Fed Vice Chair Calls for More Crypto Regulation, Notes Terra Collapse

The Federal Reserve vice chair today called on greater crypto regulation, noting that many investors have recently suffered significant losses. 

In a Friday speech at the Bank of England Conference in London, U.S. central bank governor Lael Brainard noted that the crypto market is not yet big enough to pose a “systemic risk” to the traditional financial system. 

But she added that now was the time to “ensure the regulatory perimeter encompasses crypto finance.”

“We are closely monitoring recent events where risks in the system have crystallized and many crypto investors have suffered losses,” said Brainard. “Despite significant investor losses, the crypto financial system does not yet appear to be so large or so interconnected with the traditional financial system as to pose a systemic risk.”

“This is the right time to establish which crypto activities are permissible for regulated entities and under what constraints so that spillovers to the core financial system remain well contained,” she added. 

Brainard referred to Bitcoin’s plunge—the biggest cryptocurrency by market cap is down 68.5% from its November 2021 all-time high of $69,044.77—and mentioned the collapse of blockchain network Terra. 

Terra supporters touted the network as “the next big thing”—and, for a while, it was. The network at one point became the go-to place for DeFi “degens” after Ethereum, largely drawn in by the promise of massive returns on Terra's flagship protocol, Anchor.

But then the run happened, followed by the death spiral. As traders rushed for the exits on Anchor, Terra’s UST stablecoin couldn’t withstand the sell pressure and lost its dollar peg. The algorithmic stablecoin’s sister token LUNA then collapsed to zero.

Brainard today noted that “new technology and financial engineering cannot by themselves convert risky assets into safe ones” and that crypto is susceptible to the same risks in the traditional finance world—like leverage. She added that Terra’s demise was “reminiscent of classic runs throughout history.”

Brainard’s comments echo those of the Bank of England this week: the UK central bank said that the fall in value in the crypto market meant stronger law enforcement and regulations are needed. Without greater oversight, the bank argued, crypto could pose "systemic risk" to the global financial system in the future.