Powell flags risks of new digital financial products

livemint.com:

Federal Reserve Chairman Jerome Powell said the central bank supported innovation in digital financial products but warned that it is “easy to see the risks" of certain new technologies, including cryptocurrencies, that would demand a regulatory overhaul.

Mr. Powell said Wednesday that some of these innovations would require changes to existing laws and regulations to ensure proper oversight of the broader financial sector. He spoke during a panel discussion with other central bank governors hosted by the Bank of International Settlements.

“There are potential financial-stability concerns for some products," Mr. Powell said. “We don’t know how some digital products will behave in times of market stress."

He said the central bank would be guided by a principle of “same activity, same regulation," which means that activities that are regulated in the banking system needed to be subject to the same rules if those activities migrate outside of the regulated banking sector.

“It’s highly likely that digital financial activities that are currently outside the regulatory perimeter will…be brought within it, which is necessary to level the playing field, keep trust of users, protect consumers, and all of that," Mr. Powell said.

In January, the Fed launched a review of the potential benefits and risks of issuing a U.S. digital currency. Fed officials have been divided on the matter, making it unlikely they will decide soon on whether to create a digital dollar.

Unlike private cryptocurrencies such as bitcoin, a Fed version would be issued by and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins.

Mr. Powell said the Fed is “only at the beginning of this journey" and that the Fed hadn’t