An Oxford University Law Faculty blog post reveals that crypto markets could pose a danger to traditional finance, and it should thus be rigorously regulated, especially in times of global crisis like this, to avert systemic risk.
The report argued that as crypto transactions depend on a decentralized Blockchain network, investors usually opt to move their fiat portfolios into digital currency when they lose trust in governments and central banks in order to protect their investments.
The researchers at Oxford Law scrutinized the trading volumes between January 1 and March 11 of this year and found that the top 100 cryptocurrencies increased along with the number of reported COVID-19 cases. On the other hand, this positive correlation reversed when investors began to respond more positively towards the traditional financial market.
Additionally, the analysis highlighted that the current crypto market is lightly regulated and lacking in transparent information.
Crypto Markets AreHeavily Influenced By Market Influencers
More so, it is emerging that crypto markets are dependent on “market influencers,” such as sites that alert investors to market movement by whales.
The blog report explained:
“Sophisticated investors lure uninformed investors into the crypto market by creating an artificial demand for tokens and then swiftly selling their tokens, leaving the uninformed investors with a loss.”
This has led many analysts to worry that if investors engage in herd behavior, this could cause traditional markets to crash. Therefore, financial watchdogs may need to respond quickly to regulate crypto markets so as to impede the systemic risk of traditional financial markets.
Crypto Prices Respond Well To Clear Regulation
To further support the case for more standardized crypto regulation, recent research by the Dallas Federal Reserve Bank’s Globalization Institute revealed that crypto prices respond well to clear regulation, though they drop when governments issue bans.
The research published on April 18, 2020, showed that while news reports of government bans on cryptocurrencies lead to price dips, markets soared when the regulation was clear.
It is a well-known fact in the crypto sphere that better regulation of crypto markets and exchanges is vital to deterring criminal elements within the industry and foster widespread adoption in turn.