Recent upheaval in the cryptocurrency markets shows the sector is subject to similar risks as conventional investments, underscoring the need for regulation to protect against the “false allure” of a quick profit, Federal Reserve Vice Chair Lael Brainard said Friday.
“The crypto financial system turns out to be susceptible to the same risks that are all too familiar from traditional finance,” Brainard said at a Bank of England conference.
“So this is the right time to ensure that like risks are subject to like regulatory outcomes and like disclosure so as to help investors distinguish between genuine, responsible innovation and the false allure of seemingly easy returns that obscures significant risk.”
The comments come as the slump in bitcoin and other digital currencies continues to reverberate across the industry, denting players in the fledgling financial universe.
This includes a bankruptcy filing by US crypto lender Voyager Digital, the crash of the Terra cyptocurrency, the liquidation of Singapore-based cryptocurrency hedge fund Three Arrows Capital, and moves by crypto lender Celsius to suspend customer redemptions.
Brainard said despite investment losses so far, “the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk.”
Her remarks came a day after Fed Governor Christopher Waller also highlighted risks from cryptocurrencies, while saying that the turbulence had not yet threatened major financial institutions.
“That doesn’t mean if it was 10 times bigger wouldn’t have had an impact,” 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 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.”
Waller said the recent decline in virtual currencies has exposed the falsity of claims that such investments can be a hedge against inflation, or a way to offset other risky assets.
“Crypto-assets have plummeted in value and have proven to be highly correlated with riskier equities and with risk appetite more generally,” Waller said.
