Fed's Waller says cryptocurrency buyers could lose their entire investments

By Ann Saphir

(Reuters) -Federal Reserve Governor Christopher Waller on Friday had a pair of warnings for those involved in cryptocurrency assets, telling buyers they could lose their investments, and banks that they must guard against bad actors and risks to the financial system.

Speaking at the same conference several hours later, Philadelphia Fed President Patrick Harker presented survey data suggesting that despite those risks, cryptocurrency will likely remain in demand.

In recent months the cryptocurrency industry has been roiled by massive losses for investors, bankruptcies of crypto exchanges, lenders and payment platforms, and high-profile court cases including a criminal case against FTX founder Sam Bankman-Fried. U.S. regulators including the U.S. central bank have told banks they need to be more careful about fraud risk.

In remarks to a Global Interdependence Center conference, Waller said so far the spillover to the broader financial system has been “minimal,” and it is critical that regulators make sure to mitigate financial stability risks associated with stress in the crypto industry.

At the same time, he said, banks considering engagement in cryptocurrency must meet “know your customer” and anti-money laundering requirements, and must ensure they monitor customers’ business models and risk-management systems so that the bank is “not left holding the bag” if there is a crypto meltdown

Waller had an even starker warning for traders of cryptocurrency: as assets that have no intrinsic value, cryptocurrencies are risky.

“If people want to hold such an asset, then go for it,” Waller said. “However, if you buy crypto assets and the price goes to zero at some point, please don’t be surprised and don’t expect taxpayers to socialize your losses.”

Even so, according to data Harker presented from a survey conducted in October, at least some Americans remain sold on the idea. Crypto buyers remain predominantly male, more often younger and richer than the average American, and with Black and Hispanic consumers disproportionately represented, the survey showed.

“The strength of investment and experimentation as reasons for participation in the market has remained steady and the socioeconomic groups most likely to acquire cryptocurrencies haven’t materially changed,” Harker said. “These patterns seem to suggest that cryptocurrencies will remain in demand by certain consumers despite the recent crypto winter.”

Still, only 40% of crypto owners surveyed in October said they planned to buy more – down from more than half in a similar survey last January, Harker said.

(Reporting by Ann Saphir; Editing by Paul Simao and Andrea Ricci)