By Pete Schroeder

WASHINGTON, March 9 (Reuters) – The U.S. Federal Reserve’s chief regulator said Cryptocurrency technology could still have “potentially transformative” effects on the financial system, but needed “bumping fences” to materialize.

Fed Vice Chair for Supervision Michael Barr said the recent turmoil in cryptocurrency markets makes it clear that the sector could still pose a risk to traditional banks, but the impact has been limited as regulators urge the caution.

US banking regulators, including the Fed, have taken several steps in recent months to ensure that banks approach the cryptocurrency sector with caution, including requiring banks to report any cryptocurrency activity to regulators before proceeding, and warn companies that cryptocurrency deposits can be especially volatile.

“These liquidity concerns are particularly acute for banks that have a significant portion of their balance sheets funded with such deposits,” Barr said in prepared remarks, which came a day after crypto-focused bank Silvergate Capital Corp announced plans to cut trades after facing dramatic losses.

Barr stopped short of saying that banks have no role to play in the cryptocurrency sector, instead saying that regulators are busy figuring out what companies in this space can do while still being safe.

As he indicated, the technology behind cryptocurrencies could make financial markets and payment systems more efficient and affordable.

“Our objective is to create containment barriers, leaving room for innovation that can benefit consumers and the financial system in general,” he said.

(Edited in Spanish by Ricardo Figueroa)