Germany's Central Bank Director Suggests Global Regulations Needed for Bitcoin

One of Germany's most prominent banking leaders suggested that international regulations on cryptocurrency would be the only effective way to regulate it. This comes shortly before a new study showed how one or two players can manipulate the entire market.

The director of Germany's central bank said that bitcoin and other cryptocurrencies could be hard to regulate without international rules, according to recent reports. Deutsche Bundesbank director Joachim Wuermeling said regulation happens at the global level. 

“Effective regulation of virtual currencies would therefore only be achievable through the greatest possible international cooperation, because the regulatory power of nation states is obviously limited,” Wuermeling told an event in Frankfurt according to a Reuters report. 

Cryptocurrencies

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However, when international regulations seem to be impending, the overall value of bitcoin, ether, and other cryptos appear to drop. For example, two of the most recent drops in bitcoin came shortly after both China and South Korea announced plans for further regulation. One of the sharpest drops happened after South Korea announced last year that it would ban ICOs and also anonymous trading. The country is forcing banks to comply with its know-your-customer rules and fining investors who refuse to give up their anonymity around cryptocurrencies. 

It's this volatile market that some skeptics say needs regulation from the international community. 

Bitcoin ecosystem is easy to manipulate

However, recent research also found that it doesn't take much to manipulate the entire bitcoin ecosystem. Research conducted by Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman described exactly how 'bad actors' could be controlling part of investors' bitcoin values. 

“This paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired,” the researchers wrote. “During both periods, the USD-BTC exchange rate rose by an average of four percent on days when suspicious trades took place, compared to a slight decline on days without suspicious activity. Based on rigorous analysis with extensive robustness checks, the paper demonstrates that the suspicious trading activity likely caused the unprecedented spike in the USD-BTC exchange rate in late 2013, when the rate jumped from around $150 to more than $1,000 in two months."

In short, if the market is thin for a cryptocurrency, the market can be manipulated -- even by one person.

"Despite the huge increase in market capitalization, similar to the bitcoin market in 2013 (the period examined), markets for these other cryptocurrencies are very thin. The number of cryptocurrencies has increased from approximately 80 during the period examined to 843 today! Many of these markets are thin and subject to price manipulation."

Ultimately, bitcoin and other cryptocurrencies might need that regulation from government agencies in order to avoid this manipulation. 

"As mainstream finance invests in cryptocurrency assets and as countries take steps toward legalizing bitcoin as a payment system (as Japan did in April 2017), it is important to understand how susceptible cryptocurrency markets are to manipulation. Our study provides a first examination," the researchers said.

However, regulation would show that one of cryptocurrency's signature appeals -- decentralization -- might not be enough to survive as a viable, long-term option.