Recent volatility has uncovered “serious vulnerabilities” in the crypto financial system that may require new regulation, Federal Reserve Vice Chair Lael Brainard said today during a speech in the United Kingdom.
While new technology often holds the promise of system-wide benefits, Brainard noted that new products are “often fraught with risks, including fraud and manipulation” and it can be difficult “to distinguish between hype and value.” Industry needs to be vigilant about new forms of risks, she added, because of how novel crypto technological innovations are. Current market turbulence and losses emphasize the need to ensure compliance with existing regulations and to “fill any gaps,” Brainard said.
Financial resilience will be “greatly enhanced” if regulation “encompasses the crypto financial system and reflects the principle of same risk, same disclosure, same regulatory outcome,” she said, adding that doing so would allow regulators to more effectively address the risks posed to the broader financial system. “Strong 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,” she said.
Rather than stifle innovation, a strong regulatory framework would 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,” Brainard explained. The crypto system is not yet too large or interconnected with the traditional financial system to pose a systemic risk, she said, making it “the right time” to ensure that “like risks are subject to like regulatory outcomes and like disclosure” to help investors distinguish between genuine innovation and risky easy returns.