The crypto industry and the banking sector are closely intertwined, with many crypto exchanges using banks to hold funds and process transactions.
Changes in banking regulations may impact the crypto industry, which seeks greater legitimacy and integration with traditional financial systems.
US President Joe Biden is stepping up pressure on federal banking regulators to tighten the rules for regional banks and requiring institutions the same size as Silicon Valley Bank to maintain a greater amount of liquid assets while subjecting themselves to more frequent stress tests.
The California Department of Financial Protection and Innovation ordered the shutdown of Silicon Valley Bank this month, which was headquartered in Santa Clara, California.
Silicon Valley Bank lost $42 billion in one day due to many depositors withdrawing funds through online platforms.
Biden at the Fed: tightening banking rules
The tightening of the rules applicable to regional banks aims to strengthen the stability of the financial system and to mitigate risk bank failures.
Banks would be required to maintain a higher level of readily accessible assets that can be quickly converted into cash in times of financial stress, thereby protecting their customers’ deposits and preventing market-wide disruptions.
The White House announced the changes on Thursday, which can be implemented by current banking regulators, including the Federal Reserve, without the need for new legislation.
The implication of this action is that banking regulations can be changed quickly without the need to introduce new laws, indicating a potential impact on the crypto industry.
President Joe Biden. Image: Tom Williams/CQ Roll Call/file photo.
This means that the regulatory environment for banks, and indirectly for the crypto industry, could change faster than if new legislation were needed.
A White House fact sheet reveals that the Biden administration is encouraging the Federal Reserve and other independent organizations to tighten regulations aimed at reducing banks’ reliance on debt and increasing their liquidity.
In 2018, the Trump administration eased oversight of regional banks through a bipartisan bill, changing the definition of “systemically important” banks to those with at least $250 billion in assets, reversing the strict requirements put in place by Congress following the 2008 financial crisis.
A Republican lawmaker has criticized the US central bank for not holding lenders like Silicon Valley Bank accountable when they have the power to do so.
Patrick McHenry, chairman of the House Financial Services Committee, suggests holding regulators accountable for their failure to use their oversight tools during bank failures instead of giving them more authority.
Michael Barr, head of banking regulation at the Fed, expressed the need to tighten capital and liquidity requirements.
Image: Canva
The authority of the Fed in adjusting the rules
In 2019, the Fed used its power to customize these rules, which drew objections from officials including Martin Gruenberg, the current chairman of the Federal Deposit Insurance Corporation.
The central bank’s decision to exempt lenders with assets between $100 billion and $250 billion from maintaining a standardized “liquidity coverage ratio” has drawn attention.
The ratio measures whether a lender has enough high-quality liquid assets to survive a crisis. SVB’s lack of liquidity was a significant problem as deposits left the bank and the value of its assets declined, causing its bankruptcy.
The Biden administration is pushing for tougher banking regulations for regional banks, especially those with asset sizes similar to SVB’s, in response to its failure and the potential risks posed by those banks.
The aim is to prevent future defaults and provide better protection for depositors and the financial system.
Crypto total market cap still pegged at $1 trillion on the daily chart at TradingView.com
Crypto can benefit from strict banking rules
During this time, the crypto the industry could indirectly benefit from the US government’s tightening of banking rules in several ways.
Stricter banking regulation could lead to a more stable financial system as a whole. This could help increase investor confidence in broader financial markets, including cryptocurrencies, which are often considered a speculative asset class.
As cryptocurrencies continue to grow in popularity and adoption, greater regulatory oversight could help increase their legitimacy in the eyes of traditional investors and institutions. A more regulated banking system could also help improve the reputation of the cryptocurrency industry as a whole.
Stricter banking rules could lead to stronger anti-money laundering (AML) and know-your-customer (KYC) practices. This could help reduce fraud and criminal activity in the crypto industry and increase investor and consumer confidence.
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