Introduction
Crypto assets have experienced tremendous growth over the past two decades, with the
number of coins
1
increasing from just Bitcoin in 2009 to over 5,000 currently, and reaching
a total market capitalization in excess of USD 3 trillion towards the end of 2021
2
. However,
this growth has been accompanied by significant volatility, with most crypto coins going
through several cycles of rapid growth followed by dramatic collapses. This is reminiscent
of other periods in financial history in which private forms of money have proliferated in
the absence of adequate government regulation, leading to frequent financial crises (such
as in the US during the ”Free Banking Era” of 1837–1863).
The rapid ascent of crypto assets, coupled with their increasing mainstream adoption,
has generated concerns among policymakers and regulators, who are mindful about
the potential contagion risks to other financial markets as well as the broader macro-
financial implications (see e.g. IMF (2021), IMF (2023b), Hacibedel and Perez-Saiz (2023)).
Crypto asset markets can both act as a source of shocks or as amplifiers of overall market
volatility, thereby have the potential to have significant implications for financial stability.
Consequently, policymakers face an imperative to enhance their comprehension of the
interconnections between crypto assets and financial markets, enabling them to devise
regulatory frameworks that effectively counteract the potential adverse consequences of
crypto assets on financial stability
3
.
The complex and rapidly evolving nature of the crypto market pose challenges for reg-
ulators in effectively assessing and addressing associated risks (IMF (2021), IMF (2023b)).
Crypto assets encompass a wide range of technological attributes and features, serv-
ing means of payment, to store of value, speculative asset, support for smart contracts,
fundraising, asset transfer, decentralized finance, privacy, digital identity, governance,
among others (IMF/FSB (2023)). However, their relationship with traditional financial
assets, particularly in terms of diversification potential, remains a subject of debate. While
substantial research has investigated the nature, direction and intensity of linkages be-
tween crypto assets and crypto assets and other financial assets, the findings are still
relatively inconclusive and paint a complex pictures of interdependencies.
The multifaceted interaction channels between crypto assets and financial markets may
make it challenging to assess the relationship, while it may also have changed over time.
1
In terms of terminology, let us note that while we occasionally employ the colloquial term ’coins’, we
prefer using the term ’crypto assets’ to emphasize that these assets are generally not well-suited to fulfill the
primary functions of money, such as store of value, medium of exchange, and unit of account.
2
It has since that peak substantially declined to around $1.1 trillion.
3
For example, IMF (2023a) provides high level principles for designing effective policy frameworks for
crypto assets.
2
