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Key takeaways
Cryptocurrencies made big news as prices skyrocketed, turning investors into overnight millionaires. When anything big happens in a financial market in the U.S., you can expect regulators won’t be far behind. Among other agencies, the crypto revolution caught the attention of the Federal Reserve, America’s central bank, and a top financial regulator.
Here’s what you need to know as a crypto trader and investor, considering how regulations may influence your crypto going forward.
If you’re new to crypto, here’s a brief primer on how it works. Cryptocurrencies are a form of digital money managed by distributed computer networks. Each works differently, some come from volunteer programmers, others are made by companies – Fortune 500 enterprises, startups, and everything in between.
Cryptocurrencies are digital assets that are not backed by any government. Government currencies, known as fiat currencies, are backed by the credit of their national government or government body, such as the Federal Reserve or European Central Bank. Cryptocurrencies only derive value from the communities that use them.
While cryptocurrencies may go up by 10x or 100x in value, they could also drop to zero. The industry is ripe with scams, so it’s critical to stay cautious and avoid investing more than you can afford to lose.
The Federal Reserve is focused on regulating banks and the United States dollar, so cryptocurrencies are generally outside its sphere of influence. Crypto and the Fed overlap when banks hold cryptocurrency as an asset on their balance sheets.
Banks make money using the funds from customer bank deposits to enable home loans, credit cards, business loans, and investments. The Federal Reserve requires banks to hold a certain percentage of deposits in safe assets and cash so customers can easily access funds if there’s a surge in withdrawals.
The Federal Reserve decided that cryptocurrency-related assets must be disclosed separately by banks. New cryptocurrency asset activities require notifying the Federal Reserve. Banks are urged to consider the risks of crypto to their asset portfolios.
The Federal Reserve popped up in crypto news recently to explore a Central Bank Digital Currency (CBDC), or digital dollar. In this case, the Fed is looking at creating a digital version of the US dollar that’s managed by blockchain technology. Other countries, including China, are also exploring using a CBDC.
At this point, the Fed issued a paper looking at the pros and cons of creating a new CBDC and solicited public feedback. Currently, banks and credit unions hold digital ledgers for our money. With a digital dollar, dollars would become part of a more transparent system, but there are still plenty of risks and issues to iron out before we can expect the Fed to move forward.
The Federal Reserve isn’t the only government regulator looking at cryptocurrencies. Here’s a snapshot of our other agencies and their relationships with crypto:
In the future, regulations could expand. One congressional proposal would direct the Federal Energy Regulatory Commission to investigate the energy impact of cryptocurrency.
State regulators are also on the case, notably in New York, where certain currencies must be registered to be available to local residents, and bitcoin mining is effectively banned. A high-profile case involved Tether (USDT) and related exchange Bitfinex, which agreed to fines from the New York State Attorney General related to misleading investors.
Cryptocurrencies are a unique asset class that is loosely regulated at present. Many in the government and crypto industry would like additional cryptocurrency regulations to create guidelines and guardrails that would prevent missteps rather than the Wild West we’ve inhabited over the past decade.
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