Fed Chairman Powell: Banks can legally conduct crypto business, do a good job of risk control and learn from SVB's lessons

The U.S. Senate recently proposed the 'Genius Act' in an attempt to establish a regulatory framework for cryptocurrencies, with cryptocurrency issuers to be regulated by individual states rather than a federal agency. Democratic Congressman Stephen Lynch expressed concerns at a hearing on 2/16, telling FED Chairman Jerome Powell that this could lead to further expansion of the crypto market, thereby affecting the traditional banking system. Lynch specifically pointed out that cryptocurrencies are highly speculative and volatile, with multiple sudden collapse incidents in the past, and that the potential failure of a large crypto institution could have a severe impact on banks. Powell stated that banks' relationships with cryptocurrencies currently fall into two main categories: 1) banks serving as service providers to crypto firms, such as providing deposits or payment systems; and 2) banks engaging in crypto-related businesses themselves, such as asset custody. He emphasized that the FED will not prevent banks from collaborating with legitimate crypto businesses, but banks must fully understand the risks, and regulators must ensure that banks have appropriate risk management measures in place. Powell said the FED's attitude towards crypto business is "cautious but not overly interventionist," especially after the FTX collapse, as an overly extreme regulatory response could stifle the normal business development of banks. He also mentioned that many FED-supervised banks are indeed participating in crypto business, but it is done within a risk control framework to ensure the stability of the banks is not affected. Regarding the 2023 failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank, Powell acknowledged that the collapse of these banks was exacerbated by the large deposits held by some major cryptocurrency issuers. However, he stated that the problems of these banks stemmed not only from crypto risks, but more significantly from their own poor risk management, such as holding large amounts of long-term bonds without effectively hedging interest rate risks, and over-relying on uninsured large deposits. Powell emphasized that after the SVB collapse, regulators have strengthened their monitoring of banks' risk, particularly focusing on whether deposit structures are overly concentrated in certain customer types like venture capital funds or crypto firms. He stressed that the FED's goal is to ensure the stability of the banking system and prevent similar bank runs from happening again. In conclusion, Powell stated that going forward, regulators need to learn from the Silicon Valley Bank crisis to ensure banks have more robust funding sources and strengthen their management of interest rate and liquidity risks. He reiterated that the FED will not prevent banks from collaborating with legitimate crypto businesses, but banks must clearly assess the relevant risks to ensure their own stability is not affected by crypto market volatility.