Before the world was hit by COVID-19, crypto assets such as Bitcoin and Ethereum had little correlation with financial markets. After the pandemic, the lines have become increasingly blurred.
In a new blog post, economists at the International Monetary Fund say that several Asian countries have vigorously adopted digital assets over the past few years, while stressing the need for regulation sex.
The organization noted that digitization can drive a much-needed shift to environmentally conscious payment systems and contribute to financial inclusion. However, the potential financial stability risks associated with the integration of cryptocurrencies into the Asian financial system cannot be ignored.
Spotlight on Asia
Investors in this region are following global trends and amassing a large amount of cryptocurrencies. As a result, the IMF stated that the correlation between the performance of Asian stock markets and crypto-assets, as well as returns and volatility, have increased significantly since the beginning of the pandemic.
In the context of India, a panel of economists observed that Bitcoin’s return correlation with the country’s stock market rose by as much as 10 times during the pandemic. This demonstrates the “limited risk diversification” advantage of cryptocurrencies. Additionally, volatility correlations have increased by 3x — implying a potential “spillover of risk sentiment between cryptocurrencies and equity markets.”
The interconnectedness of the Asian cryptocurrency and equity markets has reached new highs. Some factors in this trend are the increasing acceptance of crypto-focused companies and investment vehicles traded in equities and OTC (OTC) markets and the growth of retail and institutional crypto adoption, many of which have taken a deep dive into the equity and over-the-counter (OTC) markets.
Interestingly, the IMF also found that the rise in crypto-equity correlations on the African continent was accompanied by a surge in crypto-equity volatility spillovers in India, Vietnam, and other countries. Thailand.
“This demonstrates the growing interconnectedness between the two asset classes, which allows for the transmission of shocks that could affect financial markets.”
Regulation needed
Despite the requirement for clear regulation in response to growing cryptocurrency activity in Asia, many countries have opted for stricter measures or push for a blanket ban. Regulatory frameworks in Asia, including India, Vietnam and Thailand, are slow to implement, although they are being implemented.
IMF economists believe that such regulatory frameworks should be designed for the primary domestic use of these assets. They went on to add,
“They should develop clear guidelines for regulated financial institutions and seek to inform and protect retail investors. Finally, to be fully effective, cryptocurrency regulation should be closely coordinated across jurisdictions.”
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