Powell warns of crypto risks but doesn’t want innovation to be stifled

“What we’re seeing is quite a bit of turmoil,” Powell said Tuesday before the Senate Committee on Banking, Housing and Urban Affairs. “We see fraud, we see a lack of transparency, we see risk, lots and lots of things like that.”

That’s why the Fed has told regulated U.S. financial institutions to be cautious, Powell added, and “exercise great care in the way they engage with the entire crypto space.”

Following Powell’s comments, Bitcoin fell 0.84% ​​to $22,200, while Ether was down 0.7% to around $1,500, according to CoinMarketCap.

Powell’s comments echo a January joint statement by the Fed Board of Governors, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, warning banking organizations about the risks of handling crypto assets. The statement said that organizations with business models that focus on crypto-related activities or that are highly exposed to crypto assets “raise significant security and soundness concerns.”

Still, Powell said regulators shouldn’t go so far as to impede technological advances and that Congress should create a legal framework for digital assets.

“We don’t want regulation to stifle innovation in a way that only favors the incumbents and stuff like that,” he said.

The January statement, attended by the Fed’s board of governors, claimed that stablecoins, or cryptocurrencies that are pegged to the price of a fiat currency like the US dollar, face “run risk,” or the risk of overwhelming withdrawals be. But on Tuesday, Powell said stablecoins could find a place in the financial services sector if properly regulated.

He emphasized that regulations for crypto and stablecoins should mimic regulations for traditional finance, despite pleas for more tailored rules from the crypto industry.

“People will assume that when they trade something that looks like a money market fund, it has the same regulations as a money market fund or a bank deposit,” he said.