055 – Since March 2022, U.S. Federal Reserve (FED) Chairman Jerome Powell has announced a total of ten interest rate hikes, which has affected not only traditional financial markets, but also emerging markets such as cryptocurrencies.

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Now, on multiple occasions the FED has communicated that the crypto-asset ecosystem is extremely volatile and dangerous for investors, but at the same time they have ruled out opposing any innovations that may arise, and even more so if they benefit the financial markets. So, is the Fed really against the adoption of cryptocurrencies or does it seek to boost them through regulations?

It should be taken into consideration that the United States is currently facing an inflationary process, which is close to 4%, when the “ideal” value for the FED is close to 2%.

Although these measures have helped the U.S. economy to improve, at least in the short term, they have also affected international markets, since the FED has already announced that interest rates will be raised at least a couple of times during the remainder of 2023, so investors are reading that the situation is not entirely under control and, therefore, money is becoming increasingly expensive with interest rate hikes.

This is how it can be stated that, as there is an increase in the cost of money for the general public, the financial market is affected due to a lower income for stock and/or crypto-asset purchases. In addition, there is uncertainty as to how these measures may affect in the long term, so many investors decide to sell their current position in order to back their money in less volatile assets, such as gold and other precious metals.

Economist Aarón Olmo points out that “the FED’s current policies are aimed at trying to correct as soon as possible the economic imbalance that caused the pandemic. It is for this reason that we have seen an aggressive increase in interest rates in the last year in parallel to the bear markets, where some investors, not seeing speculative profit, liquidate their positions out of fear”. It also highlights how investors feel about the current situation, through the “Fear & Greed Index”:

Investors are currently confident that financial markets will recover due to reports from international organizations such as the International Monetary Fund (IMF) and the World Bank.

However, it must be taken into consideration that the measures announced by the FED have also affected banks such as Silicon Valley Bank or Signature Bank that recently announced their bankruptcy due to the large amount of withdrawals they were having and could not cope with them.

In addition, the measures extend to the world of cryptocurrencies, where not only the price of some coins has dropped significantly, but some stablecoins have come to break parity with the dollar, that is, many have ceased to be 1:1 due to the reduction they have come to suffer for the same reason as the banks that have failed.

However, Jerome Powell recently stated that the FED sees stablecoins as a form of payment and stated that “it would be appropriate to have a fairly robust federal role in what happens to the stablecoin in the future. Allowing a lot of private money creation at the state level would be a mistake.” These statements open a great possibility of seeing a possible “union” between the U.S. Federal Reserve and the world of cryptocurrencies; but at the same time such statements generate conflicts with the Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC).

The three governmental entities coincide with the idea that the cryptocurrency market must be regulated for greater control and transparency in the laws, but such regulations will depend on the treatment given to crypto-assets, since, if they are considered as securities themselves, the SEC would be the entity in charge of regulating them; while if they are considered as commodities, the CFTC would be in charge of carrying out the relevant regulations.

It is an extremely delicate debate, since even stablecoins have suffered price variations during the last few years and reaffirms the theory that crypto-assets are very volatile. But, the message between the lines is that it is well known the potential that cryptos have and how they will, in the medium term, circulate more normally among the population.

It should be noted that a formal regulation for cryptocurrencies has been under discussion in the United States since mid-2022, such regulation would seek “regulatory clarity for agencies charged with overseeing digital asset markets, provide a robust and customized regulatory framework for stable currencies, and integrate digital assets into our existing tax and banking laws”. The decision made by the U.S. Congress on this law will be fundamental to understand the direction that the world of cryptocurrencies will take.