FED Supports Innovation with Guardrails for Bank’s Crypto Activity

• The U.S Federal Reserve Vice Chairman Michael S. Barr cites findings on crypto assets.
• “Benefits of innovation can only be realized if appropriate guardrails are in place,” says Barr.
• Regulatory and supervisory framework is necessary for crypto assets to mitigate the risks that come with it.

The U.S Federal Reserve Vice Chairman Michael S. Barr published an article titled, “The Federal Reserve’s Approach to Supervision and Regulation of Bank’s Crypto-related Activities,” .In the crux of the article Barr explains some of the key highlights from the analysis made of crypto assets by the Federal Reserve and its approach to it.

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

Citing how crypto assets have become such a integral part of a common man’s life, he states:

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

Barr points out that the area of focus on regulatory framework is to encourage 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.

Additionally, Barr notes 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 flaunted as decentralized, there has been presence 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 careful and cautious approach to engaging in crypto-asset related activities and the crypto sector as a whole.