The International Monetary Fund (IMF) has called for cryptocurrency regulation in the new year. The US Federal Reserve Board has issued a discussion paper in order to prevent a new global financial disaster. To combat pressure from both the DeFi and traditional strategic sides, the paper considers the need for its own cryptocurrency.
El Salvador is ranked 89th in the 2021 global index of cryptocurrency usage. However, it could be at the centre of this year’s most interesting global financial debate. Will concerned investors or financial authorities play a major role in limiting one of the Covid-19 pandemic’s results?
The year 2021 ended with in-depth profiles of major players driving the DeFi movement in a variety of financial publications. This was partly because of Bitcoin’s rapid climb to about $69,000 in November of last year.
IMF’s Warns El Salvador
For international authorities, El Salvador appears to be the canary in the coal mine. President Nayib Bukele is encouraging national Bitcoin discussion after becoming the first government to recognize it as legal money.
Bukele has ignored earlier IMF and recent analyst concerns that he would be unable to access credit markets. He claims that his extreme monetary policy makes it simpler for workers abroad to transfer much needed foreign money home.
The IMF Board, on the other hand, told El Salvador on Tuesday that Bitcoin’s legal tender title should be removed. This comes after Bitcoin had lost 50% of its value since November.
In an escalation of its approach to this issue, it said that there are large risks associated with the use of Bitcoin (BTC). These risks ranged from financial stability, financial integrity, and consumer protection to the associated fiscal contingent liabilities.
Chainanalysis’ Global Crypto Adoption Index shows a possible problem for the global financial agency. Last year, developing economies accounted for 18 of the top 20 adopters. However, it also shows the appeal of cryptocurrencies in nations like El Salvador. This is because transfers from overseas workers account for up to 20% of the economy. Furthermore, citizens believe that retaining their funds in a new manner will stop depreciation.
According to the Index, “numerous emerging economies featured here to restrict the amount of national currency that locals can transfer out of the country. Cryptocurrency allows those people to get over such restrictions and meet their financial necessities.”
The IMF stated last year that the cryptocurrency rise had only highlighted the need to make it simpler for workers overseas to send money home to their families. This was particularly important in the developing world, where Covid-19 was stifling growth. In addition, the US Federal Reserve’s discussion paper acknowledges that excessive transfer costs stifle international trade.
According to wealthy investors, crypto investments may no longer give the much-praised non-correlated alternative to stocks, wealthy world investors. Furthermore, according to a recent IMF study, this presents larger ethical concerns in growing economies that embrace these new currencies.
The “volatility spillover” has increased greatly, according to the report. This is thanks to changes in Bitcoin’s value on the standard MSCI emerging markets index. As a result, Bitcoin’s relative value is increasing in relation to the usual effects of US stock market changes on developing nations.
According to the IMF, “crypto price movements are rapidly affecting equity markets in developing economies.” This is especially true since Covid-19 is causing a large delay in their future growth.
However, Bitcoin’s price has nearly halved in the last few months. El Salvador is realizing that international investors may have slowed the DeFi growth while also increasing the risk of developing market volatility.
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