IMF Concerns Over Crypto

January 15, 2022 2:16 pm

The IMF has announced that crypto assets are no longer considered obscure assets that used by a minority of the people.

Instead, it has acknowledged that they are an important part of the digital asset boom that has occurred over the past decade that is used by a significant part of the digital economy.

That being said, the IMF has mentioned that this emergence in the use of crypto could cause risk to future financial stability.

Bitcoin.com reports:

Our analysis suggests that crypto assets are no longer on the fringe of the financial system.

Given their relatively high volatility and valuations, their increased movement could soon pose risks to financial stability especially in countries with widespread crypto adoption.

“It is thus time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem,” they wrote.

Three other people from the IMF’s Monetary and Capital Markets Department similarly warned in October last year about the risks crypto assets pose to financial stability.

Dimitris Drakopoulos, Fabio Natalucci, and Evan Papageorgiou detailed: “Cryptoization can reduce the ability of central banks to effectively implement monetary policy. It could also create financial stability risks.”

Within the United States however, the Federal Reserve does not see it to be a huge concern as they have mentioned in the past that they will not interfere or ban the use of crypto assets, but rather also have plans to integration the technology to be used for digital currencies in the future.

The main risk that the Federal Reserve does see is more of a consumer risk in the aspect that they are not backed by an asset of value.

The IMF further explained that there was an increasing correlation between crypto and equity markets that was not observed before.

During the course of the covid pandemic, this correlation continued to increase especially in emerging market economies like Nigeria.

It was not a coincidence, the fund reported, that the countries that were emerging the most recently are also the countries that are leading the way for crypto asset adoption.

Other factors may also include the low credibility of central banks and weak domestic financial systems which probably contributes to why emerging economies are increasing in their rate of digital asset adoption.

As a result, the IMF reported that this interconnectedness could allows for the transmission of “price shocks” that can potentially destabilize financial markets.

Punchng.com reports on the IMF going further in detail regarding this:

It said, “Increased crypto-stocks correlation raises the possibility of spillovers of investor sentiment between those asset classes.

Indeed, our analysis, which examines the spillovers of prices and volatility between crypto and global equity markets, suggests that spillovers from Bitcoin returns and volatility to stock markets, and vice versa, have risen significantly in 2020–21 compared with 2017–19.”

As part of an official statement, the IMF has released a blog titled “Crypto Prices Move More in Sync With Stocks, Posing New Risks” on the IMF website to explain the reasoning.

 

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