Powell Sees a ‘Real Need’ for Crypto Regulation
He worries that closer ties between DeFi and traditional banking might result in a greater impact to businesses and consumers the next time there’s a meltdown in crypto markets.
Federal Reserve Chair Jerome Powell called for better regulation of cryptocurrencies and said that although the industry’s recent shakeout failed to cause broader financial turmoil, that may not be the case in the future.
Global increases in interest rates exposed “significant structural issues in the DeFi [decentralized finance] ecosystem,” Powell said Tuesday during a panel discussion on digital finance hosted by the Banque de France. “The good news, I suppose, is that the interaction—from a financial stability standpoint—the interaction between the DeFi ecosystem and the traditional banking system and traditional financial system is not that large at this point.
“That situation will not persist indefinitely,” he said via video. “There’s a real need for more appropriate regulation, so that as DeFi expands and starts to touch more retail customers and that sort of thing, so that appropriate regulation is in place.”
Powell reiterated that the Fed is still deliberating on the idea of a digital currency and doesn’t expect to decide on the issue for some time.
“At the end of the day, we will need approval from both the executive branch and Congress to move ahead with a central bank digital currency,” he said. “So, we see this as a process of at least a couple of years, where we’re doing work and building public confidence in our analysis and in our ultimate conclusions, which, as I say, we certainly haven’t reached yet.”
He has stopped short of endorsing a digital dollar, though Fed officials in January released a discussion paper on digital currency. Powell told the Cato Institute on September 8 that the Fed is continuing to study the matter but would likely not move without support from the White House and the Congress, “ideally in the form of a specific authorizing law.”
See also:
- Crypto in the Crosshairs
- China Is Leading the Digital Currency Race
- Digital Currencies Underpin a Sci-Fi Future for Treasury
- Why Businesses Are Trudging Toward Digital Denomination
In the comments earlier this month, Powell said the Fed’s thinking has been guided by four ideas: A digital dollar would have to protect privacy; go through intermediaries in the financial system, such as banks; be widely transferable; and use identity verification to combat money laundering, similar to the way bank accounts have verifiable owners.
Regarding stablecoins, Powell said on Tuesday that they also need regulation to help ensure they have sufficient reserves to meet their typical 1:1 redemptions. “One of the most fundamental roles” for a central bank is to anchor a nation’s currency, he said.
—With assistance from Craig Torres.
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