Before the world was hit by COVID-19, crypto assets such as Bitcoin and Ether showed little correlation with financial markets. After the pandemic, the lines have become increasingly blurred.
In a new blog post, IMF economists said several Asian countries have fiercely embraced digital assets over the past two years, while stressing the need for regulation.
The organization noted that digitalization can drive a much-needed transition to an eco-friendly payment system and also foster financial inclusion. However, the potential risks to financial stability associated with the integration of crypto into the financial system in Asia cannot be ignored.
Focus on Asia
Investors in the region have accumulated a massive amount of crypto, closely following the global trend. As a result, the IMF said the correlation between Asian stock market performance and crypto assets has increased significantly since the start of the pandemic, along with returns and volatility.
In the Indian context, the group of economists observed that the return correlations of Bitcoin and the country’s stock markets increased 10 times during the pandemic. This was indicative of the “limited risk diversification” benefits of crypto. Additionally, volatility correlations have increased 3x, signifying “potential spillovers to risk sentiment among crypto and equity markets.”
The interconnectedness of crypto and equity markets in Asia has reached a new high. Some of the factors driving this trend are the growing acceptance of crypto-focused companies and investment vehicles in the equities and over-the-counter (OTC) market and the growing adoption of retail and institutional crypto, good many of these players have dabbled in stocks as well as crypto.
Interestingly, the IMF has also found that the increase in crypto-equity correlations on the continent has been accompanied by an increase in the fallout from crypto-equity volatility in countries like India, Vietnam and China. Thailand.
“This indicates a growing interconnectedness between the two asset classes that allows the transmission of shocks that can impact financial markets.”
Need for regulation
Despite calls for regulatory clarity in response to growing crypto activity in Asia, many countries have opted for strict measures or pushed to implement blanket bans. Regulatory frameworks, although underway, have been very slow in Asia, especially in India, Vietnam and Thailand.
IMF economists believe that these regulatory frameworks should be designed for the main uses of these assets in countries. They kept adding,
“They should establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors. Finally, to be fully effective, crypto regulation must be closely coordinated across jurisdictions.
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