Speaking at the recent Bank of England Conference, the Vice Chair of the Federal Reserve, Lael Brainard, has urged crypto regulation as a necessary step to combat weighty risks such as fire sales, deleveraging and contagion in the crypto markets, and to promote competition, efficiency and speed.
The news comes amid a recent number of collapses in the crypto industry following the Terra/Luna meltdown, Three Arrows liquidation and Celsius' freezing transactions as the largest casualties of the crypto winter so far. Despite significant losses occurring, Ms. Brainard says the crypto system is not yet so interconnected with traditional finance to be considered a systemic threat.
Although she did not disclose much relating to potential policy, Ms. Brainard did confirm the future of crypto involves regulation:
Future financial resilience will be greatly enhanced if we ensure the regulatory perimeter encompasses the crypto financial system and reflects the principle of same risk, same disclosure, same regulatory outcome.
While praising the benefits of crypto and digital assets generally, the Vice Chair sought to draw a distinction as to whether lower costs were delivered by genuine innovation, or cost savings by non-compliance with existing laws. This is a curious point to make, given that crypto businesses have been clamouring for clear paths to regulation which can be complied with using decentralised technology.
Crypto has headlined US regulatory conversation in the finance space for the past few months, most recently with the Securities Exchange Commission (SEC) confirming bitcoin as a commodity and inferring ether is a security for regulatory purposes.
As the US continues to traverse the crypto winter, those in charge of inciting and enacting policy, such as Ms. Brainard, seem to believe it is a global process instead of something that must be tackled by each individual country:
Due to the cross-sectoral and cross-border scope of crypto platforms, exchanges, and activities, it is important that regulators work together domestically and internationally to maintain a stable financial system and address regulatory evasion.
This is spot on, as highly mobile crypto businesses with young staff will move to jurisdictions which have supportive frameworks for regulation, and rely on the borderless nature of blockchain networks to deliver their innovation. This poses a significant challenge to traditional financial services regulation, which has traditionally enjoyed a clear enforcement path and a gatekeeper model to ensure compliance. Designing laws which must balance incentives and costs more carefully than ever before is a difficult task.