crypto The industry has faced many challenges and setbacks last few years, but 2023 may get even messed up. Federal Reserve Vice Chairman Michael Barr is on the war path in an attempt to crack down on crypto and stablecoins.
Research suggests that Michael Barr, the Fed’s vice chairman for supervision, could play a key role in upcoming crypto and stablecoin regulations. The Peterson Institute for International Economics hosted Barr on March 9. During his speech, Barr discussed keeping cryptocurrencies out of the banking sector.
To give an idea of what Michael Barr has in mind, he announced that the Federal Reserve would be setting up a team to address “unregulated stablecoins” shortly before USDC lost its peg.
Who is Michael Barr?
Michael Barr is a lawyer who has spent much of his career jumping between academia and the US government. He was one of the architects of the Dodd-Frank Act, a law passed in the aftermath of the 2008 financial crisis. The Dodd-Frank Act legalized bank ‘bailouts’ in the United States and paved the way for similar legislation around the world.
Thanks to Dodd-Frank, a customer’s money in a bank can be used to bail out that bank in case of a financial crisis.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB). It was proposed by Elizabeth Warren, allegedly the most anti-crypto politician in the United States. The CFPB was speculated to be behind the original Operation ‘Choke Point’.
This measure secretly cut off specific industries from the banking sector. Interestingly, the CFPB was proposed by an anti-crypto politician and has reportedly been behind an operation to unbank particular sectors in the past. This means that it could be behind the current plan to unbank the crypto industry.
Unfortunately, there is no way of knowing whether the CFPB operates without an inspection. Despite being funded by the Fed and accounting for up to 12% of the Fed’s total annual budget, the CFPB is not overseen by Fed officials or US politicians. Barr may have some knowledge of this secret agency, given that he co-authored the legislation that created it.
Amazingly, Michael Barr also included something for himself in the ‘Dodd-Frank Act II’ – a new position at the Fed. Can you guess which position it is? Yes, this is the vice chair for supervision. The same position was held by Michael Barr last year.
trending anti-crypto speech
Barr delivered his speech the day before the banking crisis actually unfolded. It has been suggested that he and his anti-crypto allies will use the situation to justify chopping off the crypto industry. Keeping stable coins out of the banking system seems to be another important point.
This is because crypto, and stablecoins in particular, are direct competitors to FedNow.
FedNow is the Federal Reserve’s upcoming interbank payments platform. This is one step closer to the creation of a potential digital dollar central bank digital currency (CBDC).
So with that context in mind, let’s analyze what Barr said about crypto in his recent speech.
Michael Barr began his speech by saying that the Fed is looking to learn from the recent turmoil in the crypto markets. He added that the Federal Reserve does not want to stifle innovation, but wants stricter crypto regulations, especially around stable coins.
That’s exactly what Fed Chairman Jerome Powell said in previous testimony.
US Crypto Users on the Rise
Barr also highlighted that he spoke with college students who lost money in crypto, while acknowledging that roughly 20% of US adults either held or still hold crypto. He then said that too many regulations stifle innovation, while too little regulation threatens existing institutions.
Barr claimed that blockchain technology is beneficial but not cryptocurrencies. He also claimed that the benefits of crypto are “inconsistent with reality” and that crypto adoption is “contagious”. Barr stressed that, for many, the draw of crypto is to be outside of government control and used as a hedge against inflation when correlated to other assets.
He accurately pointed out that most cryptos claim to be decentralized, even though they really are not. The collapse of FTX was one of many crypto catastrophes and claims that crypto is attractive to criminals, even though almost every transaction is publicly viewable and traceable.
Barr concluded that crypto has finally become a threat to the banking sector. Naturally, he cited the collapses of Silvergate, Silicon Valley Bank, and Signature Bank as evidence of this danger.
Federal Reserve working with other regulators
The Federal Reserve is working with international authorities to ensure that there is no regulatory arbitrage and crypto has nowhere to run. Furthermore, the regulatory board revealed that any bank with current or prospective crypto customers must notify the Fed and that banks must not hold any crypto on their balance sheets. Banks should be aware of the “liquidity risk” associated with stablecoin deposits.
The Fed and its allies may continue to target the stablecoin in their warnings. This is because Barr believes that all stablecoins should be subject to oversight by the Fed as the adoption of stablecoins could be exponential.
concerns about stablecoins
Barr was later asked how long it would take for the Fed to crack down on stable coins. He did not give a direct answer, but indicated that it would be soon. Some in the cryptocurrency community suspect that the Securities and Exchange Commission (SEC) will do most of the heavy lifting by designating stable coins as securities.
The SEC recently sued Paxos for issuing the BUSD stablecoin. This puts the entire $137 billion market at risk. Coinbase then delisted BUSD, adding to the chaos. Depending on the SEC’s ruling on BUSD, the market may force other exchanges to delist the stablecoin.
Barr blames the crypto crackdown on ‘smaller banks effectively hiding their crypto exposure’. Furthermore, Barr said that unlike the EU, the US is unlikely to enact crypto-specific regulations, and is likely to adopt existing regulations to apply to the crypto industry.
He then dropped a bombshell saying that enforcement from the Fed, SEC and other regulators will continue until Congress adequately addresses crypto regulations. This is terrible because Congress may not have a regulatory framework in place until after the next presidential election.
Visible cracks in the crypto sector
In response to a follow-up question from the interviewer, Barr claimed that the Fed is working closely with the Financial Stability Board (FSB) on global crypto regulations. The FSB is expected to release its global crypto regulation recommendations this June.
Ultimately, the use case of stable coins is limited to crypto. Barr tacitly acknowledged that the Fed wanted to keep it that way. With the ongoing development of CBDCs, the US government can track every transaction and control savings and spending. However, with stable coins, if they were to become a payment method, the government would not be legally allowed to do so. It was an advantage that stablecoins have over CBDCs
These narratives suggest that the potential for regulatory intervention will remain.
Many crypto companies and projects are now setting up shop overseas. Based on Michael Barr’s comments, the end of this cryptocurrency will likely be marked by the de-banking of one or more stablecoin issuers.
Is the Stablecoin Crackdown Coming Soon?
Given that the Federal Reserve and other regulators want to blame the banking crisis on the crypto industry, de-banking stablecoin issuers could be one of their solutions.
If they want, they can go after the reserves backing the stablecoin.
Tether (USDT) holds about half of its reserves in the United States. The anti-crypto cabal could devise a reason to seize or freeze Tether reserves pending some arbitrary investigation. Anti-crypto allies may also target Circle by pointing to the recent de-pegging of USDC and subsequent redemptions. They may claim that if the round had been more widespread, it could have further destabilized the banking sector.
Zooming out, it is clear that the Federal Reserve and its regulatory partners are intent on cracking down on the stablecoin. These efforts may become more intense as stablecoins are seen as direct competitors.
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