A new paper published by a team from the International Monetary Fund (IMF) is pointing to the need for a global cryptocurrency framework having found an increasing correlation between these assets and stocks, which raises the risk of contagion across financial markets.
The call for a global crypto framework from the IMF staff comes amid growing concerns about the role of these assets in the global financial space and the growing risk, which now abounds with their growing linkages.
The paper titled, 'Crypto Prices Move More in Sync With Stocks, Posing New Risks', published on January 11, does not necessarily represent the views of the IMF and its executive board.
The authors Tobias Adrian, Tara Iyer, and Mahvash Qureshi, all employed by the IMF, argue that the increasing rate of adoption of crypto assets warrants a global framework to guide their national regulation and supervision.
According to IMF staff, the rising popularity of crypto assets such as Bitcoin had resulted in an increase in correlation between them and traditional assets such as stocks, raising the risk of contagion across financial markets.
“Our analysis suggests that crypto assets are no longer on the fringe of the financial system. Given their relatively high volatility and valuations, their increased co-movement could soon pose risks to financial stability especially in countries with widespread crypto adoption,” wrote the IMF team.
“It is thus time to adopt a comprehensive, coordinated global regulatory framework to guide national regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem,” the trio added.
Adrian and Qureshi are part of the IMF's Monetary and Capital Markets Department, while Iyer works in the Monetary and Financial Markets Department.
According to the paper, the market value of crypto assets has tripled since 2017 to about US$2 trillion last week with the extraordinary levels of liquidity infused by central banks during the novel coronavirus pandemic seemingly instrumental in pushing both crypto and stock prices higher.
“Indeed, our analysis, which examines the spillovers of prices and volatility between crypto and global equity markets, suggests that spillovers from Bitcoin returns and volatility to stock markets, and vice versa, have risen significantly in 2020-21 compared with 2017-19,” the authors wrote in the paper.
According to the paper, “a sharp decline in Bitcoin prices can increase investor risk aversion and lead to a fall in investment in stock markets. Spillovers in the reverse direction – that is, from the S&P 500 to Bitcoin – are on average of a similar magnitude, suggesting that sentiment in one market is transmitted to the other in a non-trivial way.”
Given the sizeable, and growing, interconnectedness between crypto and equity markets, the article called for a global framework to spell out the main uses of crypto assets and the requirements for financial institutions exposed to and engaged with these assets.
Interestingly, the article also called for the swift filling of gaps in data created by the anonymous nature of crypto assets.