Cryptocurrency and Traditional Financial Systems: Exploring the Impact of Cryptocurrencies on Traditional Banking Systems, Financial Regulations, and Monetary Policies

Abstract

This study focuses on the impact of cryptocurrencies on banking sector performance, regulatory responses, and responses of monetary policy to changes it ignites, using 12 countries data from 2014 to 2023. For the purpose, this study used the advanced econometric techniques of DCC-GARCH, GARCH-MIDAS, Panel Regression and VARX. This model is based on daily, weekly, and monthly data sets from the State Bank of Pakistan, the IMF, the World Bank, Bloomberg, CoinMarketCap, and national regulatory reports. These data sets cover macroeconomic, financial, and regulatory aspects. Some important factors are the amount of cryptocurrency traded, how volatile it is, the monetary base, the interest rate spread, the regulatory stringency index, and the growth of bank deposits. Diagnostic tests and robustness checks make sure that model estimates are accurate, to analyze cross-market spillovers and time-varying volatility correctly. VARX analysis indicates monetary tightening suppresses crypto prices. The DCC-GARCH concludes a correlation between increasing crypto-stock market during crises periods. GARCH-MIDAS, on the other hand, highlights a significant link between macroeconomic uncertainty and crypto volatility. Finally, the Panel data analysis advocates that a stable, and strong regulatory environment in economies can mitigate the systemic risk in crypto markets. The findings emphasize the need of flexible regulatory systems and monetary policies to mirror the increasing importance of digital finance, particularly in emerging economies. This research offers valuable insights to the Central banks, financial organizations, and lawmakers to better understand the digital financial world.