The International Monetary Fund’s (IMF) Division Chief and Deputy Managing Director have called for more action on the regulatory front to avoid crypto ups and downs affecting banks and traditional financial institutions.IMF Financial Supervision and Regulation Division Deputy Director Nobuyasu Sugimoto and IMF Deputy Managing Director Bo Lee believe that the growing connection between legacy finance and crypto may mean that cryptocurrency volatility may pose systemic risks to existing markets.
IMF blog post calls for curbing future crypto contagion
Volatility and instability in cryptocurrency markets are beginning to worry regulators around the world, and on January 18, Nobuyasu Sugimoto, Deputy Director of the IMF’s Financial Supervision and Regulation Department, and IMF Deputy Managing Director Bo Liwarned of the impact crypto market volatility might have on existing financial systems article
The article points out that the instability that has developed in the crypto markets as a result of the various collapses of tokens and exchanges could affect traditional markets and institutions, given the current deepening of the link between these two systems.
According to the author, regulating these markets is one of the elements that could prevent this from happening, and also indicates that investors in developed markets are flocking to some of these assets for their returns The IMF blog post states.
Developed countries are also susceptible to financial stability risks from crypto, given that institutional investors have increased their holdings of stable coins, attracted by high rates of return in previous low interest rate environments.
Substitution and Crypto Risks
While the IMF does not yet consider crypto and stabilized coins a serious risk to the global financial system, some countries have substituted their currencies with crypto and stabilized coins, making international control of these funds becoming particularly difficult. For Sugimoto and Li, this situation “poses new challenges for policy makers, as it may cause capital outflows, loss of monetary sovereignty, and threats to financial stability.”
This can be seen in an economy that is simultaneously plunged into high levels of inflation and devaluation, where citizens are losing faith in fiat currencies and flocking to other alternatives such as dollar-pegged stablecoins.
To control these risks, the author of the blog post recommends setting global regulations on virtual asset service providers to force them to separate customer assets from the holdings of these companies. They also recommend that issuers of stablecoins should be strictly regulated, much like banks.