Digital payment systems can support the transition to greener payment methods and promote financial inclusion, but at the same time, cryptoassets can pose risks to financial stability, the IMF said.
In a blog post titled “Cryptocurrencies more in sync with Asian stock markets, stressing regulatory needs,” the IMF said that few parts of the world have embraced crypto assets as much as Asia — where major adopters include individuals and institutions Investor India belongs to Vietnam and Thailand – which raises an important question about the extent to which cryptocurrencies are integrated into the region’s financial system
“Prior to the pandemic, crypto seemed isolated from the financial system. Bitcoin and other assets had little correlation with Asian equities, helping to ease concerns about financial stability,” the blog post by Nada Choueiri, Anne-Marie Gulde-Wolf Written by Tara Iyer.
However, cryptocurrency trading has surged during the pandemic as millions stay home and receive government aid, while low interest rates and easy financing conditions have also played a role.
The total global market capitalization of crypto assets has grown 20-fold in just a year and a half, reaching $3 trillion in December.
It tumbled to less than $1 trillion in June, it added, as the central bank’s interest rate hikes to curb inflation ended access to cheap credit.
“Large cryptocurrency losses could prompt these investors to rebalance their portfolios, which could lead to financial market volatility and even traditional debt defaults,” it said.
As investors in Asia flocked to the cryptocurrency space, the correlation between the region’s stock market performance and crypto-assets such as bitcoin and ethereum has increased, the blog said.
“While returns and volatility correlations between bitcoin and Asian equities were low prior to the pandemic, they have increased significantly since 2020.”
According to the blog, the main driver of the increasingly interconnected cryptocurrency and stock markets in Asia could be the increasing acceptance of cryptocurrency-related platforms and investment vehicles by exchanges, or more generally, Asian retail and institutional investors Increasing acceptance of cryptocurrencies – many of whom have positions in both stocks and the cryptocurrency market.
Furthermore, she is concerned that the increasing interdependence between the two asset classes could lead to the transmission of shocks that could affect financial markets.
“As a result, Asian authorities have become increasingly sensitive to the rising risks posed by crypto as adoption continues to expand. As a result, they have turned their focus to crypto regulation, with several including India, Vietnam and Thailand. The country is developing a regulatory framework.”
In conclusion, it said significant efforts are needed to fill key data gaps that still prevent domestic and international regulators from fully understanding the ownership and use of cryptocurrencies and how it intersects with the traditional financial sector.
It recommends that these regulations should be designed in a way that provides clear guidelines for regulated financial institutions, aims to inform and protect retail investors, is sufficiently effective and closely coordinated across jurisdictions.