Fed Banking Regulator Before Congress After FTX Implosion: Crypto Industry Needs “Strong Guardrails”
The US Federal Reserve’s top banking regulator is urging Congress to pass legislation that would regulate cryptocurrencies following last week’s rapid collapse of FTX, a leading crypto exchange.
Michael Barr, vice chairman of the Fed, said in prepared testimony released Monday that “recent events in crypto… have highlighted the risks for investors and consumers associated with new and novel asset classes and activities when.” they are not accompanied by strong crash barriers”.
Barr, who took office in July, is scheduled to testify before Congress for the first time as vice chairman Tuesday. He did not specifically refer to FTX in his written observations.
However, his appearance comes after FTX, the third-largest cryptocurrency exchange formerly run by Sam Bankman-Fried, filed for bankruptcy on Friday. The fall of FTX has spread across the crypto world, with lender BlockFi pausing customer payouts.
Barr said, “Some financial innovations present opportunities, but as we’ve seen recently, many innovations also pose risks.” These include runs on deposits, collapsing assets, misuse of customer funds, fraud, theft, manipulation and money laundering, he said.
“If these risks are not well managed, they can harm retail investors and run counter to the goals of a safe and fair financial system,” Barr said.
FTX’s collapse happened outside of the banking system, Barr noted, a focus of his oversight.
“But recent events remind us of the potential for systemic risk as linkages develop between today’s cryptosystem and the traditional financial system,” he said.
In terms of the banking system as a whole, most large banks have healthy cash reserves that exceed even what the law requires, Barr said.
But as the economy slows as the Fed hikes interest rates quickly, banks could come under more pressure, he said.
The “economic outlook has weakened,” adding to uncertainty, Barr said. “A weaker economy could weigh on households and businesses and thus the banking system as a whole.”
Sign up for the Fortune Features Email list so you don’t miss our biggest features, exclusive interviews and investigations.
