Lael Brainard, vice chair of the Federal Reserve, wants regulation of cryptocurrencies after the market recently revealed "serious vulnerabilities."
At a Bank of England conference in London on Friday, Brainard expressed her opinion that the cryptocurrency market is still not "so large or so interconnected" with traditional finance as to pose a systemic risk to the banking industry.
According to Brainard, "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,"
Additionally, companies using cryptocurrencies that might mimic traditional finance operations without adhering to the same regulatory standards were targeted in Brainard's speech.
Many cryptocurrency trading and lending platforms, she noted, "also combine activities that are required to be separated in traditional financial markets," but lack comparable regulation.
Addressing non-compliance and any potential gaps is crucial, she emphasized.
"As we work to future-proof our financial stability agenda, it is important to ensure the regulatory perimeter encompasses crypto finance," she said.
Several significant players, including the cryptocurrency hedge fund Three Arrows, have collapsed in recent months due to a falling market, including the cryptocurrency sector.
Bitcoin and ether tokens have both lost about 70% of their value.
In light of this, Brainard questioned the claim that cryptocurrencies serve as an inflation hedge.
According to her, "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 appetite more generally."
She also discussed the stablecoin market, which aims to track fiat currencies and stabilize the cryptocurrency market by giving traders an easy way to convert digital tokens into dollars.
"It is vital that stablecoins that purport to be redeemable at par in fiat currency on demand are subject to the types of prudential regulation that limit the risk of runs," she continued.
Along with its sister token luna, the once-popular stablecoin terraUSD has collapsed, costing investors billions of dollars.
"The terra crash reminds us how quickly an asset that purports to maintain a stable value relative to fiat currency can become subject to a run. The collapse of Terra and the previous failures of several other unbacked algorithmic stablecoins are reminiscent of classic runs throughout history."
The largest stablecoin in the market, tether, experienced significant outflow pressure in May, according to Brainard. She continued, "as highlighted by large recent outflow from the largest stablecoin, stablecoins pegged to fiat currency are highly vulnerable to runs."
By fLEXI tEAM