Lawmakers are pressing financial regulators about cryptocurrency risks and regulations following the recent collapse of cryptocurrency exchange FTX Trading Ltd.
Following liquidity challenges and a failed acquisition offer, FTX filed for Chapter 11 bankruptcy, sending shockwaves throughout the financial industry and raising questions about banks' involvement with cryptocurrency companies. In separate hearings with members of the Senate Banking, Housing and Urban Affairs Committee and House Financial Services Committee this week, financial regulators assured legislators that banks have been cautious about their involvement in digital assets.
"To date, the recent crypto events have had some impact in the banking system, but it's been in an aggregate level, relatively muted," the Federal Reserve's vice chair for supervision, Michael Barr, said on Nov. 16 in response to a question from Rep. Carolyn Maloney, D-N.Y. "The banking system has in general been cautious about the connections between banking and crypto-related activity."
Some banks are providing traditional banking services to crypto companies, and the agency is "attentive to the risk that that might pose, but from a systemic level, we're not seeing, currently, systemic risk from the crypto-related activity," Barr said.
Addressing the impact of the events at FTX, acting Comptroller Michael Hsu said, "I think comingling of customer funds with house funds has in general over time proven to be very difficult to risk-manage."
Hsu said banks have been offering custody of traditional assets, but crypto custody is different, and when asked on Nov. 15 by Senate Banking Committee Ranking Member Patrick Toomey, R-Pa., why the Office of the Comptroller of the Currency has not given guidance, Hsu said, "If banks can demonstrate that they can do that activity in a safe, sound and fair manner, we're all ears."
Barr said the Fed is looking into crypto custody and that requirements for capital for crypto custody would be different than for "traditional custody of non-crypto assets."
"That differential would impact bank decision-making," Barr added.
Barr described stablecoin legislation as "an urgent area" to continue working on and said he was "deeply encouraged" by the bipartisan efforts from Chairwoman Maxine Waters, D-Calif., and Ranking Member Patrick McHenry, R-N.C.
"Stablecoins are in effect a form of private money, and we've seen in history that private money can generate significant run risk and financial stability risk if not strongly and appropriately regulated," Barr said.
Both hearings included leaders of the federal banking regulators — the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — and the chair of the National Credit Union Administration, and they covered a wide range of topics.
Other topics covered during the hearings included capital requirements for banks, climate-related risks and the Fed's upcoming pilot program, the FDIC's increase in deposit insurance assessments, cybersecurity, the proposed Community Reinvestment Act rules and the recent Fifth Circuit decision related to the Consumer Financial Protection Bureau.
Also during the Senate hearing, Chairman Sherrod Brown, D-Ohio, said he looks forward to holding a hearing on Martin Gruenberg, nominated to be chair and currently in an acting capacity, and the other FDIC nominees "in the next few weeks."