FRB Vice Chair for Supervision Calls for Unified Approach to Monitor Crypto-Asset Activity

Federal Reserve Board Vice Chair for Supervision Michael S. Barr highlighted the risks and benefits of crypto-asset technologies to the U.S. payment system and called for a unified approach to oversight among regulators.

Benefits and Risks of Crypto-Assets and Stablecoins

In an address before the Peterson Institute for International Economics, Mr. Barr said the benefits of crypto-assets are to enhance the U.S. payment system, which he called "slow and expensive." He stated that new technologies, such as (i) distributed ledger technology, encryption and new methods for validating transactions can lead to quicker reconciliation and clearing and (ii) smart contracts offer operational efficiencies and reduced costs.

Mr. Barr emphasized that crypto-assets can face the same risks as traditional assets, such as liquidity and credit risks. In addition, while crypto-asset retailers often tout customer protections through a decentralized system, Mr. Barr pointed out that the retailers often operate outside of a regulatory and supervisory framework.

Mr. Barr reasoned that because of the "long and messy" history of private money, stablecoins - a type of private money - require robust regulation and oversight. Mr. Barr stated that unlike stablecoin issuers, banks regulated by the FRB are protected from bank runs and are subject to a thorough supervisory framework. In contrast, Mr. Barr said that stablecoin issuers are not supervised by the FRB and lack capital and liquidity safeguards. He warned that if stablecoins were used as a widespread means of payment without being subject to "appropriate supervision and regulation", it could cause "tremendous disruptions" for both financial institutions and consumers.

FRB Supervisory Approach to Banks Engaging in Crypto-Assets

Mr. Barr reiterated the maxim that activities that are "fundamentally the same should be regulated the same." He underscored the importance of cooperation among the FRB and other banking agencies to establish a consistent approach and provide a level playing field to financial institutions that wish to use new technologies.

He also referenced recent regulatory guidance issued by the FRB to remind covered financial institutions that:

• financial institutions intending to engage in crypto-related activities have the obligation to (i) ensure that the activities are legally permissible and (ii) notify the FRB of their intent to engage in the activities;
• financial institutions supervised by the FRB are subject to the same permissibility standards of activities, including those that are related to crypto-assets, regardless of their deposit insurance status; and
• financial institutions should be aware of the volatility that can arise from liquidity risks associated with crypto sector-affiliated deposits and ultimately lead to unpredictable deposit inflows and withdraws.