The Effects of Central Bank Digital Currency Communication and Associated Social Media Sentiment on Cryptocurrency Markets

The creation of central bank digital currency (CBDC) has been seen as a potential mechanism for addressing some of the negative consequences of increased cryptocurrency popularity. It has also been linked to the introduction or strengthening of regulations related to digital money, with some central banks identifying the need for a comprehensive regulatory framework as a precondition for successful CBDC implementation. However, this type of central bank intervention can be seen by market participants as a threat to both confidentiality and potential cryptocurrency profitability. Linking computationally analyzed social media data with hand-coded data from the websites of major central banks, we test the effects of CBDC-related announcements and social media sentiment.
on 210 blockchain and cryptocurrency fund products. We find that for a large majority of these
products, central bank announcements elicit significant returns and volatility responses, with some
variation in response related to geographical region. Both central bank announcements and positive
social media CBDC-related sentiment are associated with reduced cryptocurrency exchange traded
fund (ETF) returns and increased volatility. Our results provide evidence of a largely negative
market response to the threat of potential cryptocurrency regulation that can be directly linked to
CBDC development