International Monetary Fund: crypto poses threat to financial stability

A growing correlation with the stock market undermines crypto's 'investment hedge' role.

International Monetary Fund: crypto poses threat to financial stability

According to a new report from the International Monetary Fund (IMF), cryptocurrency is no longer an obscure asset class within the financial economy, but a growing correlation with the stock market undermines its "investment hedge" role.

With digital assets and financial markets becoming increasingly interconnected, a blog post accompanying the survey highlights new risks.

According to the report by Tobias Adrian and Tara Iyer of the IMF Monetary and Capital Markets Department, as well as Mahvash Qureshi of the IMF Research Division, "the increasing correlation between crypto assets and stocks reduces their perceived benefits of risk diversification and increases their risk of contagion across financial markets."

"Bitcoin and other crypto-assets have evolved from obscure asset classes with relatively few users to critical elements in the digital asset revolution," the article reads, stressing that this transition has created concerns about financial stability.

Crypto assets helped diversify risk for investors by acting as a hedge against swings in other asset classes by demonstrating a low correlation with stock indexes prior to the pandemic, the authors noted.

Since April 2020, this correlation coefficient has risen 3,600%, going from 0.01 to 0.36. This means that the two asset classes have risen and fallen together more closely since the COVID-19 pandemic began.

Bitcoin faces greater risks with a stronger correlation, according to IMF experts. Increasing interconnections between the crypto and equity markets could result in shocks destabilizing financial markets. Considering that crypto assets are no longer fringe items, the authors concluded:

In countries where crypto adoption is widespread, their increased volatility and valuations could soon threaten the stability of financial markets.

Further, the experts advocated the creation of a coordinated global regulatory framework “to guide national regulation and oversight and mitigate the financial stability risks associated with the crypto ecosystem.”

In a similar call for a global policy on crypto, IMF chief economist Gita Gopinath made a call last month. Despite bans on crypto, she argued that countries wouldn't be able to control offshore exchanges that aren't governed by their country's regulations.