Global Financial Stability Report 2021

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    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.

    Global Financial Stability Report (GFSR)

    • It is a semiannual report by the International Monetary Fund (IMF).
    • It assesses the stability of global financial markets and emerging-market financing with a primary focus on current conditions, especially financial and structural imbalances, that could risk an upset in global financial stability and access to financing by emerging-market countries.
    • It is released twice per year, in April and October.
    • GFSR replaced two previous reports by the IMF, the annual International Capital Markets Report and the quarterly Emerging Market Financing Report.

    Source: Outlook