Top Fed officials warn of “serious vulnerabilities” in the crypto industry

Federal Reserve Deputy Lael Brainard has said that recent cryptocurrency volatility has revealed “serious vulnerabilities” in an industry that needs stricter regulation.

Brainard told a Bank of England conference in London on Friday that crypto is not yet “as large or as interconnected” with traditional finance to pose systemic risk, but raises known regulatory concerns.

“Although identified as a fundamental breach of traditional finance, it appears that the cryptocurrency system is susceptible to the same risks that are too familiar from traditional finance, such as influence, settlement, opacity and maturity, and liquidity transformation,” Brainard said.

“As we work to secure the future of our financial stability agenda, it is important to ensure that the regulatory perimeter includes cryptocurrency.”

The crypto markets have come under relentless pressure in recent weeks, with several key players, including the crypto hedge fund Three Arrows, having dissolved as a result of falling markets. Since November’s all-time high, popular tokens such as bitcoin and ether have lost about 70 percent of their value.

In the wake of this market crash, Brainard questioned the oft-cited case that cryptocurrencies such as bitcoin act as a hedge against inflation.

“Contrary to claims that cryptocurrencies are a hedge against inflation or an uncorrelated asset class, cryptocurrencies have fallen in value and have been shown to be strongly correlated with more risky stocks and with risk appetite more generally,” she said.

Brainard’s speech also focused on the stablecoin industry, a key factor in the broader health of the crypto market. A stablecoin will track real currencies, and provide cryptocurrency market stability by offering a fast route for traders to exchange digital tokens for dollars.

“It is important that stack coins that claim to be redeemable at par in fiat currency on demand are subject to the type of prudential regulation that limits the risk of running,” she added.

Brainard’s comments regarding stablecoins follow the collapse of the once popular stablecoin terraUSD and sister token luna, a crash that wiped out billions of dollars for investors. Terra relied on computer algorithms and market demand to keep its value stable.

“Terra crash reminds us how quickly an asset claiming to maintain a stable value relative to fiat currency can be the subject of a race. The collapse of Terra and the previous failures of several other unsupported algorithmic stack coins are reminiscent of classic races. throughout history.”

Brainard also pointed to tether – the industry’s largest stablecoin – and the significant outflow pressure the stablecoin provider experienced in May. “As highlighted by the large recent outflow from the largest stack coin, stack coins linked to fiat currency are very vulnerable to races,” she added.

In addition, Brainard’s address was aimed at cryptocurrency companies that can reflect the activities of traditional finance without corresponding regulatory standards.

She noted that many crypto-trading and lending platforms had no comparable regulation, but “also combine activities that are required separately in traditional financial markets”.

“It is important to address non-compliance and any gaps that may exist,” she said.