Apocalypse FedNow

“Leaving the Fed with a dilutive role of stablecoins would be a mistake.”

– Jerome Powell, June 21, 2023

On the Longest Day of the Year, Fed Chairman Jerome Powell Takes the Stage testify before congress and the House Financial Services Committee. Last week, the Powell-led central bank decided to temporarily pause rate hikes in its mission to fight a massive battle – the fastest and most aggressive interest rate hike in US history. worth Inflation found to be on a downward trend from lockdown-induced Posture Inflation through stimulus measures. Less than a month away from the announced launch in July of FedNow, an interbank communication platform, Powell finds himself at the intersection of monetary policy, regulation and capital requirements ahead of the formal establishment of a digital dollar system.

The New Dollar: FedNow and UST, Not a Retail CBDC

“The dollar’s position 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 a Zelle or Venmo credit to your retail account, or dollar balances in your checking account at Bank of America. But generally speaking, the mechanism behind the transfer of Treasuries and other reserve assets backing these numbers on the screen is based on the technical agility of a fax machine. the dollar could be the world reserve PostureAnd transactions can be transacted through intermediaries on the explicitly centralized Bancor Rail, or less explicitly on Ethereum Rail via ERC-20 tokens as popular retail stablecoins, but these novel credit creators remains the US Treasury world reserve held by Property, These bonds are issued strictly by the US Treasury to be sold to the private sector to create dollars, with yields dependent on the federal funding rate set by the Federal Reserve. The direct issuance of some sort of retail CBDC (central bank digital currency) to the public is generally anticipated due to surveillance concerns and currency confiscation from a centralized issuer, but few are concerned with the level of financial oversight already imposed by banks. Know about, leave aside the matter of capability. Censoring, blacklisting, and even exposing your counterparty to risk retailing for these trusted third parties. All of these functions have been increasingly made possible through the digitization of currency with a heavy reliance on centralized payment rails, but as of next month, the communication network for interbank asset trading remains lossy and slow.

FedNow, which is scheduled to launch next month, serves several purposes, but perhaps none is more important than creating more efficient levers for the Fed to have 365/24/7 control over overnight banking rates like the SOFR, which allows lending. Effectively determines the cost of taking. Short-term liquidity among partially private banks attempting to meet the withdrawals of their depositors. You’ve probably heard the phrase “reverse repo” once or twice, but the underlying mechanism is often misunderstood. “repo” means repurchase agreement; Essentially a contract between two entities in which Bank A, with excess dollar liquidity, agrees to lend cash to Bank B, with overnight liquidity needs, backed by short-term loans collateralized by Bank B’s assets such as UST. Through, with conditions. Desire repurchase their securities, usually the next morning (“overnight”), plus a percentage-based fee that Bank A gets for holding them. A reverse repo is essentially the same behavior, except that Bank A is bond-rich, cash-poor, and thus is seeking dollar-denominated liquidity from Bank B. This exact scenario emerged as a result of recent regional bank failures in the US, and the Fed created new mechanisms to meet depositors’ liquidity needs. In the case of the ever-growing reverse repo market, Bank B is routinely the largest US bank, and sometimes directly the Fed. FedNow is a digital lever, made possible via the Internet, that allows full centralized control over the overnight rate of dollar borrowing, the necessary transfer of treasuries between banks, and thus the movement of dollar-denominated activity away from the Eurodollar market and into the Eurodollar market. can be brought back. Under the purview of the United States Fed and Treasury.

private-unit dollar issuance

“We will not support a central bank digital currency for individuals. If we had a CBDC, it would be mediated by banks.”

– Jerome Powell, June 21, 2023

Shortly after the FTX decline last time, the NY Fed launched its digital dollar pilot program, with BNY Mellon, PNC Bank, Citi, HSBC, MasterCard, TD Bank, Truist, US Bank, and Wells Fargo, as well as SWIFT. Cooperation was also involved. , Notable in this quorum of private sector banks too big to fail are the inclusion of the largest US bank BNY Mellon, which holds the treasury for the popular stablecoin USDC, and PNC Bank, which owns BlackRock, the world’s largest asset manager. , which earlier this week applied to the SEC for approval of the Spot Bitcoin ETF. The SEC recently caused a stir by filing its own notices against Binance and the publicly listed Coinbase for brokering the sale 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 only to Tether in market cap value, has been listed on both exchanges. Regardless, the notice was kept out. Powell took the idea of ​​stablecoins being important to the Fed and the larger US dollar system a step further this morning when he insisted that stablecoins are not only not a security, but they are money as well. “We view payment stable coins as a form of money, and in all advanced economies, the ultimate source of credibility in money is the central bank… We believe that what happens in future stable coins It would be appropriate to have a much stronger federal role in that.”

He expressed his views on not requiring directly issued government dollars and relying on private sector banks to continue their role of government debt purchases through the UST to create credit through dollars in retail accounts. and clarified. “We will not support accounts by individuals at the Federal Reserve… such accounts shall be managed through the banking system.” In February, the SEC sent a Wells notice to Paxos, the issuer of BUSD, thereby limiting Binance’s ability to compete directly in the dollar manufacturing industry. Through the signature of the weapons of regulation from the Fed, Treasury, SEC and even the Department of Justice, the entities allowed to create the digital dollar are being hand-picked before our eyes. To perpetuate the cycle of needing to buy government-issued debt to create dollars, the US government has moved to direct policy, regulatory commentary, and even disciplinary action on offshore dollar creation, for stable coins. Changing the landscape, and even the dollar, forever, the digital Federal Reserve was just moments away from being established.

Basel III

“Basel III is an international capital requirement that we must step up and meet.”

– Jerome Powell, June 21, 2023

As U.S. commercial banks begin to integrate digital assets such as bitcoin and dollar-derivatives such as stable coins, the public needs to ensure that on-sheet liquidity exists for speculative actions on commodities, which limits regulation to dollars. creates a unique opportunity to lean in favor of , Basel III will also require any bank wishing to hold bitcoin, other digital assets or even gold to hold dollars of value equal to the dollar denomination of their investments. This sudden comment on adopting this international capital requirement will force a net demand for dollars in the US banking system, despite a high monetary inflation environment. For banks or registered investment vehicles that want to offset the effects of inflation by purchasing alternative reserve assets such as bitcoin, this regulation will mean that an increase in bitcoin’s valuation in a dollar-pair will also require dollar liabilities on their balance sheets. Will increase Do you want to run a responsible bank and meet capital requirements while keeping bitcoin on your balance sheet? Better be prepared to have lots of dollars as well. The bitcoin-dollar idea parallels the petro-dollar system, which was upheld until shortly before the Nixon shockwaves closed the gold window. By strictly monopolizing the movement of oil to and from the US dollar, the US was able to essentially reconvert its growing dollar to an ever-in-demand energy commodity and become a major buyer of the dollar. As the Fed and SEC clamp down on both regional banks and private issuers of stable coins, the downstream effects of Basel III will create sustainable demand for the dollar even in a “hyperbitcoinization” environment. Powell noted that the Fed does not have specific information on capital requirements proposals at this time, but there will be a proposal in the future that will come to the Fed board later this summer.

blackrock etf

“Let me tell you, it’s not about who the president is. This is what is controlling the president’s wallet.”

Serge Varley, BlackRock recruiter

A recent application filing from BlackRock, an investment firm with total assets under management of $10 trillion, has triggered a competition of filings from other institutional asset managers in the race to become the first approved exchange-traded fund to offer exposure to bitcoin. WisdomTree, Bitwise, and Invesco have since applied to the SEC to launch bitcoin ETFs, despite universal disapproval of every spot bitcoin ETF application previously filed, notably including NYDIG, CBOE, and Fidelity. The newly found resurgence in approval confidence probably comes down to BlackRock’s near-perfect record for getting ETFs approved, which has a success rate of 575 to 1. iSHARES within the bitcoin trust form S 1 The registration details disclosed his use of Coinbase for bitcoin custody, as well as a potential conflict of interest within one of his affiliates acting as investment manager for the money market fund, Circle Reserve Fund, which is also known as USDC. Issuers hold cash, US Treasury bills, notes and other obligations insured or guaranteed by the US Treasury in the form of principal and interest, and repurchase agreements secured by such obligations or cash, which serves as the reserve backing the USDC stablecoins. It later stated that “an associate sponsor (BlackRock) has a minority equity interest in the issuer of USDC. 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 the like.” their regulatory behavior”. The BlackRock ETF’s cash custodian and trust administrator is listed above as Digital Dollar Pilot Program partner Bank of New York Mellon.

While ETFs are often used by large financial institutions as a mechanism to short commodities, recent signals from most important US regulatory bodies indicate an increase in the creation of digital dollars and the increased purchasing power of the demand-volatile reserve asset, bitcoin. reveals the true potential of There is probably no investment firm bigger than BlackRock, and no banking entity bigger than Bank of New York Mellon. There are few government bodies more influential on the global economy than the Fed and the SEC.

Welcome to institutional adoption. Just don’t talk nonsense.