Fed releases new research on risk and promise of stablecoins

The Federal Reserve released a new research report on stablecoins today, noting the risks and potential of the emerging digital assets.

In the report, researchers Gordon Liao and John Caramichael examine the current stablecoin ecosystem and the impact of stablecoins on credit intermediation and the central bank balance sheet. The paper identifies potential threats to the stability of US Federal Reserve monetary policy and examine ways they could be mitigated. 

Safe haven assets

The report found that dollar-pegged stablecoins have exhibited "safe asset qualities," compared to other crypto assets. Their price occasionally rises above their peg during market distress events, which leads to more issuance, compared to other digital assets that plummet. Essentially, when prices of cryptos like bitcoin decline, traders seek safety in stablecoins.

"These episodes demonstrate the potential for stablecoins to serve as a digital safe haven during market distress," said the report.

But, a run, or mass redemption of safe haven assets could severely disrupt markets. The authors recommend audits and liquidity requirements to mitigate the fallout of potential runs. Tether, the largest stablecoin, has historically avoided offering a full audit, according to regulators. 

"We think this type of instability is addressable with proper institutional and/or regulatory guardrails such as transparent financial audits and adequate requirements on the liquidity and quality of stablecoin reserves," they said.

Systems for stability

The Fed research dives deeper on credit intermediation, essentially how broad adoption of stablecoins could impact balance sheets of financial institutions and how that would affect the interactions between consumers and banks. It compares stablecoin narrow banking, in which physical cash is tokenized and backed by full reserves at the central bank, to two-tiered intermediation, in which stablecoins are backed by deposits issuers hold at commercial banks.

"Among the various scenarios, a two-tiered banking system can support both stablecoin issuance and maintain traditional forms of credit creation," said the report. "In contrast, a narrow-bank stablecoin framework can bring the most stability but at the potential cost of credit disintermediation."

Researchers found a two-tiered system creates less risk to US financial stability. A narrow bank approach guarantees the stablecoin peg remains unmoved, but financial distress could create a situation in which large swaths of people move their money from commercial bank deposits to safe haven stablecoins, which puts the system at risk. 

"Though this credit disruption effect could be mitigated by limits on stablecoin holdings and differential reserve interest rates, the overall structure of the narrow bank approach to stablecoin reserves is potentially destabilizing for the banking system," said the report. "Additionally, the narrow bank approach could lead to an expansion of the central bank’s balance sheet in order to accommodate the demand for reserve balances from stablecoin issuers."

As for the future, the Fed paper noted that stablecoins could see further use cases outside of trading. 

"In conclusion, the current usage of stablecoins is primarily driven by cryptocurrency trading, limited peer-to-peer payments, and DeFi," the paper noted. "Looking forward, stablecoins may see further growth through their facilitation of more inclusive payments and financial systems."

The wider conversation

Stablecoins have been on the mind of regulators in recent weeks. Both chambers of Congress have hearings scheduled for February to discuss the President’s Working Group on Financial Markets Report on Stablecoins. That report came out in November and urged Congress to limit stablecoin issuance to insured depository institutions.

During last year's House hearing on stablecoins, lawmakers heard from a number of crypto CEOs, including stablecoin issuer Circle's Jeremy Allaire and Bitfury CEO Brian Brooks, who allowed banks to hold stablecoin reserves during his time as Acting Comptroller of the Currency. 

Correction: A previous version of this article attributed the witness list to the Feb. 8 hearing. No witness list has yet been posted. We regret the error.

FTX Raises $400 Million in Series C Fundraise, Firm Reaches $32 Billion Valuation

Following the company’s subsidiary FTX US raising funds in its first Series A financing round, parent company FTX Trading Ltd. has announced it has secured $400 million in a Series C fundraise. The crypto company’s latest financing round brings the firm’s post-money valuation to $32 billion.

FTX Series C Fundraise Brings Firm’s Valuation to $32 Billion

FTX Trading Ltd. has raised $400 million in a Series C fundraising round according to an announcement on Monday. The fundraise follows the firm’s Series B at the end of July last year and Series B-1 toward the end of October 2021. The latest financing saw participation from Temasek, Paradigm, Ontario Teachers’ Pension Plan Board, Steadview Capital, Tiger Global, Insight Partners, NEA, IVP, Softbank Vision Fund 2, and Lightspeed Venture Partners.

“Our Series C financing round represents a milestone achievement for FTX, as we raised close to $2 billion in six months. This round will support our continued mission of delivering innovative products and services to the marketplace as well as expanding our global reach with additional licenses around the world,” FTX CEO Sam Bankman-Fried said in a statement sent to Bitcoin.com News. Bankman-Fried added:

“With the ongoing support from our dedicated investors and userbase, FTX will look to continue interacting with regulators to facilitate access to digital assets in a safe and compliant manner. We look forward to working alongside our investors to achieve our mission and continue our tremendous growth throughout 2022 and beyond.”

The capital fundraise brings the crypto company’s valuation to $32 billion which makes it one of the largest digital asset firms in the world in terms of capitalization. Additionally, the company’s exchange based in the United States, FTX US, raised $400 million in its first capital fundraise.

FTX says the company has seen immense growth since its Series B-1 fundraise and notes that the company’s “user base growing 60% and its average daily trading volume increased 40%, reaching approximately $14 billion in daily volume.” In October, the firm’s crypto trading volume propelled the exchange to becoming the third-largest cryptocurrency exchange worldwide.

What do you think about FTX Trading Ltd. raising $400 million in a Series C fundraise? Let us know what you think about this subject in the comments section below.

UBS Warns of Crypto Winter Amid Expectation of Fed Rate Hikes and Regulation

UBS, Switzerland’s largest bank, has warned about a crypto winter where prices crash and may not recover for years. The bank’s analysts explained several major reasons affecting the prices of cryptocurrencies.

UBS Expects Crypto Winter That Could Last Years

Switzerland’s largest bank, UBS, has warned of a crypto winter where prices crash and may not recover for years. The bank’s analysts, led by James Malcolm, recently explained in a note to clients several reasons why cryptocurrency may lose its attractiveness to investors this year.

Firstly, the UBS analysts detailed that the Federal Reserve’s interest rate hikes are set to reduce the appeal of cryptocurrencies, such as bitcoin, for many investors who see the asset class as a good alternative store of value.

The analysts added that if central banks move to get a handle on inflation, investors may not be holding bitcoin as protection against rising prices. They noted that government stimulus was a key factor boosting the prices of cryptocurrencies in 2020 and 2021.

The Fed is expected to raise interest rates several times this year. JPMorgan CEO Jamie Dimon recently said that the Federal Reserve might have to raise short-term interest rates more than four times this year. Goldman Sachs similarly expects the Fed to raise interest rates four times this year. Wharton’s finance professor Jeremy Siegel said earlier this month, “The Fed is going to have to hike many more times than what the market expects.”

The UBS analysts also claimed that some investors are increasingly realizing that bitcoin is not “better money” because of its high volatility. In addition, they said the cryptocurrency’s limited supply makes it inflexible as a currency. The analysts further stated that blockchain technology is hard to scale because of its decentralized design.

Another major hurdle for cryptocurrency is regulation, the UBS team described. Widespread cryptocurrency speculation “inevitably invites closer oversight to guard consumers” and “protect financial stability,” the analysts warned. They elaborated, “high-flying stablecoins and defi [decentralized finance] projects seem almost sure to face bigger setbacks from authorities in the coming months.”

In the U.S., the Biden administration is reportedly drafting a government-wide strategy for crypto assets. Furthermore, the chairman of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, said last week that regulating crypto exchanges is a top priority for the SEC.

What do you think about the warning by UBS? Let us know in the comments section below.

Crypto Exchange Binance Is Making 'Substantial Changes' to Become 'Fully Licensed and Fully Compliant' in UK

Cryptocurrency exchange Binance has unveiled its plan to become a “fully licensed and fully compliant” exchange in order to serve users in the U.K. The crypto exchange is reportedly “making a number of very substantial changes” in the way it operates in order to comply with the country’s regulator, the Financial Conduct Authority (FCA).

Binance Plans to Launch a Fully Licensed Crypto Exchange in the UK

Binance is working to become a fully licensed and fully compliant cryptocurrency exchange in order to launch in the U.K. where it recently ran into trouble with the Financial Conduct Authority (FCA).

The exchange’s CEO, Changpeng Zhao (CZ), said in an interview with The Telegraph that Binance will reapply for a license with the FCA. He believes that his exchange’s relationship with the British regulator has improved. He told the news outlet:

We’re fully re-engaged there … We’re making a number of very substantial changes in organizational structures, product offerings, our internal processes, and the way we work with regulators.

The U.K. Financial Conduct Authority issued a consumer warning on Binance in June stating that no entity “in the Binance Group holds any form of U.K. authorization, registration or license to conduct regulated activity in the U.K.” In August, the FCA said that Binance was no longer in violation of its rules but noted that the company has not applied for a license to operate a crypto exchange.

“We want to continue to establish a presence in the U.K. and serve U.K. users in a fully licensed and fully compliant manner,” Zhao emphasized, adding that Binance hopes to become a registered crypto asset firm in six to 18 months.

Following the warning by the FCA, several major banks in the U.K. began restricting payments to Binance, including Barclays, HSBC, Natwest, and Santander.

Besides the FCA, a number of other regulators have issued warnings of various kinds about Binance, including regulators in the U.S., South Africa, Singapore, Australia, Norway, Netherlands, Hong Kong, Germany, Italy, India, Malaysia, and Lithuania. In August, Binance said it was making regulatory compliance its top priority.

Zhao further shared with the publication that when regulators asked Binance “a very simple question: ‘Where’s your headquarters?’ and our response was that we have no headquarters, that we’re a decentralized organization, they didn’t know how to work with us.” The CEO concluded:

We understand that now. So now we’re in the process of setting up real offices, legal entities, a proper board, proper governance structures in most places, including the U.K.

What do you think about Binance launching in the U.K. after regulatory trouble with the FCA? Let us know in the comments section below.

Binance Developing Crypto Exchange in Indonesia

Binance has formed a joint venture with a consortium led by Telkom Indonesia’s $830-million venture capital arm. Binance aims “to expand the blockchain ecosystem in Indonesia with the development of a new Indonesian-based digital asset exchange.”

Binance Building Cryptocurrency Exchange in Indonesia

Blockchain and cryptocurrency infrastructure provider Binance announced Wednesday that it has established a joint venture with a consortium led by Telkom Indonesia’s $830-million venture capital arm, MDI Ventures (MDI). Telkom Indonesia is the country’s largest telecoms company.

The aim of the joint venture is “to expand the blockchain ecosystem in Indonesia with the development of a new Indonesian-based digital asset exchange,” the announcement details, elaborating:

Binance will provide world-class asset management infrastructure and technology to support the development of the new exchange platform.

“Our ambition at Binance is to grow the blockchain and cryptocurrency ecosystem globally, and this initiative in Indonesia is a significant step in that direction,” Binance CEO Changpeng Zhao (CZ) commented.

Zhao revealed last week, “We’re making a number of very substantial changes in organizational structures, product offerings, our internal processes, and the way we work with regulators.” He detailed specifically that his company is “in the process of setting up real offices, legal entities, a proper board, proper governance structures in most places, including the U.K.”

This week, Binance announced that it is shutting down its crypto exchange in Singapore. “Binance made a sizable investment into regulated exchange HGX last week. This investment made our own application somewhat redundant. We will continue to work through our partners to grow the crypto industry in Singapore,” explained Zhao.

The Indonesian government has previously indicated that it will not impose an outright ban on cryptocurrency as China did. Crypto assets are allowed to trade alongside commodity futures in Indonesia but cannot be used as a currency. The government is also pushing to set up a crypto exchange and Bank Indonesia has been exploring a central bank digital currency (CBDC).

What do you think about Binance helping to build a cryptocurrency exchange in Indonesia? Let us know in the comments section below