The recent crash in crypto prices and the ensuing failure of several large digital asset lenders, funds and brokers “highlights the urgent need” for the digital asset industry to comply with existing financial regulations, Federal Reserve Vice Chairwoman Lael Brainard said Friday.
“Future financial resilience will be greatly enhanced if we ensure the regulatory perimeter encompasses the crypto financial system and reflects the principle of same risk, same disclosure, same regulatory outcome,” she said at a speech at the Bank of England Conference in London.
Financial regulators like the Securities and Exchange Commission claim jurisdiction over cryptocurrency companies, but industry participants have often flouted those rules or fought them in court, arguing that digital assets are unlike traditional financial assets and that new laws must be passed if the government wants to oversee them.
Congress is considering several different pieces of legislation that could bring more certainty to this debate, but these bills do not appear likely to pass in the immediate future.
The dollar price of bitcoin
was trading at around $21,300 Friday, down nearly 70% from its peak of more than $67,000 in early November, while the price of ether
has declined about 75% over the same time frame.
“Contrary to claims that crypto assets are a hedge to inflation or an uncorrelated asset class, crypto assets have plummeted in value and have proven to be highly correlated with riskier equities and with risk appetitive more generally,” Brainard noted.
She added that despite these risks, digital asset technology still “holds the promise of increasing competition in the financial system, reducing transaction costs and settlement times, and channeling investment to productive new uses,” and therefore both regulators and industry participants must work quickly to bring suitable regulation to the space.
“Far from stifling innovation, strong regulatory guardrails will help enable investors and developers to build a resilient digital native financial infrastructure,” Brainard said.
The Vice Chairwoman is seen as the Fed official most supportive of issuing a central bank digital currency, or a digital form of the dollar that could provide a bridge between the traditional financial system and the crypto ecosystem.
“Given the foundational role of fiat currency, there may be an advantage for future financial stability to having a digital native form of safe central bank money—a central bank digital currency,” Brainard said. “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.”