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IMF Says Growing Connection Between Crypto and Traditional Finance Pose New Risks

The International Monetary Fund (IMF) is issuing a warning to investors that a growing link between crypto assets and the stock market may pose a risk to the financial system.

In a new report, the IMF says that the rising popularity of digital assets combined with their volatile prices could spell trouble for financial stability as cryptocurrencies continue to intertwine with traditional markets.

“The intra-day price volatility of two major crypto assets, Bitcoin (BTC) and Ethereum (ETH), is now about four to eight times more correlated with the volatility of the main US equity market indices S&P 500, Nasdaq, and Russell 2000 indices, compared to 2017-19.”

The international organization says that crypto assets are no longer on the outer limits of the financial world, which calls for regulators to design policies that would mitigate the risks stemming from price volatility and the rising use of leverage in their trading.

“Because of the relatively unregulated nature of the crypto ecosystem, any significant disruption to financial conditions driven by crypto price volatility could potentially be largely outside the control of central banks and regulatory authorities…

These findings suggest that crypto assets may no longer be considered as a fringe asset class and could potentially pose financial stability risks due to their extreme price volatility.

Thus, regulators and supervisors need to closely monitor action in the crypto markets and the exposure of financial institutions to these assets, and design appropriate regulatory policies to mitigate systemic risks emanating from crypto price spillovers.”

The IMF’s findings indicate that the connection between digital assets and stocks could be on the rise due to the public’s adoption of crypto exchange platforms and the growing popularity of BTC among both retail and institutional investors.

“Key drivers of the increased interconnectedness could include growing acceptance of crypto-related platforms and investment vehicles in the stock market and at the over-the-counter market, or more generally growing Bitcoin adoption by retail and institutional investors, many of whom have positions in both the equity and crypto markets.”

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