IMF Claims Crypto Not A Threat to Financial Stability

The International Monetary Fund (IMF) asserted that the cryptocurrency market downturn doesn’t threaten global financial stability.

In a report released July 26, the international body highlighted Russia’s invasion of Ukraine and renewed COVID-19 lockdowns as more significant threats to the global economy. The IMF believes bitcoin’s separation from the conventional banking system prevents it from posing a similar hazard.

This stance contradicts earlier sentiments. In April 2019, Christine Lagarde, then head of the IMF, said that cryptocurrencies have an unmistakable impact on the financial system and are upending the banking sector.

In October 2021, the IMF said that cryptocurrencies threatened global financial stability and called for a globally coordinated response to regulation. It highlighted crypto and decentralized finance investor protection and the issue of inadequate reserves for privately-issued stablecoins as critical issues for policymakers.

Could the spillover be the way around?

A type of contagion has spread like wildfire over the last few months in the crypto space: credit contagion. Both crypto companies, including hedge fund Three Arrows Capital and lender Celsius, face bankruptcy proceedings.

Threats of a recession drove many crypto investors to sell crypto assets, considered risky investments, driving the price of bitcoin as low as $17,000 in June 2022, causing problems with collateralized loans.

The IMF believes that the spillover of these market movements into traditional financial markets has been minimal, though investors have experienced significant losses.

But this contradicts a report published in January 2022, ironically titled, “Cryptic Connections: Spillovers between Crypto and Equity Markets,” noting that crypto prices had begun correlating with stocks and were affecting global markets. The report does have a disclaimer, though, saying that its findings are the author’s work and do not necessarily represent the IMF’s views.

Cryptocurrency prices have occasionally rallied ahead of stocks instead of negatively influencing them. It’s possible that investors get bullish on bitcoin again, and stocks come under pressure from recession fears. In that case, cryptocurrencies could continue to break away from the pack.

Key bodies anxious to separate crypto from TradFi

In June, the European Systemic Risk Board said that cryptocurrency’s surge in popularity could result in rapid shocks to the market and suggested regular monitoring of how much exposure financial markets get to cryptocurrency and decentralized finance.

Regulators globally are grappling with how banks can become involved in crypto. The Basel Committee on Banking Supervision suggested that banks hold a limited amount of bitcoin and be imposed onerous capital stipulations that would limit crypto-backed lending.