Biden’s new Fed could be a boon for crypto, experts say

Investors have focused on what Federal Reserve Chairman Jerome Powell’s renomination means for interest rates, but coming personnel changes at the central bank will be just as important for the crypto industry, experts say.

President Biden’s nomination of Governor Lael Brainard to the role of Fed vice chair, plus a promise to nominate progressives to fill three more board vacancies in the coming weeks, is good news for those who want to see the Fed issue a digital dollar, according to Owen Tedford, research analyst at Beacon Policy Advisors.

“All the comments we’ve seen out of Brainard versus her Republican colleagues are much more pro digital dollar,” he told MarketWatch. “You add three more Democratic governors and that moves things further in her direction.”

Brainard said in a May speech that several factors, including the growth of private digital money like bitcoin
BTCUSD,
+0.52%,
increased use of digital payments and foreign experimentation with central bank digital currency are “sharpening the focus” at the Fed on a potential digital dollar.

“It’s just very hard for me to imagine that the U.S., given the status of the dollar as a dominant currency in international payments, wouldn’t come to the table in that circumstance with a similar kind of an offering,” she said in remarks to the National Association for Business Economics in September.

Her embrace of central bank digital currency is in contrast to her fellow governor, the Donald Trump-appointed Christopher Waller, who called a digital dollar “a solution in search of a problem” in a speech at the American Enterprise Institute in August.

But with three vacancies to fill on the Fed’s seven-member board, President Biden has the ability to reshape the central bank into one more supportive of central bank digital currency.

One leading candidate for a board seat is Sarah Bloom Raskin, who has written in favor of a digital dollar as a potential tool for distributing federal aid money in the wake of the COVID-19 recession. Another potential nominee, Federal Reserve Bank of Atlanta President Raphael Bostic has written about central bank digital currency as a potential tool in promoting financial inclusion.

The Fed will also be an important player in regulating traditional financial institutions relationships with digital assets. On Tuesday, the central bank, in coordination with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said that it plans to “provide greater clarity” on how banks may handle digital assets.

In a joint statement, the regulators promised new guidance on whether and how banks can provide crypto-asset safekeeping and custody services, facilitation of customer crypto transactions, loans backed by crypto assets and how digital assets shall be treated on bank balance sheets.

Acting Comptroller of the Currency Michael Hsu said in a speech last week that federal banking regulators “are approacching crypto activities very carefully with a high degree of caution,” but strict regulation of banks relationship with digital assets isn’t necessarily bad for crypto in the long run, Beacon’s Tedford said.

“There’s going to be a pro-regulation atmosphere, including crypto,” he said. “In the long term it’s bullish because it’s legitimizing, but I could see it being bearish in the short term.”

Jonathan McCollum, who runs the government relations practice at the law firm Davidoff Hutcher and Citron said in an interview that stricter regulation of crypto is likely, but agreed that it could set the stage for continued growth in the industry.

“Now that Biden has nominated Powell, I think there’s little else we’re waiting on,” he told MarketWatch. “The SEC has weighed in, the Treasury issued its report on stablecoins, all of these things are coming together.”

The Fed has promised that it will issue a discussion paper on the benefits and risks associated with issuing a digital dollar, but its release has been delayed, reportedly due to divisions at the Fed over the idea.

McCollum, who represents eCurrency, a company that provides central banks with technology to issue digital currencies, said that conversations he’s had with lawmakers indicate that they are learning ever more about the utility of cryptocurrencies and believes it will ultimately support legislation giving the Fed and the Treasury the authority to issue a digital dollar.

“I think we’re going to see some movement soon,” he said. “There’s a lot of support on the House Financial Services Committee and the Senate Banking Committee and we’re hopeful there will be some legislation to update currency laws.”