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BY TYLER DURDEN
FRIDAY, JUN 23, 2023 – 04:40 PM
Authored by Mark Goodwin via BitcoinMagazine.com,
Within Fed Chair Jerome Powell’s recent congressional appearance is regulatory signaling with large implications for stablecoins, the dollar, CBDCs, and bitcoin…
“It would be a mistake to leave the Fed with a weak role of stablecoins.”
– Jerome Powell, June 21, 2023
On the longest day of the year, Fed Chair Jerome Powell took to the podium to testify before Congress and the House Financial Services Committee. Last week, the Powell-led central bank had decided to temporarily pause rate hikes — the fastest and most aggressive interest rate increases in U.S. history — in their mission to battle the massive price inflation found downstream from the lockdown-induced monetary inflation via stimulus measures.
Less than a month away from the announced July launch of FedNow, an inter-bank communication platform, Powell finds himself at a crossroad of monetary policy, regulation and capital requirements before the formal founding of the digital dollar system.
THE NEW DOLLAR: FEDNOW & USTS, NOT RETAIL CBDCS
“The status of the dollar as the world’s reserve currency is very important.”
– Jerome Powell, June 21, 2023
The dollar has been digitized for a long time; be it the Zelle or Venmo credits in your retail account, or the dollar balance in your checking account at Bank of America.
But generally speaking, the mechanisms behind the transfer of Treasuries and other reserve assets backing these numbers on a screen have remained at the technical agility of a fax machine. The dollar may be the world reserve currency, and can be transacted via intermediaries on obvious centralized banker rails, or less obviously on Ethereum rails via ERC-20 tokens in the form of popular retail stablecoins, but the U.S. Treasuries held by these novel credit creators remain the world reserve asset.
These bonds are strictly issued by the U.S. Treasury to be sold to the private sector to create dollars, incentivized with yields dependent on the federal funding rate set by the Federal Reserve. The public has generally feared the direct issuance of some form of retail CBDC (central bank digital currency) due to surveillance concerns and currency seizure from a centralized issuer, but fewer realize both the level of financial surveillance already imposed by banks, never mind the ability for these trusted third parties to censor, blacklist and even expose retail to their counter-party risk.
All of these actions are made increasingly possible via the digitization of the currency with an encroaching reliance on centralized payment rails, but up until next month, the communication network for interbank asset trades has remained lossy and slow.
FedNow, slated to launch next month, serves multiple purposes, but perhaps none as important as creating a much more efficient lever for the Fed to have 365/24/7 control on overnight banking rates, such as SOFR, effectively setting the cost of borrowing short-term liquidity between fractionalized private banks attempting to meet their depositors’ withdrawals.
You have probably heard the phrase “reverse repo” once or twice, but the underlying mechanic is often misunderstood. The “repo” stands for a repurchasing 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, via a short-term loan collateralized by Bank B’s assets such as USTs, with the conditions that Bank B will repurchase their securities, usually the next morning (“overnight”), plus a percentage-based fee that Bank A gets to keep.
A reverse repo is essentially the same behavior, except that Bank A is bond-rich, cash-poor and thus asking Bank B for dollar-denominated liquidity. This exact scenario came to fruition within the recent regional bank failures in the U.S., and the Fed created new mechanisms to backstop the liquidity needs of the depositors. In the case of the ever-growing reverse repo market, Bank B is routinely the largest American banks, and sometimes even the Fed directly.
FedNow is a digital lever, made possible via the internet, for complete centralized control on the overnight rate of borrowing dollars, the necessary transferring of Treasuries between banks, and thus the reshoring of dollar-denominated activity away from the Eurodollar market, and back to the United States within the scope of the Fed and the Treasury.
Rose Rambles... 