federal reserve

US central bank digital currency commenters divided on benefits, unified in confusion

Like a Rorschach ink blot, the Federal Reserve Board’s CBDC discussion paper provided stakeholders with an opportunity to find what they wanted to see in it.

In January, the United States Federal Reserve Board of Governors released a discussion paper on a potential U.S. central bank digital currency (CBDC) titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” The comment period for the paper ended May 20, with the Fed receiving over 2,000 pages of comments from individuals alongside responses from leading stakeholders.

Cointelegraph read a selection of shareholder responses to the Fed paper, and it quickly became apparent that there are plenty of confidently stated opinions but little agreement among them. The main points of commonality are in the places they are all perplexed.

The Fed wants to know

Appropriately for its purpose, the Fed paper provides a broad overview of central bank digital currencies and CBDC-adjacent topics without great depth. The discussion begins with the results of previous analyses that determined a U.S. CBDC would have the best results if it is privacy-protected, intermediated, widely transferable and identity-verified. It goes on to consider the potential uses, benefits and risks of a U.S. CBDC. Stablecoins and cryptocurrency are mentioned briefly, and 22 questions are offered for discussion.

The paper also looks at current developments in electronic money. On the wholesale side, the FedNow Service is expected to enable real-time, around-the-clock interbank payments beginning in 2023. Meanwhile, the private Bank On initiative and other programs strive to increase financial inclusion by promoting low-cost banking services to those who are unbanked and underserved.

Shadings of neutrality

One thing in short supply in the stakeholder comments Cointelegraph examined is neutrality. The response from the Institute of International Finance is an exception in this regard. 

The IIF is a global financial industry association with more than 450 members from over 70 countries. Its membership includes commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.

The IIF answered all of the 22 questions suggested by the Fed while remaining agnostic on the merits of creating a U.S. CBDC.

“A decision like this merits serious thought, so the IIF wanted to be quite constructive in its submission to support the Fed’s ability to evaluate the pros and cons,” Jessica Renier, the IIF’s managing director of digital finance, told Cointelegraph.

The IIF response is not unopinionated. It lists 12 policy considerations the authors feel need to be addressed before a CBDC can be launched, including environmental issues, which went unmentioned by the Fed. It offers practical suggestions on validators and other technical issues and takes pains to emphasize the need for input from the private sector for a retail CBDC.

“The business model needs to work,” said Renier. “If the risks outweigh the incentives, you may only attract intermediaries that depend on selling user data, like tech firms. That’s not good for consumers.” She added:

“If the Fed proceeds, it needs to work closely with the banks to understand the real impact on their ability to lend, and to test the actual operation of a potential CBDC.”

The Securities Industry and Financial Markets Association represents securities broker-dealers, investment banks and asset managers, advocating for effective, resilient capital markets.

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Its lengthy, detailed response does not take a position on the desirability of introducing a CBDC but concentrates on settlement and payments between financial institutions, noting that “U.S. capital markets fund 73 percent of all economic activity, in terms of equity and debt financing of nonfinancial corporations.”

Programmability and interoperability are key concerns for SIFMA, with it stating that “Many of the benefits […] often associated with wCBDCs [wholesale CBDCs] are not dependent on wCBDCs; they could be developed using other payment infrastructure such as stablecoins or settlement tokens using DLT infrastructure.”

“Let me do it”

Some commenters stated their positions more explicitly. The Credit Union National Association responded to the Fed paper with a letter. CUNA has taken a stance against a U.S. CBDC in other places, and while its wording is diplomatic in its response, its skepticism is evident. “Given that the vast majority of US payments are already being conducted through digital channels, the Fed must clearly state what problem(s) it is trying to solve,” the letter states. 

More to the point, a CBDC represents potential competition with credit unions for deposits. “If credit unions lose access to substantial deposits and must invest significant funding in new technology and the development of CBDC wallets, the benefits they are able to deliver to their members will inevitably suffer.”

The creation of a CBDC would inevitably lead to the movement of funds from banks to the Fed, states the American Banking Association in its comments, estimating that 71% of bank funding could be at risk of moving. Furthermore:

“The introduction of a CBDC would risk undermining the important role banks play in financial intermediation.” 

That is just the beginning of a litany of potential misfortunes. A CBDC would exacerbate a stress event and likely impede the transmission of monetary policy, the ABA comments say. “As we have evaluated the likely impacts of issuing a CBDC it has become clear that the purported benefits of a CBDC are uncertain and unlikely to be realized, while the costs are real and acute,” the ABA concludes. It goes on to suggest that stablecoins would be a better option. 

The Banking Policy Institute commented similarly: “To the extent a CBDC could produce one or more benefits, those benefits likely could be achieved through less harmful means.”

Circle Internet Financial, the issuer of the USD Coin (USDC) stablecoin, also argues for the superiority of stablecoins over CBDCs in its response to the Fed paper, unsurprisingly.

The Marriner S. Eccles Federal Reserve Board Building in Washington D.C. Source: AgnosticPreachersKid.

“A host of companies, including Circle, have leveraged blockchain technology to support trillions of dollars of economic activity with fiat-referenced stablecoins,” the response reads. “The introduction of a CBDC by the Federal Reserve could have a chilling effect on new innovations that could otherwise make the U.S. economy and financial sector more competitive both domestically and abroad.”

Circle engaged with select questions suggested by the Fed, concentrating on comparing CBDCs and stablecoins.

On the other end of the spectrum, there is ample enthusiasm for a U.S. CBDC in enterprise blockchain company nChain’s response, which the company provided to Cointelegraph. The authors write:

“Although some of CBDC’s potential benefits could be delivered by the private sector (albeit with credit and liquidity risk), there are social, speed, and geopolitical advantages of reasonable government involvement.”

London-based nChain sees advantages in decoupling large sections of the digital payment system from the “more fragile credit and banking system” and sees CBDCs as an opportunity to liberate consumers from “free” financial services that, in reality, feature a “pay with privacy” business model. Furthermore, nChain is convinced that a U.S. CBDC could improve financial inclusion. “If you would like to discuss further, please contact us and we would be honoured to provide further assistance,” the authors write. 

Privacy concerns run deep

A few issues stand out as sore points throughout the responses. Several doubt the ability of a U.S. CBDC to expand financial inclusion, noting that many of those who are unbanked are unbanked by choice. Questions about paying interest on a U.S. CBDC and imposing limits on the amount that could be held, both of which are potential instruments of monetary policy, are treated with particular uncertainty. nChain is the exception to this generality, arguing against both on the basis that physical money is not subject to those restrictions.

Privacy stands out as the most significant concern, however. Privacy issues are mentioned repeatedly in the responses and even elicited responses from specialized organizations.

The Electronic Privacy Information Center is a public interest research center in Washington, DC that focuses on privacy, including consumer privacy. EPIC is agnostic on issuing a CBDC but recommends in its response that if it does happen, the Fed should adopt a token-based digital currency that does not rely on distributed ledger technology and its permanent recordkeeping. It argues that a Fed-issued intermediated token could be designed to protect privacy while still allowing for Anti-Money Laundering and Counter-Terrorist Financing controls.

“The digital payment space today is a privacy nightmare,” EPIC law fellow Jake Wiener, co-author of the center’s comments, told Cointelegraph. “A CBDC will only improve privacy if paired with strong regulations to ensure that the current payment services industry is not duplicated through exploitative digital wallets and point-of-sale systems. The technology alone is not enough.”

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In its letter, the center says there are several other advantages of a token. It could be incorporated into the current banking system, with improved consumer privacy and at a lower cost than DLT would provide. The Hamilton Project, a CBDC research project conducted by the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology’s Digital Currency Initiative, also found a non-blockchain model that it tested to be preferable to DLT due to its much faster processing time.

EPIC’s comments extensively cite the ideas of XX Network founder David Chaum. Chaum himself told Cointelegraph, “Privacy needs to be built into CBDCs, and it only counts if it cannot be secretly removed. Of course, there are other major considerations: preventing large-scale criminal use, enfranchising the unbanked and protecting against counterfeiting. But without built-in privacy, CBDCs won’t drive economic growth the way that true electronic cash can.”

According to the American Civil Liberties Union and 11 other nongovernmental organizations that released a short letter, “Anonymity should be a paramount consideration in pursuit of a more just and safe financial system.”

Crypto bank Custodia sues the Fed over 19 month delay on account approval

Custodia wants to compel the Federal Reserve Board and its Kansas City branch to approve its application for a Fed master account within 30 days.

Wyoming based digital asset bank Custodia is suing the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City, claiming an “unlawful delay” in processing an application for its master account.

Custodia, formerly known as Avanti, was one of the first Special Purpose Depository Institutions (SPDIs), also known as “blockchain banks,” made under a Wyoming regulatory framework.

The bank was founded by Caitlin Long, an early advocate of Bitcoin (BTC) who established the institution in 2020 to provide accounts for crypto companies and serve as a bridge for them to the U.S. dollar payment system.

Custodia submitted an application for a Federal Reserve master account 19 months ago in October 2020. The account would allow Custodia to access the Federal Reserve payment systems without using a third-party bank.

Nathan Miller, a spokesperson for Custodia Bank, told Cointelegraph:

“Through this lawsuit, Custodia seeks to ensure that its Federal Reserve master account application receives the fair dealing and due process guaranteed to it by both federal statute and the U.S. Constitution. Custodia has satisfied every rule applicable to it, and has gone beyond by applying to become a Fed member bank.”

The suit claims the Federal Reserve violated a United Stated Code, which outlines a one-year deadline for processing the application, and says that it even states on the master account application that a decision takes five to seven business days.

The Fed’s Kansas City bank was ready to approve the account before the Federal Reserve Board asserted control over the process in spring 2021, thereby “derailing” the application, Custodia says.

Custodia states that the “black-box bureaucratic process” meant it had exhausted “all options short of litigation” and sought to compel the Federal Reserve and its Kansas City bank to approve its master account within 30 days.

Custodia plans to provide final settlement for U.S. dollar payments in digital asset transactions, along with providing digital asset custodial services. A key part of its service is to clear payments for its customers directly with the Fed, which it says will reduce costs, counterparty credit risk and delays in settlement.

The delay has postponed Custodia’s full entry to the market and forced the bank to partner with another bank that already has a master account. It says this is a “makeshift solution” that is “second best and far more expensive”.

Related: Fed governor explains who needs crypto regulation and why demand for it is growing

If Custodia wins the suit or is granted a Fed master account, it will be the first digital asset bank in the country to secure one.

In December 2021, the Republican senator for Wyoming Cynthia Lummis claimed the Fed was “violating the law” with its unfair treatment of SPDIs like Custodia through delaying applications to receive master accounts.

SPDIs were created from a Wyoming regulatory framework for cryptocurrency custody introduced in late 2019 to serve businesses unable to secure Federal Deposit Insurance Corporation (FDIC) banking services due to their dealings with cryptocurrency.

Sold your SOL? Solana price eyes 35% jump as two technical signals flip bullish

Solana’s nearly 80% year-to-date decline is likely to follow up with some relief rallies, technicals suggest.

At least two technical indicators show Solana (SOL) could undergo a sharp price recovery in June, even after the SOL/USD pair’s 78.5% year-to-date decline.

SOL price nears bullish wedge breakout

First, Solana has been painting a “falling wedge” since May, confirmed by its fluctuations inside two descending, converging trendlines. Traditional analysts consider falling wedges as bullish reversal patterns, meaning they resolve after the price breaks above their upper trendlines.

As a rule of technical analysis, a falling wedge’s profit target is measured after adding the maximum distance between its upper and lower trendlines to the breakout point. So depending on SOL’s breakout level, its price would rise by roughly $20, as shown below.

SOL/USD daily price chart featuring “rising wedge” breakout setup. Source: TradingView

That puts the SOL’s price target at $58 if measured from the current price, or about 35% higher. But if the price retreats after testing the wedge’s upper trendline and continues to fluctuate inside its range, SOL’s profit target would keep getting lower.

The Solana token can rise to at least $44 after breaking out of its wedge pattern.

Bullish divergence

More upside cues for Solana come from a growing separation between its price and momentum trends.

In detail, SOL’s recent downside moves accompany an upside retracement in the readings of its daily relative price index (RSI), a momentum oscillator that detects an asset’s overbought (>70) and oversold (

SOL/USD daily price chart featuring price-momentum divergence. Source: TradingView

This situation, otherwise known as “bullish divergence,” shows that bears are losing control and that bulls would capture the market again.

Solana still faces bearish risks

Financial market veteran Tom Bulkowski believes falling wedges are poor bullish indicators, however, with a higher breakeven failure rate of 26%. Meanwhile, there is only a 64% chance that a falling wedge would meet its profit target, which leaves Solana with the possibility of continuing its downtrend.

Related: Solana developers tackle bugs hoping to prevent further outages

Bulkowski asserts:

“The only variation that works well is a downward breakout in a bear market.”

Fundamentals around Solana agree with a downside outlook. They include a hawkish Federal Reserve and the negative impact of their tightening on riskier assets, including cryptos and equities.

As a result, SOL could move lower under the said macro risks, with its next potential downside target in the $19–$25 area, as shown below.

SOL/USD weekly price chart. Source: TradingView

This range was instrumental as support in the March–July 2021 session.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Fed forgets long-term dollar devaluation when pricing eggs in BTC

The U.S. Federal Reserve has released a blog post showing the instability of Bitcoin against the U.S. dollar when buying eggs; however, the crypto community was quick to point out the reality of the situation.

The St. Louis Federal Reserve stirred up a mix of amusement and curiosity from the crypto community on Tuesday, May 7, after publishing a post showing how the cost of eggs in Bitcoin (BTC) has fluctuated over the last 14-months compared to the U.S. dollar. 

On Monday, the Fed research arm posted a blog post titled “Buying eggs with bitcoins — A look at currency-related price volatility.”

The post initially features a graph showing the historical price of eggs in U.S. dollars for every month since January 2021, noting that the prices fluctuated between $1.47 and $2.52 over the 14-month period.

Source: The FRED® Blog

It then follows this up with a graph showing how Bitcoin has behaved in the same time period, noting that the price fluctuated “much more than it did for the U.S. dollar price.” 

The report did not stipulate whether the price of eggs had increased or the dollar had devalued, or both, as causes for the trend.

“What would the graph look like if we purchased that same carton of eggs with bitcoins instead of U.S. dollars?”

Source: The FRED® Blog

It also drew attention to Bitcoin’s transaction fees, which it says can fall between $2 and $50. 

“Plus, you’d need to add a Bitcoin transaction fee, which has been about $2 lately, but which can spike above $50 on occasion. Hopefully, if you were making this purchase with Bitcoin, you’d put many many more eggs in your basket,” it wrote.

Crypto Twitter reacts

The blog post ultimately drew ire from the crypto community on Twitter, with many arguing that the Fed was “cherry-picking” the time period to push the narrative of Bitcoin’s instability, rather than “zooming out,” which would instead show the massive devaluation of the U.S. dollar.

A Twitter user going by the name @MapleHodl pointed out the obvious by stating that the USD is continuously depreciating over time and Bitcoin is volatile short term, though appreciating, so “stack yolks accordingly.” 

Other Twitter users said that for the Fed to even recognize Bitcoin as a unit of account as being a net positive sign for the king crypto.

“No matter how they put it. They used Bitcoin as a unit of account to compare. That’s really big.”

Related: Fed money printer goes into reverse: What does it mean for crypto?

The recent post from the Federal Reserve Bank of St. Louis comes as a survey from Bloomberg’s MLIV Pulse on Monday revealed that crypto and tech stocks are “acutely vulnerable” to quantitative tightening plans by the U.S. central bank aimed at dampening inflation.

Source: bloomberg.com

“The historic shift is seen as a notable threat to tech equities and digital tokens — both risk-sensitive assets that soared in the COVID-era market mania before cratering in this year’s cross-asset crash.”

Since 2009, when Bitcoin first came into existence, the U.S. dollar has lost 26% of its value, tracking an average inflation rate of 2.32% per year since then, according to this inflation calculator.

On the other hand, one Bitcoin, which started at a value of $0.00 in 2009, is now worth $29,495 at the time of writing.

The below chart shows the purchasing power of one U.S. dollar in contemporary terms. In 1913, one U.S. dollar could buy 30 Hershey’s chocolate bars. In 2020, it can buy just one McDonald’s coffee. Additionally, the money supply (M2) in the United States has skyrocketed over the last two decades, increasing from 4.6 trillion in 2000 to $19.5 trillion in 2021.

USD purchasing power over time – visualcapitalist.com

Is Cardano ready for a go at $1? June’s hard fork FOMO lifts ADA price to weekly highs

Cardano’s previous hard forks sparked massive ADA price rallies. Will this time be different?

Cardano (ADA) was among the best performers among the top cryptocurrencies on June 6 as traders assessed a key upgrade that promises to enhance its blockchain’s smart contract capabilities.

Vasil hard fork FOMO

Dubbed “Vasil,” the so-called hard fork event will tentatively take place on June 29, 2022. As a result of the euphoria surrounding this upgrade, traders have started speculating more on ADA’s upside prospects, resulting in its better performance than other top-ranking digital assets.

For instance, ADA’s price rose by over 14% to $0.64 on June 6 compared to the 6% gains of its top rival, Ether (ETH), on the same day.

Cardano’s price history also shows similar euphoric behaviors among traders in the days leading up to hard fork events. For example, the “Alonzo” upgrade in September 2021, which introduced smart contract functionalities to the Cardano network, preceded a 200%-plus ADA price rally, as shown below.

ADA/USD daily price chart. Source: TradingView

Similarly, Cardano’s “Mary” hard fork in March 2021 preceded ADA’s 1,600%-plus price boom.

ADA bull traps

The previous price rallies that led to the hard fork events also occurred amid an expansionary macro-environment. At the time, interest rates were near-zero, and the Federal Reserve was buying $120 billion worth of government bonds every month.

But currently, the U.S. central bank has turned hawkish after witnessing persistently higher inflation. Therefore, many analysts argue that there is now less U.S. dollar liquidity to buy riskier assets, including stocks and cryptos.

Cardano has reeled under the pressure of the Fed’s tightening, with ADA trading almost 80% lower than its September 2021 peak of $3.16. The broader move downside also includes significant bounces, as shown in the chart below.

ADA/USD daily price chart featuring price rebounds in ongoing bear market. Source: TradingView

ADA price to $1?

From the technical perspective, ADA now tests a resistance confluence comprising a falling trendline and its 50-day exponential moving average (50-day EMA; the red wave) near $0.66 and a horizontal trendline (the neckline) near $0.62 that constitutes what appears to be a “double bottom” pattern.

ADA/USD daily price chart featuring ‘double bottom’ setup. Source: TradingView

A break above the resistance confluence could trigger the double bottom breakout.

Related: Crypto funds under management drop to a low not seen since July 2021

As a rule of technical analysis, traders measure the double bottom’s breakout target by adding the distance between the bottom levels and the neckline to the breakout point. That paints a June target of  $0.87, up around 40% from June ‘s price and likely ahead of the Vasil upgrade.

A follow-up rally could also see ADA testing its 200-day exponential moving average (200-day EMA; the blue wave) near $1 for a breakout or pullback. A pullback seems more likely, however, given the prevailing macro risks.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Is Solana a ‘buy’ with SOL price at 10-month lows and down 85% from its peak?

SOL price still faces headwinds from its Bitcoin correlation, macro risks as well as Solana’s downtimes.

Solana’s (SOL) price dropped on June 3, bringing its net paper losses down to 85% seven months after topping out above $260.

SOL price fell by more than 6.5% intraday to $35.68, after failing to rebound with conviction from 10-month lows. 

Now sitting on a historically significant support level, the SOL/USD pair could see an upside retracement in June, eyeing the $40-$45 area next, up around 25% from today’s price.

SOL/USD daily price chart. Source: TradingView

60% SOL price decline ahead?

However, a rebound scenario is far from guaranteed and Solana faces headwinds from trading in lockstep with Bitcoin (BTC), the top cryptocurrency (by market cap) that typically influences trends across the top altcoins. 

Notably, the weekly correlation coefficient between BTC and SOL was 0.92 as of June 4.

SOL/USD versus BTC/USD correlation coefficient. Source: TradingView

What’s more, Solana is likely to see even bigger losses than BTC if Bitcoin falls deeper below its current psychological support level of $30,000.

Meanwhile, the Federal Reserve looks determined to raise benchmark interest rates and reduce its balance sheet. As a result of this hawkish policy, riskier assets like Bitcoin have room to go lower, hurting Solana’s bullish prospects. 

Breaking below SOL’s current support level—around $35—raises the chances for a decline toward the $18-25 range, which acted as a strong support area in March-July 2021, and preceded a 1,200% price rally, as shown below.

SOL/USD weekly price chart. Source: TradingView

This bearish scenario would put SOL almost 60% below today’s price.

Solana network outages

The bearish outlook for SOL also comes as the Solana blockchain faces repeated outages, thus leaving its network practically unusable for its key “dapps,” including lending protocol Solend and decentralized exchange Serum, for hours.

Solana’s latest software glitch appeared on June 1 that shut down the network for 4.5 hours. The blockchain’s biggest outage happened in January and was down for almost 18 hours.

The outages risk spooking investors to the benefit of Solana’s competition and have already coincided with several traders rotating their capital elsewhere.

Miles Deutscher, an independent market analyst, believes crypto investors have become cautious after witnessing the recent Terra fiasco. Nonetheless, the analyst asserts that Solana’s outages would decrease over time as the network matures.

Related: Alchemy announces support for Solana Web3 applications the day after blockchain halted

“But if they fail to stifle such events, then other L1s [layer-1 blockchains] will continue to eat away at its market share,” he noted.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Is Solana a ‘buy’ with SOL price at 10-month lows and down 85% from its peak?

SOL price still faces headwinds from its Bitcoin correlation, macro risks as well as Solana’s downtimes.

Solana’s (SOL) price dropped on June 3, bringing its net paper losses down to 85% seven months after topping out above $260.

SOL price fell by more than 6.5% intraday to $35.68, after failing to rebound with conviction from 10-month lows. 

Now sitting on a historically significant support level, the SOL/USD pair could see an upside retracement in June, eyeing the $40-$45 area next, up around 25% from its June 4 price.

SOL/USD daily price chart. Source: TradingView

60% SOL price decline ahead?

However, a rebound scenario is far from guaranteed and Solana faces headwinds from trading in lockstep with Bitcoin (BTC), the top cryptocurrency (by market cap) that typically influences trends across the top altcoins. 

Notably, the weekly correlation coefficient between BTC and SOL was 0.92 as of June 4.

SOL/USD versus BTC/USD correlation coefficient. Source: TradingView

What’s more, Solana is likely to see even bigger losses than BTC if Bitcoin falls deeper below its current psychological support level of $30,000.

Meanwhile, the Federal Reserve looks determined to raise benchmark interest rates and reduce its balance sheet. As a result of this hawkish policy, riskier assets like Bitcoin have room to go lower, hurting Solana’s bullish prospects. 

Breaking below SOL’s current support level — around $35 — raises the chances for a decline toward the $18-25 range, which acted as a strong support area in March-July 2021, and preceded a 1,200% price rally, as shown below.

SOL/USD weekly price chart. Source: TradingView

This bearish scenario would put SOL almost 60% below the price on June 4.

Solana network outages

The bearish outlook for SOL also comes as the Solana blockchain faces repeated outages, thus leaving its network practically unusable for its key “dapps,” including lending protocol Solend and decentralized exchange Serum, for hours.

Solana’s latest software glitch appeared on June 1 that shut down the network for 4.5 hours. The blockchain’s biggest outage happened in January and was down for almost 18 hours.

The outages risk spooking investors to the benefit of Solana’s competition and have already coincided with several traders rotating their capital elsewhere.

Miles Deutscher, an independent market analyst, believes crypto investors have become cautious after witnessing the recent Terra fiasco. Nonetheless, the analyst asserts that Solana’s outages would decrease over time as the network matures.

Related: Alchemy announces support for Solana Web3 applications the day after blockchain halted

“But if they fail to stifle such events, then other L1s [layer-1 blockchains] will continue to eat away at its market share,” he noted.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

Fed governor explains who needs crypto regulation and why demand for it is growing

Experienced investors know how to survive, Christopher Waller reasons, but there can be wide repercussions when small investors are hit with losses.

Regulation is needed to open the crypto ecosystem to a larger public, United States Federal Reserve Board Governor Christopher Waller told an audience at the SNB-CIF Conference on Cryptoassets and Financial Innovation in Zurich, Switzerland. Financial intermediaries can help manage risk for new crypto users, but cannot eliminate it, Waller said, and new and fast-growing financial products need public confidence to survive.

The banking official used historical examples to show the relationship between technical innovation, regulation and the amassing of fortunes. “New technology — and a lack of clear rules — meant some new fortunes were made, even as others were lost,” Waller said.

Experienced investors know how to operate in unregulated marketplaces and may not need or want regulation, Waller continued. He pointed to a recent Fed survey that showed that even with the explosive crypto-assets in recent years, only 12% of American adults own crypto, and 99% of them hold it for investment purposes.

Related: How does the Fed impact crypto? | Find out on The Market Report

Intermediaries in the financial market may want regulation because new users who have negative experiences with crypto could enter into disputes with them. Waller explained: “When everyday investors start losing their life savings, for no reason except wanting to participate in a hot market, demands for collective action can mount quickly.”

Those demands can grow into the socialization of individual losses, such as calls to reimburse small investors who have suffered losses in the collapse of the Terra (LUNC; formerly, LUNA) ecosystem, the central banker reasoned. That, in turn, leads to increased demand for regulation to prevent the situation from reoccurring.

To allow broad access to the crypto ecosystem, Waller concluded:

“[…] 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.”

NY Fed president urges colleagues to prepare for coming digital payment transformation

Technology is changing fast, but the role of the central bank stays the same, Williams tells an audience of officials, scholars and financial industry leaders.

Get ready for a fundamental change in money and payments, John Williams, president and CEO of the Federal Reserve Bank of New York, told central bank officials, academics and financial industry leaders from around the world on Wednesday. Williams delivered the opening remarks at an invitation-only workshop on monetary policy implementation co-hosted by the New York Fed and Columbia University.

The central banker dismissed much of the digital asset space with a single-sentence observation that not all cryptocurrencies are backed by non-crypto assets. Central bank digital currencies (CBDCs) and stablecoins backed by safe, liquid assets have the potential for innovation, he continued.

Related: The United States turns its attention to stablecoin regulation

Williams did not elaborate on the possible future impact of digital currency. Rather, he contextualized the potential changes by pointing out the effects of the introduction of overnight reverse repurchase (ON RRP) agreements in 2014. With $2 trillion of ON RRP agreements being maintained, they have dramatically altered the structure of the Fed’s balance sheet.

An ON RRP is an agreement that a Federal Reserve bank will sell a security to an eligible financial institution and buy it back the next day for the purpose of keeping the federal fund rate within a target range. Destabilizing interest rates is one of the potential effects of the introduction of a CBDC.

The role of the central bank remains the same, regardless of technological changes, Williams emphasized. He said:

“As central bankers, it’s critical that we remain focused on carrying out our responsibilities, while keeping pace with the world around us.”

The introduction of a U.S. CBDC has been the topic of much discussion and controversy within the government. The Fed has repeatedly stated that ideally, it would have a congressional mandate before issuing one.

Fed money printer goes into reverse: What does it mean for crypto?

What will happen to the crypto markets when quantitative tightening takes full effect and the Federal Reserve shelves the money printer?

The United States Federal Reserve is starting the process of paring back its $9 trillion balance sheet that ballooned in recent years in a move called quantitative tightening (QT). 

Analysts from a crypto exchange and financial investment firm have conflicting opinions about whether QT, starting on Wednesday, will put an end to a decade of unprecedented growth across crypto markets.

Laypeople can consider QT the opposite of quantitative easing (QE), or money printing, which the Fed has been engaged in since the start of the COVID-19 pandemic in 2020. Under QE conditions, more money is created and distributed while the Fed adds bonds and other treasury instruments to its balance sheet.

The Fed plans on shrinking its balance sheet by $47.5 billion per month for the next three months. In September of this year, it plans on a $95 billion reduction. It aims to see its balance sheet reduced by $7.6 trillion by the end of 2023.

Pav Hundal, manager at the Australian crypto exchange Swyftx, believes that QT could have a negative impact on markets. He told Cointelegraph on Wednesday that “it’s very possible thatyou might just see growth in market cap trimmed slightly:”

“The Fed is culling assets harder and faster than a lot of analysts had expected and it’s difficult to imagine that this won’t have some kind of impact on investor sentiment across markets.”

Initiated in March 2020, the impact of QE on the crypto market was dramatic. CoinGecko data shows that the crypto market cap languished through 2019 and early 2020, but a vibrant bull market began in late March 2020 as the money printer fired up. The total crypto market cap burst from $162 billion on March 23, 2020, to a peak of just over $3 trillion last November.

Over a similar time frame, the Fed balance sheet increased 2.1 fold from $4.17 trillion on January 1, 2020, to $8.95 trillion on June 1, 2022. That is the fastest rate of increase since the last global financial crisis starting in 2007.

Related: UN agency head sees ‘massive opportunities’ in crypto: WEF 2022

Financial advisory firm deVere Group CEO Nigel Green believes market reactions to QT will be minimal because “it’s already priced in.” Green said there may be a “knee-jerk reaction from the markets” because of the unexpected speed with which QT is being rolled out, but he sees it as a little more than a wobble:

“Furthermore, we expect a market bounce imminently, meaning investors should be positioning portfolios to capitalise on this.”

Wage increases among American workers, especially in the hospitality industry, have already been observed as labor demand remains high. Assuming wages remain high through QT, the U.S. may emerge from the economic downturn with lower income inequality. Crypto market analyst Economiser explained in a Tuesday tweet that if people wind up with more cash in their pockets from their higher wages, “the crypto market could ultimately benefit” from QT.

Hundal added that while markets are experiencing increased volatility lately, Bitcoin (BTC) could benefit as it is now demonstrating its position as a bellwether asset. He noted that Bitcoin dominance is currently at about 47%, up by eight percentage points from the start of 2022. He said, “There are different ways to interpret this,” adding:

“It does suggest that market participants are seeking to park value in Bitcoin, meaning we could see weakness continue to trend across alt coin markets if current market conditions continue to play out.”