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  • Federal Reserve Board of Governors member Christopher Waller recently explained regulating bitcoin and cryptocurrency markets is to “protect the rest of us.”
  • The board member explains that fear of unstable markets for new investors inherently weakens the ecosystem as users look to socialize losses.
  • The governor said the space is evolving from assets like bitcoin “meant to provide an alternative means of payment,” to risky financial exposure.

Christopher Waller, a member of the Federal Reserve Board of Governors, said regulation of bitcoin and the broader cryptocurrency market is not to protect experienced investors in the space, rather “it's how to protect the rest of us.”

The governor explained that the explosive growth experienced in the industry over the past five years was “a stretch of incredible growth.” These notable levels of growth, Waller explains, led to quick recognition from both the public and the government. This highly publicized recognition of economic growth in the industry has caused a deviation away from the likes of bitcoin which is “meant to provide an alternative means of payment,” towards practices often referred to as “decentralized finance, or DeFi,” according to the governor.

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

Governor Waller went on to explain that many investors currently operating within the space view regulation through a lens of “regulation isn't just unnecessary, it's counterproductive.” Were it only these experienced investors comfortable with the risk then regulation might not be necessary.

“New retail users, by definition, do not have crypto experience,” Waller 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 protocol, or how to write a smart contract.”

The governor continued to say that even experienced investors will sometimes look to “socialize losses,” when the pain felt is too extraordinary, even for the most experienced of investors. This attempt to socialize losses was well documented as users of the Terra ecosystem began to ask for restitution following the crash of the UST stablecoin.

In concluding his thoughts, Waller stated:

“If we want to allow broad access to the crypto ecosystem, then the question isn't about what experienced users of that ecosystem want—it's about what the rest of the public needs to have confidence in the ecosystem's safety, and for better or worse, you can't program confidence.”

Waller made the comments at a virtual event cc-hosted by the Swiss National Bank (SNB) and Center for Innovative Finance (CIF) at the SNB-CIF Conference on Cryptoassets and Financial Innovation.