The Fed and web3: Understanding the U.S. central banking system’s approach to all things crypto

Despite some concerns within the web3 community about the Federal Reserve’s understanding of the evolving digital landscape, recent evidence suggests that these fears may be unfounded. The Fed has been diligently studying the intricacies of the web3 ecosystem and the technology underpinning it.

As the central bank formulates its perspectives on stablecoins, central bank digital currencies, and financial privacy, its findings, priorities, and ultimate conclusions on all web3 matters are of critical concern and worth understanding in detail.

With that in mind, the following is a primer on how the U.S. central banking system thinks about crypto. It is important to not that in most crypto matters, the Fed has no formal policy position and makes no recommendations beyond adherence to its dual mandate of ensuring maximum employment and price stability at moderate long-term interest rates. The following ‘positions’ simply refer the questions and concerns at the forefront of its research and assessment.

Fed position on Stablecoins

Stablecoins serve as the critical intermediary between the frenetic world of decentralized finance (DeFi) and the more structured realm of traditional finance. The Federal Reserve, in its research, points out that stablecoins, rather than becoming a popular medium for everyday transactions, have found their primary utility in the DeFi sector. As the Federal Reserve report states, “S.C.s are essential to transacting across crypto-assets in DeFi,” and they “are not widely used as a means of payment at present.”

Given this niche yet significant role, stablecoins must maintain their pegged stability. Any misperception that they’re as secure as conventional currency can prove risky. The report highlights, “Stablecoins have grown tremendously over the past year as digital assets gain broader adoption and the use cases of programmable digital currencies are clarified.” However, with this growth comes the necessity for vigilance. The paper further notes, “This rapid ascension has raised concerns that there might be negative impacts on banking activities and the traditional financial system.”

A case that underscores

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Author: Jacob Oliver

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