Fed Puts Stablecoins Under the Microscope: Issues New Guidance on Crypto Banking

The U.S. Federal Reserve (Fed) announced on Tuesday a new set of regulations to strengthen banking supervision engaged in activities related to cryptocurrencies and stablecoins. The move aims to mitigate the risks associated with crypto activities and protect users and the financial system.

The Fed says crypto is not off-limits, but banks need to get permission first.

Under the new regulations, the Novel Activities Supervision Program, all state banks that want to participate in crypto activities must obtain Fed pre-approval before issuing, holding, or trading stablecoins in U.S. dollars.

Additionally, upon registration, the Fed will look for flaws that could be exploited for money laundering, customer runs, or hacking. Banks that do not have adequate controls in place to prevent money laundering will not be allowed to engage in crypto activities.

The Wild West

The Fed is concerned about the banks’ ability to handle the exponential growth of the crypto industry in a safe and sound manner, as this could make them attractive to criminals. This additional oversight, according to the monetary authority, is necessary to ensure the safety and soundness of the financial system and to protect consumers from fraud and abuse.

Involving in the space will be more difficult, but the Fed said that it is open to working with banks to develop innovative and secure ways to use crypto technology. The growing regulatory scrutiny is likely to have a chilling effect on the crypto industry in the short term.

However, in the long term, it could help to legitimize the industry and make it more attractive to institutional investors.

Taking Cryptos Seriously

The regulatory landscape for crypto is still evolving, but it is clear that regulators are taking the industry seriously. This is likely to have a significant impact on the crypto industry in the coming years.

The Fed’s announcement is the latest sign that regulators around the world are taking a closer look at the crypto industry. In recent months, regulators in the United States, Europe, and Asia have all issued new guidance or regulations on crypto.

In April 2023, the European Parliament approved the Markets in Crypto-Assets Regulation (MiCA). The rules require all crypto platforms and token issuers to inform users of the risks associated with their operations.
Stablecoins with large market capitalizations, such as Tether and USDC, are required to maintain ample reserves to meet redemption requirements in the event of a mass withdrawal.

Alternatively, the total number of transactions that can be processed by a stablecoin in a day may be limited to 200 million euros ($220 million). Those are to prevent a similar scenario as the TerraUSD last year. The collapse of this stablecoin sent the crypto market into a major setback.

Apart from the Fed’s regulation, another U.S. law which was passed in 2021, will come into effect on January 1, 2024. The law requires that traders with $10,000 or more in Crypto will have to declare their Social Security number or tax identification number. Failure to report fully within 15 days will be considered a violation of the law and violators will be subject to fines or even imprisonment.

Only time will tell how these coming regulations will impact the U.S. crypto landscape. Many people have expressed concern that this law would eventually put people’s financial privacy and security at risk. It also violates the essence of cryptocurrency. The negative effect could be shown in many crypto businesses, specifically the anonymous developers behind many of the top DeFi protocols.

While countries impose relatively strict regulations, others, such as El Salvador, Dubai, or Hong Kong, are more open to crypto. On August 8, Binance announced the exchange obtained “a Bitcoin Services Provider license and the first non-provisional Digital Assets Services Provider license” to offer crypto service in El Salvador.

The post Fed Puts Stablecoins Under the Microscope: Issues New Guidance on Crypto Banking appeared first on Blockonomi.

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