Lael Brainard, Vice Chairman of Federal Reserve, stated that while the risks associated with the cryptocurrency market are similar to those with traditional finance, new regulations would be necessary in cases where existing laws do not apply.
In a speech at the Clearing House and Bank Policy Institute 2022 annual conference, the vice chair said that the crypto financial system has all the same risks as traditional finance. However, “creating clear regulatory guardrails” is necessary, given the distinctive traits of crypto.
As the second-ranking Fed official, Lael Brainard is leading the exploration of the central bank’s digital U.S. dollar. This makes her views on crypto all the more relevant.
The industry adhered to the same safety standard as traditional finance, according to Brainard’s recent remarks, in order to keep it from endangering the broader financial system.
In her speech, she also reiterated the risk of stablecoins. She believed that the private sector will produce a lot more of these tokens in the future and questioned whether the central bank need to issue its own central bank digital currency (CBDC).
The Fed vice chair said, “I believe if stablecoins are not regulated properly, they will pose a potential risk and of course, those risks can easily bleed into the core financial system.”
The collapse of algorithmic stablecoin TerraUSD (UST) in May has resulted in a loss of roughly $60 billion in value. Some people are concerned that asset-backed stablecoins like USDT or USDC would not be able to withstand large amounts of withdrawals.
The President’s Working Group on Financial Markets, which includes individuals like Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, released recommendations on stablecoins in November 2011.
Its advice that stablecoins should be governed similarly to banks and that “credential guardrails and the liquidity backstop are the best way to situate stablecoins” are ones that Brainard deemed to be “very strong” and with which she agreed.
