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Cover Global Financial Stability Notes
Cryptic Connections: Spillovers between Crypto and Equity Markets
Tara Iyer
Crypto assets have emerged as an increasingly popular asset class among retail and institutional investors. Although initially considered a fringe asset class, their increased adoption across countries—in emerging markets, in particular—amid bouts of extreme price volatility has raised concerns about their potential financial stability implications. This note examines the extent to which crypto assets have moved to the mainstream by estimating the potential for spillovers between crypto and equity markets in the United States and in emerging markets using daily data on price volatility and returns. The analysis suggests that crypto and equity markets have become increasingly interconnected across economies over time. Spillovers from price volatility of the oldest and most popular crypto asset, Bitcoin, to the S&P 500 and MSCI emerging markets indices have increased by about 12-16 percentage points since the onset of the COVID-19 pandemic, while those from its returns have increased by about 8-10 percentage points. Spillovers from the most traded stablecoin, Tether, to these indices have also increased by about 4-6 percentage points. In absolute terms, spillovers from Bitcoin to global equity markets are significant, explaining about 14-18 percent of the variation in equity price volatility and 8-10 percent of the variation in equity returns. These findings suggest that close monitoring of crypto asset markets and the adoption of appropriate regulatory policies are warranted to mitigate potential financial stability risks.
Keywords:
Crypto assets, international financial markets, volatility spillovers, return spillovers, dynamic connectedness, COVID-19, emerging markets, financial stability; crypto asset market; fringe asset class; price volatility; MSCI index; equity price misalignment; credit default swap Index; Virtual currencies; Spillovers; Stock markets; Emerging and frontier financial markets; Financial contagion; Global
Cover Global Financial Stability Notes
Cryptic Connections: Spillovers between Crypto and Equity Markets
Tara Iyer

, Tether also contributes to US equity price movements though its share is smaller relative to Bitcoin given the relatively limited movement in its prices, and averages about 4–7 percent for volatility and returns. Overall, these results are quite remarkable given that less than five years ago, the contribution of crypto assets to explaining the variations in US equity markets was one percent at the most and suggest a significant integration of the crypto asset markets with equity markets, most likely because of the increased adoption of crypto assets by retail and

Keywords:
equity market indices S&P 500; emerging markets market index; equity index; equity price movement; crypto price spillover
Cover Global Financial Stability Notes
Front Matter
Tara Iyer

variation in equity returns. These findings suggest that close monitoring of crypto asset markets and the adoption of appropriate regulatory policies are warranted to mitigate potential financial stability risks .

Keywords:
Virtual currencies; Stock markets; Emerging and frontier financial markets; Global
Cover Global Financial Stability Notes
Back Matter
Tara Iyer

of Variance Decompositions: Measuring the Connectedness of Financial Firms .” Journal of Econometrics 182 ( 1 ): 119 – 134 . Dyhrberg , A . 2016 . “ Hedging Capabilities of Bitcoin. Is It the Virtual Gold? ” Finance Research Letters 16 : 139 – 144 . Financial Stability Board (FSB) . 2018 . “ Crypto-Asset Markets. Potential Channels for Future Financial Stability Implications .” Basel, Switzerland . Griffin , J. , and A. Shams . 2020 . “ Is Bitcoin Really Un-Tethered? ” The Journal of Finance 75 : 1913 – 64 . Guesmi , K

Cover FinTech Notes
Back Matter
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier

imports of necessities—as well as multiple currency practices (MCPs) and CFMs. Crypto assets reportedly have been used in cross-border payments and remittances to hedge against inflation and exchange rate depreciation. The increasing price of crypto assets lured investors and several local startups to act as local exchanges to facilitate crypto trades. The central bank prohibits commercial banks from dealing with companies involved in crypto assets, but firms have reportedly found a workaround using third-party accounts. INDIA In India the crypto-asset market is

Keywords:
asset holder; Virtual currencies; Capital flow management
Cover FinTech Notes
Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier
Capital flow management measures (CFMs) can be part of the broader policy toolkit to help countries reap the benefits of capital flows while managing the associated risks. Their implementation typically requires that financial intermediaries verify the nature of transactions and the identities of transacting parties but is facing the rising challenge of crypto assets. Indeed, crypto assets have become a significant instrument for payments and speculative investments in some countries. They can be traded pseudonymously and held without identification of the residency of the asset holder. Many crypto service providers operate across borders, making supervision and enforcement by national authorities more difficult. The challenges posed by the attributes of crypto assets are compounded by gaps in the legal and regulatory frameworks. This paper aims to discuss how crypto assets could impact the effectiveness of CFMs from a structural and longer-term perspective. To preserve the effectiveness of CFMs against crypto-related challenges, policymakers need to consider a multifaceted strategy whose essential elements include clarifying the legal status of crypto assets and ensuring that CFM laws and regulations cover them; devising a comprehensive, consistent, and coordinated regulatory approach to crypto assets and applying it effectively to CFMs; establishing international collaborative arrangements for supervision of crypto assets; addressing data gaps and leveraging technology (regtech and suptech) to create anomaly-detection models and red-flag indicators that will allow for timely risk monitoring and CFM implementation.
Keywords:
capital flow management measures; CFMs; crypto assets; digital currencies; Regtech; Suptech; untraceable transactions; crypto exchanges; distributed ledger technology; Bitcoin; FINTECH note; asset holder; capital outflow restriction; crypto asset Adoption; crypto-asset exchange; Virtual currencies; Capital flow management; Blockchain and DLT; Capital flows; Anti-money laundering and combating the financing of terrorism (AML/CFT); Global
Cover Global Financial Stability Report, October 2021
Chapter 2 The Crypto Ecosystem and Financial Stability Challenges
International Monetary Fund. Monetary and Capital Markets Department

existing policies. Increased demand for crypto assets could facilitate capital outflows that affect the foreign exchange market. Crypto exchanges play the crucial role of facilitating the conversion of local currency to crypto assets and vice versa. The natural 27 demand and supply for conversions can easily become unbalanced over the 24/7 trading period of crypto asset markets. For markets to clear, some market makers must provide liquidity by trading more liquid pairs (such as US dollar–Bitcoin and US dollar–local currency) to determine the price of the less liquid

Keywords:
Crypto ecosystem; crypto assets; cryptoization; financial stability risks; decentralized finance; Investment funds; green economy; climate; financial vulnerabilities; economic recovery; monetary policy; investment fund sector; unit of account; transition-opportunity score; fund label; market integrity risk; climate fund; sustainability label; fund flow; commercial paper; financial leverage; Virtual currencies; Emerging and frontier financial markets; Mutual funds; Climate finance; Greenhouse gas emissions; Global; Caribbean; Europe
Cover FinTech Notes
Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets
Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier

&P Global Market Intelligence, the Block, Gold.org, Chainalysis (2021) , and IMF staff calculations. Note: Panel 2’s bold blue line represents stablecoin as a share of the total crypto-asset market (right scale). In panel 4, blue represents emerging market and developing economies and orange represents advanced economies. Panel 5 features the trading volume of the top 10 centralized exchanges and top 10 decentralized exchanges. In panel 6, EMEA = Europe, Middle East, and Africa; EU = European Union; LATAM = Latin America. BOX 1. The Crypto-Assets Ecosystem

Keywords:
crypto-assets ecosystem; crypto-asset adoption; transaction data; payments transaction; assets pose
Cover Global Financial Stability Report, April 2022
The Rapid Growth of Fintech
International Monetary Fund. Monetary and Capital Markets Department

so far taking place mainly in crypto asset markets, but they can increase the interconnect-edness of crypto investors. With the rapidly increasing adoption of DeFi by institutional investors, the linkages with traditional financial institutions are growing. DeFi may also accelerate the ongoing trend toward cryptoization in some economies (see Chapter 2 of the October 2021 Global Financial Stability Report [GFSR]). As financial services move from regulated banks to less regulated—or even unregulated—entities and platforms, as in the case of DeFi, so do the

Keywords:
is decentralized finance; DeFi lending; defi platform; mortgage market; finance liquidity; Mortgages; Global
Cover IMF Staff Country Reports
Canada: Financial Sector Assessment Program-Technical Note-Oversight of Financial Market Infrastructures and Fintech Development
International Monetary Fund. Monetary and Capital Markets Department
This paper reviews assessment of financial market infrastructures (FMIs) and authorities’ responsibilities in Canada. The report shows that the FMIs have operated normally under a well-established legal and oversight framework that is distinct for Canada. The Bank of Canada (BOC) has issued a Guideline that defines the criteria for identifying FMIs. Recognition of a clearing agency is also required under provincial securities legislation where terms and conditions and the clearing rule would apply. The current oversight approach can benefit from stronger enforcement powers available to the BOC. Provincial securities regulators are encouraged to train FMI oversight staff in advanced quantitative skills to support risk assessment. Further enhancement in managing liquidity and operational risks will help ensure the robust functioning of FMIs. Improvements in cyber resiliency continue in line with international guidance, including industry-wide exercises carried out by FMI operators and participants. However, compliance to endpoint security needs to be tightened by self-attestations and audits of FMI participants. The categorization and reporting of operational incident severity levels could be further coordinated.