IMF deems Rising Crypto and stocks Correlation Disastrous, Proffers Global Solution

Cryptocurrencies are no longer “fringe” assets in the financial market according to the International Monetary Fund (IMF). The IMF warns that there needs to be a coordinated global regulatory framework to tackle the threat that the crypto market poses to the financial market.

Crypto should be reined in before they cause a financial market collapse according to the IMF

According to research conducted by staff of the IMF, the growing rate of cryptocurrency adoption is a cause for concern to regulators globally. This is because the crypto assets such as Bitcoin have come out of obscurity to become “an integral part of the digital assets revolution.”

The report points out that since 2017, the crypto market has soared more than four-fold from having a market cap of $620 to reach more than $3 trillion before dropping to currently be around $2 trillion.

The international organization warns that such levels of growth pose a threat to economic stability if nations states do nothing to properly regulate the market. This is because, with the growth of the crypto market, digital assets are beginning to move in tandem with traditional financial assets such as stocks. The report notes that this has been especially apparent since 2020 when central banks infused large capital into their markets as a crisis response.

With this close relationship between digital assets like Bitcoin and Ethereum and traditional stocks, the IMF fears that the crypto market’s high volatility could spill over into the traditional market.

Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption. 

It warns that this contagion may already be in play as crypto was becoming more of a risk asset. As letting this go on would harm global economic stability, especially in emerging economies, they recommend that there should be a concerted global effort to regulate the crypto market.

“It is thus time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem.” 

Specific areas that this framework should address include regulations of the uses of crypto assets, exposure of regulated financial institutions to crypto, the data gaps created by the anonymity prevalent in the crypto market.

The IMF report is nothing new to the crypto market

The IMF has continuously warned of the risk that crypto poses to global economic stability. The organization was one of the vocal critics of El Salvador’s adoption of Bitcoin as legal tender. The IMF is also an advocate of Central Bank Digital Currencies (CBDC).

While the IMF considers that crypto-assets such as Bitcoin are losing their role as risk-off assets, it appears that market participants still consider Bitcoin to be a strong inflation hedge. Bitcoin proponents such as billionaire Bill Miller, who recently revealed that he now holds 50% of his portfolio in Bitcoin, are still betting big on crypto despite the market’s volatility. While the IMF continues to poke at digital currencies, IMF also admits that imposing crypto bans remain a very difficult task.

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