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Crypto prices move in sync with Asian stocks, prompting regulation

Asia’s crypto trading was the main driver of a global crypto surge, leading to a higher correlation between blockchain and equity markets. The trend can be contagious, so the International Monetary Fund (IMF) calls for a tight and comprehensive regulatory framework.

Crypto is no longer insulated from the traditional financial systems. With millions staying and home during the pandemic, the world witnessed a 20-fold surge of crypto assets in a year and a half.

Last December, the market cap for cryptocurrencies reached $3 trillion and plummeted to only $1 trillion this June, prompting speculations about the crypto winter.

IMF argues that the conventional financial sector is insulated from these sharp movements, but this might not be the case in the future.

“Contagion could spread through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities. Large losses on crypto may drive these investors to rebalance their portfolios, possibly causing financial-market volatility or even default on traditional liabilities,” IMF said.

Asian investors, both individual and institutional, embraced crypto like few parts of the world, reinforcing the correlation between the performance of the region’s equity markets and crypto assets such as Bitcoin and Ethereum.

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

This means there could be a spillover effect - high volatility in crypto markets could send shocks to the traditional financial markets.

For example, India’s shares have been more in step with crypto assets since the pandemic hit, potentially fueling broader market volatility.

“Accordingly, authorities in Asia are increasingly sensitive to the rising risks posed by crypto as adoption continues to spread. They have therefore dialed up their focus on crypto regulation, and regulatory frameworks are underway in several countries including India, Vietnam, and Thailand,” IMF said.

It also argued a need to address important data gaps, preventing regulators from fully understanding blockchain and its correlation with the financial sector.

“Regulatory frameworks for crypto in Asia should be tailored to the main uses of such assets within the countries. 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,” IMF said.

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