IMF Report: Crypto’s volatile nature could “pose financial stability challenges”

The latest Global Financial Stability Report by IMF highlighted the volatility factor in virtual currencies. While IMF stated that the crypto sphere opens pathways to several new opportunities including improved and affordable cross-border payments; it also alerted people that the digital currency assets pose financial stability challenges.

“The rapid growth of the crypto ecosystem presents new opportunities. Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly…Despite potential gains, the rapid growth and increasing adoption of crypto assets also pose financial stability challenges,”, stated IMF.

The Financial Counsellor, Director of the Monetary, and Capital Markets Department of IMF, Tobias Adrian told the Press Trust of India (PTI) that cryptocurrencies like Bitcoin could be the sole cause of instability in lieu of its extreme price swings. He also compared crypto to equities, commodities, and exchange rates. He emphasized that, while all of them are risks to investment, crypto still takes the crown for being the riskiest because of volatility. Adrian asserted that crypto may be a good investment opportunity but can never compare to that of a monetary aggregate.

“It might go back up, it might go back down. So if you’re a merchant, and you’re quoting in Bitcoin, you’re exposed to this massive volatility. It is much more volatile than equities or commodities or even exchange rates. It’s a very, very volatile asset, and that is introducing instability…It’s fine as an investment asset. But as a monetary aggregate, it just doesn’t have the right properties”.

IMF report criticizes Stablecoins

The IMF report also took the regulators’ stance by reinstating that crypto is in grave need of a legal framework. The report mentioned stablecoins’ rapid growth as a potential risk to the economic system, and that the regulators should impose laws on them. Furthermore, the IMF report promoted the issuance of CBDCs in the digital era.

“Policymakers should implement global standards for crypto-assets and enhance their ability to monitor the crypto ecosystem by addressing data gaps. As the role of stable coins grows, regulations should correspond to the risks they pose and the economic functions they perform. Emerging markets faced with cryptoisation risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies,”.