U.S. officials continue to establish the foundations for possible cryptocurrency legislation.

While testifying before the House Committee on Financial Services in July, Federal Reserve Chairman Jerome Powell discussed the Fed’s interest in regulating stablecoins and the prospect of a central bank digital currency (CBDC).

For example, stable coins (such as Tether and USD Coin) are cryptocurrencies that have their value pegged to any existing fiat currency, such as the US dollar, and are therefore stable. As a result, they’re better suited for digital payments than more volatile digital assets like Bitcoin, which can fluctuate greatly. However, there is currently little official regulation that enforces this requirement.

A strong regulatory structure exists in the United States for money market funds and bank deposits. His response was emphatic: “Stablecoins don’t have that.” There must be an acceptable regulatory framework in place before stablecoins can become a significant part of the payments universe, which we don’t believe will be the case with crypto assets, but it’s possible.

Do Crypto Investors Have to Worry About That?

Long-term cryptocurrency investors should stick to well-known cryptocurrencies like Bitcoin and Ethereum, according to the experts we’ve spoken to. It’s recommended for most people to stick with the two most widely used currencies unless they’re more active traders or are willing to take on the hazards of buying lesser-known coins.

Stablecoins and other smaller altcoins are more likely to be impacted by regulation Powell suggests, according to experts. According to Mike Uehlein, founder of WealthU Advisors, Bitcoin and stablecoins have different use cases.

Because they have a finite quantity and centralization, stablecoins are more like the current money system than bitcoin is. Stablecoins, on the other hand, are better suited for digital transactions and turning digital assets into and out of “real” money.

A financial adviser and CEO of Onramp Invest, a cryptocurrency platform for financial advisors, believes that “investors buying Bitcoin as a store of value and buying stable coins for a store of value are two separate things.”. Stablecoins would face competition from a digital currency backed by a central bank, but not Bitcoin, according to Ross.

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Nevertheless, your portfolio could be affected by any new regulations.

A CBDC may not have an impact on Bitcoin because it is decentralized and operated by individuals around the world. However, regulation of stablecoins or a CBDC is likely to cause additional market volatility. There have already been Chinese cryptocurrency regulation crackdowns that have contributed to Bitcoin’s recent price slump of $30,000 or more. When Bitcoin’s price drops, the price of other coins tends to follow suit, as we have witnessed before. Cryptocurrencies could be wiped out by regulation, according to Uehlein.

Stablecoins and smaller altcoins, rather than Bitcoin, would be hit harder by the regulations Powell highlighted. Regulatory scrutiny is inevitable for Defi and other stablecoins, Ross believes. Keep up with the latest developments and news in the space, and avoid huge bets at this time.”

Why Does Stablecoins Need to Be Regulated?

Traders can shift funds between exchanges much more swiftly using stablecoins than if they were inputting cash directly from their bank account. The process of converting a coin for a stablecoin could take many days (and incur greater costs) than exchanging a coin for actual dollars in and out of your bank account.

Even these coins, however, carry a risk if they are not governed.

According to Uehlein, “Stablecoins are currently being utilized as a replacement currency, tied 1:1 to the US dollar.” For many investors and authorities, the veracity of this peg has been an issue. Knowing that the US treasury backs each dollar would be comforting to many investors,” That’s where a digital currency created by the United States government would come in handy, as it would have the government’s backing.

A Central Bank Digital Currency’s Purpose?

Additionally, Powell’s speech reaffirmed the Fed’s interest in the creation of a digital currency issued by the US central bank. To facilitate digital transactions, a CBDC should be established. These transactions would be safe and significantly faster than current money transfers since they would be conducted on a blockchain network.

A central bank’s digital money might be used to make purchases, even though doing so is typically considered a bad idea. Fed-backed CBDC may replace stable coins like Tether or USDC, Uehlein believes.

At least according to Fed officials and the experts we talked to, there’s still a long way to go before a CBDC is implemented here in the United States. Even though Uehlein says he’s eager to see how CBDCs evolve in countries around the world, he believes it’s “too soon to tell how serious the United States is about a CBDC.”

Where Do We Go From Here With Regulating Cryptocurrency?

Federal Reserve Chairman Jerome Powell anticipates a report from the central bank to be released in early September.

he told the committee, “We’re going to deal with digital payments broadly.”. “As a result, stablecoins, crypto assets, and CBDC are all included. With all of those challenges and payment mechanisms, we believe the time has come to regulate them appropriately.

Federal Reserve plans to solicit public input on the risks and benefits of cryptocurrency, as well as interact with national groups, including Congress. There are “potential benefits and potential risks” to a central bank’s digital currency, according to a paper by Federal Reserve Chairman Jerome Powell.

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