The Federal Reserve vice chair Lael Brainard says the cryptocurrency market needs new regulations for situations not covered by existing laws. She said there have seen that the crypto financial system has all the same risks, similar to those faced by traditional finance.
Brainard, at the Clearing House and Bank Policy Institute 2022 annual conference on Wednesday, highlighted the need for creating clear regulatory guardrails. She had previously said the crypto sector needs to meet the same safety standard as traditional finance to prevent it from becoming a threat to the broader financial system.
Reiterating the risk of stablecoins, the vice chair believes there will be a lot more of such tokens created by the private sector in the future. Brainard said stablecoins is one of those areas that has the most potential for risk if not properly regulated. The risks can easily spill into the main core financial system because of the runnable nature of stablecoins. In May, around $60 million disappeared overnight with the collapse of the algorithmic stablecoin TerraUSD (UST). This raised concerns that fellow stablecoins such as USDT or USDC may not be able to sustain significant amounts of withdrawals.
The President’s Working Group on Financial Markets in November 2021 issued recommendations on stablecoins. Brainard said the report was very strong. She agreed that stablecoins should be subject to bank-like regulation and that credential guardrails and the liquidity backstop are the best way to situate stablecoins.