Fed Chairman: The United States may need more crypto regulations. Here’s what it means for investors

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The U.S. government this week laid more ground for potential future cryptocurrency regulation.

Federal Reserve Chairman Jerome Powell spoke on Wednesday July 14 about the Fed’s interest in regulating stablecoins and the potential of a central bank digital currency (CBDC), during testimony before the committee of the United States House on Financial Services.

Stablecoins (Tether and USD Coin, for example) are a category of cryptocurrencies that peg their value to an existing fiat currency, such as the US dollar. This helps stabilize their value, so they’re better suited for digital payments unlike more volatile digital assets like Bitcoin. Ideally, these coins are backed by a reserve of the currency to which they are linked, but today there is little official regulation to enforce it.

Powell compared them to money market funds or bank deposits, which have a strong regulatory framework in the United States. This does not exist for stablecoins, he said. And if they’re going to be a big part of the payments universe, which we don’t think crypto assets will be, but stablecoins could be, then we need a proper regulatory framework, which we frankly don’t.

What does this mean for crypto investors?

Experts we spoke to largely agree that long-term crypto investors should stick with well-known cryptocurrencies like Bitcoin and Ethereum. Unless you are more active in trading and comfortable with the risks of buying lesser-known coins, the two most popular currencies are the best options for most people.

Regulations like the one Powell is talking about are more likely to impact stablecoins and other smaller altcoins, experts say. They have different use cases, says Mike Uehlein, founder and financial planner at WealthU Advisors, referring to Bitcoin versus stablecoins.

If Bitcoin is digital gold, stablecoins are more comparable to the current monetary system, he says, having endless supply and centralization. Bitcoin is a potential store of value, while stablecoins are better suited for digital transactions and the conversion of digital assets to and from real money.

Investors who buy Bitcoin as a store of value and who buy stablecoins for a store of value are two different things, says Tyrone Ross, financial advisor and CEO of Onramp Invest, a cryptocurrency platform for investors. other financial advisers. A central bank-backed digital currency would be a market competitor for stablecoins, but not for Bitcoin, Ross says.

Yet any new regulation has the potential to affect your wallet.

While stablecoin regulation or a CBDC may not have a direct effect on Bitcoin which is decentralized and operated by users around the world, it is likely that regulation could bring more volatility to the crypto market. Already, we have seen crackdown on the regulation of cryptocurrencies from China play a role in the recent $ 30,000 price drop for Bitcoin. We have also seen how coin prices often follow each other when the price of Bitcoins takes a hit, altcoins often follow. The regulations could eliminate many cryptocurrencies available today, Uehlein says.

Still, the regulations that Powell mentioned would likely have a much bigger impact on the value of stablecoins or smaller altcoins, rather than Bitcoin. DeFi, stablecoins and other things are ripe for regulatory scrutiny, Ross says. Don’t make big bets in space now and stay up to date with the latest developments and news.

Why regulate Stablecoins?

Because crypto trading and prices move very quickly, stablecoins can help traders move their funds within an exchange faster than if they were depositing money from a bank account. Exchanging coins for real dollars in and out of your bank account can take several days (and incur higher fees) than exchanging a coin for a stable coin.

But without regulation, even these coins are risky.

Stablecoins are currently being used to replace the U.S. dollar, pegged 1: 1 to the dollar, Uehlein says. The verification of this anchoring has been questioned for many investors and regulators. Many investors would feel better knowing that dollars are guaranteed by the US Treasury. And that’s where a potential US government-issued digital currency comes in, because it would have that backing.

What is the purpose of a central bank digital currency?

Powells’ testimony also reiterated the Fed’s interest in a central bank digital currency for the United States. A CBDC would facilitate digital transactions. Because it would work (hypothetically) on a blockchain network, these transactions would also be secure and much faster than money transfers are today.

While it is generally not recommended to use crypto to make a purchase, this is exactly the purpose that a potential central bank digital currency could serve. A Fed-powered CBDC could replace stablecoins such as Tether or USDC, according to Uehlein.

When it comes to any actual implementation of a CBDC, Fed officials and experts we spoke to believe there is still a long way to go before we get to this, at least for the United States. United. While he says he’s very interested to see how CBDCs in countries around the world continue to evolve, Uehlein says it’s too early to say how serious the United States is about a CBDC.

What’s the next step in regulating crypto?

Now all eyes are on an upcoming Federal Reserve report, which Powell plans to release around early September.

Would address digital payments at large, he told the committee. So it means stable coins, it means crypto assets, it means CBDC. This whole set of issues and payment mechanisms, which we thought were really at a critical point in terms of proper regulation.

In addition, the Fed plans to ask the public about the risks and rewards of cryptocurrency and a potential CBDC, along with consulting with national groups, including Congress. The purpose of the report, said Powell, is to present the possible potential benefits as well as the potential risks of a central bank digital currency, and how regulators might weigh those costs and benefits.

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