Dogecoin Surges as Crypto Market Remains on Edge

Yet most major cryptos continued to slide, with

Bitcoin
down 1.5%, at $46,800, and

Ether
off 1.5%, at $3,770.

The market is on edge ahead of a key meeting of Federal Reserve officials, wrapping up on Wednesday. The Fed is expected to reduce its purchases of Treasuries and mortgage-backed securities by $30 billion in December, double its reduction of $15 billion in November. That would remove liquidity at a faster pace from the market, ending the asset purchases as soon as March 2022. The Fed is then expected to start raising rates in June 2022, with three hikes next year.

Yet investors will be scrutinizing the Fed’s tone for clues on whether monetary policy will turn incrementally tighter. Soaring inflation is raising fears that the Fed will turn more hawkish in tone or policy. Stocks sold off Tuesday on those concerns, pressuring other risk assets like cryptocurrencies.

The worry, of course, is that as the Fed turns off the tap, there will be less imaginary money to invest in imaginary assets—assuming that most cryptos lack intrinsic value and are used mainly for speculating.

Stablecoins, meanwhile, were on the hot seat in Washington at a Senate Banking Committee hearing. Stablecoins are cryptocurrencies designed to maintain a fixed $1 value, backed 1-1 by cash or other liquid reserves.

Democrats and Republicans grilled industry backers and investor-advocates along partisan lines, with both sides appearing far apart on a consensus for regulation.

Committee Chairman Sherrod Brown (D., Ohio) reiterated the Democratic view that stablecoins pose “systemic issues in our economy,” arguing cryptos have led to “wild financial speculation” and that coin issuers aren’t transparent or decentralized, making them more like unregulated banks.

“It sure looks like a potential asset bubble,” Brown said, comparing the rise of cryptos to the 1929 stock market crash and the subprime mortgages and derivatives buildup that sank financial markets in 2008.

Stablecoins create a link between the real economy and the “fantasy” economy, he added, reiterating support for tougher regulation from the Biden administration.

Sen. Elizabeth Warren (D., Mass.) also had harsh words for the industry. The coins “are propping up one of the shadiest parts of the crypto world, the place where consumers are least protected from getting scammed,” she said, referring to decentralized-finance, or DeFi, networks. Regulators need to “get serious about clamping down” on these risks before it’s too late, she added.

Republicans, for their part, argued that stablecoins could reduce transaction fees, encourage financial inclusion, and expand the use of “programmable money,” which could be deployed for automated transactions and micro-payments that aren’t feasible with traditional currency.

“In recognition of the potential of these new capabilities, any regulationshould be narrowly tailored and designed to do no harm,” said Sen. Pat Toomey (R., Pa.) in a statement.

One thing everyone agreed upon is that regulation is needed, though consensus appeared elusive. Toomey, for instance, pushed back against recent recommendations from the White House that all coin issuers be registered as banks or insured depository institutions, saying that would “stifle innovation.”

More sensible, he said, would be transparent asset and redemption-policy disclosures, required audits, and modernized rules for financial surveillance.

The partisan split isn’t just on Capitol Hill. The two Republicans commissioners on the Securities and Exchange Commission, Hester Peirce and Elad Roisman, blasted SEC Chairman Gary Gensler’s regulatory tack. They argued that his agenda “makes no mention of any regulation with respect to digital assets,” adding that the silence is sending a signal that the market can expect more questions than answers on whether cryptos qualify as securities under existing statutes.

“Such silence emboldens fraudsters and hinders conscientious participants who want to comply with the law,” Peirce and Roisman said.

Gensler has repeatedly stated, however, that he thinks some cryptos qualify as securities under existing statutes. And the SEC has been regulating the industry through enforcement actions.

The only thing everyone agrees on is that crypto needs new rules. What they should be isn’t close to being resolved, though, leaving the market vulnerable to tweets and political partisanship that shows no signs of letting up.

Write to Daren Fonda at [email protected]