During a Bank of England conference today, Lael Brainard, the Vice Chair of the U.S. Federal Reserve, spoke about financial stability and crypto-assets. She discussed cryptocurrencies, stablecoins and the need for investment in compliance.
As with other central bankers globally, she observed that currently, there are limited links to traditional finance but urged a tightening of regulatory enforcement while that’s still the case.
Brainard made an interesting point on decentralized finance (DeFi), referring to an unpublished academic paper that shows that the structure of DeFi lending makes price movements more extreme than traditional finance. When loans are automatically liquidated, the collateral is sold on decentralized exchanges (DEXs). And the prices from one exchange are then fed via an averaged oracle to other DEXs, ultimately impacting prices on centralized exchanges.
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