With cryptocurrency volatility on the rise, top executives at the International Monetary Fund are calling for greater regulatory oversight to prevent any contagion to traditional finance. Nobuyasu Sugimoto, the IMF’s deputy division chief for financial regulation and supervision, and Bo Li, the deputy managing director, have warned that if left unchecked, crypto price swings could have serious implications for banks and other established institutions.
IMF Blog Post Makes Strong Case for Containing Crypto Contagion
Regulators around the world are starting to take notice of the instability of cryptocurrency markets. On Jan. 18, the IMF’s deputy managing director, Nobuyasu Sugimoto, and the deputy division chief for financial regulation and supervision, Bo Li, voiced their concerns about the potential impact of crypto market volatility on the financial system.
The article points out that the collapses of various tokens and exchanges have created a situation where crypto market instability could spill over into traditional markets, due to the deepening relationship between the two.
The authors suggest that one way of preventing this is through regulation. They also mention that some investors in developed markets have been attracted to these assets due to their higher rates of return in an environment of historically low interest rates.
A rise in institutional investor interest in stablecoins has led to increased financial stability risks for economies.
Substitution Cryptoization and the Dangers of it
Although the IMF does not currently consider cryptocurrencies or stablecoins a major threat to the global banking system, there are some countries that are using crypto and stablecoins to replace their fiat currency, making it difficult to control from an international standpoint. For Sugimoto and Li, this presents “the potential to cause capital outflows, a loss of monetary sovereignty and threats to financial stability, creating new challenges for politicians.”
This is particularly the case for countries suffering from high levels of inflation or devaluation, as citizens lose faith in their currency and flock to alternative currencies such as dollar-pegged stablecoins.
To tackle these risks, the authors recommend that global regulations be established for virtual asset service providers as well as tighter regulations for stablecoin issuers. Experts have also warned that a run in stablecoins could cause disruption in the US Treasury market.
The authors also suggest that the global implementation of Basel Committee Directives, which are guidelines that define how much exposure banks can have to cryptocurrency at any one time, should be increased.
What do you think about the considerations put forth by the authors of the IMF blog post? Let us know in the comments below.
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