The International Monetary Fund (IMF), in a blog post titled ‘Crypto Prices Move More in Sync With Stocks, Posing New Risks’, urged for a global framework to guide nations with crypto regulations.
‘It is 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,’ noted Tobias Adrian, Tara Iyer, and Mahvash Qureshi, the authors of the blog post.
The Urgent Need for Global Regulatory Framework
According to the blog post, “crypto-assets are no longer on the fringe of the financial system.” Over the last four years, crypto’s market value has more than quadrupled from $620 billion in 2017 to nearly $3 trillion in November of last year.
Since the onset of the pandemic, greater adoption has forged a strong correlation between crypto-assets and traditional holdings like stocks, as witnessed in last week’s flash crash post fed’s plans to hike interest rates. The correlation has increased the risk of contagion across financial markets, reducing diversification scope.
“Amid greater adoption, the correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits,” the authors noted. “The stronger association between crypto and equities is also apparent in emerging market economies, several of which have led the way in crypto-asset adoption.”
(Image source: IMFBlog)
The authors suggest that such a correlation increases the likelihood of spillovers of investor sentiment between the two assets. The growing interconnectedness between crypto and stocks can cause more extensive shocks that destabilise financial markets.
In light of such possibilities with risks to financial stability, especially in countries with broader crypto adoption, the trio has recommended a ‘comprehensive, coordinated global regulatory framework’ to guide nations with crypto regulations.
What should the Global Regulatory Framework look like?
In a similar blog post, the IMF staff indicates the risks of uncoordinated regulations among countries, and it identifies vital elements necessary to make rules work at a global level. “Uncoordinated regulatory measures may facilitate potentially destabilising capital flows,” the authors noted.
According to the recommendations, policymakers should first authorise and license various crypto-asset service providers. And the regulations must be tailored to the prominent use cases of crypto. “For example, services and products for investments should have requirements similar to those of securities brokers and dealers, overseen by the securities regulator.”
In India, prominent stakeholders, including crypto platforms like CoinSwitch Kuber, have requested policymakers adopt favourable regulations that help innovations around blockchain while safeguarding crypto-asset investors.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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