IMF's latest annual report: cryptocurrencies will not pose a threat to financial stability

According to recent reports from foreign media, the latest annual report of the International Monetary Fund (IMF) pointed out that cryptocurrencies will not pose a threat to global economic stability. Or at least not yet.

2015 World Bank Group / International Monetary Fund Spring Meetings

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Every year, the International Monetary Fund publishes a report detailing the state of the world economy. This year's report is titled "A Bumpy Ride Ahead," with a chapter devoted to cryptocurrency.

The report explains that although crypto assets “substantially appreciated” during 2017 and 2018, their total market capitalization is less than 3% of the total market capitalization of the world's four largest banks. Even when the cryptocurrency is the most popular, this number does not reach 6%.

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Encrypted asset size, price appreciation, volatility and Sharpe ratio chart. Source: IMF

The report pointed out that the industry is still very concentrated; Bitcoin, Ethereum and Ripple account for 80% of the total market value of the cryptocurrency market. Although there are more than 180 active cryptocurrency exchanges worldwide, more than 80% of transactions are conducted in the top 14. Surprisingly, the International Monetary Fund calculated that in the past three years, investors have benefited from FANG stocks [Facebook, Amazon, Netflix, Google] from crypto assets. More is obtained in the middle.

In addition, the report pointed out that the impact of the first launch of Bitcoin futures on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) in December 2017 was not as great as some expected:

“Futures trading volume accounts for only a small portion of the overall volume of CME and CBOE transactions, which is only 2.3% compared to the spot currency trading volume of cryptocurrency exchanges.”

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The cumulative market share of each cryptocurrency, the proportion of mainstream cryptocurrency transactions, the proportion of bitcoin's legal currency transactions, and the bitcoin futures vs. bitcoin spot transactions. Source: IMF

For these reasons, the International Monetary Fund has concluded that the threat posed by cryptocurrencies to the statutory financial system is very limited. Rather than saying that this is a vote of confidence in the cryptocurrency, it is better to say that the actual meaning of cryptocurrency is far less important than the media’s hype. However, the report adds that “regulators should be vigilant about this” due to the rapid growth of the industry.

In general, the encryption industry gives the impression that its niche market is still larger than it thinks. More importantly, the report is optimistic about the future application of blockchain technology, which writes:

"The underlying technology of cryptographic assets – distributed ledger technology (DLT) – may also lead to a more efficient market infrastructure."

The report goes on to add:

“Future policy development requires flexibility, innovation and cooperation. As a forum for discussion and international cooperation, the IMF can provide advice and help advance the agenda for cryptographic asset regulation.”

The International Monetary Fund was established in December 1945 as part of the Bretton Woods Agreement. Its function is to maintain international economic stability by providing advice and granting loans. Headquartered in Washington, DC, it has 189 member states and controls $668 billion in funds.