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If crypto continues uncontrolled as it is incorporated into the broader financial system, according to Brainard, it will pose dangers of instability similar to those already observed.
Lael Brainard, the vice-chair of the Federal Reserve Board of the United States, advised an audience at a Bank of England conference in London on Friday to regulate or regret it later. Brainard said that the current market slump demonstrates that crypto has the same fundamental dangers as traditional finance and requires "strong guardrails."
Brainard talked in the broadest terms during her whole speech. She noted current performance difficulties in cryptocurrencies, including volatility, linkage with risky assets, exposure to bank runs and other traditional finance-related hazards, and over-collateralization as a stress amplifier. She stated that as crypto gets increasingly interwoven into the more extensive financial system, the necessity for regulation in response to these concerns would grow more pressing.
Brainard supported the “the same risk, same disclosure, and same regulatory consequence” premise. In addition, she advocated international coordination among financial regulators to address the worldwide breadth of the cryptocurrency business. The second request reflects the findings of a study issued by the U.S. Treasury Department a day earlier.
The Fed official was particularly concerned about two important areas. The first was that bank engagement with cryptocurrencies increases the financial system’s stability risk. Brainard stated that bank participation should be promoted since it “provides an interface where regulators have strong sightlines.” Despite her support for the “same risk, same disclosure” approach, she appeared to argue for a different treatment for crypto here, emphasizing that a “strong regulatory framework for crypto finance” was required to progress significant bank participation.
Brainard stated that stablecoins constitute a second area of risk spillover. She referred to them as a bridge between crypto and fiat and highlighted that the top two stablecoins represent 80% of the market valuation. She stated that Fiat-backed stablecoins are “very susceptible to runs.”
Brainard recognized the significance of a central bank digital currency (CBDC), stating:
“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.”
Interoperability across stablecoins was cited as a potential application for this neutral settlement layer. In conclusion, Brainard said that, despite crypto delivering cheaper services as one of its benefits, the expenditures associated with regulation are justified.
