Fed Deputy Chair Orchestrates Crypto and Stablecoin Crackdown

The crypto the industry has faced many challenges and setbacks the last couple of years, but 2023 could be even messier. Federal Reserve Deputy Chairman Michael Barr is on the warpath in an effort to crack down on crypto and stablecoins.

Research suggests that Michael Barr, the Fed’s deputy 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 crypto out of the banking sector.

To get an idea of ​​what Michael Barr has in mind, he announced that the Federal Reserve would establish a team to address “unregulated stablecoins” shortly before the USDC lost its link.

Who is Michael Barr?

Michael Barr is a lawyer who has spent most of his career bouncing between academia and the US government. He was one of the architects of the Dodd-Frank Act, a law passed after the financial crisis in 2008. The Dodd-Frank Act legalized “bail-ins” for banks in the United States and paved the way for similar legislation around the world.

Thanks to Dodd-Frank, a customer’s money in the bank can be used to save the bank in the event of a financial crisis.

The Dodd-Frank Act also created the Consumer Finance Protection Bureau (CFPB). Elizabeth Warren, reportedly the most anti-crypto politician in the US, suggested it. The CFPB was speculated to be behind the original Operation “Choke Point.”

This measure secretly cuts off specific industries from the banking sector. Interestingly, the CFPB was proposed by an anti-crypto politician and was allegedly behind an operation to remove banks to specific sectors in the past. This means it could be behind the current scheme to remove banks from the crypto industry.

Unfortunately, there is no way to know if the CFPB is operating without oversight. Despite being funded by the Fed and accounting for as much as 12% of the Fed’s total annual budget, the CFPB is not overseen by Fed officials or US politicians. Barr may have some insight into this secretive agency, given that he co-authored the law that created it.

Surprisingly, 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, there is a deputy supervisor. Michael Barr held the same position last year.

Trending anti-crypto speech

Barr gave his speech the day before the banking crisis really began to unfold. It has been suggested that he and his anti-crypto allies will use the situation to justify cutting down the crypto industry. Keeping stablecoins out of the banking system seems to be another key point.

This is because crypto, and especially stablecoins, are direct competitors to FedNow.

FedNow is the Federal Reserve’s upcoming interbank payment platform. It is like one step close to the creation of a potential digital dollar central bank digital currency (CBDC).

So with that context in mind, let’s analyze exactly what Barr said about crypto in his recent speech.

Michael Barr began his speech by saying that the Fed wants to learn from the recent turmoil in the crypto markets. He stated that the Federal Reserve does not want to stifle innovation, but wants strict crypto regulations, especially around stablecoins.

This is exactly what Fed Chair Jerome Powell said in earlier testimony.

US crypto users on the rise

Barr also highlighted that he spoke to students who had lost money on crypto, while acknowledging that around 20% of American adults have either had or still have crypto. He then noted that too much regulation stifles innovation, while too little regulation threatens existing institutions.

Barr went on to argue that blockchain technology is beneficial, but not cryptocurrency. He even claimed that the benefits of crypto are “inconsistent with reality” and said that crypto adoption is “contagious.” Barr argued that for many, the draw of crypto is that it falls outside of government control and that it is used as a hedge against inflation when correlated with other assets.

He accurately pointed out that most cryptos claim to be decentralized, when in fact they are not. The collapse of FTX was one of many crypto disasters and argued that crypto is attractive to criminals even though almost every transaction is publicly visible and traceable.

Barr concluded that crypto ultimately poses a threat to the banking sector. Naturally, he cited the collapse of Silvergate, Silicon Valley Bank and Signature Bank as evidence of this threat.

The Federal Reserve works with other regulators

The Federal Reserve is working with international authorities to ensure there is no regulatory arbitrage and nowhere for crypto to run to. In addition, the regulatory board revealed that any bank with current or potential crypto customers must notify the Fed and that banks should not have crypto on their balance sheets. Banks need to know the “liquidity risk” associated with stablecoin deposits.

The Fed and its allies are likely to continue to target stablecoins in their warnings. That’s because Barr believes that all stablecoins must be subject to oversight by the Fed because stablecoin adoption could be exponential.

Concerns about Stablecoins

Barr was later asked how long it would take for the Fed to crack down on stablecoins. He did not give a direct answer, but hinted that it would be soon. Some in the crypto community suspect that the Securities and Exchange Commission (SEC) will do most of the heavy lifting in designating stablecoins as securities.

The SEC recently sued Paxos over the issuance of the BUSD stablecoin. This puts the entire $137 billion market at risk. Coinbase then removed BUSD, further adding to the chaos. Depending on the SEC’s decisions on BUSD, the market may see other exchanges being forced to delist stablecoins.

Barr blamed the crypto meltdown on “small banks effectively hiding their crypto exposure.” Furthermore, Barr believed that the US is unlikely to create crypto-specific regulations, unlike the EU, and is likely to adapt existing regulations to apply to the crypto industry.

He then dropped a bombshell saying that enforcement by the Fed, SEC and other regulators will continue until Congress adequately addresses crypto regulations. This is frightening because Congress may not have a set of regulations in place until after the next presidential election.

Cracks visible in the crypto sector

In response to a follow-up question from the interviewer, Barr claimed that the Fed has been working closely with the Financial Stability Board (FSB) on global crypto regulations. The FSB was expected to release its global recommendations on crypto regulation in June.

In conclusion, the use of stablecoins is limited to crypto. Barr tacitly admitted that the Fed wants to keep it that way. With the ongoing development of CBDCs, the US government can track every transaction and control savings and spending. With stablecoins, however, if they become a payment method, the government will not be allowed to do so. This was an advantage that stablecoins have over CBDCs

These narratives point to regulatory interference likely to continue.

Many crypto companies and projects are now moving to set up shop abroad. Based on Michael Barr’s comments, the finale of this crypto crash will likely be marked by a de-banking of one or more stablecoin issuers.

Is 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 wanted, they could go after the reserves backing stablecoins.

Tether (USDT) holds almost half of its reserves in the United States. The anti-crypto cabal may find a reason to seize or freeze Tether’s reserves pending an arbitrary investigation. Anti-crypto allies may also target Circle by pointing to USDC’s recent de-pegging and the run of redemptions that followed. They could argue that had this drive been more extensive, it could have further destabilized the banking sector.

Zooming out, it’s clear that the Federal Reserve and its regulatory counterparts are intent on cracking down on stablecoins. These efforts may become more intense as stablecoins are seen as direct competitors.