Vice Chair Michael Barr, who started in July, will give his first testimony before Congress on Tuesday.
Following the abrupt collapse of FTX, a major cryptocurrency exchange, last week, the head US financial regulator at the Federal Reserve is pleading with Congress to approve legislation that would regulate digital currencies.
“Recent developments in crypto… have highlighted the dangers to investors and consumers associated with new and innovative asset classes and activities when not supported by solid guardrails,” said Michael Barr, the Fed’s vice chair for supervision, in prepared testimony made public on Monday. Tuesday is planned to be Barr’s first appearance as vice chair before Congress since he assumed office in July. He didn’t mention FTX by name in his written statements.
However, his presence comes after Sam Bankman-old Fried’s company, FTX, the third-largest cryptocurrency exchange, filed for bankruptcy on Friday. The collapse of FTX sent shockwaves across the cryptocurrency community, causing lender BlockFi to halt client withdrawals.
Some financial technologies “provide potential,” according to Barr, “but many breakthroughs also entail hazards, as we have lately witnessed.” He listed a few of them: bank run attacks, asset value collapses, client money abuse, fraud, theft, manipulation, and money laundering. If these risks aren’t properly managed, they might hurt small-scale investors and go against the objectives of a stable and equitable financial system, according to Barr.
Barr observed that the FTX collapse took place outside of the banking sector, which was the focus of his inspection. The current crypto system and the conventional financial system could become intertwined, he added, “but recent events remind us of the potential for systemic risk.”
Barr noted that, in terms of the financial sector as a whole, the majority of big banks have substantial amounts of cash reserves above and above what is even needed by law. But as the Fed quickly raises interest rates, the economy is slowing down, and he warned that this might put banks under additional strain. According to Barr, the “economic outlook has worsened,” raising uncertainty. “Households, companies, and the banking system as a whole might be stressed by a weaker economy.”
