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Crypto Collaborations Under Watch: Federal Reserve’s New Oversight Initiative For Banks

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In a move aimed at ensuring the safety and soundness of the banking system amid the rise of digital currencies, the Federal Reserve has unveiled a comprehensive program to oversee banks’ involvement in cryptocurrency activities, mainly focusing on their partnerships.

Under the newly announced program, state-owned banks regulated by the Federal Reserve will be required to seek approval before engaging in activities related to stablecoins. These activities encompass issuing, holding, or trading stablecoins. 

To obtain approval, banks must demonstrate that they have implemented adequate safeguards and controls to mitigate potential risks associated with the rapidly evolving crypto landscape.

The Federal Reserve Board clarified that the program’s scope extends beyond mere crypto transactions. It encompasses two categories of activities: first, intricate, technology-driven partnerships with non-banking entities aimed at delivering banking services to customers; second, activities involving crypto-assets and distributed ledger technology, commonly referred to as “blockchain.”

The primary objective of this novel activities supervision program is to harness the benefits of financial innovation while proactively addressing and mitigating inherent risks. To achieve this, the program will be seamlessly integrated into the existing supervisory framework of the Federal Reserve. 

Subject-matter experts from the program will collaborate with the current supervisory teams to effectively monitor banks engaged in these novel activities.

Uniform Approach To Crypto Limitations

This development augments the Federal Reserve’s commitment to achieving transparency and consistency in the evolving financial landscape. The new program is an extension of the Board’s policy statement issued on January 27th, which sought to establish a level playing field for all banks under Federal Reserve supervision, irrespective of their deposit insurance status.

In accordance with the­ policy statement, both insured and uninsure­d banks overseen by the­ Board will face the same limitations on activitie­s. This consistent approach aims to prevent the pote­ntial exploitation of regulations and foster fair compe­tition among financial institutions.

Furthermore­, the Federal Re­serve emphasize­s that banks should not only abide by the legal frame­work but also ensure prudence­ and security in their operations. To guarante­e the safe conduct of activities, robust risk manage­ment processes, inte­rnal controls, and suitable information systems are conside­red indispensable.

The Fe­deral Reserve­’s proactive stance is a response­ to the increased inte­rest and involvement of banks in ne­w and unprecedente­d activities related to crypto-asse­ts. The recently outline­d evaluation process emphasize­s their commitment to assessing such activitie­s according to established practices.

However, the Fe­deral Reserve­’s new program de­monstrates a resolute commitme­nt to balance both embracing financial innovation and safeguarding the­ stability of the banking system amidst rapidly evolving te­chnological landscapes.

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Bitcoin Breaches $24k In 5 Months After FED Chair’s “DisInflation” Speech

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Bitcoin surge past the $24k range for the first time in 2023 following FED chairman Jerome Powell remarks that 50% of inflation is in “disinflationary”.

At the time of publication, Bitcoin is trading hands at $23.7k, up by 3% in the daily index.

Unlike deflation, disinflation is the reduction in the rate of increase of overall price levels.

After announcing a 25 basis point increase in interest rates on February 1, Powell stated, “We can now say, I think for the first time, that the disinflationary process has started […] we see it really in goods prices,”

The FED Chair’s speech and the raise hike were favourably received by the crypto market as a whole, increasing the market valuation by more than $40 billion in the hours that followed the announcement.

As per figures from Coinmarketcap, the global crypto market cap led by Bitcoin is now at $1.09 trillion, a surge of over 4% over the past day.

Recalling Powell’s remarks during the media briefing, he stated that they should be ready for “ongoing rate rises” and that they still anticipate that the inflation rate in the services sector will grow for some time.

“We see ourselves as having more persistent inflation in that [services] sector, which will take longer to get down, and we have to complete the job. That’s what we’re here for.”

Adding to that, the Federal Reserve informed that “ongoing rate rises” will still be acceptable amidst the target of getting inflation back to its goal of 2%.

That being said, the Federal Reserve’s policy meeting, where the top bank was scheduled to announce its eighth consecutive rate hike, was one of the most eagerly awaited events.

Bitcoin and Ethereum even registered a minor dips in anticipation of FED interest rate hikes.

Bitcoin’s Worst Days Are Over- Expert

As reported by TronWeekly, Fed officials were expected to approve a 0.25 percentage point hike as inflation began to decline, a more moderate pace than the previous super-sized movements in 2022.

Its needs to be told that the benchmark interest rate of the United States central bank has increased by 4.25 percentage points in less than a year .

In the latest announcement, Powell noted that he expects inflation to decline soon, even if not implying that its reached the end of its cycle of rate hikes.

A similar sentiment was echoed by Yiming Ma, an assistant professor of finance at Columbia University Business School who claimed “the worst is over,” and “the pace of rate hikes is going to slow.”

Ethereum’s On-Chain Metrics Display Unusual Activities

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The Ethereum network registered quite a few anomalies as the crypto market braced for the most important event – The FED releasing the GDP information.

Data from Santiment showed that there has been a gradual decline in competition for block space implying that market participants aren’t feeling any FOMO these days.

Between Ethereum’s declining fees & the sudden massive address activity spike we picked up a few hours ago, there are quite a few anomalies to watch as traders prepare for FED and GDP info coming out.

This in turn has lowered the Average Fees indicating that the traders are not going with the hype. In fact, they are expecting ETH prices to drop further in the anticipation of FOMC meeting.

The bottom line – Ethereum prices would remain volatile.

A few days ago, Tokenview also reported that Ethereum’s average Gas fee was a record low of 9.12 Gwie. It added that ETH’s Gas fee was on a downtrend for a straight 4 days.

Next, Santiment noted that the Active Address count saw one of the biggest jumps on Ethereum recently, which it deemed as not normal. “This might be some kind of a large-scale airdrop farming operation, the report added.

Even Supply on Exchanges too showed a sharp spike accounting for 0.5% of total supply, or roughly 500k ETH were added to the exchange wallet.

“Looks like people are seeking to exit their positions, whether for the reason of price declining or anticipating the negative data releases”, Santiment concluded.

Ethereum Registered A Price Uptick

Meanwhile, The Federal Reserve is widely expected to raise interest rates by another three-quarter of a point on 27th July, and it could stun markets by being more hawkish as per a CNBC article.

Federal Reserve meetings kicked off on 26th July, which are expected to wind up on 28th with the release of Q2 GDP.

Investors are hoping to see the Central Bank raise interest rates by another 75 basis points.

Nevertheless, crypto investors are up for another rollercoaster this week. At the time of writing this post, ETH is trading at $1470 and has risen by over 6% in the last 24 hours.

Fed Exec-“Crypto-Asset Regulation Not Just For High-end Investors”

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Fed Governor Christopher Waller recently spoke on the importance of regulation of bitcoin and the broader cryptocurrency market emphasizing that it is not limited to protecting experienced investors, rather “it’s how to protect the rest of us.”

Speaking at a Conference on Cryptoassets and Financial Innovation in Zurich, Switzerland, the Federal Reserve board member explained that crypto’s explosive growth over the last five years was “a stretch of incredible growth.”

These in turn, according to Waller, led to mainstream recognition from both the public and the government.

By law or by practice, many crypto-related products and activities fall between the cracks of traditional legal and regulatory structures, outside the so-called ‘regulatory perimeter,” he stated. “In that environment, the normal backstops and safety nets of traditional finance do not necessarily or reliably apply.”

Governor Waller went on to stress that many investors currently operating within the space come with a mindset that “regulation isn’t just unnecessary, it’s counterproductive.”

New retail users, by definition, do not have crypto experience,” Waller said. “They don’t know how to independently buy a crypto asset, how to obtain and protect a private key, how to conduct trades on a DeFi protocol, or how to write a smart contract.”

The Federal Reserve exec pointed out the high volatility has brought fear and concerns for these newbie investors which he claims inherently weakens the ecosystem as attempts are made to socialize individual losses.

Citing the recent run on the Terra ecosystem, Waller argued that “everyday users were seeking restitution, and even experienced DeFi players were discussing ways to compensate retail investors.”

Fed Governor- “Regulation would prevent socialization of losses”

The top exec summarises why financial regulation is required (1) by financial intermediaries as a form of liability protection and (2) by the taxpayer to prevent the socialization of individual losses. It does not arise to protect sophisticated, experienced, well-informed investors.

Waller finally concluded his speech with the quote,

If we want to allow broad access to the crypto ecosystem, then the question isn’t about what experienced users of that ecosystem want—it’s about what the rest of the public needs to have confidence in the ecosystem’s safety, and for better or worse, you can’t program confidence.

Here’s What Crypto Analysts Have To Say On Federal Reserve’s Next Move

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The crypto market-wide correction in Q2 is set to change as investors are fervently waiting for Federal Reserve’s action at next week’s meeting. As Santiment pointed out, price volatility is expected to continue over the next few days.

In particular, Bitcoin’s price has shed nearly 40% from its peak of almost $70,000 per BTC late last year. Ethereum too is down by nearly half.

Other major coins like Binance’s BNB-2.7%, Ripple’s XRP -4.9%, Solana, Cardano, Terra’s luna, and Avalanche have all fared poorly, erasing $1.2 trillion from the combined crypto market in a matter of months.

Experts attribute its correlation to other risk assets, which as a whole have reacted in tandem to war in Ukraine, disruption in the supply chain owing to Covid cases surge in China, current interest rate hikes, and future balance sheets machinations by the Federal Reserve.

Joe Haggenmiller, head of markets at leading crypto finance company XBTO Group says “Macro uncertainty has driven all risk-on assets downwards over the last few months, including bitcoin.”

During the Covid-19 pandemic, the Federal Reserve came with a massive stimulus program doubling its balance sheet double, and interest rates fell to an all-time low. As a result, markets were flooded with liquidity in a bid to offset the economic damage of Covid-19 and lockdowns.

The Crypto market might recover if Fed adopts a less aggressive stance

After the pandemic showed signs of receding, inflation reached unprecedented levels causing the Fed to reverse its earlier policy.

Recently, Federal Reserve chair Jerome Powell signaled a half percentage point interest rate hike for the next week’s meeting. Due to this, the market is braced for the central bank to begin reducing its huge $9 trillion asset portfolio as it fights rising inflation.

But some feel the central bank might become less hawkish to avoid a recession-like scenario. Marcus Sotiriou, an analyst at the U.K.-based digital asset broker GlobalBlock said, “This is bullish for risk assets like bitcoin and equities in my opinion.”

Nonetheless, Bitcoin, crypto, and stock market traders are carefully watching for any telltale signs that the Fed might divert from its move when it meets this week.

Fed’s new rules prescribe a ban on crypto trading amongst other assets

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The Federal Reserve has formally adopted new and strict rules prohibiting its officials from trading in a slew of assets that includes cryptocurrencies. It will encompass the Federal Open Market Committee or FOMC members, regional bank presidents, and other officials including staff officers, bond desk managers, and employees who regularly attend board meetings. The new regulation also extends to spouses and minor children.

Apart from crypto, the latest rules cover a wide range of assets classes like individual stocks or sector funds or hold investments in individual bonds, agency securities, commodities, or foreign currencies. They also can’t enter into derivatives contracts, and engage in short sales or purchasing securities on margin. 

According to the press release, the Federal Reserve expects that additional staff will become subject to all or parts of these rules after the completion of further review and analysis. The rules “aim to support public confidence in the impartiality and integrity of the Committee’s work by guarding against even the appearance of any conflict of interest,” the statement also added.

The central bank’s hawkish stance comes in the wake of controversies surrounding the resignation of two of its former top execs Eric Rosengren of Boston and Robert Kaplan over their stock holdings, last year.

Fed views crypto and stablecoins as ‘risk to financial stability’

As per recently released minutes, the central bank during a January meeting, had a discussion on the cryptocurrency market, including stablecoins where officials raised alarm bells on the growth of the crypto industry. The meeting further stated that “some participants saw emerging risks to financial stability associated with the rapid growth in crypto-assets and decentralized finance platforms.”

In terms of stablecoins, Fed mentioned a potential run risk, which characterizes them as “another vulnerability in funding markets.”

Coming back to the new regulations, Fed officials currently holding market positions will still have 12 months’ time to close their portfolios. New officials will have six months to do so. In the future, officials covered by the new rules are required to provide 45 days’ notice before making any permissible asset purchases, a restriction that will go into effect July 1.

Fed’s Chairman squashes crypto ban rumors; Regulations over ban affirms Powell

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The Fed Chairman has time and again popped up in the crypto industry. While the United States, Federal Reserve hasn’t expressed extreme hostility towards the industry, like the Securities and Exchange Commission [SEC] or other regulatory entities. rumors pertaining to a ban on crypto were surfacing. The Fed Chairman Jerome Powell clarified that the occurrence of such an instance was unlikely.

China’s big crypto crackdown had left an array of governments thinking if they were right on adopting crypto. While the world had just started to recognize crypto as a legit market, China started to oust a number of firms associated with the industry. As fear surrounding the same was sprucing up in the United States, Powell pulverized rumors related to the same and revealed that the government should lay its focus on regulations instead.

Appearing in a recent hearing of the House Committee on Financial Services, Powell addressed an array of things. This list also included the role of crypto in the current world.

Fed’s Powell affirms no ban on crypto

The Fed chairman was posed with a question by Rep. Ted Budd. This question was related to the blanket ban that China had imposed on crypto. Budd asked Powell if he intended to “ban or limit the use of cryptocurrencies.” Powell asserted, “No.” He made it clear that the Fed had no intentions of banning or even limiting the use of crypto in the country.

However, he had previously noted that the creation and emergence of the digital dollar aka the US’s potential CBDC could dent the importance of stablecoins.

Responding to Budd’s question, Powell said,

“But stablecoins are like money market funds, they’re like bank deposits, but they’re to some extent outside of the regulatory perimeter. And it’s appropriate that they be regulated. Same activity, same regulation.

While countries have slowly started to open up doors for crypto, China shutting its door could deprive the country and its citizens of what the crypto-verse has to offer. Steering away from a ban, the US clearly seemed to be focusing on regulating the crypto market.

Academic paper calls Stablecoins are Wildcats; argues the need for regulation

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Stablecoins have been the talk of the town. Lawmakers around the world have held their reservations about this cohort of digital assets citing its use in cross-border transactions as a threat to the use of state-issued currencies. More recently, two prominent financial experts have now weighed in a paper whose title read, “Taming Wildcat Stablecoins.” Interestingly, these digital tokens are inherently stable that helps investors in times of wild volatility in assets such as Bitcoin, Ethereum, etc.

However, it is not this characteristic that the Yale economist Gary Gorton and the United States Federal Reserve attorney Jeffery Zhang are worried about. A major aspect that stood out on the 49-page document, was the comparison drawn between stablecoin and the Free Banking Era – a world of wildcat banking back in the 19th century if the former is remains unregulated.

“Stablecoin prices are independent of geography but not independent of the perceived risk of their backing assets. If they succeed in differentiating themselves from fiat cryptocurrencies and become used as money, then they will likely trade at time-varying”

The writer also added that protecting the monetary sovereignty of the state is crucial for building monetary policy and stated that the policymakers should learn from history and repeat the same mistakes again. According to the paper, regulating stablecoin issuers as banks and issuing a central bank digital currency [CBDC] is the only way to combat risks associated with these digital tokens.

Community Reactions to Gorton-Zhang’s stablecoin paper

Nobel laureate and member of the American Philosophical Society, Paul Krugman lauded the duo’s academic paper and asserted that they are just a modern version of free banking, wherein the “private banks issued their own notes supposedly backed by specie.” He also went on to call the existing system “crisis-ridden.” Krugman is one of the many digital asset skeptics. Hence, his latest comment has faced some criticism.

The joint scientific effort for the paper did not see a very good response from the cryptocurrency community either. Arturo Portilla, a popular XRP proponent and a fintech lawyer tweeted,

“LOL. Option a): Require stablecoin issuers to become banks. Option b): Require stablecoin issuers to become unprofitable businesses. Option c): Introduce CBDCs and tax stablecoins to death. I’m guessing Jeremy Allaire isn’t having a good time right now.”

Fed Chairman Powell Needs To Dig Deeper Into Crypto, Suggests Republican Leader

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The crypto industry has been booming with regard to popularity. Just as the world has been embracing the industry, certain lawmakers like the Fed Chairman, Jerome Powell as well as Treasury Secretary Janet Yellen were urged by Kevin McCarthy, the leader of the United States House of Representatives’ Republican party to reconsider their stance on crypto.

Appearing in a recent interview with CNBC’s Squawk Box, McCarthy addressed the ongoing interest in crypto. However, he suggested that the Fed Chairman was ignoring the entire situation hoping for it to go away,

Fed Chair And Treasury Secretary “Tried To Ignore It To Make It Go Away”

When the Republican leader was asked if the aforementioned lawmakers had a good understanding of the crypto industry, particularly Bitcoin, McCarthy was quick to suggest otherwise. He went on to suggest that these lawmakers were reportedly turning a blind eye towards Bitcoin hoping it would go away.

Both Yellen and Fed’s Powell have exerted their hate towards the king coin. While suggested that it was a “growing concern” the other went on to point out that its volatile nature. McCarthy further suggested that the US government should focus on the prospects of the crypto industry.

He added,

“This is moving towards the future. They should not ignore it. They should not only learn more about it, but the basis is going to continue to grow.

Furthermore, China and several other countries have been seen moving ahead in the digital currency space. The Asian country has time and again revealed its inclination towards crypto. While the country is already ahead with the development of its Central Bank Digital Currency [CBDC], the digital yuan, several governments have expressed fear over China’s global financial takeover. Speaking about garnering a setback in this race, McCarthy asserted,

This is something that those who regulate, those who are in government that make policy, better start understanding what it means for the future because other countries are moving forward, especially China.”

Crypto Is Backed By Underlying Networks, Suggests Former OCC Head

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Just as the crypto industry started gaining traction, officials from across the globe seem to have been looking into these digital assets, particularly Bitcoin [BTC]. The rise in the price of Bitcoin led to an array of speculations of the king coin soon replacing the dollar. However, the Chairman of the Federal Reserve of the United States, Jerome Powell, recently addressed this and suggested that Bitcoin could be a substitute for gold as opposed to the dollar as cryptocurrencies aren’t “backed by anything.”

More recently, appearing in a recent Squawk Box interview by CNBC, the United States’ former comptroller of the currency, Brian Brooks suggested otherwise. He stressed how crypto, specifically Bitcoin had backing whereas the US Dollar did not.

Crypto Over The Dollar

Bitcoin has been time and again been touted as digital gold considering the characteristics that both BTC as well as gold hoard. Store of value is a widely familiar aspect. However, Powell in his recent statements delivered a rather dubious assertion. Speaking about the same, the host of Squawk Box, Kernen said, “He just said it’s like gold but not a store of value. Does he not think that gold is a store of value?”

The Bitcoin market witnessed the arrival of several newbies throughout the last couple of months. The rise in its price lured an array of people into the market. Brooks elaborating on the same suggested that the dollar was about 40% less of a good store of value asset than it was over a year ago. This could have been a reason why people flocked into the crypto market, he added.

Additionally, Brooks said,

“The point I really wanna make is the dollar may not actually be backed by anything […] But cryptocurrencies actually are backed by something. They’re backed by underlying networks, and what you’re buying when you buy a crypto token — whatever it is Bitcoin or anything else — you’re buying a piece of a financial network built to transact all kinds of stuff.”

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