Federal Reserve Vice Chair for Supervision Michael Barr wants banks to think twice about taking on deposits from crypto firms.
In a Wednesday afternoon speech, Barr said the volatility in the crypto field earlier this year demonstrated how interconnected the sector is. He urged banks to be aware of the "heightened liquidity risks" involved with doing business with crypto-related firms and their potential exposure to money laundering and fraud.
"Many of these activities pose novel risks," he said, "and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks."
The Fed is working with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to regulate crypto-related activities, Barr noted. Until those regulations take shape, he said banks should follow the
Barr's remarks, delivered at the DC Fintech Week event, echoed a sentiment shared by acting Comptroller Michael Hsu during the same conference Tuesday. Hsu cautioned
"Using the familiar to introduce something novel can downplay or mask the risks involved and establish false expectations," Hsu said. "In time, people get hurt."
In his speech, Barr said bank regulators must strike a careful balance as it sets rules and guidelines for emerging technologies, protecting consumers, households and businesses without stifling innovation.
One area where such considerations will prove most important is bank-issued, dollar-denominated tokens, Barr said. He said that, though it's understandable banks would want to participate in digital finance, they should do so in a way that does not foster illegal or risky activity.
"While there is work underway on technical solutions for managing these risks, it remains an open question whether banks can engage in such arrangements in a manner consistent with safe and sound banking and in compliance with relevant law," he said. "Given these open questions, banks looking to experiment with these new technologies should do so only in a controlled and limited manner."
Barr encouraged banks interested in exploring tokenization to consult their regulators as they do so.
Barr also addressed the topic of stablecoins, which he sees as becoming a viable form of private money and, if not properly regulated, a financial stability risk. He echoed a sentiment
"History has shown that money-like assets are subject to runs that can threaten financial stability," Barr said. "Stablecoins linked to the dollar are of particular interest to the Federal Reserve. As Chair Powell said the other day, a central bank is and will always be the main source of trust behind money. Stablecoins borrow that trust, so we have an abiding interest in a strong federal prudential framework for their use."
Barr noted that the Fed is working with other bank regulators on how to address stablecoins. Like Powell, he encouraged Congress to pass a law solidifying the Fed's oversight of such assets.
During the speech, Barr also endorsed incorporating elements of open banking into the U.S. financial system to allow services to be tailored to customers' needs and wants. Doing this, he said, requires a regulatory commitment to protecting customer's rights to the data they generate and privacy.
Barr encouraged the Consumer Financial Protection Bureau to implement regulations that give customers access to their data, something he said the agency is authorized to do under the Dodd-Frank Act. Barr, who served as a Treasury official in the Obama administration, is credited as an architect of the 2010 banking regulation package. He played a key role in crafting the CFPB.
"While this is not an 'open banking' rule, it will set the stage for consumers to gain greater control when it comes to sharing their data with prospective providers," Barr said of the CFPB's data access initiative. "The goal of this effort is to advance consumer autonomy, enhance competition for financial services, and to provide easier portability of account information from bank to bank as well as nonbank providers. I look forward to hearing more on this from the CFPB."
Barr said the Fed should take a "technology agnostic" approach to regulation, one that gives the private sector a safe and secure foundation on which to build. A longtime proponent of expanding banking access to low-income Americans, Barr said an example of this philosophy in action is the Fed's forthcoming instant payment system, FedNow, which is
"FedNow will improve safeguards on instant payments, making the financial system safer," he said. "And it will improve access to the financial system by reducing payment delays and the high costs associated with those delays. As I have discussed extensively in my writings and speeches, these costs are particularly borne by those least able to afford them."
