The ghost of centralization is not ready to leave Ripple and its token XRP. The bull run that skyrocketed the XRP prices by over 100% last week seemed to drive the centralisation issues away from the coin. But that was pretty short-lived as now the latest research published by Bank of International Settlements (BIS) has termed XRP’s network of trusted nodes are controlled by the Ripple.
XRP centralized hence gets less affected by the regulatory news
The research report was co-authored by Raphael Auer and Stijn Claessens and the objective of the research was checking if cryptocurrencies could be bought within reach of national regulation. The authors/ researches used a methodology of assessing crypto market reactions to regulatory news flows.
The research considered 7 leading cryptocurrencies namely Bitcoin, Bitcoin Cash, Litecoin, Monero, Zcash, and XRP (based on Ripple), and check its price sensitivity to various regulatory newsflows. To check its sensitivity the researchers identified 151 regulatory news events arising out of leading nations like China, India, Japan, the United Kingdom, and the United States and matched it with price movements in the markets with respect to the news. Since this analysis spanned over seven cryptocurrencies and up to seven variables of interest were used, the researchers reduce the dimensionality for conciseness by constructing a global cryptocurrency regulatory news index (CRNI). This index was constructed as a linear combination of the three sets of consequential regulatory news, with weights equal to the average news impact on bitcoin prices
The responsiveness of cryptocurrencies compared with that of bitcoin to each news flow was captured (chart below) and the report concluded that
“ we find that both “Bitcoin clones” – Bitcoin Cash and Litecoin – as well as the second largest cryptocurrency by valuation, Ethereum, react significantly to CRNI (columns 2-4). The impact is not significantly different from 1, however, ie they are as strongly affected by these news events as bitcoin is. We next examine so-called “dark coins” Monero and Zcash – that add an extra layer of anonymity. Monero reacts significantly and more strongly than bitcoin (column 5), while Zcash (for which we only observe less than two years of data given its shorter life span) reacts less (column 6).”
“The XRP token also react less, which may reflect that its network of trusted nodes is centrally controlled by its issuer Ripple, making the XRP token distinct from other, permissionless, cryptocurrencies”
Cryptocurrency markets do get impacted by national regulations
The other findings and the key takeaway of the report were
- Cryptocurrencies such as Bitcoin have attracted much attention because of their meteoric price swings, but have also raised concerns for regulatory authorities.
- While cryptocurrencies are often thought to operate out of the reach of national regulation, in fact, their valuations, transaction volumes and user bases react substantially to news about regulatory actions.
- News events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect on valuations, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains.
- Because they rely on regulated financial institutions to operate and markets are (still) segmented across jurisdictions, cryptocurrencies are within the reach of national regulation.
While the report tries to end the debate of national regulatory framework and cryptocurrencies by proving their dependence, its way of assessing XRP on based of reaction to news flow is slightly debatable. We will have to wait for Ripple’s management to react to this as it has been justifying XRP as decentralized and a true cryptocurrency
Is XRP’s minimal price reaction to regulatory news flow actually proves it is centralized? Do let us know your views on the same.
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Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Nilesh Maurya has been associated for past 8 years as an Investment Banker with Omega Capital, a bespoke Investment Banking outfit having offices in Mumbai, New York, Singapore, and Dubai. He has been a regular contributor to business publications such as Business India and Market Express and has been a mentor to many start-up companies. Follow him on Twitter at @KoinKing1 or connect with me on linkedin.