Nobuyasu Sugimoto, deputy division chief of the IMF’s Financial Supervision and Regulation Division, and Bo Li, deputy managing director of the IMF, believe that with the growing linkages between traditional finance and crypto-currencies, the volatility of crypto-currencies could lead to systemic risks in existing markets.
IMF blog calls for containing future crypto-currency contagion
The volatility and instability of the crypto-currency markets is starting to worry regulators around the world. On Jan. 18, Nobuyasu Sugimoto, deputy division chief of the IMF’s Financial Supervision and Regulation Division, and Bo Li, deputy managing director of the IMF, published an article on the site warning about the effect that the volatility of crypto markets could have on the existing financial system.
The article notes that the instability developed in crypto markets as a result of various token and exchange collapses could affect traditional markets and institutions, given the current deepening of the links between these two systems.
Regulating these markets is one way to prevent this from happening, according to the authors, who also point out that investors in developed markets have flocked to some of these assets because of the returns they offer. The IMF blog post states:
Advanced economies are also likely to be exposed to financial stability risks related to crypto-currencies, as institutional investors have increased their holdings of stablecoins, attracted by higher rates of return in a previously low interest rate environment.
Substitution and Cryptoization Risks
While the IMF still does not consider crypto and stablecoins to be serious risks to the global financial system, some countries are substituting their currencies with crypto and stablecoins, making international oversight of these funds particularly difficult. For Sugimoto and Li, this situation has “the potential to cause capital outflows, loss of monetary sovereignty, and threats to financial stability, creating new challenges for policymakers.“
This can be seen in economies that are beset by high levels of inflation and devaluation at the same time, with citizens losing confidence in their fiat currencies and flocking to other alternatives, such as stable currencies pegged to the dollar.
To control these risks, the authors of the blog post recommend global regulation of virtual asset service providers, requiring customer assets to be segregated from the holdings of these companies. Likewise, stablecoin issuers should be heavily regulated, and it is even advisable to exercise bank-like regulation, depending on the size of the project. Experts have already stated that a rush of stablecoins could affect the U.S. Treasury bill market.
In addition, the global implementation of the Basel Committee guidelines, a standard for how much exposure to crypto-currencies banks can have at any given time, needs to be accelerated.