FED’s Powell Doesn’t Think Crypto Risks Financial Stability

Following the announcement by the Fed that the Fed would double taper bond purchase, and that interest rates will not change for the time being, crypto’s market capital has increased to $22,2 trillion. Fed’s chairman Jerome Powell held a news conference after the decision was taken where he approached several issues on the United States economy and current concerns for its financial stability.

Source: TradingView.com| Source: TradingView.com

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When asked about the concerning risks and systemic issues that could affect the U.S. financial stability nowadays, Powell broke it down to four essential “pieces” that the Feds “hold” themselves to. In his words, that’s separated in the following keys:

  1. Asset valuations: “are somewhat elevated”, Powell says.
  2. Debt owed by businesses and households: “households are in very strong financial shape”, and “businesses actually have a lot of debt, but their default rates are very very low.”
  3. Funding risk: The fed sees “market funds as a vulnerability and would applaud the SEC’s action this week”, claims Powell.
  4. Leverage among financial institutions: “is low in the sense that capital is high.”

Followingly, Powell named scenarios that they are looking at as possible risks, which start at the “emergence of a new [Covid] variant” and the concerning possibility –with no basis– that it could be resistant to vaccines. Similarly, they fear “a successful cyber attack” that could take down a major financial institution. According to the Chairman, this scenario is what they don’t have any experience with.

Even though the reporter’s question had clearly meant to assess risks from the crypto industry, Powell did not even get close to mentioning it within his “list of horrible”, and when asked again to clarify if it is a concern to him, Powell responded: “I think the concerns there are not so much current financial stability concerns.”

However, the chairman does see cryptocurrencies as “speculative assets” that are “risky” and “not backed by anything”, and he sees consumers issues for those who “may not understand what they’re getting”.

Powell thinks certain crypto market events should be closely followed. But that’s not under the Feds control, he reminded.

Powell thinks stablecoins could scale

As Powell is currently not in favor of a crackdown on crypto similar to China’s to happen in the U.S., he does have considerations regarding other possible risks and agrees there should be certain regulations. He now expressed support to Biden’s working group report on stablecoins.

Although, that report disappointed many as it failed to provide regulatory clarity and called for a new bill to “limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions.”

The report puts all the weight on Congress and does see stablecoins as a possible systemic risk and wants to stop them from having “an excessive concentration of economic power”, a statement in which people saw the huge irony of the government not wanting such a strong competitor for the banking industry.

In Powell’s views, “Stablecoins can certainly be a useful, efficient consumer-serving part of the financial system if they’re properly regulated,” and as there are no regulations at the moment he thinks “They have the potential to scale, particularly if they were to be associated with one of the very large tech networks that exist.”

You could have a payment network that was immediately systemically important that didn’t have appropriate regulation and protections. Public trusts the Fed and government to ensure that payment systems are safe and reliable.

As many can agree on the fact that certain regulations are needed to provide clarity, the report in question doesn’t paint the best picture. Powell’s statement, however, could be met halfways.

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