Digital money poses risk, says Fed chief

WASHINGTON — Federal Reserve Chairman Jerome Powell said Wednesday that new forms of digital currency such as cryptocurrencies and stablecoins pose risks to the U.S. financial system and will require new rules to protect consumers.

Powell, speaking at a panel hosted by the Bank for International Settlements, a global organization of central bankers, also said new technologies are likely to make electronic payments cheaper and faster. But they could also destabilize existing financial institutions, he said.

“Our existing regulatory frameworks were not built with a digital world in mind,” he said. “Stable coins, central bank digital currencies, and digital finance more generally will require changes to existing laws and regulations, or even entirely new rules and frameworks.”

Stablecoins are a type of cryptocurrency usually pegged to the dollar or a commodity such as gold. Central bank digital currencies are digital forms of dollars or other currencies, issued by governments. The Fed is studying digital dollars but has not yet decided to issue one. He published a study on stablecoins in January.

Powell did not provide any details on the type of regulation that might be needed. He said they should follow the principle of “same business, same regulation”, which means that transactions outside the traditional banking system should be regulated the same way as they are when carried out by the banks.

Earlier this month, President Joe Biden signed an executive order directing the Treasury Department and other federal agencies to study the impact of cryptocurrency on financial stability and national security.

His order came as several Democratic senators, including Elizabeth Warren of Massachusetts, raised concerns that the crypto could be used to evade US sanctions against Russia.

In his remarks, Powell outlined several risks that arise from the growth of digital finance, including for consumers and the broader financial system.

Americans who buy stablecoins or cryptos “may not fully understand the extent of their potential losses, or that these investments generally lack the government protections that come with many traditional financial instruments and services they are used to,” Powell said. .

Surveys show that around 16% of American adults – or 40 million people – have invested in cryptocurrencies. And 43% of men aged 18-29 have invested their money in cryptocurrency.

The Fed is also trying to figure out how digital assets like Bitcoin could affect financial markets, especially during market downturns or crashes.

“We don’t know how certain digital products will perform during times of market stress, which could lead to large destabilizing flows, nor do we know how stress in crypto markets could potentially impact the traditional financial system,” Powell said.

A concern with stablecoins is that, while many promise to maintain a value of $1, it is not always clear whether stablecoin issuers have enough cash to redeem each stablecoin they issue for $1. .

Powell also noted that crypto assets have been used for “illicit activities,” such as money laundering, and “we need to prevent this so that the innovations that survive and are widely adopted are those that add value to the world.” over time” for legal uses. .

Powell said the Fed “has long supported responsible innovation,” though he added that it’s hard to say which innovations “will have lasting effects and which will mostly turn out to be trendy.”

“And it’s never possible in real time to be sure who is who,” he said.