An International Monetary Fund (IMF) division chief and deputy managing director are calling for more regulatory action to prevent cryptocurrency ups and downs affecting banks and traditional financial institutions. Nobuyasu Sugimoto, deputy division chief of the IMF’s financial regulation and supervision division, and Bo Li, IMF deputy managing director, believe that given the growing links between legacy finance and cryptocurrencies, cryptocurrency volatility could bring systemic risks. to the existing ones. markets.
IMF Blog Post Calls For Containing Future Crypto Contagion
The volatility and instability of the cryptocurrency markets are beginning to worry regulators around the world. On January 18, Nobuyasu Sugimoto, deputy division chief of the IMF’s financial regulation and supervision division, and Bo Li, deputy managing director of the IMF, issued an article that warns about the effect that the volatility of the crypto markets could have on the existing financial system.
The article highlights that the instability developed in the crypto markets as a result of the different collapses of tokens and exchanges could affect traditional markets and institutions, given the current deepening of the links 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 due to the profitability they offer. The IMF blog post says:
Advanced economies are also susceptible to financial stability risks from cryptocurrencies, as institutional investors have increased stablecoin holdings, attracted by higher rates of return in the previously low interest rate environment.
Substitution and cryptoization risks
While the IMF does not yet consider cryptocurrencies and stablecoins to be serious risks to the global financial system, some countries are replacing their currency with cryptocurrencies and stablecoins, making international control of these funds especially difficult. For Sugimoto and Li, this situation has “the potential to cause capital outflows, a loss of monetary sovereignty and threats to financial stability, creating new challenges for politicians.”
This can be seen in economies that are being hit with 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 dollar-pegged stablecoins.
To control these risks, the blog post authors recommend establishing global regulations for virtual asset service providers, mandating that client assets be separated from the property of these companies. Additionally, stablecoin issuers must be heavily regulated, and are even encouraged to exercise similar regulations to banks, depending on the size of the project. Experts have stated before that a run on stablecoins could affect the US Treasury market.
In addition, the global implementation of the Basel Committee directives, a standard for how much exposure to cryptocurrencies banks can have at any given time, should be accelerated.
What do you think of the considerations of the authors of the IMF blog post regarding the risks of cryptocurrency contagion? Tell us in the comment section below.
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