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Late last week, Federal Reserve Chairman Jerome H. Powell delivered his semiannual monetary policy report to Congress. On June 22, Powell delivered his long-awaited testimony to both the US Senate Committee on Banking, Housing and Urban Affairs, and then to the US House Financial Services Committee on June 23, titled “Monetary Policy and the State of the Economy.”
Despite addressing both committees, his prepared remarks were consistent across both committee hearings. Committee members in both the House and Senate were eager to hear Powell’s remarks after the Fed raised its benchmark interest rate by 0.75 percent earlier this month – the largest increase since 1994.
While his testimony, and the associated monetary policy report, covered the usual issues of inflation and job growth, the report also saw a noticeable degree of attention paid to cryptoassets – specifically stablecoins.
Most of his focus on stablecoins takes place in the “Financial Stability Developments” section. The report states that the total value of stablecoins will grow to over $180 billion by March 2022. Despite the rapid growth, the stablecoin market remains highly concentrated, with the three main issuers – Tether, USD Coin and Binance USD – still accounting for over 80% of the total market value.
The report continued: “The collapse in the value of certain stablecoins and recent struggles in the markets of other digital assets demonstrate the fragility of such structures. Generally speaking, stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks for investors and potentially the financial system, including susceptibility to potentially destabilizing runs.
It added: “These vulnerabilities can be exacerbated by a lack of transparency regarding the riskiness and liquidity of the assets backing stablecoins. In addition, the increasing use of stablecoins to meet margin requirements for leveraged trading in other cryptocurrencies may increase the volatility of demand for stablecoins and increase redemption risks.”
During his testimony Thursday, Powell reiterated statements he made earlier this year to the Bank for International Settlements, consistent with his long-held belief that “same activity should have the same regulation.” He has also expressed this understanding in the context of cryptoasset regulation in the past.
While speaking to the Committee, Powell explained that he does not believe that the “same activity equals regulation” principle applies to cryptocurrencies as they currently stand. This, he said, is due to the fact that “a lot of digital finance products are in some ways quite similar to products that existed in the banking system or in the capital markets, but they’re just not regulated in the same way.” Powell also called for greater regulatory fences and oversight of the cryptoasset market, a sentiment echoed by other powerful regulators in the past.
And finally, when asked about the potential of a central bank digital currency (CBDC) during his committee testimony on Thursday, Powell explained that the Fed will soon come to Congress with a recommendation. He emphasized that the introduction of CBDC should absolutely be a bipartisan effort with buy-in from both sides. CBDCs are something that has become a real focal point for regulators and policymakers following the President’s executive order on “Ensuring the Responsible Development of Digital Assets,” which was released in March of this year.
On the topic of CBDC, Powell stated that “It is a very important potential financial innovation that will affect all Americans. Our plan is to work on both the political side and the technology side in the coming years and come to Congress with a recommendation at some point.” When asked about the potential for privately issued stablecoins to merge with CBDCs or work in coordination, Powell said, “If we’re going to have a digital dollar, it should be government-guaranteed money, not private money .”
Iran restricts cryptocurrency mining
In an effort to ease pressure on the country’s electricity supply, the Iranian government has imposed restrictions on cryptocurrency mining activities in the country. In anticipation of seasonal spikes in electricity demand, power to all 119 government-approved crypto mining facilities was cut on June 22. Back in 2019, Iran began issuing licenses to certain cryptocurrency miners, requiring them to pay higher prices for their electricity, as well as sell mined bitcoins to Iran’s central bank. The country has also repeatedly cut off electricity to miners, as it did last week.
Mostafa Rajabi Mashhadi – the spokesman for the country’s electricity industry – pointed out during an interview with state television that “the country should prepare for power shortages as demand is forecast to exceed 63,000 megawatts this week.”
SEC launches investigation into insider trading
Earlier this year, Gary Gensler – chairman of the Securities and Exchange Commission (SEC) – told Bloomberg that he had concerns about certain cryptocurrency trading platforms that were trading in front of their customers. Gensler expanded on this perceived market conflict, saying, “In fact, they often trade against their customers because they trade with their customers.”
Now, Fox Business is reporting through sources that the SEC has launched a comprehensive investigation into whether crypto exchanges have enough safeguards to prevent insider trading or market manipulation on their platforms.
It added that: “According to a person with direct knowledge of the investigation, the SEC has sent a letter to one major crypto exchange seeking information about how the platform protects users from insider trading through its network, but this person believes the inquiry covers other exchanges as well.
The letter was sent following last month’s collapse of Terra’s stablecoin UST and management token LUNA, which saw around $40 billion of investor wealth disappear. It’s unclear whether other letters have been issued, but a person with direct knowledge said based on conversations with industry insiders that the investigation is broad. While reporters could not determine which division of the SEC is leading this investigation, it is worth noting that just a few weeks ago the regulator rapidly expanded its crypto assets and cyber unit in the Enforcement Division – hiring over 20 new employees.
Regulation on compliance with the law
