Before the world was hit by COVID-19, crypto assets such as Bitcoin and Ether showed little correlation with financial markets. Post-pandemic, the lines have become increasingly blurry.
In a new blog post, IMF economists said several Asian countries have fiercely adopted digital assets in the last couple of years while highlighting the need for regulation.
The organization noted that digitalization can prompt a much-needed shift to an environmentally-conscious payment system and also aid financial inclusion. However, the potential financial stability risks associated with the integration of crypto into the financial system in Asia cannot be ignored.
Asia in Focus
Investors in the region have piled up a massive amount of crypto, closely following the global trend. As a result, IMF said that the correlation between the performance of Asia’s equity markets and crypto assets increased significantly since the start of the pandemic, as well as the returns and the volatility.
In the Indian context, the group of economists observed that the return correlations of Bitcoin and the country’s stock markets have risen by a whopping 10-fold over the pandemic. This was indicative of the “limited risk diversification” benefits of crypto. Additionally, volatility correlations have ramped up by 3-fold – meaning potential “spillovers of risk sentiment among the crypto and equity markets.”
The interconnectedness of crypto and equity markets in Asia has reached a new high. Some of the factors of this trend are the increasing acceptance of crypto-focused companies and investment vehicles in stocks and the over-the-counter (OTC) market and growing retail and institutional crypto adoption, many of these players have delved into both equity as well as crypto.
Interestingly, the IMF also found that the rise in crypto-equity correlations in the continent has been accompanied by a surge in crypto-equity volatility spillovers in countries like India, Vietnam, and Thailand.
“This indicates a growing interconnectedness between the two asset classes that permits the transmission of shocks that can impact financial markets.”
Need for Regulation
Despite calls for regulatory clarity in response to the growing crypto activity in Asia, many countries have opted for either stringent measures or pushed to implement blanket bans. Regulatory frameworks, even though underway, have been very slow in Asia, including India, Vietnam, and Thailand.
IMF economists believe such regulatory frameworks should be designed for the main uses of such assets within the countries. They went on to add,
“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.”
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