Banks should be careful with crypto-related trades

The Federal Reserve’s top banking cop Michael Barr said Thursday that banks should be “cautious and prudent” in dealing with cryptocurrency assets and the broader crypto sector — the latest sign of the Fed’s increasingly cautious stance on crypto-related activities within the banking sector.

Why it matters: The recent meltdown in the cryptocurrency sector has had limited spillover to the banks regulated by the Federal Reserve, but the central bank has warned that crypto could one day pose risks to the broader financial system.

What they say: “Our overall position is that banks at this stage of development should take a cautious and cautious approach to engaging in crypto-asset-related activities and the crypto sector,” Barr, the Fed’s deputy chairman for supervision, told Peterson. Department of International Economics. It is the Fed official’s fifth public address since he was confirmed to the post last summer.

• “We would probably see it as unsafe and unhealthy for banks to own crypto assets directly on their balance sheets,” Barr said.
• Barr also said the Fed is working to improve oversight of these activities, as well as build a “specialized team of experts who can help us learn from new developments and make sure we stay abreast of innovation in this sector.”

The backdrop: The Fed, and Washington more generally, has taken a tougher stance against crypto-related activities within the banking sector. Earlier this year, the Fed issued a statement along with other regulators warning banks that some crypto trades were “highly likely to be inconsistent with safe and sound banking practices.”

• Another joint statement, released last month, warned banks about the risks associated with deposits linked to stablecoins, a cryptocurrency meant to be linked to the US dollar.

In his speech on Thursday, Barr also warned of risks associated with stablecoins – both for banks but also for consumers if they are not regulated.

• “Consider the consequences if a stablecoin that is not subject to appropriate oversight and regulation were to be adopted as a widespread means of payment, as some stablecoin developers state as a goal,” Barr said.
• “An unregulated, unsupervised, deposit-like asset could create enormous disruption, not just for financial institutions, but for people who might rely on the coin if it were to gain widespread adoption.”