WASHINGTON (AP) — Federal Reserve Chair Jerome Powell said new forms of digital money such as cryptocurrencies and stablecoins present risks to the U.S. financial system and will require new rules to protect consumers.
Powell spoke Wednesday at a Bank for International Settlements panel. He also stated that electronic payments will be cheaper and more efficient thanks to new technology. He also warned that they can destabilize financial institutions.
“Our existing regulatory frameworks were not built with a digital world in mind,” he said. “Stablecoins, central bank digital currencies, and digital finance more generally, will require changes to existing laws and regulation or even entirely new rules and frameworks.”
Stablecoins, a form of cryptocurrency that is usually linked to the dollar and a commodity like gold, are one type. Digital currencies issued by central banks are digital versions of dollars and other currencies. While the Fed continues to investigate digital dollars, they have not made any decision as yet. In January, it released an analysis on stablecoins.
Powell highlighted several dangers that come with the rise of digital finance in his comments. These include the potential for financial instability and loss to the wider financial system.
Americans who buy stablecoins or crypto “may not fully understand the extent of their potential losses, or that these investments generally lack the government protections that accompany many of the traditional financial instruments and services that they’re used to,” Powell said.
The Fed also wants to understand how digital assets such as Bitcoin could impact financial markets during market crashes or downturns.
“We don’t know how some digital products will behave in times of market stress, which could lead to large destabilizing flows, nor do we know how stresses in crypto markets could potentially spill over into the traditional financial system,” Powell said.
One concern regarding stablecoins is that, while many promise to maintain a value of $1, it’s not always clear if stablecoin issuers have sufficient cash to redeem each stablecoin they issue for $1.
Powell also noted that crypto assets have been used for “illicit activity,” such as money laundering, and “we need to prevent this so that the innovations that do survive and do attract broad adoption are those that provide value over time” for legal uses.
Powell said the Fed has “long supported responsible innovation,” though he added that it is difficult to tell which innovations “will have lasting effects and those that will turn out mostly to be hype.”
“And it’s never possible in real time to be sure which is which,” he said.
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