How the Federal Reserve affects the entire cryptocurrency market

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  • In the face of the UST collapse, US Treasury Department Secretary Janet Yellen said there is an urgent need to regulate stablecoins.
  • After the FED increased rates in May, the crypto market shed about US$2 trillion.
  • At a Senate hearing, Yellen spoke about the risks of stablecoins, pointing to the “run” that TerraUSD (UST) has experienced from the Terra ecosystem.

This May, the Federal Reserve in the US raised the interest rates by 0.5 per cent for the first time since March 2018. The FED is more likely to increase interest rates again to control inflation. What does this mean for the global cryptocurrency market?

These higher rates play out on stocks, cryptocurrency, commodities such as gold and oil, and many other investments over the rest of this year and into 2023. After the FED increased rates in May, the crypto market shed about US$2 trillion. 

An increase in interest rates reduces money flow in the market. These have two effects on cryptos.

  1. Investors will reduce buying cryptos and may entirely stop buying
  2. Investors will withdraw their cryptos to get money for use in a costly market.

These two factors cause a dump in the crypto market, prompting more crypto traders to withdraw their funds in a precarious market. This year, if the Federal Reserve raises interest rates again, the crypto market might continue to experience a dump, despite crypto enthusiasts saying the market is decentralized.

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Still, the United States feels that there are not enough crypto regulations to rationalize the market.

Regulators call for more regulation

During her speech on the Senate floor, Senator Janet Yellen said the turbulence that UST is causing in the market underscores the need to create an appropriate regulatory framework for the industry and its potential risks.

Senator Janet Yellen said the turbulence that UST is causing in the market underscores the need to create an appropriate regulatory framework for the industry and its potential risks.
Senator Janet Yellen said the turbulence that UST is causing in the market underscores the need to create an appropriate regulatory framework for the industry and its potential risks. [Photo/ The Washington Post]
The Treasury secretary, who in recent months has maintained a more friendly tone with cryptocurrencies, said the current situation “illustrates that this is a fast-growing product and that there are risks to financial stability.” In this regard, Yellen said that the US Congress should approve a new regulatory framework for stablecoins before the end of the year.

In doing so, Yellen responded to questions from Senator Pat Toomey, who predicted terrible situations with stablecoin and cryptocurrency investors’ money if it is not regulated soon in the country. Toomey is the lead sponsor of the Uniform Secure Transaction and Stable Coin Reserve Transparency Act, known as the Stablecoin Trust Act.

The regulatory proposal by Senator Toomey and other US legislators is designed, among other things, to have stablecoin issuers back up the issuance of their assets with cash and equivalents.

Risks to DeFi protocols

From the Federal Reserve (FED), regulators also support the creation of a regulatory framework that promotes transparency and increases security. The FED sees stablecoins as having great potential for payment systems and recognizes that they carry too much risk. In its report On Financial Stability, the Fed states that stablecoins are vulnerable to runs, as happened with the UST. This is a lack of liquidity in their markets during times of great stress.

United States: A bill to penalize rug pullers and other crypto offences

The regulation of the cryptocurrency industry is at least as murky as the operation of a DeFi protocol. On the one hand, there is a scorched earth policy. And on the other, but less common is an attempt to adapt specific legal procedures to be able to fight scams and other dirty tricks; an initiative that may be commendable, even if its implementation seems more than complex. But no matter, New York Senator Kevin Thomas wants to make these digital abuses full-fledged criminal offences.

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The line between cryptocurrencies and regulation is becoming increasingly thin. Regulators are advocating for investor protection while being more concerned about blocking their growing adoption. And that’s without really taking into account the scams and other fraudulent schemes causing the detour of real digital fortunes.

Nevertheless, some voices are being raised to try and limit these scams or offer them an appropriate repressive framework. For the moment, there is no law on the subject of touts and other market manipulations. According to lovers of freedom inscribed in the genetic heritage of the cryptocurrency sector, the lack of regulations is a good thing for them because cryptos work best when decentralized. But the vast majority see crypto regulation as a necessity, according to others, especially if they are victims of scams with often permanent losses.

A bill against cryptocurrency scams

The judicial consideration of certain offences related to cryptocurrencies is a delicate subject. This is because it requires defining the boundary between the protection of victims and interference of public authorities. However, individual responsibility should not only concern those who become the preferred targets of malicious individuals but for everyone in the crypto market.

New York State Senator Kevin Thomas has just taken up the issue of legal uncertainty with the recent filing of an amendment request (S8839) on rug pulls and other frauds related to the cryptocurrency sector.

It is a project that its initiator wants to build in respect of the ideology inherent in blockchain technology; and whose objective is to make criminally condemnable certain behaviours, such as the misuse of private keys or dishonest intentions voluntarily hidden from investors.

Kevin has come up with proposals that will certainly not please everyone. For example, the willingness to punish individuals responsible for a massive resale of cryptocurrencies (more than 10% of the supply) within five years of the launch of a project.

That’s an eternity for those who only count on immediate profits. And in the end, a simple question is as unpleasant as it is necessary: where is the line between defending freedom and protecting individuals? And the answer will not be quick.

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I am a tech, business, and investment news reporter covering Africa. Most of what is good in Africa is obscured by preconceptions, yet there is still a lot of good going on. Technology is what is driving the continent and this is my passion. For Africa, I share the stories that are important to Africans.