Authorities in Asia are increasingly sensitive to the rising risks posed by crypto as adoption continues to spread

Crypto regulation, and regulatory frameworks are underway in several countries including India, Vietnam and Thailand

To be fully effective, crypto regulation should be closely coordinated across jurisdictions

The extent of integration of crypto into the financial system in Asia 

Crypto is More in Step With Asia’s Equities, Highlighting Need for Regulation

By Nada Choueiri, Anne-Marie Gulde-Wolf and Tara Iyer

Crypto trading volume, and co-movement with equity markets, has surged in the region.

Few parts of the world have embraced crypto assets like Asia, where top adopters include individual and institutional investors from India to Vietnam and Thailand.  This raises the important issue of the extent of integration of crypto into the financial system in Asia.

While digitalization can aid in the transition to an environmentally-conscious payment system and also foster financial inclusion, crypto can pose financial stability risks.

Before the pandemic, crypto seemed insulated from the financial system.  Bitcoin and other assets showed little correlation with Asian equity markets, which helped diffuse financial stability concerns.

Crypto trading, however, soared as millions stayed home and received government aid, while low interest rates and easy financing conditions also played a role.  The total market value of the world’s crypto assets surged 20-fold in just a year and a half to $3 trillion in December.  Then it plunged to less than $1 trillion in June as central bank interest rate increases to contain inflation ended easy access to cheap borrowing.

While the financial sector appears to have been insulated from these sharp movements, it may not be in future boom-bust cycles.  Contagion could spread through individual or institutional investors that may hold both crypto and traditional financial assets or liabilities.  Large losses on crypto may drive these investors to rebalance their portfolios, possibly causing financial-market volatility or even default on traditional liabilities.

As Asian investors piled into crypto, the correlation between the performance of the region’s equity markets and crypto assets such as Bitcoin and Ethereum has increased.  While the returns and volatility correlations between Bitcoin and Asian equity markets were low before the pandemic, these have increased significantly since 2020.

For example, the return correlations of Bitcoin and Indian stock markets have increased by 10-fold over the pandemic, suggesting limited risk diversification benefits of crypto.  The volatility correlations have increased by 3-fold suggesting possible spillovers of risk sentiment among the crypto and equity markets.

Key drivers of the increased interconnectedness of crypto and equity markets in Asia could include growing acceptance of crypto-related platforms and investment vehicles in the stock market and at the over-the-counter market, or more generally growing crypto adoption by retail and institutional investors in Asia, many of whom have positions in both the equity and crypto markets.

Using the spillover methodology developed in our January Global Financial Stability Note, we also find that the rise in crypto-equity correlations in Asia has been accompanied by a sharp rise in crypto-equity volatility spillovers in India, Vietnam, and Thailand.  This indicates a growing interconnectedness between the two asset classes that permits the transmission of shocks that can impact financial markets.

Accordingly, authorities in Asia are increasingly sensitive to the rising risks posed by crypto as adoption continues to spread.  They have therefore dialed up their focus on crypto regulation, and regulatory frameworks are underway in several countries including India, Vietnam and Thailand.

A significant effort is also needed to address important data gaps that still prevent domestic and international regulators from fully understanding ownership and use of crypto and its intersection with the traditional financial sector.

Regulatory frameworks for crypto in Asia should be tailored to the main uses of such assets within the countries.  They should establish clear guidelines on regulated financial institutions and seek to inform and protect retail investors.  Finally, to be fully effective, crypto regulation should be closely coordinated across jurisdictions.

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Now is the time to build a digital lifeline – before the next disaster hits

Secure and resilient internet infrastructure is a fundamental necessity

The world needs a digital lifeline

By RICCARDO PULITI

This piece was originally published on Project Syndicate on July 19, 2022.

In periods of crisis, digital technologies provide a lifeline that keeps people, communities, and businesses functioning.  From the COVID-19 pandemic to violent conflicts and natural disasters, being connected has allowed us to continue working, learning, and communicating.

How policymakers have responded to these emergencies has played a large part. In particular, as a new paper by the World Bank Group’s Development Committee shows, more agile regulation has accelerated digitalization and unleashed innovation.  In today’s global context of several overlapping crises, this needs to become the norm.  Secure and resilient internet infrastructure is a fundamental necessity.

During the pandemic, as more and more of our lives went online, internet usage spiked worldwide. In 2020, 800 million people went online for the first time, and 58 low- and middle-income countries used digital payments to deliver COVID-19 relief. 

To manage that surge, governments and regulators in more than 80 countries moved quickly to change rules, including those governing the allocation of radio spectrum – the electromagnetic waves used for wireless communications.  In Ghana, regulators assigned temporary radio spectrum to networks in high demand, and all mobile-service providers were granted permission to expand coverage.  This resulted in better-quality service for more than 30 million mobile subscribers, letting them “go” to work, learn online, and access essential services.

Agile regulations have also helped digital technologies offer critical support to people in fragile and conflict situations.  In Ukraine, the presence of a strong internet connection through satellite links, even while terrestrial infrastructure is under attack, has enabled the government to communicate with its citizens in real time.  At the beginning of the war, shelling and cyberattacks were predicted to take down the internet, but innovations such as the satellite hookups have kept the country online.  Here, too, the Ukrainian government moved quickly to speed up permissions and adapt rules.

But a digital lifeline is effective only if it is safeguarded from cyberattack, something that Ukraine knows well.  For many years, the country has been a testing ground for strikes on infrastructure.  Hackers carried out waves of attacks that hit Ukraine’s distribution centers, call centers, and power grid.

And it’s not just Ukraine.  All countries are vulnerable to these incursions.  The United States fell victim to cyberattacks last year that took down its largest fuel pipeline, leaving many Americans in long lines to fill their gas tanks.  And in Africa, Kenyan internet users endured more than 14 million malware incidents in 2020.

Like cyberattacks, nature can cause damage to communications infrastructure that demands an agile reaction.  A volcanic eruption in January this year sent the island nation of Tonga into digital darkness.  The eruption cut Tonga’s single undersea telecom cable and threw the country into 38 days of isolation from the internet and much of the outside world.  This crisis has prompted discussions about how to strengthen the network and emergency-response systems, so Tongans are not at risk of digital darkness again.

To mitigate such vulnerabilities, unleashing digitalization needs to be a high priority even in periods of relative calm.  Potentially transformative yet fast-evolving technologies require policymakers to promote financing, regulations, and institutions that make it easier to test out new ideas in real life.  Some countries are starting to make progress.  Kazakhstan is using agile regulation to digitalize, decentralize, and decarbonize its vitally important energy operations.

Unlocking the potential of digitalization for the masses through well-targeted regulation can also help close the digital divide and improve welfare.  

Recent research has shown that the availability of cheaper internet access increases employment among low-income households.

Countries such as Saint Vincent and the Grenadines and Malaysia provide low-cost plans for poorer users.  

Digital access is essential for people all over the world, especially residents of under-connected rural areas, the poor, women, and the displaced.  In Nigeria and Tanzania, poverty rates fell by seven percentage points in areas with internet connections.

With the world facing multiple emergencies, policymakers need to mobilize digital connectivity to improve the daily welfare of the most vulnerable populations.  Right now, innovation is moving so fast that many officials, especially in developing countries, are finding it hard to keep up and ensure that the benefits of digitalization reach the people who need them most.

But we should not need a crisis to accelerate the transformation.  Now is the time to build a digital lifeline – before the next disaster hits.

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Read more about the World Bank’s work on digital development and the digital lifeline that proved crucial in the pandemic in this recent paper on digitalization and development.

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