The International Monetary Fund stated that while digitalization of the payment system can aid in the transition to environmentally friendly payment methods and foster financial inclusion, crypto assets can pose risks to financial stability.
The IMF stated in a blog titled ‘Crypto is More in Step With Asia’s Equities, Highlighting Need for Regulation‘ that few parts of the world have embraced crypto assets like Asia – where top adopters include individual and institutional investors from India to Vietnam and Thailand – raising the important issue of the extent of integration of crypto into the region’s financial system.
“Before the pandemic, crypto seemed insulated from the financial system. Bitcoin and other assets showed little correlation with Asian equity markets, which helped diffuse financial stability concerns,” the blog authored by Nada Choueiri, Anne-Marie Gulde-Wolf and Tara Iyer said.
Crypto trading, on the other hand, skyrocketed during the pandemic as millions stayed at home and received government assistance, while low interest rates and easy financing also played a role.
In just a year and a half, the total market value of the world’s crypto assets increased twenty-fold to USD 3 trillion in December.
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It then fell to less than USD 1 trillion in June as central banks raised interest rates to control inflation, ending easy access to cheap borrowing, it added.
“Large losses on crypto may drive these investors to rebalance their portfolios, possibly causing financial-market volatility or even default on traditional liabilities,” it said.
According to the blog, as Asian investors piled into crypto, the correlation between the performance of the region’s equity markets and crypto assets such as Bitcoin and Ethereum has increased.
“While the returns and volatility correlations between Bitcoin and Asian equity markets were low before the pandemic, these have increased significantly since 2020.”
According to the blog, the key drivers of the increased interconnectedness of Asian crypto and equity markets could be growing acceptance of crypto-related platforms and investment vehicles in the stock market, or more broadly growing crypto adoption by Asian retail and institutional investors, many of whom have roles in both the equity and crypto markets.
Furthermore, it raised concerns that the growing interconnectedness of the two asset classes allows shocks to be transmitted that can impact financial markets.
“Accordingly, authorities in Asia are increasingly sensitive to the rising risks posed by crypto as adoption continues to spread. They have therefore dialed up their focus on crypto regulation, and regulatory frameworks are underway in several countries including India, Vietnam and Thailand.”
Finally, it stated that significant effort is required to address significant data gaps that continue to prevent domestic and international regulators from fully understanding crypto ownership and use, as well as its intersection with the traditional financial sector.
It recommended that regulations be written in such a way that they establish clear guidelines for regulated financial institutions while also seeking to inform and protect retail investors, that they become fully effective, and that they are closely coordinated across jurisdictions.
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