Fed warns banks against using PayPal stablecoins

The Federal Reserve of the United States (Fed) has just released another announcement, and the outcome is unlikely to be favorable to the crypto sector. This sounds like a warning for banks to use private stablecoins.

Fed limits relationship between banks and crypto

Shortly after the launch of stablecoins from PayPal, the Federal Reserve issues another anti-crypto statement. In the document the Fed warns banking institutions with links to the cryptosphere, especially the PYUSD. As part of its new program to supervise innovative activities, the entity tends to limit interactions between centralized and decentralized finance.

Indeed, this latest decision stipulates that banks in Federal Reserve member states must obtain special authorization before holding, issuing or transacting with stablecoins. Especially PYUSD, the new token from PayPal. And one thing’s for sure: this authorization will be hard to come by.

According to Federal Reserve SystemThe purpose of this measure was to ensure the safety and soundness of the banking system and to balance financial innovation. Thus, a bank with digital assets, in this case stablecoins, must prove that it can transact in a sound and secure manner. However, the task may be harder than it seems, as the Fed will be placing particular emphasis on vulnerability to hackers and the fight against money laundering.

More regulatory measures on digital assets

The Fed’s new program joins the Board’s policy statement of January 23, 2023, which ensures that all banks supervised by the Federal Reserve are subject to the same limitations on cryptos. However, the supervisory entity is not alone in issuing restrictions on the relationship between banking institutions and the digital asset market.

The Federal Deposit Insurance Corporation (FDIC), one of its traditional regulatory partners, has also developed regulatory measures just as strict. In its Financial Institution Letter (FIL) published on April 7, 2022, it highlights the risks associated with the sector.

However, this set of decisions may have a slightly darker purpose. Indeed, John Reed Stark suggests that fintech professionals should be wary of these highly restrictive initiatives against digital assets. These could target not only cryptos, but also decentralized finance (DeFi) similarly to the numerous accusations of the SEC against BinanceCoinbase and many others.

The more time passes, the more the crypto sector gains ground. In view of the development of these assets actions by regulators were to be expected. However, the launch of PayPal’s stablecoins seems to be setting the world on fire, and it could be that the FED is determined to maintain control over banks and the financial system.