Brainard spoke in the most general terms throughout his speech. He highlighted performance issues recently seen in cryptocurrencies, such as volatility, correlation with risky stocks, liability to bank runs and other risks associated with traditional finance, and stress-amplifying overcollateralization. As cryptocurrencies become more integrated into the broader financial system, the need for regulation to respond to these risks will become more urgent, he said.
Brainard endorsed “the principle of equal risk, equal disclosure, same regulatory outcome.” He also urged international cooperation among financial regulators to deal with the cross-border reach of the cryptocurrency sector. This latest call echoes the conclusions of a US Treasury Department report released a day earlier.
Two specific areas raised particular concern for the Fed official. The first was that banks’ involvement in crypto increases the risk to the stability of the core financial system. Bank involvement should be encouragedBrainard said, because “it provides an interface where regulators have strong lines of sight.” Despite his support for the “same risk, same information” principle, he appeared to advocate a different treatment for cryptocurrencies, stressing that a “strong regulatory framework for crypto finance” was necessary before heavy involvement by banks.
Stablecoins are a second arena of risk spreading, Brainard said. Calling them a bridge between cryptocurrencies and fiat money, he noted that the top two stablecoins account for 80% of the market cap.. Fiat-backed stablecoins are “very vulnerable to runs,” he said.
Brainard saw an important role for a central bank digital currency (CBDC), saying:
“A digital native form of central bank safe money could enhance stability by providing the neutral settlement layer of trust in the future cryptocurrency financial system.”
The official mentioned interoperability between stablecoins as a possible use of that neutral settlement layer. Finally, Brainard pointed out that although cryptocurrencies offer cheaper services among their advantages, the costs involved in regulation are worth it.
Regulate now or regret it later, US Federal Reserve Board Vice-Chairman Lael Brainard told an audience at a Bank of England conference in London on Friday. Cryptocurrencies have the same basic risks as traditional finance and need “strong guardrails,” Brainard asserted, pointing to the recent market crash as evidence.
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