Regulation is about to descend on the world of cryptocurrencies. Biden signed an executive order months ago directing the various federal agencies who will be involved in crypto regulation to get their ducks in a row so that they are not tripping over one another as they begin to regulate Bitcoin and the rest. In this regard, the Federal Reserve has just sent a letter out to banks advising them to do their crypto legal homework before getting into crypto investments. Crypto regulation of banks and inclusion of crypto enterprises in the banking system has just begun.
Make Sure That Crypto Ventures Are Legal
In the Federal Reserve’s advisory letter to banks they made it clear that the first bit of homework is to make sure that any crypto-related ventures are legal! Despite the recent fall in virtually all crypto assets, the crypto realm and specifically DeFi, NFTs, and the Metaverse hold long term promise. What the Fed wants banks to do is advise them of any plans related to crypto activities and be certain to comply with existing rules and regulations.
Crypto’s Impact On Banking System Stability
As crypto followed the stock market down it served to reinforce the Fed’s concern about banks jeopardizing their financial situations, and reserves, with poorly considered crypto ventures. This concern is balanced by the potential and emerging opportunities in the sector of crypto-related assets brings to banks and the American business community. The Federal Reserve director of supervision and regulation reminds banks that poorly considered and poorly executed ventures into the crypto world could entail risks to financial stability, consumer protection, and the soundness of both individual banks and the banking sector.
Use of Federal Reserve Payment Services and Accounts By Crypto Businesses
Meanwhile, a hotly debated issue is the fact that crypto businesses have been pushing to use Federal Reserve financial services the same way that banks do. In response to this issue the Fed has set up a three tier system for determining which crypto businesses can enter the Fed’s financial system. Interestingly, the guidelines mention cryptocurrencies or crypto businesses just once in forty-nine pages but, nevertheless, this may be a way for a crypto bank to get into the banking system. The part that applies to crypto businesses is that access to the Fed’s master accounts and payment services will be granted to institutions with “novel products” provided that they qualify.
The Fed’s Three Tier Framework
The framework proposed by the Fed will evaluate institutions by level of risk. The first tier will be applicants that are federally insured. The second tier will include applicants subject to “prudential supervision by a federal banking agency.” And the third tier will be for institutions not subject to “prudential supervision by a federal banking agency” and not federally insured. Provided that an institution such as a crypto bank is approved under this three tier system, they will no longer need to have a partnership with a traditional bank. Readers should note that this system does not guarantee anything but does provide a framework for evaluation and potential passage by institutions providing novel financial products into the Fed’s system.
Regulation Of the Crypto World
Regulation of crypto already includes paying taxes on crypto-related capital gains. The concerns of the Fed, SEC, and other agencies focus on safety of the financial system and a fair and safe crypto system for investors. As an example, when a corporate executive with inside information engages in insider trading it can be a crime. Right now in the crypto world one does not necessarily know who holds crypto assets or has “insider information” while they are manipulating the market. Much of this will change over time as regulators move to make the playing field safe for everyone.
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