Meanwhile, the Treasury Department is worried that wealthy individuals could use the largely unregulated sector to avoid tax and said it wanted big crypto-asset transfers reported to authorities.
The two announcements put the fear of Jehovah into the cryptocurrency market, which is currently being run like a get rich quick Ponzi scheme. Bitcoin, the most popular cryptocurrency, fell 30 percent on Wednesday after China announced new curbs on the sector. If the US follows suit then it could be terrible news for the industry.
It is not the technology that is the problem. Powell said that the Fed is looking into adopting a digital currency of its own, more the way that is being run.
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”.
The Fed and Treasury consider cryptocurrencies, which now have a market capitalisation of about $2 trillion, to be more like art, gold or other highly speculative assets.
However, a central bank digital currency offers whoever holds it - a person, a business, even another government - a direct claim on that central bank, which is precisely what holding a paper dollar bill does now.
Powell said the Fed would release a discussion paper this summer on digital payments, focusing on the benefits and risks of establishing a central bank digital currency and seeking public comment.
He 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.
