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Fed Establishes ‘Risk-Focused’ Program to ‘Supervise’ Crypto

Published August 10, 2023 10:36 AM
Teuta Franjkovic
Published August 10, 2023 10:36 AM
Key Takeaways
  • Fed released its program to monitor what it refers to as “novel activities”
  • Mission is to “foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system”
  • There is concern that dealing with such volatile assets could endanger the traditional banking industry

To improve control of crypto activity by the institutions it regulates, the Federal Reserve (Fed) has developed a new supervisory program . Before engaging in the issuance, possession, or transactions involving US dollar stablecoins, the US central bank additionally issued additional criteria for banks to adhere to.

The program, which will supplement the existing crypto supervisory procedures used by the central bank, intends to improve control of “novel activities” carried out by monitored banking companies, according to the Fed.

Fed to Track Crypto

As per the regulator, the initiative was created to ensure the risks connected to innovation are properly addressed.

The Fed stated that the program’s objective is to promote the advantages of financial innovation while identifying and effectively resolving concerns to guarantee the stability of the banking system, all regarding to the crypto sector as well.

The Fed’s list of novel activities  includes:

  • Partnerships in which a non-bank provides end users with banking products and services. These partnerships typically use technology like application programming interfaces that enable automated access to the bank’s infrastructure.
  • Activities include stablecoin/dollar token issuance or distribution, financing with cryptocurrency collateral, facilitating trade in cryptocurrency, and custody of cryptocurrency assets.
  • The investigation or application of DLT for various use cases, including the creation of dollar-denominated tokens and the tokenization of equities or other assets.
  • Banking institutions focused on offering typical banking services, such as deposits, payments, and lending to fintechs and businesses connected to cryptoassets.

Under the Fed, the program will be risk-based, and the level and severity of crypto monitoring will depend on the extent to which each firm engages in unique activities.

The Fed stated  that it wants the initiative to be guided by a variety of viewpoints and industry-leading techniques in risk management and monitoring.

In accordance with the central bank, “the Program will engage broadly with external experts from academia and the banking, finance, and technology industries to stay abreast of emerging issues, technologies, and new products.”

Real-time data, market monitoring, horizontal exams, and proactive, intentional, and routine information interchange across portfolios, federal bank regulatory bodies, and other stakeholders will all be taken into account by the program’s insights and analysis.

On Tuesday, the Fed made it clear that any state bank it oversees must obtain permission from the regulator before issuing, holding, or engaging in transactions involving dollar tokens, such as stablecoins , to expedite payments.

According to the Fed, state member banks that want to engage in such activities must show the central bank that they have the controls necessary to do so securely and reliably.

Debanking Of the US Sector

Some believe that the scheme, which will give banks more control over crypto on- and off-ramps, might completely debank the sector in the United States.

The action was taken the same week that payments giant PayPal announced the launch of PYUSD, its own stablecoin. The cryptocurrency community has already criticized this for its centralization and the ability of PayPal to halt and reverse transactions.

In addition, the rating agency Moody’s recently rated ten American banks  and placed six more substantial ones under examination for possible downgrades.

SHIB and PEPE Lead Market Gains Following Fed’s Statement

As Bitcoin (BTC) momentarily crossed the $30,000 mark yesterday, meme coins Shiba Inu (SHIB) and PepeCoin (PEPE) led the market’s increase.

Meme coins are tokens that were either popularized by internet memes or that were influenced by them. According to CoinGecko data, after the announcement, SHIB  increased by 9.8%, while PEPE  experienced a 12.7% increase. Still, at the time of writing both coins were down by 1.3% and 2.4%, respectively.

On the other hand, Bitcoin  hit a new monthly high of $30,126 on Tuesday, but it later dropped to about $29,487 at the time of writing.

During the same time frame, the market capitalization of all cryptocurrencies rose by about $25 billion, or 2%.

All Eyes on CPI

Although the announcement of PayPal’s stablecoin may have encouraged buyers, the price of Bitcoin struggled to hold above $30,000.

Investors are eagerly anticipating Thursday’s CPI report, which details the nation’s success in combating inflation, before a significant shift in attitude.

According to the economists surveyed, inflation will register at 3.3% year-on-year since  last July, a slight increase from the estimate from last month. The indicator is still higher than the Federal Reserve’s goal rate of 2%, although being far lower than the inflation fear of last year.

These U.S. inflation statistics are very important in determining whether the Federal Reserve decides to raise interest rates and how the economy is doing.

The price of high-risk assets like Bitcoin may have been impacted by the dollar’s rise amid poor economic statistics from China , whose exports and imports this month declined more than forecast, and Japan, where real earnings fell  for a fifteenth straight month.


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