Correlation growing between crypto and equity markets in Asia, says IMF

Before the COVID-19 pandemic in Asia there was a strong division between the crypto and financial markets in general. Now, that border has got thinner and the situation demands additional regulatory measures, the International Monetary Fund (IMF) believes.

In a blog post from Aug. 21, a group of IMF economists shared their concerns over the dynamics of Asian markets, where the integration of crypto in the larger financial system appears to be growing swiftly. This poses certain risks to financial stability, the economists stated, adding:

“While the financial sector appears to have been insulated from these sharp movements, it may not be in future boom-bust cycles. Contagion could spread through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities.”

The economists further mentioned an example of the Indian market, where the return correlations of Bitcoin (BTC) and Indian stock markets have increased 10-fold over the pandemic.

The reasons behind the tightening connection between crypto and traditional finance are believed to be a growing acceptance of crypto-related platforms and investment vehicles in the stock market and growing crypto adoption by retail and institutional investors in Asia.

Using the spillover methodology developed in their Global Financial Stability Note, the experts also found a sharp rise in crypto-equity volatility spillovers in India, Vietnam and Thailand. In conclusion, Asian regulators are being recommended to “establish clear guidelines on regulated financial institutions,” inform and protect retail investors, and closely coordinate their efforts across jurisdictions.

On July 27, the IMF director of capital markets, Tobias Adrian, stated that there could be further failures of algorithmic stablecoins. Thus, stablecoins need a “global regulatory approach” to better protect investors.