Is Crypto Frenzy Over? How Will the Federal Reserve Policy Under Kevin Warsh Affect the Crypto Market?

Summary: In 2025, the election of the chairperson of the Federal Reserve has attracted widespread attention from the global market, especially in the cryptocurrency field. Kevin Warsh, as a potential candidate for the chairperson of the Federal Reserve, represents a stricter Monetary Policy and has had a profound impact on the cryptocurrency market. Warsh advocates controlling inflation by reducing the Balance Sheet (QT) and moderately lowering interest rates, strengthening Financial Market regulation, and adopting a more conservative liquidity management approach. He is critical of cryptocurrencies, especially Bitcoin and stablecoins, believing that they are more software than currency. If Warsh is elected as the chairperson of the Federal Reserve, the crypto market may face unprecedented challenges and may even usher in more compliant development.

TL;DR:

• Warsh advocates aggressive balance sheet reduction and moderate interest rate cuts, and emphasizes the soundness of Monetary Policy.
• He is relatively conservative about cryptocurrency, considering it more of a technology than a currency.
• Stablecoin regulation may become stricter and may be included in the banking regulatory framework.
• If Warsh takes over the Fed, the liquidity of the crypto market will be under pressure, and there may be a short-term decline in valuation, but in the long run, it may promote compliance development.

Kevin Warsh: From Wall Street Darling to Fed Outsider

Kevin Warsh, as one of the potential candidates for the chairperson of the Federal Reserve, has attracted attention for his distinct stance on Monetary Policy and unique market experience. Unlike traditional academic economists, Warsh’s professional background comes from Wall Street. He worked at Morgan Stanley as the head of the M & A department and has in-depth practical experience in Financial Marekt. This background shaped his keen insight into the financial crisis and played a crucial role in the 2008 financial crisis.

When Warsh became a governor of the Federal Reserve, he was different from scholar-like officials such as Bernanke and Yellen. His observations were not limited to theoretical models, but also focused on the practical issues of rapidly changing liquidity in crises. During the 2008 financial crisis, Warsh personally participated in multiple critical decision-making moments, including rescuing Bei Ersideng and responding to the collapse of Lehman Brothers. His profound understanding of Quantitative Easing (QE) made him highly vigilant about the consequences of long-term central bank easing.

Warsh’s Monetary Policy philosophy can be said to be a kind of “anti-trend” thinking, advocating the discipline and prudence of Financial Marekt rather than loose Monetary Policy. Unlike some candidates who tend to favor low interest rates and loose liquidity policies, Warsh believes that by reducing the Fed’s Balance Sheet (i.e. shrinking the balance sheet) and combining it with a moderate interest rate cut strategy, the purchasing power of the US dollar and economic vitality can be effectively restored.

Warsh’s Monetary Policy: Aggressive QT with Moderate Rate Cuts

Kevin Warsh’s Monetary Policy proposal is very clear: to achieve economic stability through aggressive balance sheet reduction and moderate interest rate cuts. Balance sheet reduction, which means reducing bonds and other assets on the Federal Reserve’s Balance Sheet, is a means of tightening the money supply. Warsh believes that the current huge Balance Sheet of the Federal Reserve is “crowding out” private credit, leading to an imbalance in market resource allocation. Therefore, he advocates reducing these assets to restore normal market liquidity and avoid continued deterioration of inflation.

However, Wash’s interest rate cut was not to stimulate consumption and investment, but to regulate the economy without flooding and promote healthier market growth. His goal is to restore the purchasing power of the US dollar and stabilize Financial Marekt’s expectations. Wash’s control of the money supply is similar to the “Volcker era” of the 1980s, that is, to combat high inflation and restore economic stability through resolute Monetary Policy.

Behind this policy combination is Warsh’s profound understanding of the long-term stability of the market. He believes that low interest rates are not a universal key to long-term economic growth, and excessive reliance on monetary easing will cause asset prices to deviate from economic reality and ultimately bring more market risks.

Warsh and the Crypto Market: Liquidity Tightening and Stricter Regulation

In Wash’s view, cryptocurrency, especially Bitcoin, is not a real currency, but a tool similar to “software”. He has publicly stated: “Cryptocurrency is a misnomer, it is not mysterious, nor is it money. It is more like software.” This means that Wash’s attitude towards cryptocurrency tends to be cautious. He believes that what cryptocurrency brings is not real financial innovation, but a challenge to the existing financial system, especially in the field of stablecoins, and he strongly advocates strengthening regulation.

If Wash becomes the chairperson of the Federal Reserve, the regulatory environments facing cryptocurrencies will be stricter. Especially in terms of stablecoins, Wash may push to include stablecoin publishers in the regulatory framework of “narrow banks”, requiring them to hold 100% cash or short-term debt reserves. This will put greater compliance pressure on some stablecoin publishers currently operating as “shadow banks”, and small stablecoins attempting to create “credit” may be eliminated.

For Bitcoin, Wash’s “strategic reset” policy will mean a tightening of liquidity. The cryptocurrency market, which has long relied on loose Monetary Policy, may face valuation pressure in the short term. When traditional Financial Marekt faces deleveraging and tight liquidity, the value of the cryptocurrency market will also be reassessed.

Stablecoins and CBDCs: Warsh’s Dual Stance

Wash’s policy towards the cryptocurrency market is not entirely against it. He maintains a certain degree of openness towards blockchain technology and its application in the financial system. In particular, his views on central bank digital currencies (CBDCs) show a divisive attitude. He explicitly opposes retail CBDCs – digital currencies directly published by the Federal Reserve to individuals, believing that this approach not only violates privacy but may also lead to excessive concentration of financial power. However, he has shown a supportive attitude towards wholesale CBDCs, believing that blockchain technology can be used to transform interbank clearing systems, improve the efficiency of the financial system, and is particularly important in dealing with global geopolitical risks.

This binary attitude indicates that Wash may seek compliance space in the cryptocurrency market rather than completely denying its potential. The batch CBDC he supports may become a bridge for the integration of the cryptocurrency market and the traditional financial system, creating more possibilities for future blockchain technology and decentralized finance (DeFi) applications.

Conclusion: Warsh’s Policies and the Future of Crypto

Kevin Warsh’s Monetary Policy philosophy and stance on the cryptocurrency market mark a possible “strategic reset”, returning to more prudent monetary management principles. If he takes over the Federal Reserve, the Fed may adopt a more conservative Monetary Policy, promote global liquidity tightening, and bring greater regulatory pressure and liquidity challenges to the cryptocurrency market. However, this also brings an opportunity for the cryptocurrency market to “prove its innocence”: when the traditional financial system encounters problems due to deleveraging, can Bitcoin break free from the shackles of traditional finance and become a true safe-haven asset?

Although Warsh’s policies may pose short-term pressure on the cryptocurrency market, in the long run, the development of compliance and regulation may bring more stable growth to the industry. The integration between cryptocurrency and traditional finance may usher in new opportunities under Warsh’s leadership.

In the future, how the crypto market will evolve under Wash’s policies remains an important topic to watch.