IMF Reassessment: Prosperity of the Crypto Industry Poses Challenges to Financial Stability, Regulatory Frameworks Require Cross-Border Cooperation

The International Monetary Fund (IMF) recently published a report on the cryptocurrency industry, providing a series of data analysis and evaluations on the current state of the industry. An accompanying article introduces the report with the title "Crypto Boom Poses New Challenges to Financial Stability," suggesting that changes are urgently needed in the current state of the cryptocurrency industry.

Reassessment of Risks

In October 2018, the Financial Stability Board (FSB) stated that cryptocurrencies did not pose a significant risk to global financial stability. However, with the gradual rise of the crypto industry and changes in the following risk factors, the International Monetary Fund (IMF) believes that a reassessment of the impact of the crypto industry on financial stability is needed.

1. Exponential Market Cap Growth: The total market capitalization of cryptocurrencies has grown by over 10 times since the end of 2018.

2. Sharp Increase in Trading Volume: Despite the significant volatility of cryptocurrencies, which can lead to substantial losses, trading volumes continue to increase rapidly.

3. Increased Exposure of Banks to Crypto Assets: Many prominent hedge funds hold significant positions in crypto assets, indirectly increasing the exposure of the banking system to crypto assets.

4. Use of Crypto Assets for Payments or Settlement: International payment companies have begun integrating with crypto assets, especially stablecoins, to launch new services.

New Risks Emerging with Development

Since Elon Musk publicly supported Dogecoin on social media last year, it has sparked waves of "meme coins" trends. These tokens typically face higher risks than conventional cryptocurrencies. The article states:

Some meme coins are issued for speculative purposes, and their prices are heavily influenced by social media trends, often exhibiting higher volatility than Bitcoin. Investors also face the risk of tokens disappearing.

The DeFi industry, which gained momentum last year, is also considered highly risky. Despite offering returns that traditional financial industries cannot match, the volatility of these returns is extremely unstable. Additionally, since all operations on DeFi are conducted through smart contracts, they are too complex and opaque for most investors to fully understand, exposing them to potential risks. Due to the reliance on smart contract code, DeFi platforms are frequently targeted by hacking incidents.

Myths about Crypto Assets

While the IMF acknowledges the rapid growth of the crypto industry in recent years, it also cautions investors that the growth of the crypto industry is not significantly higher than other assets. The report states:

The risk-adjusted return of Bitcoin in the past year is similar to the returns of tech stocks or the S&P 500 index. However, investors face a greater risk of price declines.

Furthermore, the low correlation of crypto assets with other assets adds diversification to investment portfolios and is a significant reason why investors choose crypto assets. However, the report mentions that during periods of significant market stress, such as the mass sell-off caused by COVID-19 in 2020, the correlation between crypto assets and other asset classes significantly increases. The report warns that the diversification benefits obtained from holding crypto assets may decrease over time.

High Adoption of Cryptocurrencies in Emerging Markets and Developing Economies

In recent years, the cryptocurrency industry is no longer exclusive to advanced countries, as the adoption of cryptocurrencies in emerging markets and developing economies has significantly increased. Data from major cryptocurrency exchanges shows that the top five countries using these exchanges include emerging countries.

In terms of trading volume, the trading volume of cryptocurrency exchanges in these emerging countries has grown rapidly, even rivaling traditional securities markets, indicating a high level of acceptance of cryptocurrencies in these countries.

These emerging countries and developing economies are mainly turning to cryptocurrencies due to factors such as low central bank credibility, fragile banking systems, and inefficient payment systems.

From the data above, it is evident that the crypto industry has transitioned from regional to global, requiring cooperation between countries to address regulatory issues. The article concludes:

The global nature of crypto assets means that policymakers should enhance cross-border cooperation to reduce regulatory arbitrage risks and ensure effective supervision and enforcement. Timing is crucial, and decisive action is necessary to swiftly coordinate a unified approach globally.