The Federal Reserve is setting up a new group of crypto specialists

The Federal Reserve is putting together a “specialized team of experts” to help it monitor the crypto sector, Michael Barr, the central bank’s deputy chairman for supervision, said on Thursday.

The Fed’s top regulator said the digital asset specialists are needed to “help us learn from new developments and ensure we are up to date with innovation in this sector”.

Barr, the Fed official with the most potential influence over how the central bank regulates and oversees crypto, echoed comments made by Fed Chairman Jerome Powell this week that the banking regulator hopes to preserve crypto innovations as it moves to put up guardrails.

“Despite recent events, we have not lost sight of the potential transformative effect that these technologies can have on our financial system,” Barr said at an event for the Peterson Institute for International Economics in Washington. But he also had criticism for the industry.

“While cryptoassets are hyped as decentralized, there has been an emergence of new, fairly centralized intermediaries that are either not subject to or not compliant with appropriate regulation and oversight, perpetuating harm to consumers,” said Barr, who once worked as an advisor to Ripple, the issuer of the XRP token. “Our overall position is that at this stage of development, banks should take a cautious and prudent approach to engaging in crypto-asset-related activities and the crypto sector.”

In recent months, the Fed has issued guidance and policy statements on digital assets in the United States along with its other regulatory agencies, including the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Those kinds of statements will continue, Barr said.

Asked whether the Fed should have addressed crypto-concentration issues at certain banks well before banks began issuing open warnings, Barr said — without citing this week’s example of Silvergate Bank’s collapse — that his agency tends to give small banks more leeway . than larger.

The Fed has observed that smaller banks are becoming deeply involved in cryptocurrency activity, “the degree to which they are exposed to correlated risks is not well understood,” he said, and the crypto winter has been a lesson in the crypto sector’s risk of being highly correlated.

“We tend to have a very light-touch approach with smaller institutions, so there’s more of an impetus on them to actually be aware of these new and emerging risks, and we have to make sure they understand that,” he said.

He also directly addressed stablecoins, which had been a particular area of ​​concern for the Fed since Facebook’s failed Diem project. Large-scale adoption of such tokens – which he described as “unregulated private money subject to classical forms of ongoing risk” – could threaten the wider financial system.

If stablecoins were to catch on widely before the regulations are in place, it 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,” Barr argued. “There is a critical role for Congress to play right now in establishing a framework for stablecoins.”