Fed Vice Chair: Integrating Crypto in TradFi Requires More Regulation

Fed Vice Chairman Michael Barr gave his first policy speech Sep. 7, where among several topics he discussed cryptocurrency and integrating crypto into traditional banking practices.

In a far-reaching speech that touched on mergers, digital payments, cryptocurrencies, and Basel III capital requirements, Barr said he’s focused on building on the work regulators have done since his job was created in the wake of the global financial crisis.

Barr said stable coins and some forms of digital currency could eventually help open up access to the financial system for people of more modest means, but cryptocurrencies are not doing a good job of that now because they’re not regulated.

“I plan to make sure that the crypto activity of banks that we supervise is subject to the necessary safeguards that protect the safety of the banking system as well as bank customers,” Barr said. “Banks engaged in crypto-related activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering.”

We believe more integration between TradFi and crypto could be good for both banks and crypto, but institutions like the Fed and other national banks have historically been unwilling to work with innovative new industries in ways that don’t stifle the very innovation driving that industry.

“Managing novel risks” seems to be code for excluding novel banking services, at least based on the Fed’s track record. We are wary the real goal is to stifle innovation and impose onerous regulatory and KYC requirements on the crypto space.

Too many of the Fed’s proposed financial regulations are mechanisms of control, not safety or security. We are open to integration but every move by regulators and the central bank needs to be watched closely.