The International Monetary Fund assured that cryptocurrencies are no longer on the fringes of the financial system; although it sees risks in the widespread adoption of such assets.
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Cryptocurrencies are no longer a marginalized asset class within the financial system, according to the International Monetary Fund (IMF). However, their increasing widespread adoption and correlation with stock market an area or arena, online or offline, in which commercial dealings are conducted. indices raises some concerns about potential risks to global financial stability.
The IMF analyzed the growth of the digital digital technologies are these electronic tools that have the ability to generate, store or even process data. currencies market in a recent research, where it analyzes the possible adverse effects of this phenomenon and warns about the need for a coordinated global regulatory framework for the new asset class.
IMF Monetary and Capital capital is most commonly defined as the large sum of money you would use to invest. Markets Department Director Tobias Adrian, economist Tara Iyer, and research division deputy chief Mahvash Qureshi are listed as the authors of the research.
Crypto is no longer on the fringes of the financial system
In the article, experts claimed that the growing correlation between cryptocurrencies and stock market shares ” limits the perceived benefits of risk diversification diversification is a risk-management strategy that mixes a wide variety of investments within a portfolio. and increases the risk of contagion in financial markets ”.
The research adds that these effects are part of the growth of the crypto market seen in recent years and come with concerns about global financial stability.
Cryptoassets like Bitcoin have gone from being an obscure asset class with few users to an integral part of the digital asset revolution.
The digital asset market increased from USD $620 billion in 2017 to almost USD $3 trillion by November 2021. According to the IMF, this growth responds to the increasing popularity of assets such as Bitcoin the biggest and most popular cryptocurrency in the world. It is a decentralized digital currency that enables users to make trustless peer-to-peer transactions. between retail and institutional investors . The COVID-19 pandemic has also played a crucial role in this trend, according to the researchers.
Pandemic boosted the correlation between BTC and stocks
Central banks’ responses to the The crisis generated by the pandemic increased the appetite for risk. among investors. Cryptocurrency and stock prices rose in 2020 amid the global economic outlook, and the correlation between digital assets and major stock indices also increased.
“ Before the pandemic, cryptoassets like Bitcoin and Ethereum a decentralized open-source blockchain with smart contracts functionality. showed little correlation to major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes. But this changed after the extraordinary responses to the central bank crisis in the early 2020s. “they wrote and added:
For example, compared to the pre-pandemic years, the correlation between Bitcoin price volatility a statistical measure of dispersion of returns, measured by using the standard deviation or variance between returns from that same security or market index. and S&P 500 index volatility has increased more than fourfold, while Bitcoin’s contribution to the change change — a concept relevant to cryptocurrencies that use the UTXO model — is the number of coins sent back to a user after they use their unspent outputs to initiate a transaction. in S&P 500 index volatility is estimated to have increased by about 16 percentage points in the post-pandemic period.
The correlation coefficient between Bitcoin and the S&P 500 has risen 3,600% from 0.01 to 0.36 after April 2020. This means that the two asset classes have been rising and falling closer together since the coronavirus pandemic began.
Risks to financial stability
According to the research, this correlation suggests that Bitcoin has been acting as a risky asset for investors. Analysts also noted this interconnectedness between stocks and Bitcoin could be an answer to the “ growing acceptance of cryptocurrency-related investment vehicles and platforms in the on- and off-exchange markets “. They also pointed to widespread adoption among investors as a possible factor.
However, for the IMF, with stronger correlation comes greater risks. The agency’s research, which concludes that cryptocurrencies are no longer on the fringes of the financial system, warns that the volatility of such assets could pose risks to global financial stability, especially in countries with higher adoption of cryptocurrencies.
Although the risks posed by cryptoassets were considered minimal until a few years ago due to the smaller size of cryptocurrency cryptocurrencies are digital currencies that use cryptographic technologies to secure their operation. markets and the limited interconnectedness between cryptocurrency markets and the regulated regulation is when something is controlled by a specific set of rules. financial system, their widespread adoption could pose risks to financial stability given their high price volatility, the increasing use of leverage money that a trader borrows from a brokerage, enabling them to gain far greater exposure to a position than what their capital allows. in their trading, and the direct and indirect exposures of financial institutions to these assets.
Due to the relatively unregulated nature of the cryptocurrency ecosystem, any significant disruption in financial conditions driven by cryptocurrency price volatility could potentially be outside the control of central banks and regulatory authorities.
IMF suggests new regulatory frameworks
Finally, the IMF experts emphasized the need to adopt a “ comprehensive and coordinated global regulatory framework “between countries around the world to ” guide regulation and oversight ” and so ” mitigate risks “ cryptocurrencies can have on financial stability.
The organization suggested that such a framework should encompass regulations tailored to the main uses of digital currencies and establish clear requirements for regulated financial institutions regarding their exposure and engagement with these assets.
Given the increasing interconnectedness between cryptocurrency markets and financial markets in general, the so far “light touch” regulatory approach towards cryptoassets needs to be reviewed. Regulations must match the risks posed by cryptoassets (BIS 2021), and oversight of the cryptocurrency ecosystem must be strengthened, including by addressing data gaps.
Last month, the chief economist for the International Monetary Fund Gita Gopinath, made a similar call to enact standard global policies to regulate digital assets. The director’s statements came a few days after the IMF published an article in which it established some guidelines for the global regulation of cryptocurrencies .
- International Monetary Fund proposes principles for creating regulatory frameworks for cryptocurrencies
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- International Monetary Fund Sees “Cryptoization” as a Threat to Global Economy
Sources: Informe IFM , IMF Blog , Cointelegraph , archive
Article versioned by Hannah Estefania Perez / DiarioBitcoin
Image from Unsplash edited in Canva
