation on Trading Markets

Journal of Financial Regulation, forthcoming

66 Pages Posted: 13 Jul 2020 Last revised: 2 Mar 2021

See all articles by Brian D. Feinstein

Brian D. Feinstein

The Wharton School of the University of Pennsylvania

Kevin Werbach

University of Pennsylvania, The Wharton School, Legal Studies & Business Ethics Department

Date Written: 2020

Abstract

The meteoric growth of global cryptocurrency markets presents novel challenges to regulators. Some policymakers and scholars warn that regulation will cause trading activity to cross borders into less-regulated jurisdictions—or even smother a promising new financial asset class. Others believe regulatory actions will stimulate activity by providing clarity to market participants. Standing behind this disagreement is a debate about the desirability of either outcome. Some believe that governments should promote development of the cryptocurrency sector within their countries, while others view cryptocurrencies as conduits of illegality and fraud that should be restricted through strict regulation or even outright bans. Yet these debates have, to date, been conducted almost entirely without data concerning the effects of regulation on market activity. As a corrective, we assemble original data on cryptocurrency regulations worldwide and use them to empirically examine movement in trading activity at a number of exchanges following key regulatory announcements.

Our findings are surprising. A wide variety of models yields almost entirely null results. From the creation of bespoke licensing regimes to targeted anti-money-laundering and anti-fraud enforcement actions, as well as many other categories of government activities, we find no systemic evidence that regulatory measures cause traders to flee, or enter into, the affected jurisdictions. These findings at last provide an empirical basis for regulatory decisions concerning cryptocurrency trading. Among other things, they call into question that capital flight or chilling effects should be a first-order concern.

Keywords: cryptocurrencies, cryptocurrency trading, regulation, bitcoin, capital flight, digital assets, securities regulation

JEL Classification: E42, F31, G12, G14, G15, G18, G28, K22, O38

Suggested Citation

Feinstein, Brian D. and Werbach, Kevin, The Impact of Cryptocurrency Regulation on Trading Markets (2020). Journal of Financial Regulation, forthcoming, Available at SSRN: https://ssrn.com/abstract=3649475 or http://dx.doi.org/10.2139/ssrn.3649475

Brian D. Feinstein (Contact Author)

The Wharton School of the University of Pennsylvania ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States

Kevin Werbach

University of Pennsylvania, The Wharton School, Legal Studies & Business Ethics Department ( email )

3730 Walnut Street
Suite 600
Philadelphia, PA 19104-6365
United States
215-898-1222 (Phone)

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