Federal Reserve’s Powell: We Don’t Want to Strangle Crypto Innovation, but Sector Is a Mess

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If the crypto industry was looking for a silver lining in Federal Reserve Chairman Jerome Powell’s testimony at a hearing before the Senate Banking Committee on Tuesday, the best he could offer was that he’s hoping there’s something useful and innovative amid crypto’s mayhem.

"We have to be open to the idea that – somewhere in there – there is technology that can be featured in productive innovation that makes people's lives better," Powell told members of the committee in his twice-yearly trip to testify on Capitol Hill.

“We don’t want to stifle innovation,” he said.

Powell was asked to address cryptocurrency issues several times during his testimony, which will continue Wednesday before the House Financial Services Committee.

"We've seen just a remarkable set of events in the crypto space,” he said, noting there’s been “quite a lot of turmoil” in the past year, with companies collapsing and high-profile fraud being revealed. “We see in crypto activity lots of things that suggest that regulated financial institutions should be quite cautious in doing things in the crypto space."

The Fed and other U.S. banking regulators have repeatedly issued statements and policy interpretations that all amount to a heavy warning to banks that the agencies are watching their crypto moves closely. In the most recent warnings, regulators specified that banks that focus their businesses in this sector probably won’t meet safety-and-soundness standards, which are a baseline for being able to continue to operate in the U.S.

Silvergate Bank has been offering a real-time example of the dangers of crypto concentration in banking, as most of its crypto customers have withdrawn their deposits from the floundering institution.

Issues with stablecoins

Powell, who suggested that Congress needs to step in to provide a “workable legal framework” for digital assets in the U.S., also directly addressed stablecoins as an area in need of oversight.

“People are going to assume when they deal with something that looks like a money market fund that that has the same regulation as a money market fund or a bank deposit,” he said. “So stablecoins need some attention in that respect.”

Powell said there’s a place for stablecoins in the financial sector if they get “appropriate regulation,” but Powell argued that “there are real concerns about permissionless public blockchains, and the reason is that they've been so susceptible to fraud, to money laundering and all of those things.”

Still, it was Powell’s broader views on the economy that had the most immediate effect on the crypto sector. After his comments Tuesday that inflationary pressures are running higher than expected, bitcoin (BTC), which is viewed as a riskier asset that suffers when interest rates rise, fell about 1.6% to below $22,000. The price, however, has bounced back a bit since then, trading recently at $22,319.