Experts react to the Fed’s Digital Currency Report and falling Bitcoin and Ethereum prices. Here’s what investors should know

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It’s official: The Federal Reserve is considering issuing a US digital currency.

In a long-awaited report released last week, the Fed examined the costs and benefits of a government-issued digital currency, but postponed a final decision on whether to go ahead. Instead, the Fed is giving the public and other stakeholders until May 20 to share their thoughts before taking further action.

Unlike cryptocurrencies, which are typically created in the private sector and experience large price fluctuations on a regular basis, a central bank digital currency (CBDC) would be a digital form of cash issued and backed by the Federal Reserve. Whatever the Fed does next, according to Grant Maddox, a board-certified financial planner and founder of South Carolina-based Hampton Park Financial Planning, “could make or break cryptocurrencies in value.” “It depends on the direction our government takes,” he adds.

The Fed clarified in the report that it would not proceed with issuing a CBDC “without clear support from the Executive Branch and Congress, ideally in the form of specific enabling legislation.”

The Fed is trying to be “politically savvy” as it weighs a digital dollar, says Salman Banaei, head of North America public policy at crypto data firm Chainalysis. If the Fed had taken a clear stance on this matter, “they would have gotten a lot of political opposition,” says Banaei.

Hours after the report was released and in the midst of the worst stock market week in almost two years, Bitcoin and Ethereum both saw significant falls. Bitcoin and Ethereum prices haven’t been this low since July.

“There are two main factors driving demand for crypto right now: its value as an inflation hedge and its value as a risk asset,” says Banaei. “The perceived likelihood of a crypto future also rises or falls based on regulatory risk.”

Here’s what experts have to say about the report released this week and what investors should make of it.

What experts say about the Fed report

Salman Banaei

Position: Head of Public Policy in North America for crypto data company Chainalysis

Reaction: “What surprised me was how seriously the Fed took the idea of ​​a CBDC. The crypto industry is excited for this to happen. Much of the infrastructure built to support the crypto industry could easily integrate the CBDC with existing providers. But the timeline for a CBDC will be much longer – I think it will be two to four years before we hit another big milestone.”

Laura Shin

Position: Unchained Podcast Host and Author of The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze

Reaction: “It is not surprising that the Fed is exploring a central bank digital currency as blockchain technology, while still evolving, has many advantages over our current analog systems. Also, it could help the US dollar maintain its status as a global reserve currency. It already looks like China may try to use its digital yuan to undermine the USD’s status as a global reserve currency. It’s also not surprising that the Fed isn’t ready to announce a decision, just asking for feedback at this time, given that a central bank digital currency raises many security and privacy issues, and also has the potential to disrupt existing financial institutions.”

Grant Maddox

Position: CFP and Founder of Hampton Park Financial Planning

Reaction: “They are keeping up with the likes of China and others who have been making strides in blockchain. A US digital currency could enable faster payments to foreign allies and improve our geopolitical prospects. The move could improve monetary policy decisions by allowing for easier allocation. We join about 90 other countries exploring this option. The addition could add additional complexity to our world markets and divert attention away from the dollar.”

Chris Chen

Position: CFP and Founder of Insight Financial Strategists

Reaction: “Blockchain has many uses that don’t have to be currency, so there’s still a lot of work to be done in the private sector. It is my firm belief that no self-respecting government will relinquish control of its currencies to a private sector corporation. Governments must remain in control of the money supply and interest rates. Like it or not, these are important tools for managing economies. The US is not the only country thinking about digitizing its currency. China is also on the way, as are a number of other countries.”

What does the report mean for crypto investors?

While there are likely no immediate changes crypto investors should make based on the Fed report released this week, it’s a good reminder that policymakers are paying attention to how perceptions of crypto are evolving.

“The Fed’s move means that people who thought of crypto as an actual currency will burst their bubble,” says Chen. “A lot of bitcoin guys thought it was a currency and that it would replace traditional currencies. Well, not if the Fed, the European Central Bank and other central banks have anything to say about it.”

The fundamentals of cryptocurrency investing remain the same. Experts say you should stick to the two major cryptocurrencies, Bitcoin and Ethereum, and only invest what you can lose, or no more than 5% of your total portfolio. Prioritize important aspects of your finances, such as: B. Saving for emergencies, paying off high-interest debt, and saving for retirement always comes before cryptocurrency investments. Where you buy and trade crypto, stick to a mainstream, high-volume cryptocurrency exchange like Coinbase or Gemini, which proactively adheres to evolving federal and state regulators.

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