Investor Reactions to Crypto Token Regulation

Crypto tokens are mostly issued and traded outside traditional regulated financial markets due to their ambiguous nature. However, it is unclear whether investors in these assets view regulation to be necessary. We empirically examine crypto token price responses to regulatory news and whether these reactions vary cross-sectionally with crypto token quality and transparency. Using a sample of around 1,300 crypto tokens and 145 regulation news events, we find that on average, investors react negatively to news that increases (the likelihood of) regulation. We find that this negative reaction is mainly driven by news about securities regulation of ICOs and crypto exchanges. However, the reaction is less pronounced for crypto tokens with higher expert ratings of token quality and transparency, and for crypto token issuers that engage more with followers on social media. We conclude that current crypto token investors expect regulation to be net costly on average, but less so for higher quality tokens with a better information environment