Waller: Crypto regulations shouldn’t stifle innovation

Federal Reserve Gov. Christopher Waller said cryptocurrency regulations should ensure the market is safe without stifling innovation. 

“While it is critical that we ensure that the financial stability risks associated with crypto-assets are mitigated, it is important that we keep the various parts of the crypto ecosystem distinct in our minds as the debate about if and how to regulate crypto rolls on,” he said Feb. 10 during a digital money conference hosted by Global Interdependence Center. “Doing so will ensure we do not unduly limit the development and potential future uses of the positive features of the crypto ecosystem.”

Waller said banks operating in the crypto-aset space must follow KYC and AML requirements. “A bank engaging with crypto customers would have to be very clear about the customers’ business models, risk-management systems, and corporate governance structures to ensure that the bank is not left holding the bag if there is a crypto meltdown,” Waller said. 

Waller said the crypto-asset market completely relies on speculation, comparing the perception of value on digital assets to baseball cards. “If people believe others will buy it from them in the future at a positive price, then it will trade at a positive price today,” he said. “If not, its price will go to zero. If people want to hold such an asset, go for it. I wouldn’t do it, but I don’t collect baseball cards, either.” 

Numerous crypto-asset payment platforms, lenders, exchanges and hedge funds have collapsed within the last 12 months. Calls for greater regulation of the space were amplified in November by the failure of cryptocurrency exchange FTX and the subsequent fraud-related charges filed against its founder and CEO Sam Bankman-Fried.  

 The Biden administration has called on Congress to expand regulatory oversight of the crypto space and tighten transparency and disclosure requirements for cryptocurrency companies. Last June, Gov. Lael Brainard said regulations should prevent retail crypto customers from being exposed to market manipulation and ensure that crypto platforms aren’t used to subvert U.S. sanctions and finance terrorism. “Strong guardrails for safety and soundness, market integrity and investor and consumer protection will help ensure that new digital finance products, platforms and activities are based on genuine economic value and not on regulatory evasion, which ultimately leaves investors more exposed than they may appreciate,” she said.

In early January, the Federal Reserve Board of Governors, FDIC and Office of the Comptroller of the Currency warned banks that exposure to the crypto industry leaves them at greater risk of customers falling victim to scams and fraud. The Fed has said that state-member, non-FDIC-insured banks are not prohibited from providing custodial safekeeping services, if they do so “in a safe and sound manner and in compliance with consumer, anti-money laundering and anti-terrorist financing laws.” Last month, the Fed denied Cheyenne, Wyo.-based Custodia Bank’s request to become a member of the Federal Reserve system. Custodia is one of multiple crypto firms that have received non-depository state charters and sought access to Fed master accounts with the structures FDIC-insured banks adhere to.