The Federal Reserve Vice Chair has warned bank involvement in crypto could lead to financial instability.
In a speech given at the Bank of England conference on Friday, Fed Vice Chair Lael Brainard urged regulators to get tougher with the cryptocurrency industry.
The Chair, as well as numerous other industry figures, have warned that the crypto market’s volatility will spread to the broader financial system if stringent regulation on banks and stablecoin issuers is not established.
- Lael Brainard, a Federal Reserve vice chair and member of the Financial Stability Oversight Council said in a speech at the Bank of England Conference that regulation is required to avoid the sector from becoming a broader danger to the financial system.
- The lack of regulatory rules has impeded the growth of the cryptocurrency industry.
- Despite this year’s slump in bitcoin’s value, US lawmakers continue to emphasize the industry’s potential, development, and reach, as well as the risks of not having a clear guidelines and policy.
Brainard warned about the crypto market’s inherent risk, remarking that, like traditional markets, it would have to operate differently.
This is just the latest warning from a high-ranking official about the potential dangers of digital currencies, and it underscores the need for more oversight in this area.
Such instability has been shown in crypto platforms that have fallen prey to the multiple risks associated with the space such as hacks, fraud, and theft.
In order for digital assets to play a role in the global economy, further development is needed to address these challenges.
Despite this criticism, Brainard did say that the Fed was keeping an open mind about the potential use cases of cryptocurrencies and blockchain technology.
She believes that there is potential for these technologies to improve the efficiency of payments and settlements, but more work needs to be done to assess their risks and benefits.
“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,” she said in a speech at a Bank of England conference in London. “It is important that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.”
The crypto lending enterprises that have lately collapsed are forcing lawmakers to tighten restrictions on such platforms that do not follow the same rules as conventional finance.
Platforms that offer hybrid services with features of both decentralized and centralized finances should not be treated with exceptions, Brainard noted.
She also said that the rise of DeFi protocols presented new difficulties, since they’re based on peer-to-peer interactions and lack certified identities. Meanwhile, she was concerned about the new technology’s potential to facilitate financial crimes:
“The permissionless exchange of assets and tools that obscure the source of funds not only facilitate evasion, but also increase the risk of theft, hacks, and ransom attacks. “
According to the Fed Chair, banks’ increasing involvement in crypto and stablecoin operations ranging from custody and issuance to customer service may ignite financial instability. A devastating crash in the crypto sector might extend to include financial institutions that are closely connected to the broader market.
Brainard mentioned, while the interdependence between crypto and the basic financial system has not yet reached a level that might cause systemic risk, relevant banking institutions and stablecoin creators are the ones regulators should focus on.
The absence of regulatory standards has been a perplexing and stressful problem for the cryptocurrency industry, which is eager to grow and expand their enterprises but is uncertain about the legal limitations within which they may operate.
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