IMF fears spill-over effects between crypto and equity markets, questions ‘light touch’ regulatory approach

The International Monetary Fund (IMF) recently warned of a growing connection between cryptocurrencies and equity markets that pose risks to financial stability.

In his recent report, the international body estimated the potential for spillovers between crypto and equity markets in the US and emerging markets, analyzing daily data on price volatility and returns.

“Cryptic” connections

“Cryptoassets like Bitcoin they have gone from being an obscure asset class with few users to an integral part of the digital asset revolution, raising concerns about financial stability, “said the IMF.

In assessing the extent to which cryptocurrencies flooded into the mainstream, the IMF estimated the potential for spillovers between cryptocurrencies and equity markets.

“The correlation of crypto assets with traditional holdings such as stocks has increased significantly, limiting the perceived benefits of risk diversification and increasing the risk of contagion in financial markets,” the IMF warned.

According to the IMF, the price of Bitcoin showed little correlation with major equity price indices, such as the S&P 500 index, prior to the second quarter of 2020.

Since then, “both Bitcoin and US stock prices have risen against a backdrop of easy global financial conditions and an increased risk appetite from investors,” the IMF noted.

The 13-page analysis examined how the potential for contagion between cryptocurrencies and stocks increases during financial market volatility, underscoring their importance for emerging markets. “given its higher adoption of cryptoassets in recent months.”

According to the IMF findings, “Bitcoin and Tie“They individually account for about 12-16 percent of the variation in global equity price volatility and about 7-11 percent of the variation in global equity returns.”

Regulatory approach so far “light”

The IMF noted the need for further research to better understand these “cryptic” connections that became apparent in the aftermath of the pandemic.

According to the IMF, “Key drivers of increased interconnection could include a growing acceptance of crypto-related platforms and investment vehicles in the stock market and in the over-the-counter market ”.

Another explanation could lie in the growing adoption of Bitcoin by retail and institutional investors, “many of whom have positions in both the equity and crypto markets.”

The international body concluded the report by saying that, given the serious implications of this interconnectivity, the “light touch” regulatory approach towards cryptocurrencies should be reviewed.

“Regulations must correspond to the risks posed by crypto assets (BIS 2021), and oversight of the crypto ecosystem must be strengthened, including addressing data breaches (IMF 2021),” the IMF concluded.

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