The Federal Reserve (Fed) chairman, Jerome Powell, said that the central bank regulator does not want to prevent banks from serving crypto to perfectly legal customers as long as they understand its risks. 

During a Feb. 12 House committee on monetary policy, Powell said banks and the Fed should be “mindful” that crypto activities can be done inside financial institutions, citing custody as one example. However, he warned banks to avoid going too far in their offerings.

He added:

“In fact, in Fed-regulated banks, there are a lot of crypto activities happening now. They just happen under a framework we [the Fed] made sure the bank understood, and we understood, exactly what they are doing.”

The remarks came after the Fed chair was asked if a crypto collapse could affect the US banking system and if there are any ways to avoid it.

Anti-contagion measures

Powell was also questioned about the Silicon Valley Bank (SVB) and Signature Bank incidents. Both banks collapsed in March 2023 due to a combination of factors, such as a lack of diversification, a decline in the value of their investments in long-term US Treasuries, and a bank run.

The banks were known to be crypto-friendly, with Circle holding $3.3 billion of its USD Coin (USDC) reserves with SVB when it collapsed. 

However, Powell did not mention crypto in his answer, attributing the collapse to exposure to long positions in underwater securities and unsecured deposits.

Additionally, he said the Fed reanalyzed investments made by medium-sized banks that have “any characteristics” similar to Signature and SVB, to ensure they were not exposed to the same risks in an effort to avoid a wider contagion.

Open to innovation

Notably, this is the second time in a month that Powell has confirmed that banks can offer crypto services to their customers.

During his speech following the ‎Federal Open Market Committee (FOMC) meeting, he said that the Fed is not interested in invading the relationship between banks in crypto. In these cases, he added that the Fed’s role is to so much analyze banks.

He also acknowledged that the “threshold has been a little higher for banks engaging in crypto activities,” justifying the extra scrutiny due to the market’s novelty.

Nevertheless, Powell highlighted that the Fed remains open to innovation in financial markets. He also said on Feb. 11 that the US will not issue a central bank digital currency (CBDC) as long as he is the Fed’s chairman.

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