Can a centralized entity regulation affect the price of a decentralized digital asset?
When Satoshi Nakamoto introduced Bitcoin into the world, we were also introduced into the realm of decentralization where using Bitcoin as an example, two willing peers can transact directly between each other on monetary terms without the need for a third party. It means that they can use a currency as a medium of exchange that is not controlled by any government or central bank. With the underlying blockchain technology, the system operation of Bitcoin becomes self-governing without jeopardizing societal order.
This concept and principle of Bitcoin and the eventual flourishing of other cryptocurrencies pleasantly caught the world by surprise and their popularity surged to become an asset class of its own. But despite the great potential that the blockchain and distributed ledger technologies can bring to businesses and economies, the high volatility and speculative trading of Bitcoin and cryptocurrencies were enough for consumers and investors to become cautious about being protected and, therefore, would be needing some kind of regulation coming from the government of the locale. Since Bitcoin and altcoins (cryptocurrencies other than Bitcoin) have not been that great at self-regulation, the need for government intervention only became more imminent.
Interpret that local regulations have no impact, but the domestic impact will earn it points on preventing fraud and consumer protection.
The Effect of Government Intervention
Upon announcement of national or state government regulations on cryptocurrencies, it was found out that it affected Bitcoin price but only in a short term. However, the discouraging effect can be felt in local trading activities in the long term. But Bitcoin’s global integrative trading network has proven that it can return to normal and stabilize the price. It would be unfair, however, to interpret that local regulations have no meaning, but the domestic impact lies in preventing fraud and consumer protection.
It is ideal that the price of Bitcoin should be uniform once the global market integrates into one. But as we see it now, Bitcoin prices differ according to various market influences. If local markets are segmented due to the effect of differing regulations, price uniformity will still be distant. But look, though the effect of local regulation announcements show signs of abnormalities on Bitcoin prices, it returns to normal patterns after a day or two. This means that the global Bitcoin markets are integrated. It should be noted, too, that local trading volume may increase during the first two days, local trading activities drop within ten days or more, signs that local investors are evading local regulation, sold off their assets and migrated elsewhere. A greater financial openness would have mitigated the impact.
When China announced the banning of all ICOs in the country to stop the outflow of capital and money laundering issues, Bitcoin’s price declined to around $500. But shortly enough, the cryptocurrency king bounced back and march on upwards.
Japan’s warm reception to Bitcoin is another matter. After announcing that cryptocurrencies were legal tender, Bitcoin’s price quickly surged 2.8%.
These opposite actions impacted the price of Bitcoin.
Every single regulator in each country will be challenged to regulate crypto prices and trading activities since investors on a global scale determines it. Different prices may be the result of local currency denominations and other market frictions, but domestic regulations cannot influence abnormal returns beyond global transaction costs. Domestic regulations may not control market speculation to affect global crypto prices, but it can scamper speculators away from the local market.
All in all, government regulation can only affect Bitcoin and altcoin prices on a limited basis when the governance they apply is really for taxation purposes and the prevention of criminal activity.