“It would be a mistake to leave the Fed with a weak role for stable currencies.”
— Jerome Powell June 21, 2023
On the longest day of the year, Federal Reserve Chairman Jerome Powell took to the podium Testify before Congress and the House Financial Services Committee. Last week, the central bank led by Powell decided to pause interest rate increases – the fastest and most aggressive rate hikes in US history – as part of their mission to fight price Inflation is found downstream from the closure-induced monetary Inflation by stimulus measures. Less than a month after the announced July launch of FedNow, an interbank communications platform, Powell finds himself at a crossroads of monetary policy, regulation, and capital requirements before the formal incorporation of a digital dollar system.
The new dollar: FedNow & USTs, not retail CBDCs
“The dollar’s status as the world’s reserve currency is very important.”
— Jerome Powell June 21, 2023
The dollar has been digitized for a long time; Whether it’s Zelle or Venmo balances in your retail account, or the dollar balance in your Bank of America checking account. But in general, the mechanics behind turning the safes and other backup assets that support those numbers on the screen remained in the technical agility of the fax machine. The dollar may be the world’s reserve currencyand can be transacted via brokers on the rails of the obvious central banks, or less obviously on the rails of Ethereum via ERC-20 tokens in the form of the popular retail stablecoins, but the US Treasurys held by these new credit creators remain the global reserve Origin. These bonds are issued strictly by the US Treasury for sale to the private sector to create dollars, with incentivized returns dependent on the federal funding rate set by the Federal Reserve. The public is generally fearful of direct issuance of a form of retail CBDC (Central Bank Digital Currency) due to concerns of surveillance and expropriation of the coin from a central issuer, but few are aware of the level of financial oversight banks actually enforce, regardless of capacity. For these trusted third parties to censor, blacklist and even expose retail to counterparty risk. All of these measures are increasingly made possible by the digitization of currency while encroaching on reliance on centralized payment bars, but until next month, the communication network for interbank asset trading remains lossy and sluggish.
FedNow, due to launch next month, serves multiple purposes, but perhaps none as important as creating a more effective lever for the Fed to control rates for 365/24/7 overnight banking services such as SOFR, and to set the cost of borrowing. Effectively short-term liquidity among fragmented private banks trying to meet depositor withdrawals. You may have heard the phrase “reverse repo” once or twice, but the underlying mechanism is often misunderstood. The term “repo” stands for a repurchase agreement; Essentially a contract between two entities in which Bank A, having excess dollar liquidity, agrees to lend Bank B cash, with overnight liquidity needs, via a short-term loan secured by Bank B’s assets such as earth tanks, with terms that stipulate On it Bank B will repurchase their securities, usually the next morning (“overnight”), plus a fee based on the percentage held by Bank A. A reverse repo is basically the same behavior, except that Bank A is bond-rich, liquidity-poor, and thus asks Bank B for dollar-denominated liquidity. This delicate scenario has come to fruition in light of the recent failures of regional banks in the US, and the Fed has created new mechanisms to support depositors’ liquidity needs. In the case of the ever-growing reverse repo market, Bank B is routinely the largest US bank, sometimes directly the Federal Reserve. FedNow is a digital lever, made possible online, for complete centralized control of the overnight dollar borrowing rate, the necessary conversion of interbank Treasuries, and thus the resale of dollar-denominated activity away from the euro market, back to the United States within the domain of the Federal Reserve and the Treasury Department .
Issuance of the dollar to the private party
We will not support a central bank digital currency for individuals. If we really had a central bank digital currency, it would be mediation by banks.”
— Jerome Powell June 21, 2023
Shortly after FTX fell last fall, the Federal Reserve Bank of New York launched its Digital Dollar Pilot Program, which includes BNY Mellon, PNC Bank, Citi, HSBC, Mastercard, TD Bank, Trust, US Bank, and Wells Fargo, as well as collaborations with SWIFT. Notable within this large quorum in which private sector banks cannot fail are the inclusion of BNY Mellon, the largest US bank, which holds USDC stablecoin treasuries, and PNC Bank, former owner of BlackRock with 22.4%, the largest asset manager in the world. , who just earlier this week filed with the Securities and Exchange Commission for approval of a Bitcoin spot ETF. The Securities and Exchange Commission (SEC) recently made itself felt by filing its own notices against Binance and exchange-listed Coinbase for brokering sales of unregistered securities in the form of cryptocurrency tokens. While BUSD, the USD stablecoin issued by Binance, was listed as an unregistered security, USDC, the USD stablecoin issued by Circle, which is second in market capitalization to only Tether, was excluded despite being listed in Both exchanges. Powell took the idea of stablecoins being important to the Federal Reserve and the larger US dollar system a step further this morning when he hinted that stablecoins are not only a security, they are money. “We see payment stablecoins as a form of money, and in all advanced economies the ultimate source of credibility in money is the central bank… We think it would be appropriate to have a very strong federal role in what happens with stablecoins in the future.”
He continued to articulate his views on not needing directly issued government dollars, instead relying on private sector banks to continue their role of purchasing government debt via treasuries in order to create cross-dollar credit in retail accounts. “We will not support accounts at the Federal Reserve by individuals…these accounts will be managed through the banking system.” In February, the SEC filed a notice from Wells to BUSD issuer Paxos, directly limiting Binance’s ability to compete in the dollar creation industry. The Department of Justice, the entities that are allowed to earn digital dollars are hand-selected right before our eyes. In order to continue the cycle of needing to buy government-issued debt to create dollars, the U.S. government moved to direct policy and regulatory suspension, even disciplinary action on dollar creation offshore, changing the landscape for stablecoins, and even the dollar itself, forever, just moments before the Federal Reserve was founded. digital.
Basel 3
“Basel III is an international capital requirement that we must go ahead and complete.”
— Jerome Powell June 21, 2023
As US commercial banks begin to integrate digital assets such as bitcoin and dollar derivatives as stablecoins, the need to ensure liquidity is on paper in order to speculate on commodities creates a unique opportunity to tilt regulation in favor of the dollar. Basel III will require any bank that wants to hold bitcoin, other digital assets, or even gold, to also hold an equal portion of the dollar against the dollar-denominated valuation of its investment. This sudden suspension of adoption of this international capital requirement will impose a net demand for dollars in the US banking system, despite the highly inflationary monetary environment. For banks or registered investment vehicles looking to offset inflationary effects by purchasing alternative reserve assets such as bitcoin, this regulation means that an increased valuation of bitcoin in the dollar pair would also increase the need for dollar liabilities on their balance sheet. Do you want to run a responsible bank and meet capital requirements while also keeping bitcoin on your balance sheet? You better also be prepared to hold a lot of dollars. The Bitcoin-Dollar idea is parallel to the petro-dollar system, which was supported from the closing of the gold window via the Nixon shock until only fairly recently. By creating a monopoly in and out of oil strictly against the US dollar, the US was essentially able to re-peg its bloated dollar to an ever-demanding energy commodity, creating a huge buyer of the dollar. As the Fed and the SEC revolve around both regional banks and private issuers of stablecoins, the bottom line effect of Basel III will create lasting demand for dollars, even in an “excessive currency” environment. Powell mentioned that the Fed does not have details on capital requirement proposals at this time, but there will be a future proposal coming to the Fed later this summer.
BlackRock ETF
“Let me tell you, it is not who is the boss. It is who controls the wallet of the boss.”
– Serge Farlay, recruiter for BlackRock
The recent filing from BlackRock, an investment firm with $10 trillion in assets under management, has kicked off a wave of filing from other institutional asset managers in the race to acquire the first authorized exchange-traded fund offering exposure to bitcoin. WisdomTree, Bitwise, and Invesco have since filed with the Securities and Exchange Commission seeking to launch a Bitcoin ETF, despite the universal rejection of every previously submitted Bitcoin ETF application, notably including NYDIG, CBOE, and Fidelity. Perhaps the eventual resurgence of newfound approval trust comes from BlackRock’s near-perfect record of getting ETFs approved, with a success rate of 575 to 1. Within the iSHARES Bitcoin Trust model S-1 The filing statement was their disclosure of the use of Coinbase in custody of Bitcoin, as well as a notice of a potential conflict of interest within a subsidiary of which they act as investment manager in a money market fund, a Circle Reserve Fund, which USDC issuers use to “hold cash, U.S. Treasury bills, and securities.” financial, and other obligations insured or secured with respect to principal and interest by the US Treasury, and repurchase agreements secured by such commitments or cash, which act as reserves backing the USDC stablecoin.” It later states that “the sponsoring affiliate (BlackRock) has a minority stake in the USDC issuer.” The S-1 includes a line stating that “the price of bitcoin may be affected by stablecoins (including Tether and USDC), the activities of stablecoin issuers, and regulatory transactions.” The BlackRock ETF cash custodian and fund manager is listed as the aforementioned partner in the Bank of New York Mellon Digital Dollar Pilot Program.
While ETFs are often used as a commodity selling mechanism by large financial institutions, recent signals from the most important US regulators reveal real potential for further creation of the digital dollar and increasing the purchasing power of a demand-inelastic reserve asset, Bitcoin. Perhaps there is no investment firm larger than BlackRock, and no banking entity larger than Bank of New York Mellon. There are few government agencies that have more influence on the global economy than the Federal Reserve and the Securities and Exchange Commission.
Welcome to institutional adoption. Just don’t dance.
