Fed vice chair says crypto crash shows 'urgent' need for regulation

The ongoing crypto crash has highlighted an "urgent need" for regulation, Federal Reserve Vice Chair Lael Brainard said Friday.

"The recent turbulence and losses among retail investors in crypto highlight the urgent need to ensure compliance with existing regulations and to fill any gaps where regulations or enforcement may need to be tailored," Brainard said at a Bank of England conference in London.

As crypto contagion has plunged hedge fund Three Arrows Capital and broker Voyager Digital into bankruptcy while imperiling several other firms, Brainard noted that the digital asset world is "susceptible to the same risks that are all too familiar from traditional finance."

Crypto investors should be better protected against undisclosed conflicts of interests and manipulation that leaves markets vulnerable to runs, according to Brainard.

"We have seen crypto-trading platforms and crypto-lending firms not only engage in activities similar to those in traditional finance without comparable regulatory compliance, but also combine activities that are required to be separated in traditional financial markets," Brainard added. "For example, some platforms combine market infrastructure and client facilitation with risk-taking businesses like asset creation, proprietary trading, venture capital and lending."

Crypto is not intertwined enough with the traditional financial system to pose a systemic risk to this point, according to Brainard. But she said regulators will need to soon weigh the pros and cons of greater bank involvement in the industry: "Bank involvement provides an interface where regulators have strong sightlines and can help ensure strong protections … But bringing risks from crypto into the heart of the financial system without the appropriate guardrails could increase the potential for spillovers and has uncertain implications for the stability of the system."

Brainard stressed the need for "regulators [to] work together domestically and internationally," given crypto's cross-border scope. She said it is time "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."