We don’t want to stifle crypto innovation, but the sector is a mess
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If the crypto industry was looking for a silver lining in Federal Reserve Chairman Jerome Powell’s testimony during a Senate Banking Committee 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 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 during 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 amount to a strong warning to banks that the agencies are closely monitoring their crypto movements. 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offered a real-time example of the dangers of crypto-concentration in banking, as most of their crypto-customers have withdrawn their deposits from the flying institution.
Problems with stablecoins
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 are given “appropriate regulation”, but Powell argued that “there are real concerns about permissionless public blockchains, and the reason is that they have been so vulnerable to fraud, to money laundering . and all those things.”
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. However, the price has retreated slightly since then, recently trading at $22,319.
