The International Monetary Fund has called for stricter regulation of the crypto asset market, saying that if regulators don’t act quickly, digital assets could threaten the overall financial system.
The failure of one of the biggest platforms in the industry has already brought attention to the fact that crypto assets lack essential safety measures and the risks they pose. According to a Washington-based lender, most bitcoin investors have already lost money.
Experts at the Bank for International Settlements said that about three-quarters of those who invested in bitcoin lost their money after the FTX shut down in November 2022.
The value of the virtual currency and Ethereum reached a record high of around USD 68,000 in November 2021 before falling by roughly 75% in 2022. As of November 2022, the industry was worth USD 900 billion, well down from an earlier estimate of over USD 3 trillion.
In a recent blog post, International Monetary Fund Deputy Managing Director Bo Li and Deputy Division Chief Nobayasu Sugimoto wrote that the losses “punctuated an already perilous period for crypto, which has lost trillions of dollars in market value.”
Stablecoins, hedge funds, and crypto exchanges have all seen market breakdowns, which have led to severe worries about the sector’s integrity and user protection.
The International Monetary Fund noted that there may soon be worries about systemic risk and financial instability since cryptocurrencies have “been growing and have deeper links with the core financial system.”
The International Monetary Fund stated that many of these issues could be resolved by enhancing financial regulation and supervision, apart from creating international standards that national regulatory authorities can consistently apply.
Although stablecoins and crypto-assets do not pose problems to the global financial system, the lender pointed out that several underdeveloped and emerging market economies have already been “materially affected.”
Some of these markets, it claimed, are already witnessing sizable retail holdings of cryptocurrency assets. In addition, some of them are also going through a process known as “cryptoisation,” in which digital assets are used in place of local money and help to get around exchange and capital control constraints.
Such substitution could result in capital outflows and a loss of monetary sovereignty, and dangers to financial stability, thereby posing significant difficulties for decision-makers.
The International Monetary Fund also cautioned that there might be hazards associated with cryptocurrencies for advanced countries, pointing out that institutional investors had increased their stablecoin holdings during solid rates of return.
“Therefore, we believe it’s crucial for regulatory authorities to quickly manage crypto risks, without stifling innovation,” the statement continued.