The International Monetary Fund (IMF) has drawn attention to the need for urgent regulation concerning the increasing co-movement of cryptocurrencies with the equities market in Asia, particularly India, Vietnam, and Thailand.
It observed the significantly high and unmatched adoption of crypto assets by individuals and institutional investors in these countries, and the recurring implications of the extent of this integration of crypto into the financial system in Asia.
The financial system is having a disruptive change. With digitalization enhancing the transition to an environmentally-conscious payment system and fostering financial inclusion, crypto can pose financial stability risks if there is no regulatory and monetary control.
Before the COVID-19 pandemic, cryptocurrencies exhibited little correlation with the Asian equity markets. Bitcoin and other assets seemed insulated from the financial system, discarding concerns about crypto causing financial instability.
After about a year and a half into the pandemic, the total market value of the world’s crypto assets soared 2000 percent (20-fold) to $3 trillion in December 2021. This is a result of the surge in crypto trading as millions of people were staying at home and receiving government aid. Low-interest rates and easy financing conditions which were in place to mitigate the impact of the COVID also played a role.
The International Monetary Fund noted that while the financial sector seems to be unsusceptible to these sharp fluctuations in the cryptocurrency space, the case may be different in the future. There could be transmissions through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities. As large losses on crypto may cause these investors to re-arrange their portfolios, potentially causing financial-market volatility or even default on traditional liabilities.
As Asian investors increased their holdings of crypto assets like Bitcoin and Ethereum, there was a resultant jump in the interconnection between the performance of the region’s equity markets and these crypto assets. Data from IMF, and CryptoCompare, show that return correlations of Bitcoin and the stock markets in India, Vietnam, and Thailand increased by 10-fold, 30-fold, and just below 5-fold respectively. Similarly, their stock markets volatility correlations with Bitcoin increased by 3-fold, more than 2-fold, and 7-folds respectively.
With the returns and volatility correlations between Bitcoin and Asian equity markets rising and suggesting an increasing exposure to financial stability risks, government authorities in Asia are waking up to the realities that may befall them in the nearest future. They have therefore started paying more attention to crypto regulation, and regulatory frameworks are currently in pipeline in several countries including India, Vietnam, and Thailand.”
IMF thinks that the authorities in Asia should establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors. Finally, to be fully effective, crypto regulation should be closely coordinated across jurisdictions.
