4 takeaways from Michael Barr’s DC Fintech Week speech
Federal Reserve Deputy Chairman for Supervision Michael Barr may have intended balance sheet to be a central theme in his speech Wednesday at DC Fintech Week.
“Finding the right balance between creating an enabling environment that supports innovation and managing related risks to businesses, households and the stability of the financial system is no easy task,” he said. “Everyone has a stake in getting the regulatory balance right.”
Barr concluded the speech by emphasizing “the need to get the railing right.”
But the undercurrent in his appearance may well have been connected — not just in reference to the effect technologies like digital assets could have on the financial system, but in the number of times Barr made it clear that the Fed doesn’t regulate in a bubble.
He was careful to note that the central bank works with the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) to develop crypto regulation.
He made two calls to Congress: one, urging lawmakers to create a strong framework for the oversight of stablecoins, and another to reiterate that the Fed would be loathe to create a central bank digital currency (CBDC) without lawmakers’ support.
And Barr expressed enthusiasm for progress the Consumer Financial Protection Bureau (CFPB) could make regarding users’ control over their own personal information.
Several of the talking points can generate a sense of deja vu. “We continue to work with [the concept of regulating crypto] from the overarching principle that the same type of activity should be regulated in the same way,” Barr said, echoing a stance he took in his first public comments since joining the Fed’s board — which again echoes Fed Chairman Jerome Powell’s philosophy of a CBDC.
Although some of the words sound familiar, several of Barr’s comments stood out as potential guideposts for future reference:
1. On crypto.
Key quote: “Because cryptoassets have proven to be so volatile, they are unlikely to grow into monetary substitutes and become a viable means of paying for transactions.”
This clearly shows the Fed’s limited expectations for the asset class. Perhaps more nuanced is Barr’s assurance that the Fed, OCC and FDIC teamwork on crypto regulation “is not intended to discourage banks from providing access to banking products and services to businesses linked to crypto assets.”
“It is important for banks to understand some of the increased liquidity risks they may face from certain types of deposits from crypto-asset companies,” Barr warned, adding that the interconnectedness of the crypto market could contribute to “amplified stress.”
The comments, coincidental or not, came the day after BNY Mellon began accepting clients’ cryptocurrencies to hold or transfer.
“When a bank’s deposits are concentrated in deposits from the cryptoasset industry or from cryptoasset companies that are highly interconnected or share similar risk profiles, banks may experience deposit fluctuations that are correlated and closely linked to broader developments in the cryptoasset markets,” Barr said.
In a later reference to dollar-denominated tokens sent along a distributed ledger, Barr said: “Banks that want to experiment with these new technologies should only do so in a controlled and limited way.”
2. On stablecoins.
Key quote: “As Chairman Powell said the other day, a central bank is and always will be the most important source of confidence behind money. Stablecoins lend this trust, so we have a continuing interest in a strong federally prudent framework for their use.”
Stablecoins, Barr said, “have a greater capacity to function as privately issued money” than cryptoassets do. But they are still “exposed to runs that could threaten financial stability.
“It’s important to get the regulatory framework right before they do,” Barr said.
3. On a potential CBDC.
Key quote: “The Federal Reserve has not made any decisions on whether to issue a CBDC.”
This clarification has come up in probably every public discussion about a digital dollar. However, Barr provided two status updates.
Firstly, that the central bank is “in the final stages of creating the FedNow service”, which is scheduled to be launched between May and July next year.
Second, the Fed is “doing the work to understand the technological requirements” to create a CBDC, Barr said. The central bank “deepens our understanding of potential policy trade-offs, and takes a look at how other countries are thinking about and experimenting with CBDCs.”
4. The time of regulation.
Key quote: “When regulations are too prescriptive or regulators too cautious, they risk stifling innovation and locking in the market power of dominant players in ways that can raise costs and limit access. When regulation is lax or behind the curve, it can facilitate risk-taking and a race to the bottom that puts consumers, businesses and the economy at risk and discredits new products and services with consumers and investors.”
This sentiment can be a practical reference when regulators urge that it is appropriate to get crypto rules on the books. But it may also underscore the cautious pace at which the Fed has taken its CBDC efforts. Some lawmakers have pushed for a shorter timeline, fearing the dollar would lose its primacy among world currencies.
