Crypto Investment Protection: Fed Throws Its Weight Behind Investor Safety

Federal Reserve Vice Chairwoman Lael Brainard said the time is ripe for bringing cryptocurrencies under the regulatory ambit. Policy makers should provide investor protections and other regulatory aspects to the space, she said on Friday. Like risks will need to be subjected to like regulatory outcomes, she explained.

Regulation Before Industry Grows Too Large

Brainard said U.S. policy makers should extend investor protections and other financial rules to the cryptocurrency industry immediately. According to a Wall Street Journal report, the Fed Chairwoman said crypto investments are not support by protections. The protections need to be brought in before the industry grows too large and begins to pose risks to the financial system, she added.

The crypto ecosystem turns out to be susceptible to risks, she was quoted as saying in a speech in London. She added,

“While touted as a fundamental break from traditional finance, the crypto financial system turns out to be susceptible to risks. The risks are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation.”

The Fed chairwoman said now is the right time to ensure that like risks are subject to like regulatory outcomes. Also, there is need to curb the false allure of seemingly easy returns that obscures significant risk, she added. “Like regulatory outcomes and like disclosure are needed to help investors distinguish between genuine, responsible innovation.”

Basic Crypto Protection Need Of The Hour

There is a need to protect customers against exploitation and manipulation. Policy makers ought to begin by applying basic protections for mom-and-pop retail customers, she added. Protections to guard against undisclosed conflicts of interest, and manipulation, risks to which crypto is vulnerable, are needed, she said.

“If investors lack these basic protections, these markets will be vulnerable to runs. It is important that the foundations for sound regulation of the crypto financial system be established now. This should be done before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.”

Earlier in the week, a Fed panel said the usage of cryptocurrencies, especially the CBDCs, could strengthen U.S. dollar’s role in international market.