The International Monetary Fund (IMF) raised concerns in a blog post on Tuesday of this week about the increased usage of cryptocurrencies beyond just a fringe group and the subsequent implications for financial stability.
The IMF is particularly concerned about the connection between crypto assets and the financial markets, stating that virtual currencies pose a threat to financial stability, given their “volatile price movements, astronomic valuations, and coupling with mainstream investment markets”. It appears that at the start of the COVID-19 pandemic, central banks launched massive asset-buying programs to cushion their economies against the pandemic, the IMF noted. What has emerged is that crypto prices and US stocks surged in tandem as investors grew their risk appetite. This correlation limits Crypto’s perceived risk diversification benefits and raises the risk of shocks across financial markets.
In order to mitigate such risks the IMF has suggested that a robust, coordinated global regulatory framework is necessary to monitor and reduce the perceived financial stability risks coming from the cryptocurrency ecosystem.
The blog post also noted the meteoric rise of the crypto market, stating that the sector has witnessed a four-fold increase since 2017. In 2021, the market capitalization of the sector reached over $3 trillion, before dropping to its current cap of about $2 trillion.
The IMF is concerned that without global regulation, the cryptoeconomy will put consumers at risk of significant financial loss. Many investors do not realize they are investing in such a volatile asset, where prices can fluctuate wildly even in one single trading day.
National regulators should work to have common rules globally, enhance cross-border supervision and because it is such a new field, push for data standardization, the IMF stated.