The United States Federal Reserve (the Fed) intends to form a group of experts focused on the cryptocurrency industry. This was announced by Michael Barr, the Fed’s deputy chair for supervision.
Speaking at the Peterson Institute for International Economics in Washington, Barr acknowledged that digital assets could have a transformative impact on the financial system. However, he noted that “the benefits of innovation can be realised only with appropriate guardrails.”
“Innovations always arrive quickly, but consumers need time to realise that they can both earn money and lose money on new financial products,” Barr said.
According to him, the group will help the Fed draw lessons from new developments and monitor the industry’s evolution. He added that regulation should be a consultative process that ensures a balance between excessive and insufficient oversight.
Barr named stablecoins as a concern, arguing that the assets they are backed by can be illiquid:
“This mismatch of value and liquidity — a recipe for a classic bank run.”
Barr did not rule out that, in the absence of regulation, any broad rollout of stablecoins could threaten the economy at large.
In response, Custodia CEO Caitlin Long (formerly Avanti) pointed to liquidity problems at Silicon Valley Bank (SVB).
FRIENDLY REMINDER that, right as the panic was happening in Silicon Valley, the Fed’s Vice Chair for Supervision Barr said in a speech: “The banks we regulate, in contrast, are well protected from bank runs thru a robust array of supervisory requirements.” https://t.co/FpPl2Qlk7x
— Caitlin Long ?⚡️? (@CaitlinLong_) March 10, 2023
“A friendly reminder that, at the moment Silicon Valley was in a panic, the Fed’s vice chair for supervision Barr said in his remarks: ‘Banks that we regulate are, by contrast, well protected from bank runs thanks to a robust set of supervisory requirements,’” Long wrote.
On March 9, SVB’s shares fell more than 60%, and its market value dropped by $10 billion after the institution announced an issuance of $1.75 billion in securities. In this context, five venture-capital firms focused on digital assets advised their portfolio companies withdraw funds from Silicon Valley Bank.
On March 10, California’s Department of Financial Protection and Innovation closed SVB.
Earlier, a number of crypto firms distanced themselves from Silvergate Bank amid bankruptcy rumours.
Silvergate Capital Corporation said it planned to liquidate its subsidiary. The plan provides for full reimbursement of deposits.
In February, the Fed warned banks about liquidity risks associated with crypto firms.
In March, four Republican senators, in a letter to supervisory agencies, said that tightening regulation of banks serving the industry could punishes the entire sector.