Fed Governor: Banks Must Remain ‘Safe and Sound’ Around Crypto

Banks must approach crypto customers in the same “safe and sound” manner they generally employ.

So said Federal Reserve Board Governor Christopher Waller while speaking Friday (Feb. 10) at a Global Interdependence Center conference focused on decentralized finance.

“As with any customer in any industry, 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 at the event.

Banks considering engaging in activities related to crypto-assets must also meet their know your customer (KYC) and anti-money laundering (AML) requirements, Waller added.

He noted that the decline in the values of crypto-assets and the bankruptcies of firms related to crypto had impacted not only consumers but also institutional investors that had the resources to conduct due diligence.

“For example, it has been reported that at least 15 public pension funds, which manage public employee retirement funds, had investments in the now-bankrupt crypto-asset exchange, FTX,” Waller said.

There’s been only limited spillover of the troubles of the crypto industry to other parts of the financial system because of the limited number of connections between the two, Waller said.

Waller said that while crypto-assets are nothing more than speculative assets — “like a baseball card” — blockchain and technologies like smart contracts and tokenization that are part of the crypto ecosystem have broader applications.

“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,” Waller said. “Doing so will ensure we do not unduly limit the development and potential future uses of the positive features of the crypto ecosystem.”

Waller’s speech came at a time when the digital asset landscape faces regulatory pressures, increasingly disinterested retail investors, a potentially unbanked future, and a dire threat to staking.

It also came about two weeks after the Federal Reserve denied digital asset bank Custodia Bank’s attempt to become a member of the Federal Reserve System, saying the submitted application was inconsistent with factors required under the law.