Federal Reserve Board Governor Christopher Waller is not a fan of cryptocurrency personally, but he sees value in the underlying technology for traditional finance, he said Friday at a conference on digital money, decentralized finance and cryptocurrencies in La Jolla, California.
In his prepared remarks, he said digital assets and their supportive technologies present many unique challenges and risks for banks, but cautioned against disregarding them completely.
“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 at the event, which was hosted by the Global Interdependence Center, a Philadelphia-based nonprofit. “Doing so will ensure we do not unduly limit the development and potential future uses of the positive features of the crypto ecosystem.”
Waller expressed no opinion on the regulatory treatment of crypto assets, but his view on their potential benefits is rosy in bank supervision circles. In recent public remarks, Fed Vice Chair for Supervision Michael Barr and Fed Gov. Lisa Cook both have described crypto as an area that should have limited engagement with traditional banking.
Other regulators, including the Securities and Exchange Commission, have gone so far as to enact specific rules around crypto assets. In late January, the White House released a “roadmap to mitigate crypto risks,” that encouraged agencies to go further.
Waller, in his speech, said he has not invested in cryptocurrency but he has no problem with others “playing” in the space, so long as they are aware of the risks involved, namely that the value of the assets could fall to zero. He added that those who dabble in the space should not expect “taxpayers to socialize [their] losses.”
People have long ascribed value to items that are intrinsically worthless, Waller said, citing research from the economist Paul Sameulson on “the social contrivance of money” dating back to 1958. In this sense, he said, cryptocurrency presents nothing “fundamentally new or interesting.”
However, Waller cited several elements of the digital asset market that he sees becoming valuable to traditional finance, including distributed ledgers — commonly known as blockchain — as well as tokenization and smart contracts.
“That technology has some amazing ability to do things and do them well and do them better [than current market tools],” he said during the question and answer portion of the event. “That’s what you’re going to see coming more and more into centralized finance. The crypto assets may never get there, but the technology will survive and go forward.”
Waller said that the world of cryptocurrencies has already come a long way from its decentralized origins, noting that while the technology was originally intended to be a strictly peer-to-peer trading market, it has been intermediated by exchanges and other entities that have proliferated in the space in recent years. In this sense, he said, the technology is becoming more and more like traditional finance, in that it is now centered on the trust in intermediaries.
Pointing to the failed crypto exchange FTX and others, Waller said many intermediaries in the space have proven to be unfit for interacting with the traditional financial system, but he expects that to change as best practices around corporate governance, risk management and transparency come to the fore.
“They’ll grow, they’ll mature, they’ll get there, and when that happens, there will be a lot more ability to think about interacting crypto into the traditional financial sector,” he said.
Last month, the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued a joint statement that banks would have to clear a high bar to prove they could handle digital assets in a safe and sound manner.
Waller echoed this sentiment, saying the speculative nature of cryptocurrencies themselves mean they should be kept off bank balance sheets.
“We don’t let banks get into collectables, we don’t let them hold art, we don’t let them hold all these kinds of speculative things where the price goes to zero. Limited edition sneakers. We don’t want the banks getting into that stuff,” he said. “That’s the thing you have to realize about these crypto assets: there is an equilibrium where its value is positive and an equilibrium where it goes to zero. That’s an incredibly risky asset. We don’t allow banks to do it with other things that have these types of properties. So if you’re going to let crypto in, it’s got to be very carefully watched.”
Yet, even if the crypto sector is inherently risky, Waller said, the potential innovations in it are worth protecting.
“The question is does this technology in the crypto system have a value proposition outside of the crypto ecosystem?” Waller said. “My view is let’s find out. It may and it may not, so let’s give it a run and see where it goes.”