On Wednesday, July 14, the head of the Federal Reserve, Jerome Powell, said that the US doesn’t have a regulatory framework for cryptocurrencies, which he thinks is important if certain types of cryptocurrencies continue to grow in popularity.
The US government keeps laying the groundwork for how cryptocurrencies will be regulated in the future.
Jerome Powell, the head of the Federal Reserve, talked about the Fed’s desire to control stablecoins and the possibility of a central bank digital currency when he spoke to the US House Committee on Financial Services in July (CBDC).
Stablecoins, like Tether and USD Coin, are a type of cryptocurrency that is tied to a fiat money like the US dollar. Unlike digital assets like Bitcoin, whose value can change quickly, this helps keep their value stable, making them better for digital payments. In a perfect world, these coins would be backed by a reserve of the currency they are tied to. However, there are no formal laws in place to make sure this happens right now.
Powell compared them to heavily regulated money market funds and bank deposits in the US. He said, “Stablecoins don’t have that.” “And if they’re going to be a big part of payments, which we don’t think crypto assets will be, but stablecoins might be, we’ll need a good legal framework, which we don’t have right now.”
What does this mean for people who have Bitcoin and other cryptocurrencies?
Experts said that people who want to invest in crypto for the long term should stick with well-known coins like Bitcoin and Ethereum. Most people should stick to the two most popular currencies unless they are more active traders who are willing to take risks by buying less-known coins.
Experts say that regulations like the ones Powell wants to make are more likely to affect stablecoins and other smaller altcoins. Mike Uehlein, the founder of WealthU Advisors and a financial advisor, says that Bitcoin and stablecoins are used in different ways.
He says that if Bitcoin is “digital gold,” then stablecoins, which have an unlimited supply and are controlled by a few people, are more like the way money works now. Stablecoins are better for digital transactions and moving digital assets to and from “real” money than Bitcoin, which is a store of potential value.
“Investors buying Bitcoin as a store of value and buying stablecoins for a store of value are two different things,” says Tyrone Ross, CEO of Onramp Invest, a cryptocurrency platform for other financial advisors. Ross says that a digital currency backed by the central bank would be a threat to stablecoins, but not Bitcoin.
Any new rule, though, could change the way your portfolio works
Even though stablecoin law or a CBDC may not directly affect Bitcoin, which is decentralized and run by people all over the world, regulations are likely to make the crypto market more risky. China’s latest attack on cryptocurrency laws has already caused Bitcoin’s price to drop by $30,000. We’ve also seen that coin prices tend to go in the same direction. For example, when Bitcoin’s price goes down, altcoins tend to do the same. Uehlein says that regulation could kill off some of the cryptocurrencies that are around now.
Still, Powell’s proposed laws are more likely to affect the value of stablecoins or smaller altcoins than Bitcoin. Ross says that the government should pay attention to DeFi, stablecoins, and other things. “Don’t make large bets in the space now, and stay educated on recent developments and news.”
Why do we need rules for stablecoins?
Stablecoins could make it easier for traders to move money around in an exchange than if they had to transfer money from a bank account. This is because crypto trading and prices change so quickly. Trading coins for real money in and out of your bank account could take many days and cost more than trading coins for stablecoins.
Without rules, even coins can be dangerous.
Uehlein says, “Stablecoins are currently used as a replacement for the U.S. dollar, pegged 1:1 with the dollar. Many investors and government officials have questioned whether or not the peg is true. Many investors would feel better if they knew that the US Treasury would back their money.” This is where a possible digital currency issued by the U.S. government comes in, since it would be backed by the government.What is the point of a Central Bank’s digital currency?Powell’s comments also showed that the Federal Reserve is still interested in a digital currency issued by the US central bank. With a CBDC, it would be easier to do digital transactions. Because it would (theoretically) run on a blockchain network, this kind of transaction would be safe and much faster than it is now.Even though it’s usually not a good idea to buy things with crypto, a possible central bank digital currency could be used to do just that. Uehlein says that a Fed-backed CBDC could be a good alternative to stablecoins like Tether or USDC.Fed officials and the experts we talked to all agreed that, at least in the United States, there is still a long way to go before a CBDC is fully put into place. Uehlein says he wants to see how CBDCs in other countries develop, but he also thinks “it’s too early to tell how serious the United States is about a CBDC.”What will the next round of crypto regulation look like?All eyes are now on a report from the Federal Reserve that Powell hopes to put out at the beginning of September.”We’ll take care of digital payments in general,” he told the committee. “This is shown by things like stablecoins, crypto assets, and CBDC. We think we’ve reached a key point in terms of having the right rules for all kinds of challenges and ways to pay.”The Fed also plans to ask the public about the risks and benefits of cryptocurrencies, as well as the possibility of a CBDC, and to talk with national groups like Congress. Powell says that the goal of the research is to “set out the probable potential benefits and risks” of a digital currency issued by a central bank, as well as how regulators might weigh these costs and benefits.
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