November 26, 2022

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The Fed's Michael Barr says the cryptocurrency turmoil highlights potential risks to the financial system

The Fed’s Michael Barr says the cryptocurrency turmoil highlights potential risks to the financial system

WASHINGTON — The cryptocurrency market’s tumult is a red flag for the broader financial system, the Federal Reserve’s top banking regulator told lawmakers on Tuesday, as he pushes for tougher barriers in the wake of… The rapid collapse of the cryptocurrency exchange FTX.

“Recent events in the cryptocurrency markets have highlighted the risks associated with new asset classes when they are not accompanied by strong buffers,” Mr. Barr told lawmakers. He didn’t recognize any of them encryption companies by name.

Mr. Barr, in written testimony, said the collapse of the cryptocurrency market “reminds us of the potential for systemic risks if links evolve between the crypto system that exists today and the traditional financial system.”

In addition to Mr. Barr, Tuesday’s observation hearing before the Senate Banking Committee included two other top bank regulators: Michael Hsu, acting comptroller of the currency, and Martin Gruenberg, acting president of the Federal Deposit Insurance Corporation. To testify again Wednesday before the House Financial Services Committee. Sessions have been scheduled before FTX collapsed.

Ohio Sen. Sherrod Brown, the Democratic chairman of the Senate Banking Committee, said it was appropriate for regulators to treat cryptocurrencies questionably because such currencies have been used for speculation, fraud, evading sanctions, and theft.

“There just doesn’t seem to be anything useful or profitable that hundreds of cryptocurrencies can be used for speculation,” he said. “Private cryptocurrencies are not sponsored or protected by the government, nor should they be.”

Cryptocurrency exchange FTX was seen as a survivor in a struggling industry, but over the course of six days, the exchange collapsed due to a sudden liquidity crisis. The WSJ explains what drove FTX’s growth and what led to its downfall. Illustration: Alexandra Larkin

Sen. Pat Toomey (R.) criticized regulators for not providing banks with more guidance that would limit the types of activities allowed.

If banks can demonstrate that they can participate in the crypto space “in a safe, sound and fair way, we are all ears,” Mr. Hsu said.

Senator Cynthia Loomis (R. He defended the encryption bill which it filed earlier this year and said it would have put sandpapers on the industry and prevent the collapse of FTX.

“It is clear that Congress needs to regulate digital assets,” she said.

In his prepared remarks, Mr. Barr said the three agencies are working together to “assess the risks and opportunities posed by a range of activities related to crypto assets.”

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While the US banking system emerged from the pandemic in strong financial shape, the domestic economic outlook weakened amid it Tighter financial conditions and increased uncertainty. As a result, the Fed will increase its focus on liquidity, credit and interest rate risks in the companies it oversees, Mr. Barr said.

“Uncertainty has increased financial market volatility and may also reveal pockets of excess leverage and liquidity risks in the non-bank financial sector, threatening spillovers into the banking system and the real economy,” he said in written notes.

Tuesday session comes one day after The White House said he would run Mr. Gruenberg, a Democrat, is set to serve as the full-time leader of the FDIC, pairing his nomination with two Republican aides I nominated earlier in the fall. The law requires a party balance on the FDIC’s five-member board of directors, and the banking regulator currently includes three Democrats and no Republicans.

Mr Brown said he hoped to advance his candidacy “as quickly as possible”.

write to Andrew Ackerman at [email protected]

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