A division chief and deputy managing director of the International Monetary Fund (IMF) are calling for more regulatory action to avoid crypto highs and lows affecting banks and traditional financial institutions. 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 given the growing links between legacy finance and crypto, the volatility of cryptocurrency could lead to systemic risks for the existing. markets.
IMF blog post calls for containing future crypto contagion
The volatility and instability in the cryptocurrency markets are beginning to worry regulators around the world. On January 18, Nobuyasu Sugimoto, Deputy Division Chief of the IMF’s Financial Supervision and Regulation Division, and Bo Li, Deputy Managing Director of the IMF, Posted an article warning of the effect volatility in the crypto markets could have on the existing financial system.
The article notes that the instability developed in the crypto markets following the various token and exchange meltdowns could affect traditional markets and institutions, given the current deepening ties between these two systems.
Regulation of these markets is one of the elements to prevent this from happening, according to the authors, who also indicate 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 susceptible to crypto-related financial stability risks, as institutional investors have increased their holdings of stablecoins, attracted by higher rates of return in a previously low interest rate environment.
Substitution and encryption risks
While the IMF still does not consider crypto and stablecoins to be serious risks to the global financial system, some countries are replacing their currencies with crypto and stablecoins, making international monitoring 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 is seen in economies that are simultaneously experiencing high levels of inflation and devaluation, with citizens losing faith in their fiat currencies and flocking to other alternatives, such as dollar-pegged stablecoins.
To control these risks, the authors of the blog post recommend implementing global regulations for virtual asset service providers, requiring customer assets to be segregated from the holdings of these companies. Additionally, stablecoin issuers should be heavily regulated and are even advised to exercise banking-like regulations, depending on the size of the project. Experts have previously said that a run on stablecoins could affect the US Treasuries market.
Additionally, the global implementation of the Basel Committee Guidelines, a standard on how much exposure to cryptocurrencies banks can have at any time, needs to be accelerated.
What do you think of the IMF blog post authors’ considerations regarding the contagion risks of cryptocurrencies? Tell us in the comments section below.
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