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Ex-FDIC Chair Bair: 'I Welcome' New Rules for Crypto

Sheila Bair, a former chairperson of the Federal Deposit Insurance Corporation (FDIC), believes the U.S. should create a wholly new regulatory framework for cryptocurrencies.

Speaking at CB Insights’ Future of Fintech conference on Thursday, the noted Fedcoin supporter – that is, a cryptocurrency operated by the U.S. central bank – addressed the challenges that regulators face when applying existing financial regulations to the nascent crypto space.

Bair adding that “regulators get a bad rep on this … [but] money transfer law is weird.”

She went on to explain:

“We are trying to jam [cryptocurrencies] into [a] state of money transaction laws, it just doesn’t work. I think at some point, we will need a federal framework to have some type of regulatory oversight of exchanges established to trade crypto assets. They may also be securities, if there is an [initial coin offering] being used to raise equity, they need to regulate it.”

Bair declared that she “welcome[s] regulation” of the cryptocurrency space, advocating for action that takes place sooner than later.

Indeed, the former head of the U.S. government corporation that backs up bank deposits said that the private sector may force financial institutions to adopt private currencies – including cryptocurrencies – because “everybody hates bank account fees, the retailers hate interchange fees.”

“If there is a way to get around that, I think you can see a shift [fairly] quickly,” she said, adding:

“I do think the Fed needs to get ahead of this.”

Bair reiterated her support for the “FedCoin,” noting that a central bank-issued cryptocurrency would solve transitional issues existing in current monetary policies issues while allowing the Federal Reserve maintain its ability to control the U.S.’ money supply.

As an example, she pointed out that a bank which receives a 1.95 percent interest rate with the Fed tried to offer a 0.01 percent rate to individuals opening a savings account.

Sheila Bair image via CB Insights

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The Case For A FedCoin Is Growing, and To Challenge Bitcoin (BTC)

If you cannot beat them, join them. This is an all too familiar popular phrase that is used as a general way of dealing with situations where you cannot control your oponent. In this case, the Federal Reserve of the United States might be destined to make a similar decision when it comes to dealing with Bitcoin (BTC) and the entire cryptocurrency industry.

Anyone who is knee deep in this crypto and blockchain industry understands and knows that both entities are the future of investing, payment settlement and so many possibilities on the blockchain. A former top official of the Federal Reserve has seen the proverbial light and is also echoing this sentiment.

Former Governor of the US Federal Reserve, Kevin Warsh, had this to say about crypto:

Most central banks have a view that these crypto-assets are clever, like guys in the garage did it and it’s kind of cool, or risky…to think about the Fed creating FedCoin, where we would bring legal activities into a digital coin. Not that it would supplant and replace cash, but it would be a pretty effective way when the next crisis happens for us to maybe conduct monetary policy

This is some good news given the already known news that Venezuela has led the way with the Petro and China is considering its own State backed crypto to counter the current influx of regular cryptocurencies in its economies that could threaten their valuable Yuan. State control is something that the Chinese government wants due to the current political system in the country. The Communist party is firm in its ways to protect the well being of its citizens and the nation in general.

One thing is for sure, once a FedCoin is considered, possible ways to back it would be through already present paper USD money, or the oil reserves in the country or even the Gold that everyone believes is in Fort Knox. A portion of the total FedCoin would be in circulation for the masses and possibly be used as legal tender. The Feds would then continue monitoring inflation and deflation like they would with regular fiat money. This would then challenge the King of Crypto – BTC – head on! Like two bulls in a fight.

In conclusion, the world is changing through crypto and blockchain. Any government that does not have a taskforce to investigate a way forward, will be left behind as the rest of the world evolves and benefits through the new technology.

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JPMorgan Report: Crypto Could One Day Help Diversify Portfolios

Cryptocurrencies could one day help investors diversify their equity and bond portfolios, analysts for JPMorgan Chase wrote in a new, 71-page research report focused on the tech.

The report, entitled “Decrypting Cryptocurrencies: Technology, Applications and Challenges” and dated Feb. 9, was drafted by the bank’s Global Research unit. A copy obtained by CoinDesk explores a range of subjects related to cryptocurrency and blockchain, notably exploring the implications for investors, financial firms and central banks, among others.

Perhaps the most notable part of the report is that it – albeit cautiously – predicts that cryptocurrencies might one day play a role in the diversification of global bond and equity portfolios. The report states:

“If past returns, volatilities and correlations persist, [cryptocurrencies] could potentially have a role in diversifying one’s global bond and equity portfolio. But in our view, that is a big if given the astronomic returns and volatilities of the past few years.”

“If [cryptocurrencies] survive the next few years and remain part of the global market, then they will likely have exited their current speculative phase and would then have more normal returns, volatilities (both much lower) and correlations (more like that of other zero-return assets such as gold and JPY),” the authors continue.

That sentiment perhaps stands in contrast with comments from the bank’s chairman, president and CEO, Jamie Dimon, who last year issued his now-infamous remark that bitcoin is a “fraud.” As posited by the report’s authors, cryptocurrencies are “unlikely to disappear completely.”

“[Cryptocurrencies] are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat,” they wrote.

Blockchain boon

Looking past the investment picture, the bank’s report looks at the wider question of blockchain use, particularly by private firms who would maintain their own gated or “permissioned” blockchains.

The authors write that blockchain is a “superior database,” and that despite concerns from regulators, the tech itself is potential “regulation friendly.”

“In our view, the biggest appeal of blockchain will be in the ability to deliver efficiency gains across the value chain,” the report states, going on to explain:

“The proposed uses a distributed ledger in the financial sector are likely to be based on known participants defined in advance, with appropriate KYC/AML documentation with tightly authorized access. Consequently, we believe that distributed ledger technology has the potential to offer regulators greater degrees of transparency, higher levels of resiliency and shorter settlement times, reducing counterparty and market risk.”

Likewise, the authors argued that blockchain has the potential to disrupt “cross-border payments, settlement/clearing/collateral management as well as the broader world of TMT, transportation and healthcare.” That said, the report cautions that any benefits would be seen “only where any cost efficiencies offset regulatory, technical and security hurdles” to implementing the technology.

On central bank cryptos

The report also touches on the topic of a so-called “Fedcoin,” or a kind of cryptocurrency (or digital currency) created by a central bank.

And while Fed officials themselves have largely said “no time soon” to the idea (in contrast with other central banks who are actively investigating applications), JPMorgan’s report digs into the possible implications – and ramifications – of such an issuance.

The report’s authors make the case that, in one sense, a Feedcoin would be supportive of a “central bank-provided payment services” within a cashless system, and that this could help banks implement negative interest rates, which some economists endorse.

However, they also point out that the issuance of such a currency “would give non-banks access to the Fed balance sheet,” which could in turn “endanger the economically and socially important financial intermediation function of commercial banks.”

Likewise, the authors claimed that a state-issued cryptocurrency could impact the extension of credit to the private sector because it would undermine fractional reserve banking, writing:

“If cryptocurrencies were seen as superior to bank deposits, prompting a wholesale shift into cryptocurrencies, then a much larger share of savings would go to the central bank’s assets (government debt) and less to commercial banks loans, thus potentially dramatically increasing private credit risk premia and reducing the flow of credit to the private sector”

The report also grapples with the problem of anonymity for a state-issued cryptocurrency.

“On the one hand, privacy has come to be seen as an implicit constitutional right, and that may extend to monetary transactions,” the authors note. “On the other hand, there are several laws on the books intended to prevent the financial system from being used to launder money or finance terrorism and other activities.”

Image Credit: Lewis Tse Pui Lung / Shutterstock.com

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