Fed: Cryptocurrencies pose a risk to the financial system

New forms of digital money, such as cryptocurrencies and their form of stablecoins, pose a risk to the U.S. financial system and require new consumer protection rules, the Federal Reserve said.

Federal Reserve Chairman Jerome Powell said new technologies are likely to make electronic payments cheaper and faster, but they could also destabilize financial institutions.

He said their regulations were not built with the digital world in mind, adding that stablecoins, digital currencies, and digital finance, in general, would require changes to regulations or the introduction of new rules and frameworks.

By the way, stablecoins are a type of cryptocurrency that is usually tied to the dollar or commodities such as gold, while central bank digital currencies are digital forms of currency issued by governments. The Federal Reserve is considering the introduction of the digital dollar but has not yet decided whether to issue it.

Powell cited several risks stemming from the growth of digital finance, including consumer security and the broader financial system.

“Buyers of stablecoin or cryptocurrencies may not understand the extent of their potential losses or that these investments lack the state protection that accompanies many traditional financial instruments and services to which they are accustomed,” he said.

Polls show that 16 percent of adult Americans, or 40 million people, have invested in cryptocurrencies, and that percentage among men aged 18 to 29 is as high as 43 percent.

The Federal Reserve is investigating how digital assets such as Bitcoin could affect financial markets, especially during large stock market fluctuations, and how stress in crypto markets could potentially spill over into the traditional financial system.

Powell also noted that cryptocurrencies are being used for illegal activities such as money laundering and that this should be prevented, in part because legitimate technological innovations of this kind would have a chance of success.