Recent upheaval in cryptocurrency markets shows that the sector faces risks similar to those of conventional assets, underscoring the need for regulation to protect against the “false lure” of a quick profit, US Federal Reserve Vice Chair Lael Brainard said on Friday.
“The crypto financial system is proving to be vulnerable to the same risks that are all too familiar to traditional finance,” Brainard said at a Bank of England conference.
“So this is the right time to ensure that similar risks are subject to similar regulatory outcomes and disclosures to help investors distinguish between genuine, responsible innovation and the false appeal of seemingly simple returns that obscure significant risk.”
The comments come as the plunge in bitcoin and other digital currencies continues to resonate across the industry, impacting players in the fledgling financial universe.
These include a bankruptcy filing by US crypto lender Voyager Digital, the crash of Terra cryptocurrency, the liquidation of Singapore-based cryptocurrency hedge fund Three Arrows Capital, and moves by crypto lender Celsius to suspend customer redemptions.
Despite previous investment losses, Brainard said, “The crypto financial system does not yet appear to be large enough or so interconnected with the traditional financial system that it poses systemic risk.”
Her comments came a day after Fed Governor Christopher Waller also highlighted the risks of cryptocurrencies, while saying the turmoil has not yet threatened major financial institutions.
“That’s not to say that if it was 10 times bigger, it wouldn’t have had an effect,” Waller said in a discussion with the National Association for Business Economics.
“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.”
Waller said the recent decline in virtual currencies has exposed the falsity of claims that such investments could be a hedge against inflation or a way to offset other risky assets.
“Crypto assets have declined in value and have shown to be highly correlated with riskier stocks and risk appetite in general,” Waller said.
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