Powell warns of crypto risks, but doesn’t want innovation stifled

After an opening statement in which Chairman Jerome Powell sent stocks lower by implying that the Fed could speed up and augment coming interest rate hikes, he touched on crypto, telling senators he saw several risks when it comes to digital assets.

“What we see is, you know, quite a lot of turmoil,” Powell said Tuesday before the Senate Committee on Banking, Housing, and Urban Affairs. “We see fraud, we see a lack of transparency, we see run risk, lots and lots of things like that.”

As such, the Fed has told regulated U.S. financial institutions to be wary, Powell added, and to take “great care in the ways that they engage…with the whole crypto space.”

Following Powell’s comments, Bitcoin was down 0.84% to $22,200, while Ether was down 0.7% to about $1,500, according to CoinMarketCap.

Powell’s comments echoed a January joint statement issued by the Fed’s board of governors, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency that warned banking organizations of the risks of engaging with crypto assets. The statement said organizations with business models centered on crypto-related activities or with a high amount of exposure to crypto assets “raise significant safety and soundness concerns.”

Still, Powell said that regulators shouldn’t go so far as to hamper technological advancement and that Congress should create a legal framework for digital assets.

“We don’t want regulation to stifle innovation in a way that just favors incumbents and that kind of thing,” he said.

The January statement in which the Fed’s board of governors participated claimed that stablecoins, or cryptocurrencies tied to the price of a fiat currency like the U.S. dollar, were susceptible to “run risk,” or risks of overwhelming withdrawals. But, on Tuesday, Powell said that stablecoins could find a place in the financial services sector if properly regulated.

He emphasized that the regulations for crypto and stablecoins should emulate the regulations for the traditional financial world, despite pleas for more tailored rules from the crypto industry. 

“People are going to assume when they deal with something that looks like a money market fund that it has the same regulations as a money market fund or a bank deposit,” he said.

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