US Fed creates new crypto team amid concerns about unregulated stablecoins

by · March 11, 2023

The US Federal Reserve is set to create a “specialized team of experts” to keep pace with developments in the cryptocurrency industry, according to a Fed official, amid concerns from the central bank about “unregulated” stablecoins.

Speaking at the Peterson Institute for International Economics in Washington on March 9, Deputy Supervisor Michael Barr admitted that crypto could have a “transformative effect” on the financial system, but added that “the benefits of innovation can only be realized if appropriate guardrails are in place.”

According to Barr, the new crypto team will help the Federal Reserve “learn from new developments and make sure we stay abreast of innovation in this sector.” He added:

“Innovation always comes quickly, but it takes time for consumers to realize that they can both make and lose money on new financial products.”

Meanwhile, Barr noted that regulation must be a “deliberative process” to ensure a balance is struck between over-regulation that “will stifle innovation” and under-regulation that “will allow significant damage to households and the financial system”

Related: Fed Signals Sharp Rate Hike in March Due to Inflation — Here’s How Bitcoin Traders Can Prepare

One part of crypto that Barr highlighted as a point of concern was stablecoins.

He said the assets backing many stablecoins in circulation are illiquid, meaning it can be difficult to liquidate them for cash when needed, arguing:

“This mismatch in value and liquidity is the recipe for a classic bank run.”

He believes that unless regulated by the Fed, any widespread use of stablecoins could put households, businesses and the wider economy at risk.

Caitlin Long, CEO of Custodia Bank – which has consistently been rejected from joining the Federal Reserve System – pointed out the irony of Barr’s comments given her belief that Silvergate Bank collapsed due to liquidity problems stemming from a bank run.

Long also pointed to the current issues facing Silicon Valley Bank, whose shares plunged after a March 8 financial update revealed it sold $21 billion of its holdings at a loss of $1.8 billion, prompting fears because it was forced to sell to free up capital.