Oxford Law Researchers Call for Strict Cryptocurrency Regulation to Avoid Another Financial Crisis
Researchers at the Oxford University Faculty of Law have published a blog post reporting they have observed an increasing trend of people moving their assets into crypto. The researchers cited the coronavirus pandemic as the main catalyst for the shift in investment behaviour. The recent phenomenon indicates that investors see crypto as a safe haven in response to the current financial crisis.
Naïve Investors Face Greater Risks
The researchers observed crypto trading volumes between 1st January and 11th March, 2020. Throughout this period, they identified the top cryptocurrencies value increased in response to new and higher reports of coronavirus cases. They further noted that this price action reversed the moment people begun to give a more positive response to traditional financial markets.
The researchers see cryptocurrency trading as a threat to traditional finance. They, therefore, urge for stricter regulations during this time of global difficulty to prevent cryptocurrency and alternative digital assets from posing a systemic risk to the current financial system.
Researchers say that the decentralized nature of cryptocurrency transactions do not rely on any central authority. Therefore, large-scale migration of cryptocurrencies from investors indicates an overall loss in trust for the banks and governments as a whole to secure their money properly.
Researchers claim that the cryptocurrency market indicates high volatility, bubbles and crashes, a phenomenon that could be explained through herding behavior. In other words, a large group of investors does something that inspires more investors to do the same. The researchers further described the crypto market as being lightly regulated and lacking transparent information.
The researchers noted that a massive influence on the cryptocurrency market is basically triggered by “market influencers” which are various websites and designed telegram channels detecting movement of “holders” of large amounts of cryptocurrencies.
The asymmetric spread of information can influence investors to make “pump and dump” schemes. Sophisticated investors attract naïve investors into the crypto market. They (sophisticated investors) perform this by inducing an artificial demand on a particular type of crypto asset, before selling their own assets to the masses. This eventually leaves the uninformed investors with a loss.
Researchers are concerned if uninformed investors engage in herding behavior, then this might lead to a market crash. Since the traditional financial market corresponds in a similar way as the crypto market, regulators should act rapidly to regulate the crypto market to prevent the systemic risk of the traditional financial system, the researchers advised.
The Financial Stability Board Urged for Proactive Crypto Regulation
This is not the time authorities call for crypto regulation. June last year, the Financial Stability Board (FSB) – the Swiss financial watchdog – urged regulators including finance ministers and central bank governors to act actively to foresee the potential impact of crypto on financial stability. The FSB brought representatives of various countries came together in a G20 meeting whereby regulators agreed to examine cryptocurrency and assess important regulations to be applied to the industry. Government officials and central banks took a closer examination at the impact of cryptos on investors, crime, and the world economy. They agreed that cryptos pose a significant risk for investors and expressed concerns regarding their use for illegal activities. G20 countries promised to apply the standards of FATF (Financial Action Task Force) – an intergovernmental body established to fight terrorist financing and money laundering – to cryptocurrency.
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