Fed’s Brainard Calls for Sound Regulation of Crypto Financial System to Be Established ‘Now’

Federal Reserve Vice Chair Lael Brainard has stressed the importance of establishing sound regulation for the crypto financial system “now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.”

Lael Brainard, the vice chair of the Board of the Federal Reserve Governors, talked about crypto regulation and decentralized finance (defi) Friday at a Bank of England conference in London.

She began by referencing recent volatility in the crypto market, stating that it “has exposed serious vulnerabilities in the crypto financial system.” She added that both traditional and crypto financial systems are susceptible to leverage, settlement, opacity, maturity, and liquidity transformation risks.

Noting that “Innovation has the potential to make financial services faster, cheaper, and more inclusive and to do so in ways that are native to the digital ecosystem,” Brainard stressed:

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.

Emphasizing the need for national and international cooperation, the Federal Reserve vice chair opined: “The recent turbulence and losses among retail investors in crypto highlight the urgent need to ensure compliance with existing regulations and to fill any gaps where regulations or enforcement may need to be tailored — for instance, for decentralized protocols and platforms.”

Brainard continued:

Future financial resilience will be greatly enhanced if we ensure the regulatory perimeter encompasses the crypto financial system and reflects the principle of same risk, same disclosure, same regulatory outcome.

The Fed vice chair added that a U.S. central bank digital currency (CBDC) could help financial stability “by providing the neutral trusted settlement layer in the future crypto financial system.”

On Thursday, the U.S. Treasury Department delivered a framework for international engagement on crypto assets to President Joe Biden as directed in the executive order he issued back in March. The Treasury stressed the importance of collaborating with international allies to develop global crypto standards to regulate digital assets.

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