Brainard stresses need for crypto regulation

Bank Regulatory Federal Issues Digital Assets Federal Reserve Cryptocurrency Fintech Risk Management

On July 8, Fed Vice Chair Lael Brainard warned that “[r]ecent volatility has exposed serious vulnerabilities in the crypto financial system.” Speaking before a Bank of England conference, Brainard explained that while crypto-assets are presented as a “fundamental break from traditional finance,” they are still susceptible to leverage, settlement, opacity, and maturity and liquidity transformation risks. The recent bankruptcy of a prominent crypto hedge fund and failed projects in the cryptocurrency space demonstrate that the crypto ecosystem faces many of the same challenges that are well known from traditional finance, she said. Brainard acknowledged that a “digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system,” but she also stressed that it is important “that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.” Novel crypto products often come with new risk factors, she said, adding that it may also be difficult “to distinguish between hype and value.” A strong regulatory framework that imposes “guardrails for safety and soundness, market integrity, and investor and consumer protection will help ensure that new digital finance products, platforms and activities are based on genuine economic value and not on regulatory evasion,” Brainard stated. She also noted that strong regulatory guardrails would also help investors and developers build “a resilient digital native financial infrastructure” and help banks, payments providers, and fintech companies “improve the customer experience, make settlement faster, reduce costs, and allow for rapid product improvement and customization.”