Risks and Regulation of Cryptocurrency during Pandemic:
A Systematic Literature Review
KESHAV BAJAJ
Symbiosis Institute of Digital and Telecom Management,
Constituent of Symbiosis International Deemed University,
INDIA
SAIKAT GOCHHAIT
Symbiosis Institute of Digital and Telecom Management,
Constituent of Symbiosis International Deemed University,
INDIA
SANGEETA PANDIT
Sydenham Institute of Management (SIMSREE),
INDIA
TAMANNA DALWAI
Department of Business and Accounting
Muscat College
OMAN
MERCIA SELVA MALAR JUSTIN
Xavier Institute of Management and Entrepreneurship,
INDIA
Key-Words: - Cryptocurrency, Systematic Literature Review, Volatility, Pandemic, Cyber Security, Money
Laundering.
Received: May 25, 2021. Revised: April 13, 2022. Accepted: May 10, 2022. Published: June 2, 2022.
1 Introduction
Cryptocurrency as its name suggests is crypted
currency. Crypted means secured in such a way that
contents are accessible only to sender and receiver.
The origin of the word "crypto" is the Greek word
"Kryptos" meaning hidden. The issue of security of
communication has been addressed
from time
immemorable.
Codes, pictures, secret ink, and the
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Keshav Bajaj, Saikat Gochhait,
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Abstract: - Cryptocurrencies differ from traditional financial assets as they are not governed by any higher
authority, have no physical representation, are indefinitely divisible, and are not based on any tangible assets or
country. While their popularity and use have surged over the years, they are still subject to an underlying risk.
The purpose of this research is to investigate the regulatory approach for cryptocurrencies adopted around the
world. To achieve the purpose of this research, extant literature is examined using a systematic literature review.
Using a total of 49 Scopus indexed shortlisted articles, the extant literature on the various risks related to
cryptocurrency and the regulatory approach adopted for the same was explored. The prior literature was
classified into four thematic clusters of the regulatory approach to risks: pandemic, volatility, money laundering
and cyber security. The findings suggest the regulations governing cryptocurrency are still at an infancy stage,
and it still suffers from the challenge of limited transparency. The pandemic did not have a drastic impact on
cryptocurrency. Cryptocurrencies are volatile in reaction to economic policy uncertainty and macroeconomic
variables. To the best of the author’s knowledge, this review paper is one of the few contributing to the gaps in
the literature on the various risks and their associated regulatory approach to managing cryptocurrency.
like were used. The underlying strength of
cryptocurrency is its encryption. Cryptography
ensures data security with the use of computers and
blockchain technology. The sender sends encrypted
data. The recipient has a key that can convert it into
readable mode
.
Cryptocurrency is a virtual
currency, available only in electronic form. But it
is not the digital currency which is the virtual
form of fiat money issued by Governments. The
said virtual currency is not encrypted, the bank
account or wallet is safeguarded by a password.
On the other hand, cryptocurrency is not issued
by regulatory authorities; private players create
the currency. The currency is encrypted.
The world of cryptocurrency is highly technical,
and few people truly understand it. Simplistically
put, it is a system that is not regulated by any
statutory authority, it is said to be decentralized. It
is managed by distributed consensus. The system
oversees the creation and operation of
cryptocurrency units. It defines origin, determines
ownership, and facilitates transactions.
Blockchains are lists of records, called blocks,
that are linked and secured using cryptography.
The blocks are continuously growing. They are
linked and are secured using cryptography. The
risk of fraud due to fraudulent alteration is
difficult, as the change in one block needs to
change in all subsequent blocks and collusion of a
widespread network of people would be needed.
Bitcoin was the first cryptocurrency created. It
was created by Satoshi Nakamoto (a pseudonym
for an individual or group of individuals) in
2009. The cryptocurrencies created after Bitcoin
are collectively referred to as alternative
cryptocurrencies and called “altcoins.” The
website of coin market cap gives the list of
cryptocurrencies traded with their name, symbol,
market cap, price, circulating supply and volume
[40]. There are about two hundred traded
cryptocurrencies, the top five being Bitcoin,
Ethereum, Binance Coin, Cardano, and Tether.
Trading in cryptocurrency has ignited passion,
greed, and
crime reminiscence of the Gold Rush
of 1848. People have raked in huge profits and
such word-of-mouth stories have made
cryptocurrency markets very alluring.
The Cryptocurrency world involves encryption,
miners, proof-of-stake and proof-of-work models,
hash functions, nodes, tokens, time stamping,
blockchain, wallets of different kinds, keys and
of course cryptographies. This paper does not
describe and explore the nuances of the
technical side of cryptocurrencies. It explores the
risks involved, particularly the regulatory risk.
Risk is a future happening that is not desirable.
To mitigate the possibility of the negative event or
adverse impact of the event, risk management has
evolved and is practised. However, it is often
perceived as a compliance issue that can be solved
by drawing rules [41]. Rule-based risk models do
not at times work.
The entire system of cryptocurrency is managed
by a community of people that are secretive and
distrustful of each other. This system is going
from strength to strength, but many are cynical
of the sustainability of a system that is not built
on transparency and mutual trust. There are
hundreds of cryptocurrencies that are traded on
exchanges and many of the exchanges are not
licensed. Thousands of cryptocurrencies have
existed at some point or the other. It has generated
employment for thousands of people. An
ecosystem has been created involving the
stakeholders of miners, wallets, exchanges,
payment companies and others. If the system
created on the strength of blockchain for some
reason collapses, it is bound to cause trauma to all
world economies and create systemic risk in the
financial markets. There is no ombudsman or
redressal mechanism and damage to stakeholders
is irreversible.
In addition, uncoordinated regulatory measures by
different governments on crypto-assets may
destabilize capital flows, while the IMF's primary
mission is to safeguard the stability of the global
monetary and financial system. These assets are
altering the system profoundly by imposing an
operational and financial risk when inadequately
disclosed. By focusing on certain key elements, like
licensing crypto-asset services and tailoring
specifications to meet the needs of primary crypto
applications, the IMF recommends comprehensive
international standards to address risks associated
with crypto assets. A currency substitution risk is
more acute and immediate in developing markets, as
crypto assets are replacing domestic currency and
capital account management. There is a need for
international collaboration to overcome
technological, legal, regulatory, and supervisory
challenges. Developing a regulatory approach for
crypto-assets has become a focus of the IMF's
strategy to carry out its mandate, in close
collaboration with the Financial Stability Board.
History has proved that the most guarded jewels
and paintings can be stolen. Espionage and spy
network have given results. There is a murky
world of blackmail and extortion. The
cryptocurrency world cannot be an exception.
Scammers sell dreams of financial freedom; tempt
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by quick-rich examples., dupe people to pay in
cryptocurrency for lucrative returns and disappear
with the cryptocurrency. In 2020 in the US, about
seven thousand people were cheated, and the
victims lost in all about eighty million dollars.
About seven thousand people in the US were
defrauded in 2020, resulting in an eighty-million-
dollar loss for them [42].
Laws are not predictive; they are always reactive.
Many countries have accepted the existence of
cryptocurrency and are still contemplating how to
regulate it. Some have banned it, some have
regulations, mandatory licensing, and registrations
and a few have given total freedom. This paper is
exploratory research on the regulatory approach
by various countries and the risks emerging due to
cryptocurrency mining. The past studies suggest
the actors related to the cryptocurrency domain
comply with certain rules but it is difficult to
enforce the social norms and government policies
[18]. Cryptocurrencies were created to overcome
censorship. Bitcoin is the best-known
cryptocurrency
that has grown exponentially since
2008. It is one of the 1,500 cryptocurrencies
existing around the world, of which Ethereum,
Ripple, and Litecoin are also well known.
However, it is argued that annually around 76
billion dollars of illegal activity may involve
Bitcoin [14]. Cryptocurrencies continue to be
known for being the largest unregulated market in
the world, reported that by early 2022, around 10
billion dollars’ worth of cryptocurrencies were
held by illicit addresses, with a substantial
component in electronic wallets that are associated
with crypto theft [39]. Therefore, the issues
surrounding cryptocurrencies lead to no
protection, liability clauses or insurers.
While there continues to be a call for more
government regulation, its opposers argue that this
would disrupt the true characteristics of
cryptocurrencies which would lead to significant
illiquidity and reduction of their value. The past
studies argued on the regulators attempt to control
nefarious activities such as tax evasion, terror
financing, and money laundering, innovative
activities will always be pursued by market
participants through virtual currencies for
overcoming regulatory practices [11]. The crypto
asset market by nature allows for the creation of
new currencies and exchanges thus promoting
opening for anonymous transactions, such as
crypto-funded visa cards by Coinbase exchange
in the United Kingdom [37].
This research paper is structured as follows.
Section 2 discusses the system
atic literature
review (SLR) outlined in the methodology
to
investigate the existing knowledge gaps related to
the risks and regulations of the cryptocurrency
.
Section 3 provides the results of content
analysis of research articles shortlisted for the
study to depict the importance of
Cryptocurrency regulations in developing and
developed countries with the major challenges
of the pandemic, money laundering and cyber
security impacts on the changing market
conditions. Lastly, section 4 presents the
conclusion.
2 Research Methodology
This research conducts a systematic review of
the literature emerging on
cryptocurrency and its
regulations. The methodology of systematic
literature
review (SLR) is adopted from the
approaches used by [29], [22] [33]. SLR offers
many advantages
over the traditional literature
review as it supports generating a standalone
view
on the desired topic and avoids any bias.
Through SLR, the research can
explore existing
literature combinations, create definitions, and
build on foundations for future research. SLR
allows the researcher to follow a systematic
methodology to synthesize the knowledge from
existing articles [31]
. SLR allows the researcher
to adopt a predefined process that may vary in
terms of stages. However, SLR results in the
following four broad stages:
2.1 Plan the review
2.2 Identify and evaluate the articles
2.3 Extract and synthesize data
2.4 Disseminate the review results
This study adopts the above broad stages, and
these are more broadly outlined below:
2.1 Stage 1: Plan the Review
2.1.1 Identify the Need
This study focuses on the SLR of the regulatory
developments for cryptocurrencies in the
developed and developing markets. Various
motivations are driving the research objectives.
First, a literature search was conducted on Google
Scholar to explore if a topic existed with similar
objectives. There were only two relevant
contributions available in this field. The previous
study findings from a literature review of prior
studies on crypto laundering from a system
thinking perspective [12]. A systematic review of
empirical literature for all the possible topics
associated with cryptocurrency already studied in
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the past [10]. From this perspective, this study
offers a novel approach to investigating the
specifics of regulations of cryptocurrency.
Second, the regulations are in various stages for
the cryptocurrency markets, thus there needs to be
a systematic study on the emerging developments
addressing the various risks. Third, the analysis
emerging from this study would foster future
research directions.
2.1.2 Review Protocol
A review protocol was adopted to ensure a
transparent and high-quality collection process of
research articles. The Scopus database was used to
collect research articles with keywords published
up to October 2021. Scopus is considered one of
the largest databases of high-quality peer-
reviewed articles and advanced search functions
[20] [8]. Scopus also ensures a high level of
precision and is comprehensive to include all
relevant published articles [24]. The keywords
were derived from the research objectives and the
initial scope of the literature. The six main
keyword themes that were used as the search
strings were, “cryptocurrency,” “regulations,”
“pandemic,” “volatility,” “cyber security” and
“money laundering.”
Table 1. Inclusion and exclusion criteria
Criteria
Exclusion
Inclusion
Document type
Language
Focus
Conference
Paper,
Book
Chapter, Review,
Note
Russian, Spanish,
Chinese, Turkish
Not pertaining to
research
objectives
Article
English
Regulations
Source: [24]
In the search in the Scopus database, the
keywords were investigated using the “Article
Title, Abstract, Keywords” search field. As seen
in Figure 1, the first search was run with the
keywords, “cryptocurrency” and “regulations”
that generated a total of 273 papers for the
period 2014 to 30th October 2021.
Fig. 1: Results of search, screening, and
selection
These articles were further screened using a few
exclusion and inclusion criteria that a r e outlined
in Table 1. The exclusion criteria based on
“document type” and “language” generated a total of
142 papers. We excluded conference proceedings,
book series and trade publications from the search
and those articles that were not in the English
language. Further, the articles were analysed based
on the keywords which further narrowed it down
to forty-nine papers.
2.2 Stage 2: Identify and Evaluate the
Articles
The article titles, abstracts and keywords were
screened to identify the research papers closest to
the research aims. The information was reviewed
using the Scopus generated MS Excel database.
The reliability of the process was ensured through
two members of the research team separately
coding the forty-nine research papers using the
key themes of “pandemic,” “money laundering,”
“cyber security” and “volatility.” The results of
both members were compared, and the final
categorization of articles was confirmed that was
as follows:
1.
“cryptocurrency,” “regulation”, “pandemic” (6
research articles)
2.
“cryptocurrency,” “regulation”, “money
laundering” (25 research articles)
3.
“cryptocurrency,” “regulation”, “cyber security”
(5 research articles)
4.
“cryptocurrency,” “regulation”, “volatility” (13
research articles)
Figure 2 presents the share of research articles
addressing the various cryptocurrency risks. The
risk of money laundering has the highest
number of published articles.
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2.3 Stage 3: Extract and Synthesize Data
2.3.1 Data Extraction
The data extraction was undertaken through the
Scopus database which included the research
articles relevant to this research. The output from
the database was generated in a comma-separated
values (CSV) file in MS Excel format. The MS
Excel CSV file included the information
presented in Table 2.
Fig.2: Research articles addressing various risks
Table 2. Extracted information from the Scopus
database
Contents
Authors, Author(s) ID,
Title, Year, Source
Title,
Volume, Issue, Page start and
end number, citations
received by the article, DOI,
EID
Abstract, author keywords,
index keywords
publisher,
document type, publication
stage, open access
2.3.2 Data Synthesis
The selected articles were synthesized using
descriptive and thematic analysis [33]. The
research adopted the NVIVO software to conduct
the keyword and content analysis. The themed
analysis results in synthesizing information,
outlining main contributions, and identifying the
key themes related to cryptocurrency risks.
2.4 Stage 4: Disseminate the Review
Results
To the best of our knowledge, this is one of the
first studies to conduct SLR of cryptocurrency and
its related regulations. It provides state of the art
insights
into the way regulations are being
developed or proposed to address the various
risk
related to cryptocurrencies. The presentation of
the results is discussed in the following section.
3 Results and Discussion
3.1 Cryptocurrency Regulation in Developed
and Developing Countries
It has been seen that developed countries and
developing countries have different stands when it
comes to regulating cryptocurrency in their
countries, few of the examples of some countries are
stated below: Developed countries: The United
States, China, and The United Kingdom.
The United States: While each state has their
regulations, overall, the sentiment is positive in the
United States. A licensing framework called
BitLicense was announced by the New York State
Department of Financial Services, requiring
companies to gain a license from the department to
transact in crypto.
China: From accommodating cryptocurrencies
initially to banning them completely as of June
2021, China has been the toughest on
cryptocurrencies. As a result, 40 per cent of total
crypto mining operations in China have been shut
down. Despite this, blockchain technology is widely
supported and a digital Yuan is in development, as
well as trials of centrally regulated cryptocurrency
[42].
The United Kingdon: In the UK, there is no
legislation regulating cryptocurrencies, and the
market is regulated by the Financial Conduct
Authority (FCA), which grants licenses to exchanges
and businesses, which handle crypto assets. The
FCA has a "stringent set of rules," in particular for
derivatives trading in cryptocurrency. Gains or
losses on cryptocurrency transactions are subject to
capital gains tax in the UK, and in addition, firms
must comply with anti-terrorism financing (CTF)
and anti-money laundering (AML) regulations.
Developing countries: European Union, El Salvador,
Singapore
European Union: Regulations within the European
Union are complicated, and member nations and the
Union have overlapping concerns. While most EU
countries have ‘soft-touch’ frameworks, the bloc has
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begun to consider a consolidated framework on
crypto. The draft Market in Crypto-Assets
Regulation (MiCA) legislation will treat crypto as
regulated financial instruments and thus require prior
approval from regulators.
El Salvador: The South American country became
the first to officially adopt Bitcoin as legal tender.
The government claims the move will give many
citizens access to banking services for the first time.
The country has also accepted US Dollar as a legal
tender for the past 20 years. Economists and many
international bodies like World Bank, and IMF have
been criticizing the country’s bitcoin adoption.
Singapore: It has implemented licensing
requirements and complies with Anti-Money
Laundering and Counter-terrorism Financing for
transacting in cryptocurrencies under its Payment
Services Act.
It has been seen that developed countries and
developing countries have different stands when it
comes to accepting cryptocurrency as legal tender in
their countries, but it can be said that countries are
continuously trying to bring cryptocurrency into
regulatory aspect to save themselves and their
investors from trapping in them, bringing
cryptocurrencies in regulatory lenses help to manage
them better and also leads to elimination of weak
and improper cryptocurrencies. Developed countries
like the US, UK, and China have brought
cryptocurrency into regulatory lenses and Anti-
money laundering, but have not given any
statements to accept cryptocurrency as legal tender
by the government. Among the developed countries,
China has proposed to launch its central
cryptocurrency along with its digital currency Yuan.
Discussions are regularly going around amongst the
global financial bodies like the World Bank and IMF
regarding standardised regulation of crypto-
currencies and how countries should follow them.
However, certain developing American and
European countries have already started to accept
them as legal tender and they are receiving heavy
criticism from such financial bodies. Certain
developing countries like El Salvador, Panama,
Lugano(Switzerland), and Honduras(SEZ) can be
seen as countries that are accepting cryptocurrency
as legal tender along with certain regulatory
frameworks launched along with them, some
developing countries are having a more affirmative
approach towards acceptance of cryptocurrencies
possibly because they think cryptocurrency can help
them to improve financial inclusion, remove
poverty, and fight against corruption resulting in the
overall economic growth of the country, however,
there is no such real-life case study to prove that
crypto-currencies help in eradicating poverty and
corruption. It can be said that the developing
countries accepting crypto-currencies as legal tender
can be tax-haven countries and may have been
imposing such laws to lure investors over the world.
Certain Asian Developing countries like India,
Singapore, Malaysia, and Indonesia are having
discussions and improvements in regulating and
monitoring the crypto-currencies through the lenses
of Anti-money laundering and Counter-Terrorism
Financing first, they have not stated any plans to
accept them as legal tender, where India has started
crypto traders to tax on the profit gained in crypto-
currency and the central bank is also planning to
launch a digital currency
[15]
.
3.2 Cryptocurrencies Regulations and
Pandemic
During a pandemic, the price dynamics of any asset
depend on the type of market [32]. There is a
correlation between the Coronavirus Panic Index and
world currencies like the Euro, British pound, and
Renminbi of China, as well as
between the moves
of the Bloomberg Galaxy Crypto Index [34]. The
global pandemic of Covid-19 has affected
financial markets worldwide [1]. Although
cryptocurrency could have been viewed as a
perfect asset to hedge high uncertainty downturn
periods, since public companies and fiat
currencies are correlated with economic
conditions [32], the Covid-19 pandemic
negatively impacted cryptocurrency returns for
investors worldwide [36]. In recent Covid-19
developments, a lot of new literature has focused
on the impact
of the pandemic on worldwide
financial markets, where even cross-hedge strate
gies
can fail in critical situations and stress periods, as
the market is highly influenced by herd behaviour,
which may weaken under normal circumstances
[34]. Despite the lack of connection between
digital currency and the real economy,
cryptocurrency only experienced a brief period of
panic in comparison to other financial assets in the
wake of COVID-19 [32]. Behavioural science
psychology also informs the results and outcomes
of a price reaction, since co-movements indicate
no room is left for diversification benefits when
panic selling or panic buying occurs [34]. When
considering the hedging properties of
cryptocurrencies, cryptocurrency should not be
considered an alternative investment tool since
there is no relationship between them and the real
economy [32].
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3.3 Cryptocurrency Regulations and Money
Laundering
Crypto businesses pose two major challenges to
the economy; first, they pose a high risk of
terrorist financing, and second, they raise new
regulations imposed by the government [4]. While
the modified Anti-Money Laundering (AML)
laws are insufficient to address all the provisional
risks of cryptocurrency, there is a high time for
states to frame this business under a new law and
bring about a revolution in the future [9]. To
avoid the scrutiny of falling under AML laws,
many financial institutions don’t accept
cryptocurrency as a mode of transfer payments.
In relation to
crypto-assets, Germany, Switzerland, and The
UK are all highly susceptible to
money
laundering. Switzerland is considered a crypto
valley and encourages such transactions, Germany
has been restricting it through provisions, but still,
reports are made, and The UK is the strictest on
cryptocurrencies, but it is
home to a large amount
of money laundering. A uniform framework and
government oversight are needed to prevent
misinformation and misuse [1]. The globalization
of currency has revolutionized transnational
busi
ness and crime methods at the same time
[35]. In addition to making
the tasks convenient,
it has also slowed traditional regulatory
approaches in terms of verifying the legal status of
money that is being transferred, creating an
uncertain environment [1].
The cryptocurrency relies on secrecy,
decentralization, and lack of responsibility,
making it capable of conducting operations
instantly, which would not be possible before,
these digital and decentralized features make it
difficult for them to regulate for law agencies to
regulate the financial system also the consumer-
investor protections are challenged as well [9].
Such a hidden use of crypto assets creates a sense
of doubt and questions can be raised if it is linked
to cybercrimes such as ransomware, hacking and
digital wallets, to combat the growing threat of
ransomware attacks and other cybercrimes, the
White House is considering a wide range of
oversight of the cryptocurrency market, the US
national security advisers will gather officials
from 30 countries [27]. China has banned
cryptocurrency business and online payments,
consisting of trading, clearing, and settling, but it
has not banned the possession of digital currency
[30]. Cryptocurrencies are the perfect alternative
for layering incriminated funds through crypto
ATMs to exchange Bitcoins for cash with the
ATMs found in almost every jurisdiction, money
launderers also use unregulated crypto exchanges
that bypass the KYC requirements for identifying
the beneficial owner of transactions [18].
Regulations have also resulted in the shutting
down of crypto start-ups leaving the market,
after
the implementation of the fifth AML directive in
Europe and effectively harming the domestic
economies by driving out innovation [18].
As a result of the following research gaps, it can
be suggested to introduce a reform of extending
common law to cryptocurrency and Blockchain
regulation by global organizations such as the
World Bank and IMF and to clearly state the
penalties if laws aren’t followed. Research can be
done on the differences in AML laws between
democratic and autocratic countries. The success
and consequences of implementing AML laws in
some European countries such as Malta can be
studied. Research can be conducted to determine
if countries that allow crypto transactions are tax
havens for illegal money, or if they lack legal
expertise.
3.4 Cryptocurrency Regulations and
Cybersecurity
An Initial Coin Offering (ICO) is one way for
small and medium-sized enterprises (SMEs) to
access financing, given that banks are difficult to
access.
The regulation of ICOs in European
countries was deemed to be beneficial
for the
future development of financial regulations [21].
The ICO process is an option for online money
valeting [28]. ICOs are more adaptable to
SMEs, while IPOs are more adaptable to large
entities [21]. A lack of uniformity in
government
regulations, insufficient tax
regulations, and inadequate cyber security are the
greatest obstacles facing issuers. ICOs are seen
as a barrier to development
in Ukraine due to
the lack of regulation [21]. In North America,
Asia, and Europe, most ICOs are conducted due
to government reg
ulation and legal frameworks
specific to cryptocurrency. ICO companies are
required to comply with regulations that govern
investment activities, such as
the Prospectus
Directive and the Markets in Financial
Instruments Directive (MiFID), the Alternative
Investment Fund Managers Directive (AIFMD)
and the Fourth Anti-Money Laundering
Directive [17]. There are four stages required
to minimize the risks associated with ICOs:
high volatility,
superficial due diligence, minimal
governance control, and the lack of investors.
Despite Bitcoin being classified as a digital
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property right, BRICS countries are unsure, at
present, whether cryptocurrency is a financial
asset [13]. Nevertheless, there are also some
security concerns involved when transacting in a
digital medium. The use of Bitcoin by
cybercriminals as a form of payment creates an
opportunity to peek inside their financial
operations, as demonstrated by the ransomware
ecosystem, which has
extorted more than 16
million USD from 20,000 victims in the last two
years
[38].
Several countries are overcoming the security
barrier by issuing national
digital currencies to
transact globally with members. National
currencies are
being discussed, the possibility of
creating a “currency payable” of the BRICS
(RUIND), a new trend is state-sponsored
cryptocurrencies being discussed in
all BRICS
countries, a common cryptocurrency, and using
Blockchain technology [19]. In order to carry
out international transactions, an
international
agreement is necessary, which defines the
parameters of dig
ital currency issuance based
on Blockchain technology, transparency and
protection of such financial assets [13].
According to the above research gaps, we have
some recommendations for future researchers. In
order to investigate the reason for such low
usage in some countries, a comparative study
based on consumer mindset can be conducted on
the skewed data of the cryptocurrency market
among various countries. For cryptocurrencies to
become official in the world economy, each
country must establish a monitoring agency that
oversees all digital transactions and communicates
them to the international governing bodies. To
have a detailed discussion with member countries
about cryptocurrencies, country leaders and
intellectuals must raise the topic at the G7, G20
and World Economic Forum summits.
3.5 Cryptocurrency Regulations and
Volatility
Price predictions can be divided into two
categories: market-based predictions and macro-
based predictions. Macro-based indicators include
technical indicators, the three-factor price model
for crypto, and volatility indexes. Global
economic fluctuations and political instability are
macroeconomic factors [23]. Economic policy
uncertainty index (EPU) and cryptocurrency
volatility are linked, where the China EPU
predicts cryptocurrency volatility, a change in
China EPU is negatively associated with Bitcoin
and Litecoin volatility. There is no clear effect of
change in China EPU on the volatility of Litecoin
and Bitcoin after the Chinese Government’s
crypto ban policy in September 2017, but
perhaps a positive effect as policy changes may
increase the uncertainty of such trading.
Increasing the EPU induces investors to trade
their fiat money for Bitcoin, thereby increasing
the liquidity, which reduces volatility. EPU and
cryptocurrency are negatively correlated, so
cryptocurrency can be used as a hedge against
EPU risk [23]. EPU is negatively correlated with
various financial assets, such as (cryptocurrency,
stocks, bonds, and commodities), indicating the
impact of EPU on portfolios [2]. Bitcoin’s
volatility is affected by news regarding
regulations and hacking attacks against crypto
exchanges, resulting in more volatile bitcoin
investments, demonstrating that US
macroeconomic news and announcements like
monetary policy and budget decisions have little
impact on bitcoin volatility, whereas bitcoin
volatility is directly correlated with consumer
confidence. As there is no central authority that is
in charge of maintaining bitcoin’s price
quotation, it is affected by demand and supply
that are available in the market and various semi
and unregulated factors, leading to a serious issue
with theorists who want to investigate the pricing
behaviour. Moreover, its volatility increases one
day before the publication of a news article
relating to any regulations, as observed by
various articles in the Financial Times newspaper
[25] . After the price crash, EPU has a negative
impact on optimal weighted portfolio [26].
B e f o r e the price crash, EPU positively
impacts optimally weighted [ 2 6 ] .
Cryptocurrency volatility can also be a result of
cyber-attacks [6], where ransomware attackers
generally demand payments in cryptocurrencies,
resulting in huge transactions. According to [25],
the annualized standard deviation for Bitcoin is
71.12 per cent. Annualized standard deviations of
commodities are 25.40 per cent, equities are 20.60
per cent, fixed income is 3.10 per cent, and
foreign exchange is 10.30 per cent which is very
low compared to the standard deviation of
cryptocurrencies [3].
Based on the above research gap, we suggest that
research should be done in areas such as
performing a further advanced quantitative
analysis and finding out if the volatility is
seasonal every year during a specific period or the
volatility level in other cryptocurrencies. A
comparison of how much volatility is observed in
stock markets, bond markets, or any other market
WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.61
Keshav Bajaj, Saikat Gochhait,
Sangeeta Pandit, Tamanna Dalwai,
Mercia Selva Malar Justin
E-ISSN: 2224-3496
649
Volume 18, 2022
during that period, such as a commodity or fiat
currency. In addition, a study can be performed if
volatility is affected by news from any other
country in addition to those listed above.
Researchers can investigate the volatility of the
cryptocurrency by looking at the power shortage
since one bitcoin requires so much energy to
mine. By creating a scenario analysis, it is
possible to compare the volatility in the bond
market and cryptocurrency market.
4 Conclusion
This study critically reviewed the literature on the
development of the regulatory approach toward
risk associated with cryptocurrency. This
objective was investigated using the systematic
literature review (SLR) using the articles
published in Scopus indexed database. The SLR
stages involved keywords and content analysis of
the forty-nine shortlisted papers. The SLR
highlights there are four main risks of
cryptocurrencies that requires a regulatory
approach. The major risks prominently
investigated in the research article include pan-
demic, volatility, cyber security, and money
laundering. While the pandemic had a widespread
negative impact on traditional financial assets,
cryptocurrencies only were briefly affected.
The money laundering regulations have
insufficient coverage of cryptocurrency and thus
the risks remain relatively high. While the threat
of cybersecurity looms over cryptocurrencies, the
motivation of the countries to issue digital
currency using blockchain technology is likely to
overcome this risk, however, this is yet to
materialise. The research on volatility has covered
market-based and macro-economic indicator risks
affecting cryptocurrencies. The results of the
studies have indicated a relationship with various
factors one of which is economic policy
uncertainty. These risks are yet to have regulations
being made available for cryptocurrency. The
findings of this study have implications for
regulators, practitioners, investors, professionals,
and academicians. The regulatory authorities must
ensure providing transparent structures that boost
the confidence of the investors. With the various
risks facing cryptocurrencies, regulatory
authorities must develop laws for mitigating the
same. Due to the shortcomings of the
regulations, practitioners will continue to face
challenges in cyber security threats. The risk-
averse investors on the other hand would continue
to avoid the cryptocurrency market as it does not
offer a viable investment opportunity. For
academicians, the findings of this study open
avenues for future research on various external
factors such as the pandemic, or market
volatilities that may affect the cryptocurrencies.
This study suffers from certain limitations. The
research articles included in this study were from
the Scopus indexed database. This results in
eliminating articles with relevant content in the
field of cryptocurrency. Though this is true, the
Scopus database continues to offer highly
respected and peer-reviewed articles. The
shortlisting of articles under the structured
literature review stages is considered a subjective
process. However, to overcome this limitation,
reliability was ensured for coding the articles by
two independent researchers. The findings suggest
SLR is the starting point for future research areas.
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WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2022.18.61
Keshav Bajaj, Saikat Gochhait,
Sangeeta Pandit, Tamanna Dalwai,
Mercia Selva Malar Justin
E-ISSN: 2224-3496
652
Volume 18, 2022