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The International Monetary Fund (IMF) Department Head and Deputy Managing Director has called for more measures on the regulatory side to avoid the ups and downs of cryptocurrencies affecting banks and traditional financial institutions. Nobuyasu Sugimoto, Deputy Head of the IMF’s Financial Supervision and Regulation Department, and Bo Li, Deputy Managing Director of the IMF, believe that given the growing linkages between legacy finance and cryptocurrency, cryptocurrency’s volatility could bring systemic risks to existing ones. markets.
IMF blog post calls for future crypto infections to be contained
Volatility and instability in the cryptocurrency markets are starting to worry regulators around the world. in january. At the age of 18, Nobuyasu Sugimoto, Deputy Head of the Financial Supervision and Regulation Department of the International Monetary Fund, and Bo Li, Deputy Managing Director of the International Monetary Fund, published an article warning of the impact of the volatility of digital currency markets on the current financial system. .
The article notes that the instability that has arisen in the cryptocurrency markets as a result of the various collapses of tokens and exchanges may affect traditional markets and institutions, given the current deepening of the links between these two systems.
Regulation of these markets is one element preventing this from happening, according to the authors, who also point out that investors in developed markets have been flocking to some of these assets because of the returns they offer. The IMF blog post states:
Developed economies are also vulnerable to financial stability risks from cryptocurrencies, since institutional investors have increased their holdings of stablecoins, attracted by higher rates of return in a previously low interest rate environment.
Substitution and encryption risks
While the International Monetary Fund still does not consider cryptocurrencies and stablecoins to be serious risks to the global financial system, some countries are exchanging their currencies for cryptocurrencies and stablecoins, which makes international control of these funds particularly difficult. For Sugimoto and Lee, this situation “could cause capital outflows, loss of monetary sovereignty, and threats to financial stability, creating new challenges for policymakers.”
This can be seen in economies that are hit by high levels of inflation and currency depreciation at the same time, as citizens lose confidence in their fiat currencies and flock to other alternatives, such as stable currencies pegged to the dollar.
To control this risk, the authors of the blog post recommend that global regulations be put in place for providers of virtual asset services, mandating the separation of clients’ assets from the holdings of these companies. Also, stablecoin issuers have to be heavily regulated, and it is even advised to practice bank-like regulations, depending on the size of the project. Experts have previously mentioned that the decline in stablecoins may affect the US Treasury bond market.
Also, global implementation of the Basel Committee directives, a benchmark regarding the amount of cryptocurrency exposure banks can have at any one time, should be accelerated.
What do you think of the considerations of the IMF blog post authors regarding cryptocurrency contagion risks? Tell us in the comments section below.
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