FTX Aftermath: Top US Fed Regulator Urges Crypto ‘Guardrails’

The top US bank regulator at the Federal Reserve is urging Congress to pass a law that would put regulation on cryptocurrencies after the rapid fall last week of FTX, the leading crypto exchange.

Michael Barr, the Fed’s vice chairman for supervision, said in a prepared testimony released on Monday that “recent crypto events … have highlighted the risks to investors and consumers associated with new and novel asset classes and activities if not followed by strict precautionary measures.”

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

But his appearance comes after FTX, the third largest cryptocurrency exchange, led by Sam Bankman-Fried, filed for bankruptcy on Friday. The fall of FTX has spread throughout the crypto world, when the lender BlockFi stopped the issuance of clients.

Barr said “some financial innovations offer opportunities, but as we’ve seen recently, many innovations also have risks.” These include money on deposits, asset value deterioration, misappropriation of customer funds, fraud, theft, manipulation and money laundering. . .

“These risks, if not properly managed, can harm retail investors and undermine the goals of a safe and fair financial system,” Barr said.

FTX’s collapse occurred outside the banking system, Barr noted, which is the focus of his oversight.

“But recent events remind us that there may be a systemic risk if the connection develops between the crypto system that exists today and the traditional financial system,” he said.

As for the banking system as a whole, most major banks have healthy levels of capital reserves, Barr said, beyond what is required by law.

But as the economy slows as the Fed rapidly raises interest rates, banks may come under more pressure, he said.

“The economic outlook has been weak,” Barr said, “a weak economy can put pressure on households and businesses, and thus, the banking system as a whole.”