Crypto Industry Should Face Tougher Regulations, Fed Vice Chairwoman Says

Ms. Brainard’s remarks signal her support for ongoing efforts by lawmakers and U.S. financial regulators to rein in an industry that has ballooned with virtually no regulation. In addition to tougher investor protections, her speech called for steps to address crypto trading and lending firms that engage in activities similar to those in traditional finance “without comparable regulatory compliance.”

The speech didn’t specify which regulators should act to tackle these issues. Lawmakers in both chambers of Congress are working on legislation to impose a regulatory framework for the crypto industry, including a focus on tougher rules for stablecoins, a type of cryptocurrency designed to trade in line with the U.S. dollar or another national currency.

“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, speaking at a conference hosted by the Bank of England.

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 added, referring to an investor stampede.

Run risk is a key vulnerability of stablecoins, Ms. Brainard said. As a result, they ought to be subject to the types of banklike regulation “that limit the risk of runs and payment system vulnerabilities that such private moneys have exhibited historically.”

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.

Write to Andrew Ackerman at andrew.ackerman@wsj.com