Federal Reserve Takes Bold Move to Protect Banks from Crypto with Enhanced Guidance and Supervision

In recent years, the rise of cryptocurrency has caused a lot of excitement and controversy in the financial world. While some see it as the future of money, others warn of its potential dangers, particularly for traditional banks. As the collapse of the Silvergate bank has taught the risks related to crypto investments, several central banks are now taking strict measures to protect investors from crypto threats. In response, the Federal Reserve is considering a bold move to safeguard banks from the risks posed by crypto.

Fed to Issue More Guidance to Banks

During a speech in Washington, Michael Barr, the Vice Chairman for Bank Supervision at the Federal Reserve, stated that the Fed, along with other regulators, is actively considering how to conduct certain crypto-asset activity in a manner that aligns with safe and sound banking practices. In addition, Barr announced that regulators are currently investigating crypto assets and will provide additional guidance to banks interested in investing in them.

According to the highest-ranking regulatory official of the US Federal Reserve, while cryptocurrency technology still holds the potential for transformative effects on the financial system, it requires “guardrails” in order to fully realize these benefits.

Barr acknowledged that the recent instability in the crypto market highlights the potential risks the sector could pose to traditional banks. However, he also noted that regulators’ cautious approach has helped mitigate any significant impact. He said, 

“Banks should take a careful and cautious approach to engaging in crypto-asset related activities and the crypto sector. We would likely view it as unsafe and unsound for banks to directly own crypto assets on their balance sheets.”

Fed Ensures Safety While Dealing with Crypto Sector

Over the past few months, U.S. bank regulators, including the Federal Reserve, have implemented several measures to ensure banks exercise caution when dealing with the crypto sector. These measures include mandating that banks report any crypto activities to regulators before proceeding and cautioning firms about the high volatility of crypto deposits. 

Mr. Barr said, “In addition to sharing what we learn with the public on an ongoing basis, we are also enhancing our supervision of these activities.”

Mr. Barr revealed that the Federal Reserve is in the process of assembling a team of experts to educate officials about the latest developments in cryptocurrencies. While investors have shown a growing interest in crypto assets, their value has experienced significant fluctuations in recent years, partly due to a series of scandals that have impacted investor confidence and resulted in steep price drops.

In prepared remarks, Barr stated that liquidity concerns are especially significant for banks that rely heavily on volatile deposits to fund a meaningful portion of their balance sheets. This statement followed Silvergate Capital Corp’s announcement of plans to liquidate after incurring substantial losses related to cryptocurrencies, which occurred just a day prior.