Leadership at the International Monetary Fund (IMF) are pressing for immediate regulatory action to stop cryptocurrency volatility from impacting traditional finance systems and banks. Nobuyasu Sugimoto, deputy division head for financial regulation and supervision, and Bo Li, deputy managing director, have warned of the dangers of cryptocurrency contagion to existing markets.
IMF Blog Post Highlights Crypto Contagion Risks
As regulators around the globe voice their concerns about the instability of cryptocurrency markets, the IMF is responding. On Jan. 18, Nobuyasu Sugimoto and Bo Li published an article warning of the potential contagion from crypto markets to the traditional financial sector.
The article explains that the market collapses of exchanges and tokens could have a large impact on the traditional financial infrastructure. The authors state that the presence of these markets is one of the major factors preventing a large scale contagion.
The IMF blog post says:
Advanced economies are particularly exposed to the risks posed by cryptocurrencies due to their attractiveness to institutional investors, who are drawn to higher rates of return and lower interest rates.
Substitution Cryptoization Risks
The IMF does not view cryptocurrencies or stablecoins as a major threat to the global banking system, but there are some countries that are utilizing digital assets to replace their currency, which makes international control of these funds difficult. Sugimoto and Li acknowledged this, noting that “the potential to cause capital outflows, a loss of monetary sovereignty and threats to financial stability, creating new challenges for politicians.”
This is evident in economies that are facing high levels of inflation and devaluation. As citizens lose faith in their fiat currencies, they look to stablecoins, which are pegged to the US dollar. To reduce these risks, the authors of this blog recommend that global regulations be established.
Virtual asset service providers should be required to keep their clients’ assets separate from their own. Additionally, the authors suggest that stablecoin issuers should be closely regulated, depending on the size of the project. We have previously discussed the potential for a “run” on stablecoins in the US Treasury market.
In addition, the authors recommend that the Basel Committee accelerate directives that limit how much exposure banks can have to cryptocurrencies at any given time.
Do you agree with the IMF bloggers’ concerns about cryptocurrency contagion? Leave your thoughts in the comments section below.
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