Popular Bollywood star Salman Khan is a brand ambassador for a non-fungible token (NFT) mobile app. These tokens use distributed ledger technology or blockchain to record the ownership of a creative asset. They can be traded on a global platform like Ethereum. Cricketer Dinesh Karthik created a digital asset from the video of the last ball six he hit three years ago against Bangladesh to win a trophy for India. The video had 212 million (21.2 crores) views on YouTube. That token is up for an auction.
The popularity of crypto assets is growing. The market value surpassed $2.5 trillion in early May before falling 40% and then recovering to $2.1 trillion by September 2021, according to the Global Financial Stability Report published last week by the International Monetary Fund.
The annual meetings of the World Bank and the International Monetary Fund take place every year in October. All the finest economic minds discuss, debate the future of the world economy. The two global institutions release data that reviews the state of the world economy and risks to future growth. This column has always advocated taking a big-picture view of things. Your search for information should begin with reports from the two institutions released last week. It does not get more significant than the analysis put out by the two institutions. There is an extensive media spotlight on the macro-economic aspects. Global growth is set to slow, and there are significant inflation risks for the world economy. If you start adopting crypto assets and use them instead of currency, you are contributing a potential threat to the financial stability in an economy, according to the IMF report.
The Global Financial Stability Report released last week by the International Monetary Fund brings to light risks associated with the spread of crypto assets. These include fiscal risks to governments and systemic risks to the financial system.
“Threats to fiscal policy could also intensify, given the potential for crypto assets to facilitate tax evasion,” said the IMF report. That could hurt government finances due to the loss of tax revenue. There is a good chance that money could be pulled out of traditional equity or bond markets. That could affect the foreign exchange markets. The report also argues that despite a significant surge in values of crypto assets, returns are less impressive when adjusted for volatility. The performance is similar to that of the U.S. technology companies or the S&P 500.
Cryptoization is a new term for the adoption of crypto assets. The IMF report suggests that an increased usage can reduce the ability of central banks to implement monetary policy effectively. A primary reason for cryptoization or people to adopt crypto assets could be due to the weak credibility of the central banks. A primary function of a central bank like the Reserve Bank of India is to monitor the money supply in an economy to control inflation. However, inflation can spiral in emerging economies as banks could keep interest rates low to stimulate faster growth. In many countries, banking systems are vulnerable due to reckless lending and non-performing assets. The public confidence in the banking system is low. Inefficient payment systems and limited access to financial services could also be why people are taking to crypto assets.
Many choose crypto assets like stablecoin or others for their low correlation with other assets.
They justify it by arguing that it is suitable for diversification. The IMF report further states that the correlation between these crypto-assets and some key asset classes increased significantly during recent episodes of market stress (for example, the Covid-19 sell-off in 2020). “The diversification benefit could also decline over time if there is the continued involvement of institutional holders that are affected by common factors,” it adds.
What it means to you
There is always that temptation to make fast money. However, it is essential to be aware of the risks involved. Nobody can stop you from taking risks.
The important thing is to be mindful of the challenges you could face if there is an upheaval in the global financial system. Risk diversification is a good idea. However, it may be a good idea to designate only a portion of your investments for new bets.
(The author is editor-in-chief at www.moneyminute.in)
