US regulators warn on cryptocurrencies

US Federal Reserve chief Jerome Powell has turned up the heat on cryptocurrencies, saying they pose risks to financial stability, and indicating that greater regulation of the increasingly popular electronic currency may be warranted.

The Treasury Department, meanwhile, has flagged its concerns that wealthy individuals could use the largely unregulated sector to avoid tax and said it wanted big crypto asset transfers reported to authorities.

The back-to-back announcements came in a week when Bitcoin, the most popular cryptocurrency, took a wild ride, falling as much as 30 per cent on Wednesday after China announced new curbs on the sector, underscoring the volatility of the sector.

Powell underlined cryptocurrency risks in an unusual video message as the Fed explores the possibility of adopting a digital currency of its own.

While highlighting the potential benefits of advances in financial technology, Powell said cryptocurrencies, stablecoins and other innovations “may also carry potential risks to those users and to the broader financial system”.

As the technology advanced, “so must our attention to the appropriate regulatory and oversight framework. This includes paying attention to private-sector payments innovators who are currently not within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries.”

Powell’s comments signalled how seriously the Fed has been forced to reckon with the surge in popularity and market values of non-traditional currency options such as Bitcoin, especially as it looks at developing a digital version of the US dollar, the world’s reserve currency.

The Fed and Treasury consider cryptocurrencies, which now have a market capitalisation of about $US2 trillion ($A2.6 trillion), to be more like art, gold or other highly speculative assets.

A central bank digital currency, though, offers whoever holds it a direct claim on that central bank, which is exactly what holding a paper dollar bill does now.

Powell noted that “to date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value”.

The Treasury also flagged cryptocurrency risks, including opportunities for wealthy individuals to move taxable assets into the largely unregulated crypto sector.

“Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion”, the Treasury said.

While the Fed and some other developed economies are still conducting research on what a central bank digital currency would look like, China is moving ahead at a fast clip and is piloting a digital version of the yuan, with plans to ramp up usage before the 2022 Winter Olympics in Beijing.

Powell said last month the Fed would not rush its efforts in response to China’s more aggressive pace, noting the approach taken there would not work in the United States.

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