- The contagion will spread through individual or institutional investors that hold both crypto and traditional financial assets or liabilities.
- Total market value of the world’s crypto assets surged 20-fold in just a year and a half after covid-19 to $3 trillion.
Image: REUTERS
The rise in crypto currency trading is likely to pose financial instability in developing countries in coming years, the International Monetary Fund has cautioned.
In a statement, the fund said that their financial sectors may not be well insulated against the sharp movements of the crypto trade.
“The contagion will spread through individual or institutional investors that hold both crypto and traditional financial assets or liabilities hence could lead to large losses on crypto and may drive the investors to rebalance their portfolios,” IMF says.
It said the imbalances could possibly cause financial market volatility or even default on traditional liabilities.
The virtual digital currency is on the rise because of its feature to exchange on a one-to-one basis with physical cash thus easing payments and cutting transaction costs.
Investors buy cryptocurrencies to preserve their savings or carry out international transactions either for individual remittances or for those in diaspora.
Before the Covid-19 pandemic, crypto seemed insulated from the financial system with Bitcoin and other assets showing little correlation with equity markets, which helped diffuse financial stability concerns.
Crypto trading however soared during and after the pandemic as millions stayed home and received government aid.
According to the lender, the total market value of the world’s crypto assets surged 20-fold in just a year and a half after Covid-19 to $3 trillion (Sh 359.1 trillion).
INF said while digitalisation can aid the transition to environmentally conscious payment system and also foster financial inclusion, crypto can pose financial stability risks.
Kenya has over four million crypto owners, the largest in Africa, and is ranked among top 15 emerging global economies with the highest percentage of populations who own the digital currency.
In 2021 the United Nations Conference on Trade and Development (UNCTAD) ranked Kenya fourth with 8.5 per cent of its population being digital currency owners.
Ukraine topped the list with 12.7 per cent followed by Russia at 11.9 per cent and Venezuela at 10.3 per cent.
Returns from cryptocurrency trading and holding are known to be highly speculative just like other speculative trades.
They are overshadowed by the risks and costs they pose in developing countries.
The Central Bank of Kenya(CBK) holds the same opinion on crypto regulation. Early this year, governor Patrick Njoroge said the regulator still does not support cryptocurrency transactions.
“Because of the risks involved even as such dealings increase, Kenyans should avoid peer-to-peer cryptocurrency transaction since it is not regulated,” he said.
Globally, over 300 million people use or own cryptocurrencies as of 2022 while the global crypto market cap stands at $1.06 trillion(Sh119.7 trillion) as of August this year.