Uncertain Regulations, Definite Impacts: The Impact of the US Securities and Exchange Commission's Regulatory Interventions on Crypto Assets

TL;DR

This paper analyzes how SEC regulatory announcements impact crypto asset markets, revealing significant declines in returns and trading volumes, influenced by sentiment and asset features, with evidence of pre-announcement informed trading.

Contribution

It provides the first empirical evidence of SEC interventions' effects on crypto markets using event study methodology, highlighting factors influencing market reactions.

Findings

Crypto assets' returns drop 12% within a week of SEC announcements

Market reactions are stronger for smaller, more volatile, and illiquid assets

Pre-announcement trading volumes suggest informed trading before SEC actions

Abstract

This study employs an event study methodology to investigate the market impact of the U.S. Securities and Exchange Commission's (SEC) classification of crypto assets as securities. It explores how SEC interventions influence asset returns and trading volumes, focusing on explicitly named crypto assets. The empirical analysis highlights significant adverse market reactions, notably returns plummeting 12% over one week post-announcement, persisting for a month. We demonstrate that the severity of market reaction depends on sentiment and asset characteristics such as market size, age, volatility, and illiquidity. Further, we identify significant ex-ante trading volume effects indicative of pre-announcement informed trading.