IMF calls for regulation amid increased co-movement of Asian crypto and equity markets

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The International Monetary Fund (IMF) said the co-movement of cryptocurrency and equity markets in Asia, particularly India, Thailand and Vietnam, calls for urgent regulation.

In a blog post, the IMF observed that retail and institutional investors in these three countries are among the top users of the crypto market, and that it is high time for financial regulators to step in and integrate the crypto markets. and finance.

The global financial institution noted that the return correlation of Bitcoin and the stock market in India has increased tenfold since the outbreak, indicating that the crypto offers modest benefits in risk diversification. Additionally, volatility correlations increased three-fold, indicating “possible spillover of risk emotion between crypto and equity markets.”

The increase in crypto-equity correlations in Asia has coincided with a significant increase in the fallout from crypto-equity volatility in India, Vietnam and Thailand, he added.

This means a growing interconnection between the two asset classes, allowing the impacts to be transmitted to the financial markets.

He further observed that digitizing money will create an eco-friendly payment system and accelerate the financial inclusion of people who cannot afford to use traditional banks.

As acceptance of cryptocurrency grows, government agencies in Asia are concerned about the risks it poses. Hence, they have focused more on regulation and regulatory frameworks are being developed in various countries including India, Vietnam and Thailand. India levies a 30% tax plus surcharges and a tax on capital gains obtained from crypto assets, the highest tax bracket.

As long as crypto is unregulated, the IMF observes, it poses a risk to financial stability. Before the pandemic, the crypto market seemed isolated from the traditional financial market, the main selling point of digital assets. Bitcoin and altcoins showed little correlation with Asian stock markets, negating concerns about the crypto causing financial instability.

A year and a half into the pandemic, the value of the global crypto market increased 20-fold to $3 trillion in December 2021. While millions of people stayed home and received government assistance, crypto trading surged. Then in June 2022, when central banks raised interest rates to curb inflation, the crypto market plunged below $1 trillion.

Although the financial sector appears to be immune to these steep swings, this may not be the case in future market cycles. Retail or institutional investors, who own both crypto assets and traditional financial assets, may be affected. Large crypto losses can cause these investors to reorganize their holdings, potentially generating financial market volatility or even default on traditional liabilities, the New York-based global financial institution noted.

As Asian investors poured money into cryptocurrency, the correlation between the success of stock markets in the region and crypto assets like Bitcoin and Ethereum grew. While correlations between Bitcoin and Asian stock markets were minimal before the pandemic, they have increased significantly since 2020, he added.

“They 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,” the IMF said. in the blog.

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