Fed’s top financial regulator urges ‘guardrails’ for crypto

The top U.S. banking regulator at the Federal Reserve is urging Congress to pass legislation that would impose regulation on crypto currencies in the wake of the swift collapse last week of FTX, a leading crypto exchange.

Michael Barr, the Fed’s vice chair for supervision, said in prepared testimony released Monday that “recent events in crypto … have highlighted the risks to investors and consumers associated with new and novel asset classes and activities when not accompanied by strong guardrails.”

Barr, who took office in July, is scheduled to testify before Congress on Tuesday for the first time as vice chair. He did not refer specifically to FTX in his written remarks.

Yet his appearance comes after FTX, the third-largest crypto currency exchange, formerly led by Sam Bankman-Fried, filed for bankruptcy Friday. The fall of FTX has rippled throughout the crypto world, with lender BlockFi pausing customer withdrawals.

Barr said “some financial innovations offer opportunities, but as we have recently seen, many innovations also carry risks.” Those include runs on deposits, collapsing asset values, misuse of customer funds, fraud, theft, manipulation, and money laundering, he said.

“These risks, if not well controlled, can harm retail investors and cut against the goals of a safe and fair financial system,” Barr said.

The collapse of FTX occurred outside the banking system, Barr noted, a focus of his oversight.

“But recent events remind us of the potential for systemic risk if interlinkages develop between the crypto system that exists today and the traditional financial system,” he said.

Regarding the banking system overall, most large banks have healthy levels of cash reserves, Barr said, beyond even what is required by regulation.

But with the economy slowing as the Fed rapidly lifts interest rates, banks may come under more stress, he said.

The “economic outlook has weakened,” increasing uncertainty, Barr said. “A weaker economy could put stress on households and businesses and, thus, on the banking system as a whole.”