How Crypto Regulations Shape Market Sentiment and Drive Prices

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Crypto regulations continue to affect the prices of major digital assets. Diverse approaches continue to drive change, while the industry continues to await the development of balanced rule. How are cryptocurrencies reacting to regulatory developments?

The growing popularity of cryptocurrencies has caught the attention of major governing bodies. An industry that essentially prides itself in being uncontrolled (decentralized) is now facing a number of regulatory developments.

How have the latest crypto regulations shaped the digital assets industry of today?

Crypto Regulations Worldwide

The European Union

One of the first regions to develop significant cryptocurrency regulations was the European Union (EU) with the introduction of the Markets in Crypto-Assets (MiCA) Regulation.

Greg Moritz, the co-founder and CEO at Alt-Tab Capital, said:

“When MiCA was passed, this helped to shore up price levels for all digital assets as it represented regulatory clarity, something that had been missing in Europe for digital assets. Perhaps even more importantly, it was seen as a likely template for regulation in other markets.”

During the period when MiCA was passed (May 2023), the prices of major cryptocurrencies took a hit. Bitcoin (BTC) dipped by around 5% between the start and end of the month, and BNB lost over 7% during the same time period.

However, not all major cryptocurrencies react to regulatory decisions in the same way. Ether (ETH) gained 1.7%, and XRP grew by 10.5%.

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The United States

The United States (US) also does not shy away from bringing up new regulatory announcements every so often.

A recent development was the XRP vs. the US Securities and Exchange Commission (SEC) dispute, where the SEC alleged that Ripple, the creator of the XRP token, made $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors. The SEC has also been targeting other major players in the digital assets industry, including Coinbase and Binance.

In addition to the SEC, the Biden Administration is also taking a hard stance on crypto regulations, aiming to tackle illegal cryptocurrency activity.

The Rest of the World

In China, cryptocurrency exchanges are banned from operating. Meanwhile, cryptocurrencies are classified as property. In the United Kingdom (UK), exchanges are required to register with the UK Financial Conduct Authority (FCA).

While some countries choose to take a harsher stance when it comes to regulating cryptocurrencies, others are much more lenient. El Salvadore uses BTC as a legal tender, for example, and Lithuania has cultivated a favorable regulatory stance.

How Regulatory Developments are Shaping Crypto Markets

Regulatory developments can often have a significant impact on crypto prices since they can highly impact how digital assets are seen by the wider public. A favorable decision is bound to have a more positive impact and vice versa.

Alt-Tab Capital’s Moritz explained that the outcome of the XRP vs. SEC lawsuit has had a “major impact on altcoin prices.” In addition, this had also affected BTC’s dominance in the market, forcing it to fall below the 50% mark.

Moritz added:

“Being regulated as a security comes with a plethora of requirements that are challenging for digital assets to meet due to their often, decentralized nature. In this case, the verdict indicates a more favorable regulatory treatment for most altcoins and therefore caused a short-term bull run in the price of affected assets.”

The XRP price, for example, has rallied throughout the duration of the trial, especially since the SEC had filed a motion for interlocutory appeal. The token had gained over 6% since falling from $0.4863 on 18 August 2023 to $0.5162 on 28 August.

The CEO and co-founder of Redefine, Dr. Shira Brezis, added that uninformed regulation, the misapplication of regulation, and over-regulation can also have a negative impact on the future of crypto prices as well as the industry’s further growth.

Other financial events, however, can also play a major role in how cryptocurrencies perform in the current market. Ahead of Federal Reserve chair Jerome Powell’s speech at Jackson Hole on 25 August 2023, BTC fell from $26,688 to $25,800 within the same day.

Effect of Local Regulations on Global Crypto Markets

How local cryptocurrency regulations will affect digital assets purely depends on the size of the market in the country where they are based.

Moritz explained: “For example, when we see regulatory news come out of the US or China, it often has a significant impact on price because those economies represent some of the largest sources of capital, both retail and institutional.

“On the other hand, when nations with less impact on the global economy pass laws, the market reaction is less significant as the total expected impact on inflows and outflows is relatively minimal.”

Dr. Brezis added that as the Biden Administration and the EU are showing more “openness to cryptocurrency regulation,” it could push toward a more global and cooperative regulatory framework.

“Such an approach would make the rules of the game clear and consistent across borders, promoting a vibrant, competitive, and innovation-friendly environment,” she said.

Crypto Regulations Challenge Investor Perception

Regulatory developments will always have an effect on investor perception, which could then shape the price of various cryptocurrencies.

“In the early days, and to a lesser degree even today, there was a counter-culture ethos in crypto that intentionally ran counter to working within a regulatory framework. While not the only reason, this is part of the reason we have seen it take so long for the space to be embraced by governments via reasonable and not overly burdensome regulation,” Moritz commented.

Indeed, crypto regulations are developing slowly. While some countries have gotten the hang of them, the wider world is still trying to figure things out, which could lead to mass uncertainty. Such uncertainty does have the potential to also challenge investor perception.

Moritz added: “Fortunately, what we see now is mainstream recognition of the legitimacy of the space. Comprehensive and favorable laws for digital assets have been passed in major economic hubs in Europe and Asia, with the US lagging behind but moving towards the same result.

“When these laws pass, it has a massive impact on sentiment among professional investors and also leads to retail excitement. With each new acknowledgment of digital assets as a new and valid market, it becomes less taboo to discuss around the dinner table.”

The Future of Crypto Regulations

Dr. Brezis noted that crypto regulation should come as a facilitator that encourages fair competition, fosters innovation, and instills market confidence.

“The crypto industry is still in its infancy, and its regulatory landscape will inevitably evolve in the coming years. As we navigate this changing terrain, we should aim to strike a balance: facilitating innovation while safeguarding consumer interests. Through balanced regulation, we can unlock the revolutionary potential of cryptocurrencies and [decentralized finance] DeFi, creating a win-win scenario for all stakeholders involved.”

Moritz added that governments are looking to tackle a number of regulatory “hurdles” with the industry seeing “financial markets passing comprehensive regulations” that could, in terms, enable a bull-run as well as the industry’s long-term growth.

He concluded:

“While progress here is still slow, once complete, it will mean that there is no longer a drag on market prices due to regulatory uncertainty. This is likely to pave the way for major price action to the upside as more institutional capital becomes comfortable allocating significantly to the space, and the retail narratives change in a more favorable way along with that.”

The Bottom Line

Regulatory decisions continue to wield significant power over crypto prices and sentiment, illustrated by the XRP vs. SEC case’s impact. In addition, local regulations continue to influence global markets, especially from economic powerhouses like the USA and China.

The more crypto regulations evolve, the higher the chances are for them to reshape investor sentiment.

Future progress promises to remove barriers, attract institutional investors, and drive long-term growth, while a collaborative global framework could foster industry-wide advancement.

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Iliana Mavrou
Crypto journalist
Iliana Mavrou
Crypto journalist

Iliana is an experienced crypto/tech journalist reporting on blockchain, regulation, DeFi, and Web3 industries. Before joining Techopedia, she contributed to a number of online publications, including Capital.com, Cryptonews, and Business2Community, among others. In addition to working in journalism, she also has experience in tech and crypto PR.  Iliana graduated from the City University of London with a degree in Journalism in 2021. She is currently pursuing a Master's degree in Communication.