Global Financial Stability Report 2021

In News

• Recently, the International Monetary Fund (IMF) released its Global Financial Stability Report 2021.

Key Findings

• Global
  • Prevalence:
    • As per Global Consumer Survey in 2020, 99 per cent of its respondents responded that they did trade in cryptocurrencies. 
    • Nigeria, Vietnam and the Philippines topped the mentioned survey. 
  • Tempting Option:
    • It pointed out that for emerging markets and developing economies, adoption of cryptocurrency might be luring but they also come with a set of potential macro-financial risks, especially with respect to asset and currency substitution.
• India:
  • India has seen a massive spurt in crypto users of late. 
  • The number of blockchain start-ups surpassed 300 in 2021, with the daily crypto trading volume peaking between $300 -$500 million.
  • India ranks higher than China, United States, Germany and Japan in crypto adoption. 
• Miscellaneous:
  • Market Value of Crypto:
    • After recurrent fluctuations, the market value of crypto assets has increased again to more than $2 trillion at the time of publishing the report. 
    • This amounts to a year-to-date 170 per cent increase.
  • Dominant and interest shift:
    • As per the report, Bitcoin remains the dominant Crypto asset. However, its market share fell sharply in 2021 from 70 per cent to less than 45 per cent. 
    • The interest has shifted towards newer blockchains that use smart contracts that replace the earlier ones by enhancing scalability, interoperability, and sustainability.
  • Stable Coins:
    • Stablecoin trading volumes have outpaced all other crypto assets. 
    • This is primarily because of their high usability for on-spot settlements and derivatives trades on exchanges. 
    • The relative price stability has shielded users from the volatility of other crypto assets. 

Significance of Crypto

• No intermediaries:
  • The crypto-ecosystem is free of intermediaries and match credit platforms match borrowers and lenders without any credit-risk evaluation. 
• Anonymity promoted:
  • They operate directly on blockchains without any customer identification requirements. 
• Deregulated finance:
  • Deregulated finance made possible by the crypto ecosystem has particularly helped its popularity and intake. 
• More options to invest in:
  • Lot of cryptocurrencies and other stable coins are available for the customers to invest in.

Challenges associated with Crypto

• Operational Risks:
  • Operational risks may potentially result in significant downtime when failures and disruptions would prevent the use of services. 
  • High periods of transaction activity and poorly designed systems and controls make it particularly vulnerable to such risks. 
• Cyber risks:
  • Cyber risks occur because such systems are prone to cyber-attacks.
• Asset and currency substitution:
  • It will be a major problem for emerging economies.
• Huge price volatility:
  • Price fluctuation is extremely high but so is the return on such investments.
  • This could potentially lead to huge losses for the customers. 
• Governance Risks:
  • These platforms lack transparency pertaining to how cryptos are issued and distributed. This could again pave the way for huge losses.
• Lacking oversight mechanism:
  • Lacking an oversight mechanism, the ecosystem is vulnerable to consumer fraud and market integrity risk.
• No monitoring mechanism:
  • The IMF stated that there is no reliable method to estimate the stock or flow of crypto assets based on country residency. 
  • It added that a commonly used proxy is residency estimates based on internet visits to websites of crypto asset providers.

Way Ahead

• There is a need to enact de-dollarization policies including-
  • enhancing monetary policy credibility; 
  • a sound fiscal position; 
  • effective legal and regulatory measures; and 
  • the implementation of central bank digital currencies.

Source: Outlook