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International Monetary Fund. Monetary and Capital Markets Department

are not yet systemic, but risks should be closely monitored given the global implications and the inadequate operational and regulatory frameworks in most jurisdictions. Challenges posed by the crypto ecosystem include operational and financial integrity risks from crypto asset providers, investor protection risks for crypto assets and DeFi, and inadequate reserves and disclosure for some stablecoins. In emerging markets, the advent of crypto assets has benefits but can accelerate cryptoization and circumvent exchange and capital control restrictions

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

International Monetary Fund. Monetary and Capital Markets Department

Abstract

Financial stability risks have been contained so far, reflecting ongoing policy support and a rebound in the global economy earlier this year. Chapter 1 explains that financial conditions have eased further in net in advanced economies but changed little in emerging markets. However, the optimism that propelled markets earlier in the year has faded on growing concerns about the strength of the global recovery, and ongoing supply chain disruptions intensified inflation concerns. Signs of stretched asset valuations in some market segments persist, and pockets of vulnerabilities remain in the nonbank financial sector; recovery is uneven in the corporate sector. Chapter 2 discusses the opportunities and challenges of the crypto ecosystem. Crypto asset providers’ lack of operational or cyber resilience poses risks, and significant data gaps imperil financial integrity. Crypto assets in emerging markets may accelerate dollarization risks. Chapter 3 shows that sustainable funds can support the global transition to a green economy but must be scaled up to have a major impact. It also discusses how a disorderly transition could disrupt the broader investment fund sector in the future.

Parma Bains and Mr. Ranjit Singh

). They were a key element in the growth of the crypto asset and DeFi markets. In some emerging market and developing economies, dollar-denominated stablecoins could become popular as a store of value and a hedge against inflation and currency depreciation. From the users’ perspective, this so-called cryptoization provides an avenue to protect financial interests in the face of macroeconomic pressures and weak financial institutions. Where they are not regulated, stablecoins can circumvent controls on free capital movement while complicating macroeconomic management

International Monetary Fund. Monetary and Capital Markets Department

counterparty risk; poor market liquidity and funding strains; acceleration of cryptoization in emerging markets; and possible cyber-related events. The war has already had an impact on financial intermediaries, nonfinancial firms, and markets directly or indirectly exposed to Russia and Ukraine. Europe bears a higher risk than other regions due to its proximity, reliance on Russia for energy needs, and the non-negligible exposure of some banks and other financial institutions to Russian financial assets and markets. Banks’ direct exposures to Russia are relatively small

Tara Iyer

-Brown (2021) discuss the risks associated with adopting crypto assets as a national currency, and Adrian, He, and Narain (2021) write about the risks associated with an unregulated crypto ecosystem. For a detailed discussion of the trends of crypto adoption (“cryptoization”) in emerging market economies and the risks and opportunities, see IMF (2021) . 3 In November 2021, Bitcoin and Ether accounted for about 40 and 20 percentof total crypto market cap, respectively, while Tether, the largest stablecoin and in the top five crypto assets by market cap, accounted

International Monetary Fund. Monetary and Capital Markets Department

exacerbated preexisting inflation pressure, poses challenging trade-offs for central banks. Repercussions of the war continue to reverberate globally and will test the resiliency of the financial system through various channels, including direct and indirect exposures of banks, nonbank financial intermediaries, and firms; market disruptions (including in commodity markets) and increased counterparty risk; acceleration of cryptoization in emerging markets; and possible cyber-related events. Emerging and frontier markets are facing tighter financial conditions and a

Mr. Dong He, Annamaria Kokenyne, Xavier Lavayssière, Ms. Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier

panel regression model confirms the relative importance of macroeconomic and demographic factors in driving crypto-asset adoption (Appendix 2; see also Feyen, Kawashima, and Mittal 2022 ). Empirical results show that volatile macroeconomic conditions (such as currency depreciation and high inflation) and a younger population age structure tend to boost crypto-asset adoption. Continued growth and adoption of crypto assets could also induce new macrofinancial risks such as “cryptoization.” Crypto assets may be regarded by some as a new asset class with distinct

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