Fed official says crypto is ‘risky’ and ‘speculative’

Christopher Waller, Governor of the US Federal Reserve. Al Drago/Bloomberg via Getty Images

It’s been a tough 18 months for many cryptocurrency investors, but Federal Reserve Governor Christopher Waller says they should have seen it coming.

“If you buy cryptoassets and the price goes to zero at some point, please don’t be surprised,” Waller said in a Friday speech at a Global Interdependence Center conference in San Diego. “And don’t expect the taxpayers to socialize your losses.”

After Crypto Winter helped trigger industry-wide bankruptcies and slashed the price of the world’s leading digital asset, Bitcoin, by 64% in 2022, crypto prices have rebounded this year. Bitcoin is now up over 30% year-to-date, and some believe the rally will continue. Cathie Wood, CEO of ARK Invest, argues that Bitcoin will be a source of stability for people in countries struggling with inflation, financial crises and political instability.

“Where do these people go to get insurance against an implosion of their purchasing power and wealth? It’s in something like Bitcoin. Bitcoin is insurance,” Wood said Bloomberg last week, adding that she expects increased Bitcoin adoption to push the cryptocurrency’s price to $1 million by 2030.

But the Fed’s Waller views cryptocurrencies in a different light, arguing on Friday that they have no intrinsic value and amount to nothing more than “risky” speculation — “like a baseball card.”

“To me, a crypto asset is nothing more than a speculative asset,” he said. “If people believe that others will buy it from them in the future at a positive price, it will trade at a positive price today. If not, the price will go to zero. If people want to hold such an asset, then go for it . I wouldn’t, but I don’t collect baseball cards either.”

Under Chairman Gary Gensler, who once called the crypto industry the “Wild West,” the Securities and Exchange Commission (SEC) has cracked down on crypto companies that violate US regulations or offer products that are not properly registered. On Thursday, Gensler reached a $30 million settlement with crypto exchange Kraken over its staking feature that offered users rewards for locking their crypto to validate “proof-of-stake” blockchains. And on Friday, he doubled down on his plans to increase regulation in the crypto sector.

“This is very much a non-compliant field, and they are commingling client funds with their businesses,” he told Bloomberg of crypto exchanges that offer betting services. “We don’t allow the New York Stock Exchange to also run a hedge fund and trade on the exchange. Why would we do this?”

Adding to the pressure on the crypto industry, Fed Governor Waller issued a warning in his Friday speech to banks looking to jump into cryptocurrencies, saying he was concerned that doing so could “create an increased risk of fraud and scams, legal uncertainty, and the prevalence of inaccurate and misleading financial disclosures.”

“While I don’t care if people take on risky investments or engage in risky business ventures, banks and other financial intermediaries must engage in any activity they do in a safe and sound manner,” he said. “A bank that engages with crypto customers needs to be very clear about the customers’ business models, risk management systems and corporate governance structures to ensure that the bank is not left in the bag if there is a crypto meltdown.”

Despite Waller’s warnings about the risks of cryptocurrencies and even the potential for “spillovers” into the financial system amid a meltdown, the Fed governor doesn’t believe the entire crypto industry is without merit. He argued that distributed ledger technology — which forms the basis of cryptocurrencies’ blockchains — could be useful for a “wide range of data management problems.” And smart contracts, a type of transaction protocol that runs on the blockchain, can be used to speed up securities transactions in the stock market.

“While it is critical that we ensure that the risks to financial stability associated with crypto assets are mitigated, it is important that we keep the different parts of the crypto ecosystem distinct in our minds as the debate about and how to regulate crypto continues,” he said. . “Doing so will ensure that we do not unduly limit the development and potential future use of the positive features of the crypto ecosystem.”