WASHINGTON—Better guardrails are needed for cryptocurrencies to protect small investors and to dampen any risks that might emerge as the industry grows, Federal Reserve Vice Chairwoman Lael Brainard said Friday.

While touted as a fundamental break from traditional finance, the crypto financial system turns out to be susceptible to risks “that are all too familiar from traditional finance, such as leverage, settlement, opacity, and maturity and liquidity transformation,” Ms. Brainard said in a speech in London, according to her prepared remarks.