© Reuters. FILE PHOTO: A representation of bitcoin is seen in an illustration picture taken on June 23, 2017. REUTERS/Benoit Tessier/
By Pete Schroeder
WASHINGTON (Reuters) – The top regulatory official for the U.S. Federal Reserve said cryptocurrency technology still could have “potential transformative” effects on the financial system, but needs “guardrails” to realize them.
Fed Vice Chair for Supervision Michael Barr said recent turmoil in crypto markets make clear the sector could still pose a risk to traditional banks, but that the impact has been limited as regulators urge caution.
U.S. bank regulators, including the Fed, have taken several steps in recent months to ensure banks are approaching the crypto sector with caution, including requiring banks to flag any crypto activities to regulators before proceeding, and warning firms that crypto deposits can be particularly volatile.
“These liquidity concerns are particularly acute for banks that have a meaningful portion of their balance sheets funded with such deposits,” said Barr in prepared remarks, which came one day after crypto-focused bank Silvergate Capital Corp (NYSE:.N) announced plans to liquidate after facing dramatic losses.
Barr stopped short of saying banks have no role to play in crypto, but rather said regulators are busy figuring out what firms could do in the space while remaining safe and sound. He noted that technology behind crypto could make financial markets and payments systems more efficient and affordable.
“Our goal is to create guardrails, while making room for innovation that can benefit consumers and the financial system more broadly,” he said.
The US Attorney General, William Barr, recently highlighted the positive aspects of cryptocurrency, but warned of the risk of crime and fraud associated with its use.
In a statement made on October 8th, Barr said that, while cryptocurrency can potentially offer significant opportunities, “it can also be exploited by financial criminals and terrorist financiers” unless there are guardrails put in place to reduce the risk associated with digital assets.
During the statement, he made several recommendations to the government and financial regulators in order to ensure that the potential benefits of cryptocurrency are realized while at the same time, imposing significant anti-fraud and anti-crime measures.
These recommendations include the implementation of robust know your customer (KYC) and anti-money laundering (AML) measures for financial institutions, as well as for crypto-market participants. Barr also suggested the adoption of monitoring tools and processes to identify unusual activity, enforce record keeping requirements and reduce the anonymity associated with cryptocurrency transactions.
Furthermore, the US Attorney General called for the development of “best practices” for crypto-related products, services and activities that could be graphically referred to as “guardrails.” Barr’s comments echo the sentiments of other lawmakers, who have voiced similar concerns regarding the need for bolstering security measures in the crypto world.
In conclusion, it is clear that government officials are taking the potential risks of cryptocurrency seriously and are looking to take proactive steps to ensure that digital assets are kept secure and that their potential benefits can be realized. The recommendations issued by Barr will no doubt be looked upon favorably by crypto enthusiasts and financial regulators alike as they look to make digital assets a viable option for the future.