The Federal Reserve’s top bank regulator on Thursday tried to send something of an olive branch to the crypto industry.
In a speech in Washington, Fed Vice Chairman for Bank Supervision Michael Barr said that the Fed and other regulators were working to consider “whether and how” certain crypto-asset activity can be conducted in a manner that is consistent with safe and sound banking.
The key point is that innovation must be balanced with guardrails, Barr said, in a talk at the Peterson Institute for International Economics.
Barr’s conciliatory tone is somewhat in contrast with written regulatory guidance to banks.
“The Fed is using various channels to send a message to crypto firms and banks: Stay away from each other,” said Ian Katz, managing director of Capital Alpha Partners, in a recent note to clients.
“The tone reflects regulators’ growing distrust of the industry and a desire to ensure that crypto’s woes don’t spread to the traditional banking sector,” Katz added.
In his speech, Barr said that the Fed has not lost sight of the “potential transformative effect” that these technologies could have on the financial sysgtem.
Regulation should not lock in the power of incumbents or stifle innovation, he said.
The technology underlying crypto assets could bring new functionality or efficiencies to payment systems, he said.
At the same time, the technology has several key risks — including fraud and scams of crypto participants to money laundering and terrorist financing, Barr said.
Banks could face run risks from stablecoins, Barr said, and he called for Congress to pass laws to regulate them.
Stablecoins
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-0.06%
can be used to convert fiat currencies, into crypto assets.
“I think there is a critical role for Congress to play now, in establishing a framework for stablecoins,” Barr said. Stablecoins, pose potential for systemic risks. “They are a form of private money that borrows the trust of a central bank,” he said.
“You can think of a stablecoin as a completely unregulated money market fund attached to a payments rail,” he added.
The research firm Kaiko said earlier this week that stablecoins are likely to become ubiquitous among traders following Silvergate Capital Corp.’s
SI,
-14.39%
collapse.
Read: Crypto traders may lean toward stablecoins after Silvergate ceases crypto payments network
Barr said the Fed is creating a specialized team of experts that can help the central bank learn from new developments and make sure it stays up to date on innovation.
Some House Republicans are strong advocates of the crypto industry. The House Financial Services Committee’s new subcommittee on digital assets is holding a hearing later Thursday on what they call the Biden Administration’s attack on the digital asset ecosystem.
