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Fed Chairwoman Calls for More Crypto Regulation, Suggests Central Bank Digital Currency is the Future

Tyler Irvin

Summary: Federal Reserve Vice Chairwoman Lael Brainard demands more regulations for the crypto industry amid recent events exposing the digital asset world, in a speech she gave Friday in London.  “The recent turbulence and losses among retail investors in crypto highlight the urgent need to ensure compliance with existing regulations and to fill any gaps where ...

Federal Reserve Vice Chairwoman Lael Brainard demands more regulations for the crypto industry amid recent events exposing the digital asset world, in a speech she gave Friday in London. 

“The recent turbulence and losses among retail investors in crypto highlight the urgent need to ensure compliance with existing regulations and to fill any gaps where regulations or enforcement may need to be tailored—for instance, for decentralized protocols and platforms,” a copy of her speech said. 

Brainard listed three insights into crypto from the recent turbulence: volatility, catastrophic collapses and vulnerability. She noted that the recent events in crypto such as the Terra Network’s collapse, bankruptcy from Three Arrows Capital and Voyager Digital and temporary platform halts from Vauld, Celsius and others have made these insights much more prominent. 

She explained that it is clear the crypto market is extremely volatile, citing Bitcoin’s decline by 70% from its all-time high along with other alt coins with similar drops. 

As for collapses, she talked about the Terra Network’s collapse, which saw their two cryptocurrencies, formerly known as UST and LUNA, drop by 99% in the course of a week, which started the insolvency issues at Three Arrows Capital. She emphasized that new technology and financial engineering cannot magically convert risky assets into safe ones, referring to algorithmic stablecoins. 

Lastly, she said that crypto platforms are highly susceptible to deleveraging, fire sales, and contagion, risks that are well known in traditional finance. As a result, Brainard believes that the crypto industry should be treated and regulated like traditional finance. 

“While touted as a fundamental break from traditional finance, the crypto financial system turns out to be susceptible to the same risks that are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation,” her speech said. “As we work to future-proof our financial stability agenda, it is important to ensure the regulatory perimeter encompasses crypto finance.”

The vice chairwoman also added that a central bank-backed digital currency from the U.S. “may be an advantage for future financial stability.” While the US is most likely still a bit out from making this a reality, the conversation is certainly gaining traction. 

The Senate is expected to confirm Michael Barr, President Joe Biden’s pick to be the next Fed vice chairman for supervision. Barr will lead the central bank’s regulatory and financial-supervision efforts, which includes overseeing stablecoins. 

Author: Tyler Irvin

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