The International Monetary Fund has said that the crash in Bitcoin prices has not affected global financial stability. The financial institution released a report titled the “World Economic Outlook Update: Gloomy and More Uncertain,” acknowledging that the sell-off has not harmed the financial system.
IMF says the crypto crash has not affected the financial stability
Bitcoin’s price is currently around 70% below its all-time high of $69,000 in November last year. Every other cryptocurrency has also dropped in value, with the entire market cap dropping by around two-thirds from the ATH.
Investors in financial assets have been facing uncertainty caused by macroeconomic factors such as the ongoing war in Russia, the effects of the COVID-19 pandemic, and issues with the supply chain. These factors have made investors turn their attention away from risky assets, with crypto and equities losing value.
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In a recent report, the IMF said that cryptocurrencies had reported a massive sell-off that caused losses to the holders of crypto assets. The market crash also triggered the collapse of some algorithmic stablecoins, with some crypto firms and hedge funds reporting bankruptcy after their operations were affected.
The IMF was referring to the collapse of the Terra ecosystem in May this year. The Terra ecosystem collapsed in May after the UST stablecoin lost its peg to the US dollar. The collapse of the Terra ecosystem led to losses of around $60 billion. The fall of Terra also caused ripple effects on the entire industry.
One organization affected by Terra’s collapse is Three Arrows Capital, a crypto hedge fund. The hedge fund has massive exposure to LUNA, and when it crumbled, it affected the hedge fund’s liquidity. 3AC filed for bankruptcy after defaulting on a $680M offered by Voyager Digital. Because of this loan, Voyager Digital also filed for bankruptcy.
UST collapse prompts calls for stablecoin regulations
Several institutions have been looking into ways to regulate stablecoins and ensure they do not carry a high level of risk for investors. The Bank of England and the Federal Reserve have advocated for stablecoin regulations.
The collapse of UST has heightened this regulatory scrutiny. The Vice Chair of the US Federal Reserve, Lael Brainard, issued a statement earlier this month saying that the collapse of Terra was similar to the classic runs that have happened in history. Brainard also added that new technologies would not protect investors from such losses.
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