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IMF sees stablecoins posing biggest risk to crypto markets — 'There are others that could fail'

The International Monetary Fund says crypto markets could see further selling pressure and more failures of coin offerings, including stablecoins.

“We could see further selloffs, both in crypto assets and in risky asset markets, like equities,” Tobias Adrian, Director of Monetary and Capital Markets for the IMF, told Yahoo Finance in an interview. “There could be further failures of some of the coin offerings — in particular, some of the algorithmic stablecoins that have been hit most hard, and there are others that could fail.”

If a recession ensues, crypto would drop even further, says Adrian.

In particular, Adrian sees the potential for more fiat-backed stablecoins to experience runs. TerraUSD – an algorithmic stablecoin—experienced a run in May that touched off a bear market in crypto and led to fiat-backed stablecoin Tether to break the buck.

An illustration picture taken in London on May 8, 2022, shows a gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying US dollar notes. - Tether (USDT) is an Ethereum token known as a stablecoin that is pegged to the value of the US dollar, and is currently the largest stablecoin with a market value of USD 83 billion dollars. (Photo by Justin TALLIS / AFP) (Photo by JUSTIN TALLIS/AFP via Getty Images)
(Photo by JUSTIN TALLIS/AFP via Getty Images)

And Adrian thinks there could be more pain in the future for fiat-backed stablecoins, too.

“There's some vulnerability there, because they're not backed one to one,” Adrian says, referencing Tether in particular. “[Some fiat-backed stablecoins] are backed by somewhat risky assets…it is certainly a vulnerability that some of the stablecoins are not fully backed by cash-like assets.”

Adrian adds though, that certain stablecoins are cash backed and that those are less vulnerable to runs and have seen inflows.

While crypto markets have plunged, the losses haven’t spilled over into the mainstream financial system in a way resembling the financial crisis of 2008.

Adrian is less worried about a so-called shadow banking incident where, during the financial crisis of 2008, assets that were hidden off balance sheet went bad and exposed the banking system to billions in losses and solvency concerns.

“What was very worrisome in the 2008 crisis was that the banks were highly exposed to the shadow banks, and we don't see this exposure of banks to shadow banks through crypto at the moment,” says Adrian.

In its latest world economic outlook report published Tuesday, the IMF made only a passing mention of crypto assets, writing: "Crypto assets have experienced a dramatic sell-off that has led to large losses in crypto investment vehicles and caused the failure of algorithmic stablecoins and crypto hedge funds, but spillovers to the broader financial system have been limited so far."

The key headline out of the IMF's latest report was the Fund yet again downgrading its expectations for global economic growth this year amid soaring inflation and rising interest rates worldwide.

Still, Adrian says regulations are needed to protect investors and the financial system, suggesting a global regulatory approach is needed to precent regulatory arbitrage across countries.

In Adrian's view, enforcing existing securities laws that apply to crypto is needed, and regulating the crypto infrastructure used by millions of investors should be a priority for regulators.

“There are 40,000 coins out there,” says Adrian. “Regulating the coins themselves is going to be difficult, but regulating the entry points such as exchanges and wallet providers to invest in those coins, that's something that is very concrete and very feasible.”

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