Biz Quick Take: Crypto market meltdown indicates need to further strengthen financial regulation
Published: Jun 20, 2022 02:04 AM
bitcoin Photo:IC
bitcoin Photo:IC

Affected by the US Federal Reserve's (Fed) most aggressive rate hike since 1994, global risk assets have been heavily hammered over the weekend. Largest cryptocurrency Bitcoin tumbled as much as 13 percent on Saturday, breaching $18,000, as the sell-off in the crypto market accelerates. The total market cap of cryptocurrencies was around $870 billion on Saturday, down from $3 trillion in November, according to media reports.

In face of the skyrocketing inflation, US Fed was pushed to aggressively raise its interest rate, increasing the risks of economic stagflation and even recession, resulting in a comprehensive impact on risk assets. The current sell-off in cryptocurrencies deserves the vigilance of global investors, as well as regulators of all economies across the world.

After the US Fed raised its benchmark interest rates three-quarters of a percentage point, economists slashed their projections for Q2 output growth in recent days. As US stock benchmark index S&P 500 fell into bear territory last week, there is growing sense among investors, consumers and business leaders that conditions could worsen.

Looking ahead, investors are seeing more selling pressure next week. Moreover, the dramatic declines have not been limited to stocks. Bitcoin dropped more than 30 percent in a week amid reports about blowups of crypto-focused trading firms. The plummet of the cryptocurrencies may continue in the near future as risks aversion goes high. It is worth for all major economies to think about reducing the impact of risk assets on the financial system.

In the past, China has concentrated on tackling the potential risks of cryptocurrencies and the risks accumulated in the financial system have been effectively disposed of. China's Bitcoin trading has plunged to 10 percent of the global share from 90 percent, and the country has effectively curbed speculation in cryptocurrency trading as part of an effort to fend off domestic financial risks and restore financial order, the central bank said in March.

The precaution measures China's regulators had made have largely strengthened the country's ability to resist risks when faced with the current risks posed by the US interest rate hikes on global financial markets. The slump in cryptocurrencies shows the necessity to strengthen financial supervision in the long run.

The US Fed, fresh from its most aggressive interest rate hike in more than a quarter of a century, signaled on Friday that the rising risk of recession will not stop its move to bring down inflation that's punishing American households. In a report, it warned that "measures of valuation pressures on risky assets remain high compared with historical values."

China's central bank said in March that it will maintain a high-pressure crackdown on virtual currency transactions. It also outlined key financial market policies and tasks for 2022. As relevant rules to be issued to further close loopholes, the ability of China's economy to resist risks will be further enhanced and the interests of Chinese investors will be protected amid global financial volatilities.