Federal Reserve Vice Chairman Lael Brainard stressed the importance of establishing sound regulation of the crypto financial system.”
Fed Vice Chairman Brainard on crypto regulation
Federal Reserve Vice Chair Lael Brainard spoke about crypto regulation and decentralized finance (defi) at a Bank of England conference in London on Friday.
She began by noting the recent volatility in the crypto markets, which she said “exposes 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 it can do so in ways that are unique to the digital ecosystem,” Brainard stressed.
It is important to establish a sound regulatory foundation for crypto-financial systems now, before crypto ecosystems become large or interconnected and potentially pose risks to the stability of the broader financial system.
Emphasizing the need for national and international cooperation, the Federal Reserve Vice Chairman opined.” Recent disruptions and losses among private investors in crypto underscore the urgent need to ensure compliance with existing regulations and to fill gaps that may require regulatory and enforcement adjustments, for example, in decentralized protocols and platforms.”
Future financial resilience would be greatly enhanced if regulatory boundaries encompassed the crypto-financial system and reflected the principles of same risk, same disclosure, same regulatory outcomes.
The Fed Vice Chairman added that U.S. central bank digital currencies (CBDCs) could help financial stability “by providing a neutral, trusted settlement layer in a future crypto financial system.”
On Thursday, the U.S. Treasury Department delivered to the President a framework for international engagement on crypto assets, as directed by President Joe Biden in his March executive order. The Treasury Department stressed the importance of working with international allies to develop global cryptographic standards to regulate digital assets.
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