What a difference a year can make.
In 2024, with the winding down of the Biden Administration, we had Gary Gensler as SEC chair. The Fed, under Jerome Powell's leadership, did not adopt an anti-crypto stance similar to the Administration. It did, however, remain relatively silent on the topic.
The most notable piece of news to come from the central bank regarding crypto was Powell's stance that it would not even look into a CBDC, let alone bring one out.
Outside of that, mum was the word.
Perhaps the Fed realized the fruitlessness of proposing anything. Regulatory clarity was not in the Administration's best interest. Congress was doing nothing and the Fed basically would have authorized something that was overridden by other regulatory bodies that were under the Administration.
Hence, the silence.
That is no longer the case. In fact, as we will see, the Fed is now very "pro-crypto".
The Fed Instructs US Banks To Get Into Crypto
United States banks are now being instructed to get into crypto. The central bank is no longer viewing them as a threat to the banking system or dangerous assets to be involved in. Actually, the sentiment is that missing out would put the banks at risk of becoming obsolete.
This is something the Fed wants to avoid.
It was clearly stated Federal Reserve Vice-Chair Michelle Bowman:
She shared at the Wyoming Blockchain Symposium on August 19 that she believes that if banks stay on the sidelines, innovative blockchain technology will move on without them, making the traditional banking sector less relevant in the long run.
The goal is to get the banks to become active participants in crypto as opposed to sitting back and observing what is taking place.
To me, this greenlights a number of different options for banks.
It starts with stablecoins, something I believe most major US banks will pursue. Then we have the custody of crypto-assets, creating an entry point for many larger institutions. Next is the ability to swap, similar to a Coinbase. Why couldn't many of the major banks provide this service, especially with DeFi infrastructure being readily available?
Naturally, a lot of this will flow into investment banks such as Goldman Sachs or JPMorgan. That said, commercial banks can find an enormous market forming.
Four Principles of Focus
According to Bowman, there are four principles where the Fed is focusing.
They are:
- regulatory clarity
- tailored regulation
- consumer protection
- American competitiveness
Taken in general, this is rather abstract. There are some nuances that should be mentioned.
One is tailored regulation. Instead of trying to fit all ideas into a general framework, the central bank is open to looking at things individually. This is crucial when dealing with innovation. We are certain to see the banks coming up with ideas that were never tried before. The regulator needs to offer the flexibility to at least explore the idea.
Second, the idea of American competitiveness also stands out. This is something the Administration is echoing. Both are aligned on this.
Obviously, the Fed has a vested interest since its membership is made up on commercial banks. The banking system excelling, especially on a global scale, is something the central bank seeks. Without it, there is no Fed.
It is evident the Fed chairs understand the change that is happening. Tokenization is here and it not going away. Since the banks are the concern of the Fed, it is seeking to get as much of the new system under their control, another similarity to the government.
As stated in other articles, we will probably have a hybrid system for the next decade or two. By this I mean crypto will be accessed mostly through banks, who remain gatekeepers. They will develop the infrastructure while the decentralized world lags behind. This lead will allow them to cater to their customers, with tens of trillions in assets under management.
The tokenization of real world assets coupled with stablecoins will put the banks in a powerful position to benefit. Based on this, the Fed is instructing the banks to get involved now.