Experts react to the Fed’s digital currency report and falling Bitcoin and Ethereum prices. Here’s what investors need to know

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It’s official: the Federal Reserve is toying with the idea of ​​issuing a US digital currency.

In a long-awaited report released last week, the Fed explored the costs and benefits of a government-issued digital currency, but postponed a final decision on whether to move forward. Instead, the Fed is giving the public and other stakeholders until May 20 to provide feedback before taking further action.

Unlike cryptocurrencies, which are typically created in the private sector and regularly experience large price swings, a central bank digital currency (CBDC) would be a digital form of cash issued and backed by the US central bank. However, whatever the Fed does next could “fortify cryptocurrencies or hurt their value,” according to Grant Maddox, certified financial planner and founder of South Carolina-based Hampton Park Financial Planning. “It depends on the direction our government chooses to take,” he adds.

The Fed made it clear in the report that it will 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, North America public policy manager for crypto data firm Chainalysis. Had the Fed taken a clear stance on the issue, “it would have received a lot of political pushback,” Banaei says.

Within hours of the report’s release, and amid the stock market’s worst week in nearly two years, Bitcoin and Ethereum saw significant declines. Bitcoin and Ethereum prices haven’t been this low since July.

“There are currently two main factors influencing the demand for crypto: its value as an inflation hedge and its value as a risk asset,” Banaei says. “The perceived probability of a crypto future also increases or decreases based on regulatory risk.”

Here’s what experts are saying about the report released this week and what investors should think about it.

What experts say about the Fed report

Salman Banaei

Point of view: Head of public policy in North America for the crypto-data company Chainalysis

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

Laura Shin

Point of view: Host of the “Unchained” podcast and author of “The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze”

Reaction: “It’s no surprise that the Fed is exploring a central bank digital currency because blockchain technology, while still under development, has many advantages over our current analog systems. Moreover, it could help the US dollar retain its status as the world’s reserve currency. It already looks like China may be trying to leverage its digital yuan to reduce the USD’s status as the world’s reserve currency. It is also not surprising that the Fed is not ready to announce a decision, but is currently only asking for comment, since a central bank digital currency raises many questions about security and privacy, and has the potential to disrupt existing financial institutions.

Grant Maddox

Point of view: CFP and founder of Hampton Park Financial Planning

Reaction: “They are keeping pace with China and others who have advanced in blockchain. A US digital currency could enable faster payments to foreign allies, improving our geopolitical prospects. This move could improve monetary policy decisions by allowing for easier distribution. We join approximately 90 other countries that are considering this option. This addition could add further complexity to our global markets and distract from the dollar.

Chris Chen

Point of view: CFP and founder of Insight Financial Strategists

Reaction: “Blockchain has a lot of applications that don’t need to be a currency, so there’s still a lot to do in the private sector. I firmly believe that no self-respecting government will relinquish control of its currencies to a private sector entity. Governments must keep control of the money supply and interest rates. Whether we like it or not, these are major tools for managing savings. The United States is not the only country considering 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 likely aren’t any 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 taking shape.

“The Fed’s decision means that people who thought of crypto as real money will burst their bubble,” Chen says. “Many types of Bitcoin thought it was a currency and would replace traditional currencies. Well, not if the Fed, European Central Bank and other central banks have anything to say about this subject.

The fundamentals of cryptocurrency investing remain the same. Experts say you should stick to the two big cryptocurrencies, Bitcoin and Ethereum, and only invest what you are okay with losing or no more than 5% of your total portfolio. Always prioritize important aspects of your finances, such as saving for emergencies, paying off high-interest debt, and saving for retirement, before investing in cryptocurrency. When it comes to where you buy and trade crypto, stick with a mainstream, high-volume cryptocurrency exchange, like Coinbase or Gemini, that proactively complies with changes from federal regulators and state.


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