Home Markets Crypto more in line with Asian stocks, underscoring need for regulation – IMF Blog

Crypto more in line with Asian stocks, underscoring need for regulation – IMF Blog

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Crypto more in line with Asian stocks, underscoring need for regulation – IMF Blog

By Nada Choueiri, Anne-Marie Gulde-Wolf and Tara Iyer

中文, 日本語

Crypto trading volume and co-movement with stock markets has increased in the region.

Few regions in the world have embraced crypto assets like Asia, where major adopters include individual and institutional investors from India to Vietnam and Thailand. This raises the important question of the extent of crypto integration into the financial system in Asia.

Although digitization can facilitate the transition to an environmentally friendly payment system and also promote financial inclusioncrypto can pose financial stability risks.

Before the pandemic, crypto seemed isolated from the financial system. Bitcoin and other assets showed little correlation with Asian stock markets, which helped dispel financial stability concerns.

Crypto trading, however, soared as millions stayed home and received government assistance, while low interest rates and easy financing conditions also played a role. The total market value of global crypto assets grew 20x in just a year and a half to reach $3 trillion in December. Then it plunged to less than $1 trillion in June as central bank interest rate hikes to contain inflation ended easy access to cheap borrowing.

While the financial sector appears to have been immune to these sudden moves, it may not be in future booms and busts. The contagion could spread through individual or institutional investors who may hold both crypto and traditional financial assets or liabilities. Large crypto losses can lead these investors to rebalance their portfolios, possibly causing financial market volatility or even a default on traditional liabilities.

As Asian investors have piled into crypto, the correlation between the performance of stock markets in the region and crypto assets such as Bitcoin and Ethereum has increased. While returns and volatility correlations between Bitcoin and Asian stock markets were low before the pandemic, these have increased significantly since 2020.

For example, the return correlations of Bitcoin and Indian stock markets increased 10-fold during the pandemic, suggesting limited benefits from crypto risk diversification. Volatility correlations jumped 3x, suggesting possible spillovers from risk sentiment in the crypto and equity markets.

Key drivers for the increased interconnectedness of crypto and equity markets in Asia could include the growing acceptance of crypto-related platforms and investment vehicles in the stock market and over-the-counter market, or more generally the growing adoption of crypto by retail and institutional investors. in Asia, many of whom hold positions in both the equity and crypto markets.

Using the spillover methodology developed in our January report Global Financial Stability Note, we also find that the rise in crypto-equity correlations in Asia has been accompanied by a sharp increase in the fallout from crypto-equity volatility in India, Vietnam and Thailand. This indicates a growing interconnectedness between the two asset classes that allows the transmission of shocks that can affect financial markets.

As a result, Asian authorities are increasingly sensitive to the growing risks posed by crypto as adoption continues to spread. They have therefore focused their attention on crypto regulation, and regulatory frameworks are underway in several countries, including India, Vietnam, and Thailand.

Significant effort is also required to address important data gaps which still prevent national and international regulators from fully understanding the ownership and use of crypto and its intersection with the traditional financial sector.

Regulatory frameworks for crypto in Asia should be tailored to the main uses of these assets in the countries. They should establish clear guidelines on regulated financial institutions and strive to inform and protect retail investors. Finally, to be fully effective, crypto regulation must be closely coordinated across jurisdictions.

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