The Fed’s Brainard says crypto needs to be regulated before it gets too big

Federal Reserve Governor Lael Brainard speaks at the National Association of Business Economics (NABE) Annual Meeting in Arlington, Virginia on Monday, September 27, 2021.

Al Drago | Bloomberg | Getty Images

Federal Reserve Vice Chair Lael Brainard became the latest official to comment on crypto, saying on Friday that regulation is needed or the industry could become a greater threat.

“Innovation has the potential to make financial services faster, cheaper and more inclusive in ways that are inherent to the digital ecosystem,” she said, speaking at a Bank of England conference in London. “It is important that the foundations for sound regulation of the crypto-financial system are laid now, before the crypto ecosystem becomes so large or interconnected that it could pose risks to the stability of the broader financial system.”

The lack of regulatory guidelines has been a confusing and bothersome issue for the crypto industry, whose participants are interested in developing and growing businesses but unclear the regulatory parameters within which they can do so.

Despite this year’s crash — Bitcoin’s price is currently about 70% below its all-time high of $68,982.20 set in November — US regulators continue to draw attention to the potential, growth and reach of the industry, as well as the possible fallout from it missing release frame for it.

Brainard’s comments come a month after Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) introduced legislation creating a regulatory framework for crypto that would empower the Commodity Futures Trading Commission to cover most of the industry to regulate.

Earlier this year, President Joe Biden announced a cryptocurrency executive order that sought to address the lack of a framework for crypto development in the US

Brainard highlighted the volatility of cryptocurrency prices on Friday.

She also pointed to recent events that have further weighed on crypto prices and dampened sentiment, most notably the collapse of Terra, as well as attempts to create decentralized stablecoins and the current liquidity crisis involving Three Arrows Capital.

“New technology and financial engineering alone cannot transform risky assets into safe ones,” Brainard said.

“Despite significant investor losses, the crypto financial system does not yet appear to be large enough or sufficiently connected to the traditional financial system to pose systemic risk,” she added. “This is the right time to determine what crypto activities are allowed for regulated entities and under what restrictions, so that the impact on the core financial system remains well contained.”