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Cryptocurrencies Crashed This Week; Digital Coins Are Still The Future

(CNN) -- It hasn't been a great week for digital currencies.

Bitcoin is trading nearly 40% below its record price of $64,000 following a sudden crash sparked by regulatory moves in China. Ethereum is down more than 35% from its all-time high, and dogecoin is off more than 45%.

Investors expect cryptocurrencies to be volatile. But the severity and breadth of the pullback has traders worried about a potential bubble, and observers are asking tough questions about whether coins are good stores of value.

The crash follows heightened interest from institutional investors in crypto assets, a trend highlighted by Tesla's decision to purchase $1.5 billion worth of bitcoin. Adoption by other big corporates and investors may now slow.

But the week also provided two major announcements from the US government that could, over time, help to mainstream cryptocurrencies, and address some problems commonly associated with digital coins.

The first major announcement was from the US Treasury, which called for crypto transfers worth more than $10,000 to be reported to the Internal Revenue Service.

"As with cash transactions, businesses that receive cryptoassets with a fair market value of more than $10,000 would also be reported on," it said in a report on tax enforcement published on Thursday.

Getting the IRS involved may not sound like a positive development for cryptocurrencies. But the government treating coins the same way it treats cash could be a key step in moving cryptocurrencies into the mainstream.

But wait, there's more: The second development came from the US Federal Reserve, which announced new steps in the development of a potential digital dollar that would be controlled by the central bank.

Chair Jerome Powell said in a rare recorded video message Thursday that the Fed will publish a discussion paper this summer exploring technology for digital payments, "with a particular focus on the possibility of issuing a US central bank digital currency." It is asking for public comments on the issue.

"Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation," added Powell.

The Fed thinks a digital dollar might be an improvement over current offerings, including "stablecoins" that are pegged to the value of other assets including reserve currencies.

"To date, cryptocurrencies have not served as a convenient way to make payments, given, among other factors, their swings in value," said Powell. "Stablecoins aim to use new technologies in a way that has the potential to enhance payments efficiency, speed up settlement flows, and reduce end-user costs — but they may also carry potential risks to those users and to the broader financial system."

The Fed has been studying digital currencies for some time, but other central banks are moving more quickly. China is already running real-world tests with a digital version of the yuan, for example.

Even as the Fed moves to deepen its push into crypto, the central bank made clear that cash is still king.

"We think it is important that any potential [central bank digital currency] could serve as a complement to, and not a replacement of, cash and current private-sector digital forms of the dollar, such as deposits at commercial banks," said Powell.

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