Out of the Dark: The Effect of Law Enforcement Actions on Cryptocurrency Market Prices

Abstract

The susceptibility of cryptocurrencies to criminal activity is a vigorously debated issue of high policy relevance. Not only the share of cryptocurrency turnover linked to crime is unknown, also the question which of several cryptocurrencies are prevalent on the darknet, and hence should be prioritized in building analytical capability for law enforcement, calls for empirical research. Using the event study methodology, we estimate the market reaction on cryptocurrency exchanges to news about successful law enforcement actions of systemic relevance for the cybercriminal ecosystem. The events studied include seizures of darknet marketplaces and shutdowns of cybercriminal data centers and mixers. Although the number of relevant events is still small, we observe significant cumulative abnormal returns to such news over the past years. We cautiously interpret the obtained results by cryptocurrency and direction of the effect, and derive implications for future research and policy.