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Cryptocurrency Regulations: Institutions and Financial Openness

Publication | July 2019
Cryptocurrency Regulations: Institutions and Financial Openness

A certain level of institutional quality may be necessary before opening up to new forms of financial technology.

We assess how effective governance institutions and de jure financial openness influence the attitude of policy makers in pursuing further financial development by allowing the use of cryptocurrency. In other words, we examine the relationships between (a) de jure openness to cryptocurrency and institutional strength, and (b) de jure openness to cryptocurrency and de jure capital openness. Our main method of estimation is a cross-sectional ordered probit model using institutional and macroeconomic data drawn from several sources, including the Chinn-Ito index, the World Bank’s Worldwide Governance Indicators, and the World Bank’s World Development Indicators, among others, over the period 2010‒2018. To measure the de jure openness to cryptocurrency, we compose an index of 218 economies by using the current legal and regulatory status of cryptocurrency compiled in 2018. Our results show that effective governance institutions are associated with a less restrictive regulatory stance on cryptocurrency, whereas financial openness is not found to be significant. The results imply that a certain level of institutional quality may be necessary before opening up to new forms of financial technology. As cryptocurrency is recognized as a risky speculative financial instrument, its current state of many unknowns can prevent policy makers from conducting a thorough surveillance to avoid system-wide vulnerabilities.

WORKING PAPER NO: 978