FRB Governor Says Crypto Assets Are Risky and Speculative, But Calls for Nuance in Regulation

Federal Reserve Board Governor Christopher J. Waller stated that crypto assets are "speculative" and risky for investors and financial intermediaries, but said that agencies need to approach regulating the "crypto ecosystem" in a manner that does not "unduly limit" development.

In remarks at the Global Interdependence Center Conference, Mr. Waller said that it is helpful to analyze the crypto ecosystem as having three distinct interacting parts:

• crypto assets, defined as digital assets created through cryptographic techniques that are traded;
• database management protocols, including permissioned and permissionless distributed ledger technologies; and
• technology and security that enables trading of crypto assets, including smart contracts and tokenization.

Observing that while both database management protocols and technology are necessary for trading crypto assets, Mr. Waller said that they also have broader applications that may be used to address a wide range of data management problems in the financial sector. Smart contracts, he noted, could be used to automate transactions for non-crypto assets which would decrease the time necessary for clearing and settlement of trades. Similarly, Mr. Waller stated that tokenization technology used to protect identifying personal data in crypto asset transactions could be applied to increase productivity in other industries as well.

Mr. Waller addressed the inherent risk of investing in crypto assets, which he said was "nothing more than a speculative asset." Mr. Waller stated that such crypto assets are held by investors or financial intermediaries with the belief that their perceived value will increase. He said that if crypto assets are no longer perceived to have value, then investors and institutions will be subject to losses just as with any other speculative investment.

In addition, Mr. Waller emphasized the duties of banks and other financial intermediaries to ensure that "risky" crypto investments and business ventures are done in a "safe and sound manner." Mr. Waller said that while he supports prudent innovation in the financial system, he is concerned about the heightened risks for banks. Among other measures banks must take, Mr. Waller stressed the "critical task" of meeting the "know your customer" and "anti-money laundering" requirements for customers involved in crypto asset-related activities.

Finally, Mr. Waller stated that it was important to understand the distinction between the various parts of the "crypto ecosystem" in the debate over "if and how" crypto should be regulated. This, he said, will ensure regulatory agencies do not "unduly limit the development and potential future uses of the positive features of the crypto ecosystem."