Cryptocurrencies, given their nascent stage and relatively small user base, are prone to volatility and instability in value. Since the creation of the world’s first cryptocurrency, Bitcoin (BTC), there has hardly been a time when the market has refrained from volatility. This continued unpredictability of digital assets has remained a concern for regulators around the world.
The IMF’s Deputy Division Chief for Financial Supervision and Regulation Nobuyasu Sugimoto and Deputy Managing Director Bo Li issued a warning in a recently published article. He noted that volatility in the crypto market is likely to
have efficiencies in the traditional financial system.
While outlining the reasons why the crypto industry is unpredictable, the article cites multiple incidents that have occurred in space in the form of crypto projects like the Terra Network (LUNA) collapse and the major crypto companies filing for bankruptcy. Such cases have the potential to affect both financial systems due to the ties between them which become even stronger over time.
International Monetary Fund officials noted in the article that markets need regulation to avoid the possibility of any effect on existing financial markets. It was also mentioned that investors from developed markets are attracted to the newly developed asset class after being lured by their investment returns.
Because institutional investors have increased their holdings of stablecoins due to higher rates of return in a previously low interest rate environment, the IMF blog post indicates that advanced countries are also vulnerable to threats to the financial stability of crypto.
While the IMF continues to dismiss cryptocurrencies and stablecoins as significant threats to the global financial system, several countries are replacing their national currencies with cryptocurrencies and stablecoins, making global surveillance of these funds particularly difficult. This circumstance, in the words of Sugimoto and Li, “has the potential to lead to capital outflows, loss of monetary sovereignty, and threats to financial stability, generating new problems for policymakers.”
Citizens are losing faith in their fiat currencies and turning to other alternatives, such as dollar-pegged stablecoins, in economies that are simultaneously experiencing high levels of inflation and depreciation.
The writers of this blog post suggest that in order to reduce these dangers, there should be international standards for organizations providing services for virtual assets, requiring them to separate customer assets from their own assets. Depending on the size of the project, issuers of stablecoins should also be subject to strict regulation, and may even be required to do so. A stablecoin run could impact the US Treasury securities market, according to past experts.