Federal Reserve Offers Clarity on Bank’s Crypto Activity

• Vice Chairman of the U.S Federal Reserve Michael S. Barr explains findings on crypto assets.
• “Benefits of innovation can only be realized if suitable regulations are there,” says Barr.
• Supervisory infrastructure is necessary to reduce the risks related to cryptocurrencies.

The Vice Chairman of the Federal Reserve Michael S. Barr recently published an article titled, “The Federal Reserve’s Approach to Supervision and Regulation of Bank’s Crypto-related Activities,” which outlines the analysis of crypto assets by the Federal Reserve and its strategy to tackle them.

Barr opens the article by acknowledging the, “potential transformative effect that these technologies could have on our financial system.” He discusses their mission to provide clarity to the banks under their supervision about what they have learned and about their supervisory expectations.

Talking about the widespread use of cryptos, he states:

A fifth of Americans, many of them with limited savings, say they have owned some form of crypto. The issues in the crypto sector over the past year may have affected a large segment of the public.

Barr notes that the focus is to promote innovation, to support safety and soundness of financial institutions, offer broader financial stability, and to protect the public from fraud and other abusive behavior.

Upon analyzing Barr’s team stated that crypto assets have no intrinsic value beyond the faith of their owners, and hence, it can face the same fundamental liquidity and credit risks as traditional assets. “It can be highly correlated with other traditional risks, rather than being hedges against such risks,” says Barr.

Furthermore, Barr says that in the absence of a regulatory or supervisory framework, customers don’t have the information they need to assess and mitigate their risks. Investors do not have the structural protections they have relied on for many decades, which leads to ponzi schemes.

Moreover, while crypto assets are said to be decentralized, there has been emergence of new, centralized intermediaries that were not subjected under jurisdictions, which will harm the consumers. In response, the Federal Reserve plans to regulate all cryptocurrency transactions the same as every financial services’ activities.

Barr concludes his article by stating that there is a need to balance innovation with safeguards. He adds, “Our goal is to create guardrails, while making room for innovation that can benefit consumers and the financial system more broadly.” He says that they will be taking a thoughtful and cautious approach to engaging in crypto-asset related activities and the crypto sector as a whole.

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