IMF warns crypto rout could lead to systemic risk, backs Fed digital coin

The International Monetary Fund says the Fed is likely to increase volatility in cryptocurrencies and stocks by raising interest rates and increasing the correlation between the two asset classes.

Cryptocurrencies have huge discounts. Since hitting a record low in November, the value of Bitcoin (BTC) has almost halved.

“The Fed needs to tighten its financial position, which means it needs to raise interest rates and lower the prices of risky assets, which can be somewhat painful,” said the IMF’s Director of Currency and Capital Markets. One Tobias Adrian said. He told Yahoo Finance in an interview.

“It will change economic activity and it will change inflation,” he added.

Adrian has not given an exact timeline, but he believes the market could take two to six months to fully adjust to the new interest rate levels.

He explained that the large leverage in the cryptocurrency market increases the volatility of spot prices. Hedge funds invest in both assets and are closely related to leverage in the stock market.

At this point, banks themselves are generally hardly exposed to crypto assets. However, Adrian argued that there is still a gap in actual risk within digital assets, as there is little data showing how much risk investors are taking as a whole and they don’t know the full extent of the exposure. ..

“There is very little data at this point and data disclosure is not uniform,” he said.

Adrian added: “Investors often don’t know how much risk they are taking…there are few limitations on margin setting and internet risk.” “So there really is a lot of room to improve the regulatory environment for the crypto space.”

Adrian says cryptocurrencies are largely embedded in shadow banking systems, but expect more regulation over time. He states that the challenge is that crypto is highly decentralized, as there is no legal entity that manages digital currencies like bitcoin.

Economists have argued that digital wallet providers that store users’ cryptocurrency are well suited to regulation using data disclosure and cyber risk requirements.

Why Stablecoin, CBDC Makes sense

Binary code tunnel on a black background. CBDC registration concept of digital currency central bank

When it comes to Stablecoin, Adrian offers the same services as traditional banks, so we recommend that some issuers get a banking license and be regulated as such.

“We know that the highly regulated, Fed-backed banks and banks are doing well,” he told Yahoo Finance. “If stablecoin providers don’t have such regulatory setup or liquidity provisions, it will be difficult for them to really achieve stability.”

However, other stablecoin issuers may not be suitable for obtaining a banking license, he said, referring to what works like a money market fund.

“Whether Stablecoin is like a bank or a mutual fund depends on the business model of Stablecoin,” Adrian added.

Some stablecoin issuers have a banking license in some states, while others apply for a banking license. Currently, US policy makers are considering whether to grant stablecoin issuers a banking license at the federal level with access to the Federal Reserve. The Biden administration has recommended that only banks be allowed to issue stablecoins.

As Adrian said, a well-designed central bank digital currency (CBDC) is a good idea. Economists say properly designed payment systems could be more efficient, more Americans could access the financial system, and pay with other countries cheaper and faster. There is.

But he also says that CBDC is the basis for enabling the existence of cryptocurrencies.

“There are many issues with crypto assets, but it is hard to imagine them disappearing,” Adrian says. “Central bank digital currency is also an important bridge to the crypto-asset world and confirms that the Federal Reserve is an important foundation for this new financial system.”

Adrian added that CBDCs should be able to coexist with Stablecoin in the private sector.

For more information about cryptocurrencies, check out the following:

What is Dogecoin and how to buy it

Ethereum: what is it and how do you invest?

Top 21 Cryptocurrency Leaders to Watch in the Second Half of 2021

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