How to protect public from risks of crypto assets is key question for regulators, Fed governor asserts

The main issue in crypto-asset regulation is how to protect the public at large – not the sophisticated crypto-investors, a member of the Federal Reserve Board said Friday.

Speaking at the SNB-CIF Conference on Cryptoassets and Financial Innovation in Zürich, Fed Gov. Christopher Waller said that by law or by practice, many crypto-related products and activities fall between the cracks of traditional legal and regulatory structures, outside the so-called “regulatory perimeter.”

“In that environment, the normal backstops and safety nets of traditional finance do not necessarily or reliably apply,” Waller said.

Calling the crypto marketplace a “rough and tumble” environment, Waller asserted that many participants who survive and thrive in the market consider regulation counterproductive as it “drives up costs, creates barriers to entry, and stifles innovation.”

“From some crypto advocates, I have heard this argument as well as a related one: that these experienced investors know what they’re getting into, and that they’re not asking for protection because they believe they don’t need it,” he said.

“Given all of that, the argument goes, why should anyone bring regulation into a space that’s not asking for it?”

But Waller indicated that the growing number of crypto investors increasingly is including unseasoned, non-professional investors who are attracted by high returns.

“New retail users, by definition, do not have crypto experience,” he said. “They don’t know how to independently buy a crypto asset, how to obtain and protect a private key, how to conduct trades on a DeFi (decentralized finance) protocol, or how to write a smart contract. They need help, and for a price, a range of fast-growing exchanges, wallet providers, and other intermediaries are willing to provide it.”

However, he said while intermediaries can potentially help monitor and manage risk, they can’t eliminate it. “In such a volatile market, any user still has a meaningful chance of losing their money,” he said.

Waller said broad access to the “crypto ecosystem” hinges on what the public at large needs, to have confidence in the system’s safety. “And, for better or worse, you can’t program confidence,” he said.

The Fed governor indicated the confidence question doesn’t always have a clear answer and involves real and difficult tradeoffs. “But it’s a question that every new and fast-growing financial product must address if it wants to last very long,” he concluded.

Federal Reserve Gov. Christopher J. Waller: Risk in the Crypto Markets