Federal Reserve Official Urges Caution in Bank Investment in Cryptocurrency

Federal regulatory authorities, including the Federal Reserve, are expected to issue additional guidelines on banks’ cryptocurrency investments, according to Michael Bahr, deputy director of the Federal Reserve’s financial supervision. Bahr cautioned that banks must exercise caution when investing in cryptocurrencies.

In a speech on cryptocurrency prepared for September 9, Bahr acknowledged the potential impact of cryptocurrency technology on the financial system. However, he emphasized that a “guardrail” of regulations was needed to achieve this potential impact.

Bahr noted that the recent turmoil in the cryptocurrency market highlighted the risks digital assets could pose to traditional banks. However, he credited regulatory authorities’ warnings with limiting the fallout from such risks.

He explained that banks have taken measures to protect themselves, such as reporting to authorities before engaging in cryptocurrency investment and warning about the volatility of cryptocurrency deposits. Bahr also pointed out the recent situation with the cryptocurrency bank Silvergate Capital and stated that it was a concern for banks that fill part of their balance sheets with cryptocurrency deposits.

Bahr stressed the need for banks to exercise caution when engaging in cryptocurrency-related activities. He also confirmed that regulatory authorities are looking for ways to ensure that banks can engage in cryptocurrency activities safely and soundly. Furthermore, he said that additional guidelines will be issued for banks that want to participate in cryptocurrency activities.

Bahr was positive about the potential of cryptocurrency-based technology to make the financial and payment markets more efficient and cost-effective. He emphasized that the regulatory goal is to create guardrails to protect consumers while also creating opportunities for innovation that benefit the financial system as a whole.

The cryptocurrency bank Silvergate Capital had declared voluntary liquidation on September 8, raising concerns that regulatory authorities would take a tougher stance on banks’ cryptocurrency investments. However, Bahr did not oppose banks’ participation in cryptocurrency-related activities, but rather emphasized the need for caution and regulations.

In conclusion, Bahr’s speech demonstrates that regulatory authorities are closely monitoring banks’ cryptocurrency investments and are willing to issue additional guidelines to ensure safety and soundness. Banks must be cautious when investing in cryptocurrencies, and regulatory authorities are seeking to find ways to encourage innovation in the financial system while ensuring consumer protection.

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