On Wednesday, the Federal Reserve released minutes from the Federal Open Market Committee’s July 26-27 meeting. The committee noted concerns over digital assets and the need for crypto regulations to limit systemic risk.
“Declining risk appetite has also led to sharp declines in the price of some digital assets,” the notes said. The Fed discussed issues regarding digital asset volatility as well as the financial stability of stablecoins and their rapid growth.
“These assets, including stablecoins, were subject to vulnerabilities—such as runs, fire sales and excessive leverage—similar to those associated with more traditional assets,” the committee noted.
The recent turmoil in digital asset markets has not spread to other asset classes. But the rising importance and interconnectedness of digital assets with the financial system pose a great risk, the committee says. The turmoil underscores “the need to establish a robust supervisory and regulatory framework for this industry that would appropriately limit potential systemic risks,” the minutes note.
A few participants mentioned the need to strengthen the oversight and regulation of some nonbank institutions. That would likely include exchanges such as Coinbase (COIN), which is currently under investigation by the SEC.
Federal Reserve Crypto Regulation Letter
On Tuesday, the Federal Reserve outlined steps banks should take before getting involved in cryptocurrency.
Banks under the board’s supervision should notify it before engaging in cryptocurrency-related activities. They should ensure that the activities are legal, determine the need for regulatory filings, and have adequate controls and systems in place to conduct the activities.
“The emerging crypto-asset sector presents potential opportunities to banking organizations, their customers, and the overall financial system; however, crypto-asset-related activities may also pose risk related to safety and soundness, consumer protection, and financial stability,” the Fed Board wrote in its release.
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While most of the cryptocurrency community is staunchly opposed to incremental crypto regulations, the board emphasized the potential risks involved with the assets. Those include cybersecurity issues, threat from money laundering and illicit financing operations, as well as consumer protection, legal compliance and financial stability.
The Fed says it’s closely monitoring banking organizations’ participation in cryptocurrency activities and related developments, “given the heightened and novel risks posed by crypto-assets.”
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