The world of cryptocurrencies needs strong regulation to be begun to be put in place now before it becomes so pervasive it poses financial stability risks, Federal Reserve Vice Chair Lael Brainard said Friday.
"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," Brainard said in prepared remarks to a Bank of England conference in London.
In a full-throated speech, Brainard made the case that not doing so would store up problems for the future and said that until there are robust guardrails for crypto finance, bank involvement might further entrench a "riskier and less compliant ecosystem."
The risks of loosely regulated cryptocurrencies and stablecoins, which exploded in value during the COVID-19 pandemic, have come into sharp focus with the crypto market slumping sharply and the downfall of major "stablecoin" terraUSD. Leading cryptocurrency Bitcoin has dropped more than 75% from its all-time high over the past seven months.
Brainard noted that cryptocurrencies are highly vulnerable to deleveraging, fire sales and contagion and argued that new technologies and financial engineering cannot alone transform risky assets into safe ones.
National and international cooperation would be needed, Brainard said, to ensure compliance with existing regulations and tailor new ones, in particular in the area of decentralized protocols and platforms.
"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," Brainard said.
She added that a U.S. central bank digital currency, which she has shown support for, could help financial stability "by providing the neutral trusted settlement layer in the future crypto financial system."
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