Blog: Crypto assets could pose risk to financial system, IMF warns – ZAWYA

The International Monetary Fund (IMF) has called for tighter regulation of the crypto assets industry, saying that digital assets could pose risks to the financial system if regulators fail to act fast. 

The collapse of one of the industry’s largest platforms has already highlighted risks from crypto assets that lack basic protections, with the majority of bitcoin investors alone losing money, the Washington-based lender said. 

It noted that if authorities don’t act quickly, the financial stability of economies in both emerging and advanced markets could be at risk. 

Last November, following the collapse of major crypto exchange FTX, economists at the Bank of International Settlements said that around three-quarters of people who invested in bitcoin have lost their money.  

After surging to a record high of more than $68,000 in November 2021, the virtual currency, as well as ethereum, lost 75% of their value about a year later. As of November, the industry that was previously valued at around $3 trillion stood at $900 billion. 

“The losses punctuated an already perilous period for crypto, which has lost trillions of dollars in market value,” said IMF Deputy Managing Director Bo Li and Deputy Division Chief Nobayasu Sugimoto  in a new blog post. 

“During times of stress, we’ve seen market failures of stablecoins, crypto-focused hedge funds and crypto exchanges which in turn raised serious concerns about market integrity and user protection”. 

Deeper links 

The IMF pointed out that cryptocurrencies now have “growing and deeper links with the core financial system”, so “there could also be concerns about systemic risk and financial stability in the near future.” 

“Many of these concerns can be addressed by strengthening financial regulation and supervision, and by developing global standards that can be implemented consistently by national regulatory authorities,” the IMF said. 

The lender noted that while crypto assets, as well as stablecoins, are not yet risks to the global financial system, some emerging market and developing economies are already “materially affected.” 

It said that some of these markets are already seeing large retail holdings of crypto assets. Some of them are also experiencing the so-called cryptoisation, when digital assets are substituted for domestic currency and assets, and circumvent exchange and capital control restrictions. 

“Such substitution has the potential to cause capital outflows, a loss of monetary sovereignty, and threats to financial stability, creating new challenges for policy makers.” 

“Authorities need to address the root causes of cryptoisation, by improving trust in their domestic economic policies, currencies and banking systems.” 

Cryptocurrencies can also pose risks to advanced economies, the IMF warned, citing that institutional investors had already expanded their stablecoin holdings when rates of return were high. 

“Therefore, we think it’s important for regulatory authorities to quickly manage risks from crypto, while not stifling innovation.” 

(Reporting by Cleofe Maceda; editing by Seban Scaria) 

Cleofe.maceda@lseg.com 

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