Federal Reserve Chair Jerome Powell has made a major statement that could reshape the relationship between traditional banks and the cryptocurrency sector.
Speaking before the House Financial Services Committee, Powell addressed concerns about the increasing interaction between cryptocurrency and the traditional banking system.
While acknowledging crypto’s volatility and speculative nature, he stated that the Fed does not intend to prevent banks from serving legal crypto customers as long as they understand and manage the associated risks.
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Concerns over crypto’s impact on traditional banking
As cryptocurrency continues to expand, some have raised concerns that its volatility could negatively impact the traditional banking system.
With digital assets being speculative and prone to sudden collapses, there are fears that a major crypto failure could have ripple effects on FDIC-insured banks, which have access to the Federal Reserve’s discount window.
The key question posed to Powell was whether additional safeguards are needed to protect the financial system from potential crypto-related disruptions.
In response, Powell clarified that the Fed does not intend to block banks from offering services to legal cryptocurrency customers. While past crypto market failures have prompted increased scrutiny, Powell cautioned against excessive regulatory intervention.
He noted that while financial institutions should exercise caution, crypto-related services, including custody, could be successfully integrated within the banking system under appropriate oversight.
“There were a bunch of disasters, and we were reacting in some extent to those. You don’t want to go so far as to overplay your hand on that. I think we need to be mindful that many of these activities can very well be done inside of banks, and custody may well be one of them”- Powell added
Inflation pressures add complexity to crypto’s path forward
Beyond regulatory concerns, broader macroeconomic factors are also influencing the crypto market. The release of hotter-than-expected CPI data has fueled concerns over inflation, pushing Bitcoin (BTC) toward $95,000 while raising fears of a potential drop to $90,000 in the coming days.
With inflation proving stickier than expected, investors are now closely monitoring the Federal Reserve’s next move.
The CME FedWatch tool now assigns a 97% probability that interest rates will remain unchanged at the March 19 meeting, which could weigh on digital assets. Powell’s stance on crypto banking comes at a time when economic uncertainty is adding further volatility to the market.
That being said, Powell’s stance on crypto, combined with the SEC allowing banks to custody crypto again, could potentially set the stage for a return to free banking.
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