Cryptocurrencies: The IMF warns of systemic risk and calls for regulation

© Reuters – In a report released earlier this week, the International Monetary Fund (IMF) warned of the ever-closer ties between mainstream financial markets and the cryptocurrency market, pointing to systemic risks.

In particular, the IMF claims that cryptocurrencies are no longer on the “margin” of the financial system, and that given their high volatility, the growing correlation between cryptocurrencies and equities could soon pose risks to financial stability.

Cryptocurrency volatility ripples through stock markets

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

“Crypto assets such as (BTC-USD) have matured from an obscure asset class with few users to an integral part of the digital asset revolution, raising financial stability concerns. “, he added.

The IMF goes even more specific in its report, estimating that bitcoin’s volatility explains about 15% of the volatility during the pandemic, and about 10% of the variation in S&P 500 returns, noting that “a sharp decline in bitcoin price may increase investors’ risk aversion and lead to a drop in equity market investments,” the fund wrote.

In this context, the IMF has argued that it is time to adopt a comprehensive and coordinated global regulatory framework to guide national regulation to mitigate the financial stability risks associated with cryptocurrencies.

Morgan Stanley (NYSE:) also highlights the link between cryptos and exchanges

Finally, it should be noted that the investment bank Morgan Stanley also underlined this in a note published on Monday.

In particular, she noted that “the market has treated most cryptocurrencies as risky speculative assets, as shown by the strong positive correlation between bitcoin and stock markets over the past six months”.

Morgan Stanley judged that this “supports our view that crypto investors should pay more attention to stocks than to prices”.

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