Fed vice chair Brainard urges faster crypto regulation, touts role for stablecoin

Brainard says if crypto remains unregulated as it is integrated into the larger financial system, it will bring risks of instability of the type currently being seen.

Brainard spoke the most general terms throughout her speech. She highlighted performance issues that have been seen in cryptocurrency recently, such as volatility, correlation with risky equities, liability to bank runs and other risks associated with traditional finance, and overcollateralization as a stress amplifier. As crypto becomes more integrated into the larger financial system, the need for regulation in response to those risks will become more urgent, she said.

Brainard endorsed “the principle of same risk, same disclosure, same regulatory outcome.” She also urged international cooperation among financial regulators to deal with the cross-border scope of the crypto industry. The latter appeal echoes the conclusions of a U.S. Treasury Department report released a day earlier.

Two specific areas aroused particular concern in the Fed official. The first was bank involvement with crypto increases the risk of the stability of the core financial system. Bank involvement should be encouraged, Brainard said, because it “provides an interface where regulators have strong sightlines.” In spite of her endorsement of the “same risk, same disclosure” principle, she seemed to argue for different treatment for crypto here, stressing that a “strong regulatory framework for crypto finance” was necessary in advance of heavy bank involvement.

Related: Brainard tells House committee about potential role of CBDC, future of stablecoins

Stablecoins are a second area of risk spillover, Brainard said. Calling them a bridge between crypto and fiat, she noted that the top two stablecoins account for 80% of the market capitalization. Fiat-backed stablecoins are “highly vulnerable to runs,” she said.

Brainard saw an important role for a central bank digital currency (CBDC), saying:

“A digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system.”

She gave interoperability between stablecoins as a potential use for that neutral settlement layer. Finally, Brainard pointed out that, while crypto offers cheaper services among its advantages, the costs that regulation entails are worth it.

Regulate now or regret it later, United States Federal Reserve Board vice chairperson Lael Brainard told an audience at a Bank of England conference in London on Friday. Crypto has the same basic risks as tradition finance and needs “strong guardrails,” Brainard claimed, pointing to the recent downturn in market as proof.