Federal Reserve Vice Chair of Supervision Michael Barr stressed in a speech Thursday at the Peterson Institute in Washington warned banks to tread carefully in the crypto space, stressing any activity in the space that looks like banking should follow the same rules as banks.
“Our overall stance is that, at this stage of the development, banks should take a careful and cautious approach to engaging in crypto-asset related activities and the crypto sector,” Barr said.
“One overarching principle of the Federal Reserve’s financial oversight is that activities that are fundamentally the same should be regulated the same, regardless of where or how the activity occurs or the terms used to describe the activity.”
In a mostly backward-looking speech, Barr said an appropriate regulatory framework for cryptocurrencies is needed, but that right now the Fed and other banking agencies are focused on using existing authorities to protect the banking system from the risks of crypto.
Barr called on Congress to regulate crypto and specifically to establish a framework for stablecoins, noting that stablecoins pose the potential for systemic risk if they’re not regulated appropriately.
“We don’t have strong federal prudential supervision and oversight of stablecoins,” he said in a Q&A following his speech. “They do have this ability because of network effects to scale quickly and they are a form of private money that borrows the trust to the central bank. And I think that’s absolutely critical that we get the regulatory oversight of that.”
Barr said banks should be aware of all the risks they face and take into account those risks and put in place appropriate risk controls.
“We expect supervised entities to ensure that they conduct their activities in a safe and sound manner and in compliance with all relevant laws, including anti-money laundering laws,” he said.
Barr’s speech comes just as Silvergate Capital (SI), one of the crypto market’s top banks, became the first crypto bank to fail after feeling ripples from FTX’s collapse that caused billions in deposit withdrawals.
Barr drew parallels to the financial crisis, warning that experience shows new types of financial products and innovation which had become intertwined with the banking system eventually resulted in “devastating consequences.”
“Experience has shown that crypto assets can face the same fundamental liquidity and credit risks as traditional assets, and can be highly correlated with other traditional risks, rather than being hedges against such risks,” he said.
Barr’s comments come after the Fed, along with the FDIC, and the Office of the Comptroller of the Currency last month encouraged banks that use funding from crypto firms to monitor liquidity and maintain strong risk management practices to prevent runs.
The agencies warned deposits banks host from crypto firms can be impacted by periods of stress in markets, volatility, and outside factors over which crypto firms have no control.
The agencies encouraged banks to use existing risk management tools to guard against runs but stopped short of creating and requiring new risk management rules.
Barr underscored Thursday that the Fed has told banks it wouldn’t be a safe practice to hold crypto on their balance sheet.
“We must learn from the past to ensure that we do not allow for new forms of unregulated private money subject to classic forms of run risk, and with the associated spillovers and systemic implications for households, businesses, and the broader economy,” he said.
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