We don’t want to stifle crypto innovation, but the sector is a mess

If the crypto industry was looking for a silver lining in Federal Reserve Chairman Jerome Powell’s testimony in a US Senate hearing on Tuesday, the best he could offer was that he hopes there is something useful and innovative amid the crypto chaos.

“We have to be open to the idea that — somewhere in there — there is technology that can be used in productive innovation that makes people’s lives better,” Powell told members of the Senate Banking Committee on his twice-yearly trip to testify on Capitol Hill .

“We don’t want to stifle innovation,” he said.

Powell was asked to address cryptocurrency issues several times in his testimony, which will continue Wednesday before the House Financial Services Committee.

“We’ve just seen a remarkable set of events in the crypto space,” he said, noting that there has been “quite a lot of turmoil” in the past year, with companies collapsing and high-profile frauds being exposed. “We see in crypto activity a lot of things that suggest that regulated financial institutions should be quite careful about doing things in the crypto space.”

The Fed and other US banking regulators have repeatedly issued statements and policy interpretations that all amounted to a strong warning to banks that the agencies are closely watching their crypto movements. And in the latest warnings, regulators specified that banks focusing their operations in this sector are unlikely to meet safety and soundness standards, which are a baseline for being able to continue operating in the US

Silvergate Bank has offered a real-time example of the dangers of crypto concentration in banking, as most of their crypto customers have pulled out of the floundering institution.

Powell, who suggested that Congress must step in to provide a “workable legal framework” for digital assets in the United States, also directly addressed stablecoins as an area in need of oversight.

“People are going to assume when they trade something that looks like an MMF that it has the same regulation as a MMF or a bank deposit,” he said. “So stablecoins need some attention in that regard.”

Powell said there is a place for stablecoins in the financial sector, if they get “appropriate regulation,” but in the meantime, Powell argued that “there are real concerns about permissionless public blockchains, and the reason is that they have been so prone to fraud, for money laundering and all that stuff.”

Still, it was Powell’s broader view of the economy that had the most immediate effect on the crypto sector. Following his comments on Tuesday that inflationary pressures are higher than expected, bitcoin (BTC), which is seen as a riskier asset that suffers when interest rates rise, fell about 1.6% to under $22,000. The price has jumped a bit since then, recently trading at $22,319.