Feds Fear Financial Stability Threatened By Crypto | Can Regulation Stop Disruption?

2 min read

The US Federal Reserve is not sitting on its laurels when it comes to the cryptocurrency industry. They see dark times ahead for the economic stability of the country unless steps are taken.

cryptocurrency price market

US Financial Stability

According to a new report by CNBC, Fed Vice Chair Lael Brainard says that although the digital asset space has the potential to disrupt the financial system, she highlights the significance of regulating the nascent industry while it is still relatively small.

“Innovation has the potential to make financial services faster, cheaper and more inclusive, and to do so in ways that are native to the digital ecosystem.

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.”

Brainard also says the volatile price of cryptocurrencies are particularly troublesome, but notes that the digital asset industry and the traditional financial system still aren’t so intertwined where something can’t be done now to prevent bigger risks in the future.

“New technology and financial engineering cannot by themselves convert risky assets into safe ones. 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.”

Crypto Regulation in US and Abroad

The U.S. Treasury Department published a fact sheet Thursday outlining how it could work with foreign regulators to address the cryptocurrency sector.

The fact sheet, which is the first report published by the department as a result of U.S. President Joe Biden’s executive order on crypto, said the framework “is intended to ensure that … America’s core democratic values are respected,” pointing to consumer, investor and business protection, the safety of the global financial system and interoperability.

According to the sheet, the framework’s policy objectives also include reducing the potential use of crypto for illicit finance, promoting access to financial services, supporting technological advancement and “reinforc[ing] U.S. leadership in the global financial system.”

“The United States must continue to work with international partners on standards for the development of digital payment architectures and CBDCs (central bank digital currencies) to reduce payment inefficiencies and ensure that any new payment systems are consistent with U.S. values and legal requirements,” the fact sheet said.

This work should address those concerns, the document noted.

“Additionally, the United States will promote the adoption and implementation of international standards through bilateral and regional engagements. Across all engagements the United States will seek to ensure a coordinated message, limit duplication and encourage that work is maintained within its primary stakeholders,” the document said.

To support this work, the Treasury Department said the U.S. should hold “engagements” and other types of forums, the fact sheet said.

The Justice Department published its response to Biden’s executive order on digital assets last month.

Featured Image: Shutterstock/Tithi Luadthong/Natalia Siiatovskaia

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