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However, as millions stayed at home and received government assistance, crypto trading boomed during the pandemic, while low interest rates and easy financial conditions played a role.
Digitalization of the payment system will help the transition to an environmentally conscious payment method and promote financial inclusion, but at the same time crypto-assets pose risks to financial stability, the International Monetary Fund said.
In a blog titled 'Crypto in step with Asia's equities, highlights need for regulation', the IMF said some parts of the world have embraced crypto assets like Asia -- including individuals and institutional investors from India to Vietnam. and Thailand – which raises the key issue of the extent of crypto's integration into the region's financial system.
"Prior to the pandemic, crypto seemed isolated from the financial system. Bitcoin and other assets showed little correlation to Asian equity markets, which helped diffuse financial stability concerns," said a blog written by Nada Chouyeri, Anne-Marie Gulde-Wolf and Tara Iyer. .
However, as millions stayed at home and received government assistance, crypto trading boomed during the pandemic, while low interest rates and easy financial conditions played a role.
The total market value of the world's crypto assets increased twenty-fold in just over a year and a half to reach US$3 trillion in December. Then, it fell below $1 trillion in June as the central bank raised interest rates to control inflation. Access to low credit, it added.
"Large losses in crypto may prompt these investors to rebalance their portfolios, which may trigger financial-market volatility or stabilize in traditional liabilities," it said.
As Asian investors flock to crypto, the blog said, the correlation between the performance of the region's equity markets and crypto assets such as Bitcoin and Ethereum has increased.
"Although the correlations between returns and volatility between Bitcoin and Asian equity markets were low before the pandemic, these have increased significantly since 2020." The blog said key drivers of the increased correlation of crypto and equity markets in Asia include the growing acceptance of crypto. -- related platforms and investment vehicles in the stock market, or growing crypto adoption by retail and institutional investors in Asia -- many of whom have positions in equity and crypto markets.
Additionally, the growing correlation between the two asset classes has raised concerns about allowing transmission of shocks to impact financial markets.
"Accordingly, as adoption continues to spread, authorities in Asia are increasingly sensitive to the risks digital currency poses. So they have focused on crypto regulation, and regulatory frameworks are underway in several countries, including India, Vietnam and Thailand."
In conclusion, it said significant effort is needed to address important data gaps that still prevent domestic and international regulators from fully understanding the ownership and use of crypto and its intersection with the traditional financial sector.
It recommended that regulations be framed in such a way as to establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors, should be fully effective and closely coordinated across jurisdictions.
