The US Federal Reserve’s top banking cop has signalled greater oversight ahead for crypto activity, pointing Monday to a need for firms to face “similar regulatory safeguards as other financial services providers.”
Michael Barr’s prepared testimony, released ahead of his appearance on Tuesday before the Senate Banking Committee, follows the fallout from the collapse of cryptocurrency platform FTX, which filed last week for protection from creditors under US bankruptcy law.
The fall of FTX has reverberated across the digital currency landscape.
“We do not want to stifle innovation, but when regulation is lax or behind the curve, it can facilitate risk-taking and a race to the bottom that puts consumers, businesses, and the economy in danger,” said Barr in his prepared remarks.
While financial innovations offer opportunities, Barr cautioned that “many innovations also carry risks” ranging from liquidity runs to the rapid collapse of asset values.
If not well-controlled, such risks can hurt retail investors, and recent events serve as a reminder of the potential for systemic issues “if interlinkages develop between the crypto system that exists today and the traditional financial system,” he said.
Cash-strapped FTX filed for bankruptcy last week and its high-profile founder and chief executive Sam Bankman-Fried resigned after Binance, the world’s biggest cryptocurrency platform, scrapped a takeover bid — sending chills across the cryptocurrency world.
“Crypto-asset-related activity, requires effective oversight that includes safeguards to ensure that crypto companies are subject to similar regulatory safeguards as other financial services providers,” Barr said.
FTX until recently was considered the world’s second-largest cryptocurrency platform, at one point valued at $32 billion.
Barr’s comments came shortly after Fed Vice Chair Lael Brainard expressed the need for regulation in the sector as well on Monday.
Weighing in on the FTX situation, she said it reinforces the fact that crypto finance “needs to be under the regulatory perimeter,” stressing that digital currencies are “no different than traditional finance in the risks that it exposes investors to.”