Fed Vice Chair for Supervision says work on crypto regulation underway, Bitcoin price drops below $21,500

• Federal Reserve Vice Chair for Supervision on Thursday discussed the potential of the technology behind crypto that can be harnessed only with guardrails in place.
• Earlier this week, Fed Chair Jerome Powell also reiterated the need for a legal framework for crypto activities.
• Bitcoin price has declined by more than 4% in the last three days to trade below $21,500

The crypto market has been considerably impacted this week following Federal Reserve Chair Jerome Powell's hawkish comments on Tuesday. Most recently, Fed’s Vice Chair for Supervision and FOMC member Michael S. Barr provided more information on the Fed's standing regarding crypto and similar digital activities.

Federal Reserve is optimistic about crypto

In a speech at the Peterson Institute for International Economics, Fed’s Vice Chair for Supervision, Michael S. Barr, discussed the Federal Reserve's Approach to Supervision and Regulation of Banks’ Crypto-related Activities. Barr discussed the recent crypto winter and provided insight into the central bank's notion regarding digital assets.

Barr stated that despite the recent disappointing run that the crypto market observed, the central bank is still optimistic about blockchain technology. The policymaker said,

"Despite recent events, we have not lost sight of the potential transformative effect that these technologies could have on our financial system… But the benefits of innovation can only be realized if appropriate guardrails are in place."

While Barr did not explicitly provide information as to what guardrails can be implemented, he did speak about the advances the Fed has been making on that front. 

The legal scholar stated that the Fed has been working with other federal bank regulatory agencies to provide clarity and guidance on what is permissible, safe and sound, and compliant with anti-money laundering and anti-terrorist financing laws. He added that the central bank is also working with its international counterparts to minimize the possibility of regulatory arbitrage across jurisdictions.

Regarding banks’ engagement with crypto, Barr said the Fed’s overall stance is that, at this stage, “banks should take a careful and cautious approach to engaging in crypto-asset related activities and the crypto sector.”

Towards the end of the speech, Barr noted that going forward, the Fed would be providing additional clarity on its views of risks and effective risk management practices across a range of crypto-related activity.

Earlier this week, Fed Chair Jerome Powell also discussed crypto quite briefly. Testifying on Capitol Hill, Powell said,

"I do think it would be important for us to have a workable legal framework around digital activities. That is important, and something Congress in principle needs to do because we can't really do that."

Bitcoin price takes a dip

Following Powell's comments regarding the possibility of higher interest rate hikes in the future, the crypto market plunged. Bitcoin price subsequently posted red on the charts, with the biggest cryptocurrency dropping to trade below $21,500.

At the time of writing, BTC could be seen changing hands at $21,452, treading right at the cusp of falling through its critical support at $21,410.

BTC/USD 1-day chart

This price point also coincides with the 100-day Exponential Moving Average (EMA). Losing this support could trigger a potential 14% crash, bringing the price to $18,289.

The cryptocurrency could invalidate this bullish thesis if it bounces off the critical support and rallies beyond $23,782. Breaching this critical resistance would allow Bitcoin price to recover to year-to-date highs of $24,760, providing room to initiate a sustainable rally.