The Federal Reserve System’s Vice Chair for Supervision Michael Barr has called on federally regulated banks to be cautious while providing services to crypto firms.

Barr, speaking at DC Fintech Week on Oct. 12, said that the Fed was working hard to find the right balance between promoting crypto market innovation and managing related risks.

With reference to the recent crypto market contagion, the Fed executive urged federally regulated banks to ensure they have appropriate measures in place, to manage crypto-related risks before opting to deal with crypto firms.

Vice Chair Barr noted that although banks are not directly exposed to crypto market losses, the liquidity risks associated with deposit fluctuations may affect their financial stability.

“When a bank’s deposits are concentrated in deposits from the crypto-asset industry, banks may experience deposit fluctuations that are correlated and closely linked to broader developments in crypto-asset markets.” 

Barr clarified that the statement was not meant to discourage banks from offering products and services to crypto firms, but to remind them to appropriately manage their risks.

Similarly, the acting head of the OCC Michael Hsu had earlier advised U.S. banks to conduct their crypto-related activities with caution to prevent any contagion that may spill over into the mainstream economy.

Barr went on to argue that the fast-paced adoption of stablecoins could pose a risk to the financial stability of the U.S. economy.

He explained that since dollar-pegged stablecoins borrow their trust from the Fed’s trust, it is important for them to be properly regulated early.

“Over time, stablecoins could pose a risk to financial stability, and it is important to get the regulatory framework right before they do.”

The U.S. Congress is working on a number of bills that will bring regulation to the issuance and usage of stablecoins, particularly as a  medium of exchange.

Barr called on banks looking to integrate blockchain solutions into their system, to factor in the associated risk and ensure that their innovations are in compliance with relevant law.

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