Nobuyasu Sugimoto, Deputy Head of the IMF’s Department of Financial Supervision and Regulation, and Bo Li, Deputy Managing Director of the IMF, believe that given the growing links between traditional finance and cryptocurrencies, the volatility of the latter could lead to systemic risks in existing markets.
IMF blog calls for containing future cryptocurrency contagion
The volatility and instability of the cryptocurrency markets have started to worry regulators around the world. On January 18, Nobuyasu Sugimoto, Deputy Head of the IMF’s Department of Financial Supervision and Regulation, and Bo Li, Deputy Managing Director of the IMF, published an article on the website warning about the effect that the volatility of crypto markets can have on the existing financial system.
The article notes that the instability developed in crypto markets following the various token and exchange meltdowns may affect traditional markets and institutions, given the current deeper ties between these two systems.
Regulating these markets is one way to prevent this from happening, say the authors, who also note that investors in developed markets have flocked to some of these assets because of the yields they offer. . The IMF blog post says:
Advanced economies are also likely to face financial stability risks from cryptocurrencies as institutional investors have increased their holdings of stablecoins, attracted by higher returns amid rising interest rates.
Substitution and Cryptoization Risks
While the IMF still does not consider crypto and stablecoins to be serious risks to the global financial system, some countries are replacing their currency with crypto and stablecoins, making international control of these funds particularly difficult. For Sugimoto and Li, this situation has “the potential to cause capital outflows, loss of monetary sovereignty and threats to financial stability, creating new challenges for policy makers.“
This can be seen in economies plagued by high levels of inflation and devaluation at the same time, where citizens lose faith in their fiat currencies and flock to other alternatives, such as dollar-pegged stablecoins.
To control these risks, the authors of the blog post recommend implementing global rules for virtual asset providers that require customer assets to be segregated from the holdings of these companies. Similarly, issuers of stablecoins should be heavily regulated, and even bank-like regulation is advisable, depending on the size of the project. Experts have previously said that a run on stablecoins could affect the US Treasury market.
In addition, the global implementation of the Basel Committee’s guidelines, a standard for how much exposure to cryptocurrency banks can have at any given time, must be accelerated.