Sharp price swings in cryptocurrencies are causing “destabilising” capital flows in emerging markets, and the use of crypto in place of traditional currencies poses “immediate and acute risks”, according to a senior official at the IMF.
“Crypto is being used to take money out of countries that are regarded as unstable [by some external investors],” said Tobias Adrian, the IMF’s financial counsellor and head of its monetary and capital markets department.
“It is a big challenge for policymakers in some countries,” Adrian said in an interview with the Financial Times, noting that “cryptocurrency markets have lost about $1tn in value since the peak”.
The IMF last week urged El Salvador to stop recognising bitcoin as legal tender, reiterating its warning that official adoption of the digital asset last year presented “large risks” for the stability and integrity of the country’s financial system.
Nayib Bukele, the president of El Salvador — which is seeking more than $1bn in financing from the IMF — plans to raise money by selling bonds linked to the world’s biggest cryptocurrency. The scheme has drawn criticism from some of the international investors that own debt already issued by the government.
Adrian said that some emerging markets and developing economies now faced “immediate and acute risks” as a result of their existing established currencies being replaced by crypto assets, a process that has been dubbed “cryptoisation”.
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“Capital flow management measures will need to be fine-tuned in the face of cryptoisation,” said Adrian. “Applying established regulatory tools to manage capital flows may be more challenging when value is transmitted through new instruments, new channels and new service providers that are not regulated entities.”
Signs of closer correlation between the performance of cryptocurrencies and other financial assets in developed countries, such as US technology stocks, government bonds and even crude oil are also troubling the IMF.
Officials at the Washington-based fund believe that sharp deleveraging episodes in cryptocurrencies are feeding in to sell-offs in equity markets.
“The correlation between crypto and equity markets has been trending up strongly. Crypto is now very closely tied to what is happening in equities. We can’t just dismiss it,” said Adrian.
The IMF has urged national and global regulators to establish a co-ordinated, consistent and comprehensive approach to supervising cryptocurrencies — a daunting task, given the speed at which digital assets are moving into mainstream finance.
“Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring,” said Adrian.
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