The US central bank signals possible approval of Bitcoin ETFs

In a note published this Tuesday (8), the US central bank announced two measures to monitor the cryptocurrency sector. In short, the Fed will monitor fields that the SEC has no control over, something that has been expected since last year.

While the US BC’s first benchmark focuses on banks, including custody and trading of cryptocurrencies, the second benchmark focuses entirely on stablecoins.

Bitcoin, which was already rising, reached $30,000. Therefore, the market responded well to the release. Other cryptocurrencies are also operating high this Wednesday (9).

Fed to Monitor Banks’ Engagement in Cryptocurrency

All banking organizations under Fed supervision will be affected, the Fed said, including small businesses with less than $10 billion in consolidated assets. In other words, supervision will be general.

According to the text, the innovation of cryptocurrencies can reduce costs, create products that better meet users’ needs, increase competition and ultimately improve financial services offerings.

However, the Fed is concerned about the risks of this innovation. The monitoring was divided into four parts.

• Complex, technology-driven partnerships with non-banking companies to provide banking services;
• activities related to crypto assets;
• Projects using DLT (blockchain) with the potential to significantly impact the financial system;
• Concentrated provision of banking services for entities related to crypto assets and fintechs.

While the first deals with the use of banks by third parties, via APIs, the second concerns the custody and trading of cryptocurrencies by banks. The last two are linked to stablecoins and also to banking access by cryptocurrency companies in general.

“The program will be risk-based, and the level and intensity of supervision will vary depending on the level of involvement in new activities by each supervised banking organization”wrote the Fed. Then it notices that too “Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any class or type”.

Finally, the Fed’s announcement comes after Moody’s downgraded ten US banks’ risk ratings and notified six other giants. However, none of the downgrades were linked to exposure to cryptocurrencies.

Fed will also monitor stablecoins

The second Fed measure is entirely focused on the stablecoin sector, i.e. cryptocurrencies backed and pegged to the US dollar. The announcement comes the same week that PayPal is launching its stablecoin PYUSD.

In short, the US BC wants to ensure that stablecoin issuers are in good financial health, but also meet the financial standards found in the traditional system.

Also divided into parts, the text addresses five risks of these products: operational, cybersecurity, liquidity, criminal activity and consumer compliance.

While the first point is about the stablecoin issuing companies themselves, the second is linked to the technology used in such coins. The third point deals with a scenario of massive withdrawals, which require liquid reserves.

The last two relate to verifying users’ identities, called KYC, as well as protecting this data. Therefore, this could be the biggest change in the industry, which has functioned without much oversight for almost a decade.

Finally, the Fed advises that all banks wishing to issue a stablecoin must obtain approval before conducting any tests. At the moment, the stablecoin sector is the most profitable sector in the cryptocurrency industry and more and more players are interested in meeting the market demand.

Fed Crypto Oversight May Boost Bitcoin ETFs

When the Fed makes moves regarding cryptocurrencies, the financial market always takes note. While the Fed does not currently supervise banks directly with regard to cryptocurrency services, the new program could have far-reaching consequences.

The biggest implication of such a program could be the tacit recognition of the legitimacy of cryptocurrencies in the US financial system. Historically, investors have been more comfortable with regulators being more actively involved.

In turn, such recognition by the Fed could increase investor confidence in financial products related to Bitcoin and other cryptocurrencies.

At the center of attention is the possibility of BlackRock, one of the largest asset managers in the world, launching a Bitcoin ETF. With clearer and stricter regulatory standards, access to the industry can become more streamlined and easier for companies like BlackRock.

A well-defined regulatory environment often serves as an invitation for traditional financial institutions to explore new areas.

Stability is another crucial consideration. The cryptocurrency market is notorious for its volatility.

The stronger presence of the Fed could potentially serve as a buffer, making Bitcoin ETFs a more attractive option for traditional investors looking for Bitcoin appreciation, but without the usual rollercoasters associated with price.

In addition, the Fed’s move could open the floodgates for an increase in institutional investment flows in cryptocurrencies. With more institutional money pouring into the space, products like BlackRock’s Bitcoin ETF could benefit greatly.

Finally, while the Fed’s oversight may lead some banks to consider offering their own cryptocurrency products, they are just as likely to see companies like BlackRock as potential partners. This could lead to an unprecedented bull run for Bitcoin.