Michael Barr, the Federal Reserve's top financial regulatory official, on Tuesday said he is concerned about risks from the non-bank sector, including cryptocurrencies, for which the U.S. central bank and other regulators have poor visibility.
"We're concerned about the risks that we don't know about in the non-bank sector," Barr said in response to a question during an appearance before the Senate Banking Committee. "That includes obviously crypto activity, but more broadly risks in parts of the financial system where we don't have good visibility, we don't have good transparency, we don't have good data. That can create risks that blow back to the financial system that we do regulate."
Barr's remarks came in his first congressional testimony since becoming the Fed's top Wall Street cop over the summer and augmented his prepared comments to the committee that he was keeping a close eye for stresses in the financial system amid a weakening economy. He had also signaled stiffer oversight of the cryptocurrency arena is in the offing, an issue that has taken on added urgency with the collapse last week of crypto-exchange FTX.
Recent events in crypto markets, Barr said in his written testimony, "while mostly occurring outside the banking sector, have highlighted the risks to investors and consumers associated with new and novel asset classes and activities when not accompanied by strong guardrails."
"We do not want to stifle innovation, but when regulation is lax or behind the curve, it can facilitate risk taking and a race to the bottom that puts consumers, businesses, and the economy in danger and discredits new products and services with consumers and investors."
Barr and other top regulators from the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency appearing before the committee were pressed by Senator Patrick Toomey, the panel's ranking Republican, for why they have not issued guidance to banks about forming relationships, such as custody services, with crypto firms that could foster greater oversight of the sector.
Toomey voiced concern that the Fed was signaling it may issue guidance to banks wishing to provide custody services for crypto assets to place those assets on their own balance sheets, which would increase their capital requirements. Banks are not required to place other types of custody assets on their own balance sheets.
"Wouldn't this impose a significant cost on banks if they are in fact obligated to put all of the ... crypto custody assets on their balance sheets," Toomey asked Barr.
"We've seen banks operate in a pretty cautious way to date. There are very few institutions that are currently seeking to engage in custody activity," Barr said. He said it was his understanding of recent Securities and Exchange Commission accounting interpretations for publicly traded banks that they would need to hold capital against crypto assets held in custody in a way they would not need to for traditional custody assets.
"So that differential would impact bank decision making," he said.
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