Lael Brainard: Preparing for the financial system of the future

Speech by Ms Lael Brainard, Member of the Board of Governors of the Federal Reserve System, at the 2022 US Monetary Policy Forum, New York City, 18 February 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The financial system is undergoing fast-moving changes associated with digitalization and decentralization. Some of these innovations hold considerable promise to reduce transaction costs and frictions, increase competition, and improve financial inclusion, but there are also potential risks. With technology driving profound change, it is important we prepare for the financial system of the future and not limit our thinking to the financial system of today.

The Evolving Digitalization and Decentralization of Finance

In recent years, there has been explosive growth in the development and adoption of new digital assets that leverage distributed ledger technologies and cryptography. The market capitalization of cryptocurrencies grew from less than $100 billion five years ago to a high of almost $3 trillion in November 2021 and is currently around $2 trillion.

In parallel, we have seen rapid growth in the platforms that facilitate the crypto finance ecosystem, including decentralized finance (DeFi) platforms. These crypto platforms facilitate a variety of activities, including lending, trading, and custodying crypto-assets, in some cases outside the traditional regulatory guardrails for investor and consumer protection, market integrity, and transparency.