An official from the Federal Reserve said that the US central bank is planning to establish a specialist team of experts to monitor changes in the cryptocurrency sector. This move comes in response to worries over uncontrolled stable currencies.
Vice Chair for Supervision Michael Barr acknowledged that cryptocurrencies could have a transformative impact on the financial system but added that the advantages of innovation can only be realised if the right safeguards are in place on March 9 at the Peterson Institute for International Economics in Washington.
The new crypto team, according to Barr, will assist the Federal Reserve in learning from new developments and ensuring that we are current on innovation in this field. Also, he said that while innovation typically happens swiftly, it sometimes takes some time for customers to understand how new financial products might result in both gains and losses.
In the meanwhile, Barr pointed out that regulation needs to be a deliberate process to ensure a balance is found between over-regulation, which would inhibit innovation, and under-regulation, which will allow for significant harm to households and the financial system.
Barr singled out stable coins as one area of worry in the cryptocurrency world. He said that many stable coins in circulation are backed by illiquid assets, making it challenging to convert them into cash when necessary.
He said that the assets supporting many stablecoins in use are illiquid, which makes it challenging to convert them into cash when necessary. He claimed that this mismatch between value and liquidity is the formula for a traditional bank run. Unless the Fed regulates stablecoin adoption, he thinks it might endanger individuals, companies, and the overall economy.
The CEO of the Custodia Bank, which has repeatedly been denied entry into the Federal Reserve System, Caitlin Long, drew attention to the irony in Barr’s remarks given her opinion that a bank run caused Silvergate Bank to fail and her notion that the bank’s demise was caused by liquidity problems.
Long also referred to the current problems that Silicon Valley Bank is experiencing. After a March 8 financial update revealed that the bank had sold $21 billion worth of its holdings at a $1.8 billion loss, investors began to worry that the bank was being forced to sell to raise capital, which caused the share price to crash.
Smaller institutions are becoming increasingly engaged in cryptocurrency activity, as seen by the Fed, but it is unclear to what degree they are vulnerable to correlated risks. The crypto winter has taught us that these risks are highly correlated.
Along with other U.S. regulating bodies like the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, the Fed has recently been issuing guidelines and policy statements about digital assets. Reflecting from Barr’s statements, these actions will continue to persist.