Treasury Secretary Scott Bessent's call for a review of the Federal Reserve, citing policy errors, has introduced uncertainty into crypto markets.

Executive Summary

Treasury Secretary Scott Bessent has called for an independent review of the Federal Reserve's operations, criticizing its policy missteps and regulatory overreach. This action, signaling a potential power grab by the Trump administration, introduces uncertainty into both traditional and crypto markets.

The Event in Detail

Bessent's article criticizes the Fed for expanding its role beyond its mandate and for policy missteps based on inflated employment figures. He argues that the Fed's interventions have exacerbated wealth inequality. Specifically, Bessent stated that the Federal Reserve is spiraling out of control and needs a full internal audit to curb the unchecked growth of its ever-expanding operations.

Market Implications

The call for review has raised concerns about the Fed's future policies and independence, potentially leading to increased market volatility. The employment data revision washed $60B from the crypto market cap. The Bank for International Settlements (BIS) has warned that the growing adoption of cryptocurrencies may pose risks to the traditional financial system and exacerbate wealth inequality.

Expert Commentary

Senator Cynthia Lummis alleges the Fed categorized crypto as a source of reputational risk for banks during a Biden-era government-wide effort called “Operation Choke Point 2.0” that sought to undermine crypto companies.

Broader Context

This event is part of a broader trend of political pressure on the Federal Reserve's independence. The Trump administration has taken actions that have sparked fears of a politicized central bank prioritizing short-term economic gains over long-term stability. This politicization has already triggered a steepening U.S. yield curve, with long-end Treasury yields reflecting inflationary and fiscal concerns.

The growing adoption of cryptocurrencies may pose risks to the traditional financial system and exacerbate wealth inequality, according to the Bank for International Settlements (BIS). The BIS also raised concerns about how crypto markets may worsen income inequality by enabling larger investors to capitalize on the emotions of less sophisticated retail participants, as seen during the FTX collapse in 2022. The report noted that “Most disturbingly, large bitcoin holders (“whales”) were selling as ordinary retail investors (“krill”) were buying.”

In response to Fed policy uncertainty, asset allocation strategies are diverging. Traditional markets are witnessing a shift toward inflation-protected assets and shorter-duration bonds, while crypto markets are seeing a surge in stablecoin adoption. Data from the U.S. Treasury indicates that stablecoin market capitalization surpassed $200 billion by January 2025, driven by the GENIUS Act's regulatory framework, which mandates full backing of stablecoins by high-quality liquid assets.