WASHINGTON - The top regulatory official for the U.S. Federal Reserve said cryptocurrency technology still could have "potential transformative" effects on the financial system, but needs "guardrails" to realize them.

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

U.S. bank regulators, including the Fed, have taken several steps in recent months to ensure banks are approaching the crypto sector with caution, including requiring banks to flag any crypto activities to regulators before proceeding, and warning firms that crypto deposits can be particularly volatile.

"These liquidity concerns are particularly acute for banks that have a meaningful portion of their balance sheets funded with such deposits," said Barr in prepared remarks, which came one day after crypto-focused bank Silvergate Capital Corp (SI.N) announced plans to liquidate after facing dramatic losses.

Barr stopped short of saying banks have no role to play in crypto, but rather said regulators are busy figuring out what firms could do in the space while remaining safe and sound. He noted that technology behind crypto could make financial markets and payments systems more efficient and affordable.

"Our goal is to create guardrails, while making room for innovation that can benefit consumers and the financial system more broadly," he said.

  - Reuters