Fed calls for tighter regulation of the cryptocurrency industry

The cryptocurrency industry needs tougher regulation, as the collapse in the market for digital assets testified to serious vulnerabilities within the sector. This was stated by Fed Vice Chair Fed Lael Brainard at a Bank of England conference, according to Financial Times.

In her view, due to the relatively small size of the market and weak interconnection with the traditional economy, cryptocurrencies do not yet threaten financial stability. At the same time, regulators need to establish a regulatory framework to protect investors, Brainard added.

“Although the crypto-financial system stands in opposition to the traditional one, it has proven vulnerable to the same risks that we are well acquainted with in traditional finance. As we work to safeguard financial stability, it is important that the regulatory perimeter covers cryptocurrencies,” she said.

Brainard doubted that Bitcoin is a hedge against inflation. The vice chair noted that cryptocurrencies are highly correlated with high-risk assets.

The official also said that regulators should pay particular attention to stablecoins. In her words, the collapse of the Terra ecosystem recalls a classic example of bank run.

She stressed that “stablecoins” are highly vulnerable to such crises. As an example, Brainard cited the May outflow of funds from Tether’s USDT.

In June 2022, Fed Chair Jerome Powell said that, in light of market volatility, the agency is closely monitoring cryptocurrencies. He noted that the industry does not yet have a meaningful impact on macroeconomics.

Earlier in May, Michael Barr, a candidate for the Fed’s vice chair, called for developing a regulatory framework for regulating stablecoins.

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