Crypto market faces more sell-offs and crashes with stablecoins particularly vulnerable, IMF says

Crypto could be further battered and experience more sell-offs and collapses, esepcially stablecoins, as the crypto crash hits the market, the International Monetary Fund said.

“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, said in an interview with Yahoo Finance. 

He said a recession could cause further price drops for cryptocurrencies, as a gloomy economic outlook dents confidence.

“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.”

More fiat-backed stablecoins could experience pluges, like stablecoin TerraUSD, which collapsed in May and helped triggered a drastic “crypto winter” that caused widespread losses across the industry.

“[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 mentioned.

However, these collapses would not pose a major threat to global financial conditions as their spill over to the broader traditional financial systems has been limited, the IMF said in a report on global economic outlook this week.

Surging inflation and interest rates globally contributed to the IMF’s gloomy economic outlook as the Russia-Ukraine war rages on and causes intense market volatility.

Adrian said crypto regulation is essential and should at the top of regulators’ agendas, calling for a global regulatory framework.

“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,” he said.

Crypto regulation has been a major topic recently as countries move to properly regulate the as-yet unregulated crypto market. The EU is set to enforce the world’s first regulatory regime for crypto after agreeing on its Markets in Crypto-Assets (MiCA) rules last month.