The unintended consequences of the regulation of cryptocurrencies

Abstract

This paper investigates whether the application of the latest guidance of the Financial Action Task Force (FATF) for regulating cryptocurrencies may engender unintended consequences at odds with the initial purposes of transparency and technology neutrality. For instance, we will ask whether regulation strengthening may incite a category of investors to flight to unregulated and non-compliant decentralised exchange platforms to stay under the radar of regulators. Furthermore, we ask whether regulation may lead to a two-tier industry, fragmented between compliant trading venues that attract mainstream users and non-compliant trading venues that attract privacy-centric users. We argue that somewhat paradoxically, regulation may push part of the crypto-industry to the ‘dark side’ of financial innovation and drives privacy-centric investors out of the scope of regulators.

The Detection of Asset Price Bubbles in the Cryptocurrency Markets with an Application to Risk Management and the Measurement of Model Risk

“…In the wake of the downturn in the cryptocurrency markets that began in earnest in 2022 that coincided with central banks raising interest rates, and the several high-profile blow-ups of several cryptocurrency exchanges and trading firms (e.g., most infamously FTX) that followed, the debate about the proper scope for supervision over this asset class has transitioned into a phase of a fevered pitch. The central question has been not only if but how cryptocurrencies should be brought under the supervisory umbrella, including which asset classes the various cryptocurrencies should be classified as (e.g., securities vs. commodities), but also possible unintended consequences of ill designed regulation (Sauce, 2022). In view of our findings, that there is a powerful interaction between cryptocurrencies and another major risk asset that leads to a self-reinforcing vicious cycle of bubble behavior, any such regulatory regime should account for these linkages.…”