The sell-off in the crypto market hasn’t really spilled over into the broader financial system, according to Antonio Garcia Pascual, deputy chief of the global market analysis division at the International Monetary Fund.

The crypto industry’s total market cap fell to a recent low of $873 billion from its peak of $3 trillion last November. The downturn put pressure on many crypto platforms, but largely “remained within the ecosystem” without spilling over into the “real economy,” Pascual said on CoinDesk TV’s “First Mover” show on Friday.

“What you saw is quite a bit of a shake-up in the risker [assets],” including certain stablecoins and tokens within decentralized finance (DeFi), Pascual said.

Still, Pascual noted that those in the U.S. and elsewhere who invested substantial amounts of money into crypto lost big on the implosion of the TerraUSD stablecoin in May.

The interview followed the release of the IMF’s “World Economic Outlook Update: Gloomy and More Uncertain” July report, which detailed how the sell-off in crypto assets “led to large losses in crypto investment vehicles” and “the failure of algorithmic stablecoins.”

Moreover, issues with liquidity hit funds and lenders that bought into Terra’s network. Crypto hedge fund Three Arrows Capital, for example, lost over $200 million with its investment in TerraUSD. Similarly, crypto broker Celsius Network, which has filed for Chapter 11 bankruptcy, blamed its liquidity issues to the “domino effect” stemming from Terra’s collapse.

Pascual’s view reflects comments made by Citigroup analysts in May. The bank’s analysts said the collapse of Terra would be unlikely to affect the wider financial system because the crypto industry is relatively small.

Still, Pascual said crypto is growing, and he thinks algorithmic stablecoins will be adopted, although he said regulators need to set a clear policy on them first.

Crypto is expanding especially fast in emerging markets that are bearing the brunt of a worsening global economy, Pascual said, especially in countries with high debt, rising inflation and volatile currencies.

Although crypto itself is volatile, public blockchains allow people to move their money into an always-on, global financial system and escape domestic turmoil, he said. Additionally, the need for cheaper cross-border payments is likely driving use.

While the world escaped crypto contagion this time around, the increasing adoption and influence of crypto could cause “global risk spillovers” the next time, Pascaul cautioned.

This risk may only be years from now, when crypto is more widely used as an alternative to domestic currencies. El Salvador and the Central African Republic have already adopted bitcoin as legal tender, for example.

Pascual said that while the adoption of a cryptocurrency as legal tender may boost financial inclusion and represent an advancement in technology, it becomes a problem when a country adopts a digital currency in the midst of “issues related to macro and financial stability.”


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