While expressing concerns about the crypto markets, Vice-Chair of the US Federal Reserve, Lael Brainard, has said it is important that the foundations for sound regulation of the crypto financial system be established now before the ecosystem becomes so large or interconnected, that it might pose risks to the stability of the broader financial systems.
Brainard made the remarks at the ongoing Bank of England conference.
"Innovation has the potential to make financial services faster, cheaper, and more inclusive and to do so in ways that are native to the digital ecosystem. Enabling responsible innovation to flourish will require that the regulatory perimeter encompass the crypto financial system according to the principle of like risk, like regulatory outcome, and that novel risks associated with the new technologies be appropriately addressed," Brainard said at the conference.
It is important to note that the price of Bitcoin has dropped by as much as 75 per cent from its all-time high over the past seven months, and it has declined almost 60 percent in the three months since April. Most other prominent crypto-assets have experienced even steeper declines over the same period.
Recent volatility has exposed serious vulnerabilities in the crypto-financial system, she said, adding that to future-proof the financial stability agenda, it was important to ensure the regulatory perimeter encompasses crypto finance.
"We are closely monitoring recent events where risks in the system have crystallized and many crypto investors have suffered losses. Despite significant investor losses, the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk," she added.
Further, this is the right time to ensure that like risks are subject to regulatory outcomes and disclosures so as to help investors distinguish between genuine, responsible innovation and the false allure of seemingly easy returns on investments.
"This is the right time to establish which crypto activities are permissible for regulated entities and under what constraints so that spillovers to the core financial system remain well contained," the Vice-Chair added.
Due to the cross-sectoral and cross-border scope of crypto platforms, exchanges, and their activities, it is important that regulators work together domestically and internationally to maintain a stable financial system and address regulatory evasion, she stated.
"In implementing a same-risk-same-regulatory-outcome principle, we should start by ensuring basic protections are in place for consumers and investors."