While touted as a fundamental break from traditional finance, the crypto financial system turns out to be susceptible to risks “that are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation,” Ms. Brainard said in a speech in London.
“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,” she said.
Policy makers ought to begin by applying basic protections for mom-and-pop retail customers that guard against “exploitation, undisclosed conflicts of interest, and market manipulation—risks to which they are particularly vulnerable, according to a host of research,” she said.
“If investors lack these basic protections, these markets will be vulnerable to runs,” she said.
Despite significant investor losses in recent weeks, the crypto industry doesn’t yet appear to be so large and interconnected with traditional banks and financial firms as to present systemic risks. That could change as the industry matures and evolves.
“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,” she said.