Cryptocurrencies, given their infancy stage and relatively less user base, are prone to volatility and instability in their value. Since the inception of the first cryptocurrency in the world, Bitcoin (BTC), there was hardly any time when the market refrained from volatility. This continued unpredictability of digital assets remained a concern for regulators worldwide.
Deputy division chief of the IMF’s financial supervision and regulations, Nobuyasu Sugimoto, and deputy managing director, Bo Li, put a warning in a recently published article. It noted the crypto market’s volatility is likely to
have efficacies in the traditional financial system.
While highlighting the reasons for the crypto industry being unpredictable, the article cited multiple mishaps that took place in the space in the form of crypto projects like Terra (LUNA) network collapse and bankruptcy filing of prominent crypto firms. Such instances have the potential to affect both financial systems due to links between them which are getting even stronger with time.
The officials at the International Monetary Fund noted in the article the markets need regulations in order to avoid the possibility of any effect on existing financial markets. There was also mention that the investors from developed markets are getting attracted towards the newly developed asset class after getting attracted by their returns on investment.
Because institutional investors have boosted their stablecoin holdings as a result of greater rates of return in the previously low-interest rate environment, the IMF Blog article states that advanced nations are also vulnerable to financial stability threats from crypto.
While the IMF continues to not view cryptocurrencies and stablecoins as significant threats to the global financial system, several nations are replacing their national currencies with cryptocurrencies and stablecoins, which makes global oversight of these funds, particularly challenging. This circumstance, in the words of Sugimoto and Li, “has the potential to lead to capital outflows, a loss of monetary sovereignty, and threats to financial stability, generating new issues for policymakers.”
Citizens lose faith in their fiat currencies and turn to other alternatives, like dollar-pegged stablecoins, in economies that are being slammed with high levels of inflation and depreciation at the same time.
The writers of this blog post suggest that in order to reduce these dangers, there should be international standards for organizations that provide services for virtual assets, requiring them to keep customer assets separate from their own assets. Depending on the size of the project, stablecoin issuers should also be subject to strict regulation, and it may even be urged that they do so. A stablecoin run could have an impact on the market for US Treasury securities, according to experts in the past.
Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.
