#CBDC

21 03, 2022

Karen Petrou: How to Set Course to a Digital Future

2023-04-03T13:18:42-04:00March 21st, 2022|The Vault|

Last week, we laid out the macrofinancial implications of the Ukraine crisis – i.e., its impact on the global financial-and-regulatory order.  Some of this analysis is founded on President Biden’s digital-asset executive order, which also has profound and immediate impact on critical macroprudential issues at the border of innovation and regulation to which we now turn.  To forecast how digitalization will come upon us, the digital-asset order must be read in the Administration’s broader context in which high-impact political issues, such as racial equity, weigh at least as heavily as the complexities of CBDC or even the benefit of a future financial crises foregone.

Administration policy based on Democratic politics is set not only by the digital-asset order, but also by other White House directives that will define the boundaries of what Treasury and the agencies – the Fed included at least to a point – will do.  To forecast digital-asset policy, one must thus also divine the outcome of two other executive orders.

First, there’s the President’s competition directive.  Every critical consumer-protection question under the CFPB’s purview is now considered first and foremost in terms of competition, with the agency’s director making it manifestly clear that almost anything done by any big bank is a target for structural reform.  Director Chopra doesn’t like fintech or biotech much better than most banks do, but his approach to digital assets is likely only to squelch big banks as much as he can and thus to drive cryptoassets further into …

14 03, 2022

Karen Petrou: The Collapse of the Global Financial Order and What’s to Come

2023-04-03T15:09:21-04:00March 14th, 2022|The Vault|

The Great Depression’s role sparking the Second World War led the victors to create the Bretton Woods agreement establishing stable reserve assets under-girding a world prosperous and peaceful enough to prevent another conflagration.  After 2008, the world reinforced another set of global norms, setting cross-border financial standards over the next fifteen years by newly empowered transnational financial agencies.  Now, what was left of Bretton Woods is in ashes and national geopolitical interests will again dictate critical financial requirements.  Although it’s of course possible that Russia’s devastating invasion will end without still more cataclysmic carnage, it has done irreparable damage to the largely frictionless cross-border finance on which it and its oligarchs relied.  China should take a lesson.

To be sure, this globalized and increasingly financialized construct was imperfect even for the hegemonic states and systemic financial companies in whose interests it worked the best.  As Rana Foroohar pointed out last week, it was premised on the optimistic “end of history” reasoning that expected an interdependent world to be all-for one and one-for-all.  Quite simply, if you must go through someone else’s space to get where you want to go, then you are more likely to abide by the rules applicable in that space to ensure you get there.  Over time, this creates a macrofinancial system in which currencies, payments, assets, and risks moved with few speedbumps from one end of the earth to the other.  Even where rules might slow all of this down, safe-haven states constructed high-price bypasses.  This, …

7 03, 2022

Karen Petrou: Why Armies Now March on Their Wallets

2023-04-04T12:29:27-04:00March 7th, 2022|The Vault|

Napoleon famously said that armies march on their stomachs.  Now, it’s clear that armies also march on their wallets.

The dollar’s blitzkrieg triumph isn’t due to any love of the greenback — even America’s closest allies have long hoped to counterbalance US. economic dominance with rival payment systems able to operate unscathed regardless of U.S. sanctions.  However, the EU, U.K., and Japan have never gotten much past dreaming about payment-system challenges because the embedded dollar-based system has become essentially friction- and risk-free.  That’s hard to beat.

China might still have a shot at a yuan-based substitute, but it would have to ensure liquidity (essentially impossible when a currency isn’t freely convertible) as well as political neutrality.  China’s decision suddenly to mount de facto nationalization of what was once a thriving, privately-owned digital-commerce sector will at the least give pause to those whose funds would move through a Chinese-dominated system.

Any nation that wants to replace the dollar also has to have sovereign obligations readily understood to be a safe haven under acute stress that are issued in amounts sufficient to absorb extreme shock.  China and the EU has no single issuer of sovereign bonds in quantity and quality sufficient to substitute for Treasury obligations.  Most market participants think China is more likely to be the cause of a shock than ever to serve as a shock absorber, ruling out its sovereign debt even if it grows large enough to mount a challenge to the U.S. Treasury.

And, finally, there’s the …

15 02, 2022

FedFin: Stablecoin Legislative Consensus in Sight, But from a Distance

2023-04-04T15:59:02-04:00February 15th, 2022|The Vault|

Despite fierce partisan fighting over pending Fed nominations, today’s Senate Banking hearing on stablecoin regulation was considerably more bipartisan that last week’s HFSC session (see Client Report CRYPTO24).  Both Chairman Brown (D-OH) and Ranking Member Toomey (R-PA) are in broad agreement on a two-tier structure in which stablecoins are issued either by banks or by nonbanks subject to strict reserve-asset, AML, and related regulation.

The full report is available to retainer clients. To find out how you can sign up for the service, click here

14 02, 2022

Karen Petrou: Two Regulatory Decisions That Will Define the Future of Money

2023-04-04T16:07:43-04:00February 14th, 2022|The Vault|

Like all of you, we at FedFin spend a lot of time watching the U.S. Congress, but I’m increasingly wondering why.  Sure, there’s the blood and guts.  Watching Congressional deliberations is more and more like being a spectator at a hockey game for the fights or NASCAR races for the next fiery crash.  Does any of this carnage really matter?  Not much when it comes to vital, urgent financial policy questions such as what money has come to be in the United States.  With Congress mired in a never-ending cock fight, regulators hold the fate of finance mostly in their own fierce grip.  Even without deployment of the Fed’s nuclear CBDC option, two developments last week show clearly how much power regulators have to redefine U.S. digital currency.

First, there was outgoing FDIC Chair McWilliams’ offhand suggestion in her final remarks that stablecoins have all the characteristics of fiat currency deposits and thus could be eligible for FDIC insurance under current law.  As soon as he took the helm, Acting FDIC Chairman Gruenberg demanded tough cryptocurrency regulation, but he didn’t rule out deposit status for at least some stablecoins if the agency was satisfied with their stability.

The impact of an FDIC decision deeming at least some stablecoins to be deposits is hard to over-estimate.  As I detail in my book, what’s actually in a bank deposit isn’t what most people think they hold, i.e., a virtual pile of dollars.  In fact, money in the bank is …

14 02, 2022

Karen Petrou: Two Regulatory Decisions That Will Define the Future of Money

2023-04-04T16:07:34-04:00February 14th, 2022|The Vault|

Like all of you, we at FedFin spend a lot of time watching the U.S. Congress, but I’m increasingly wondering why.  Sure, there’s the blood and guts.  Watching Congressional deliberations is more and more like being a spectator at a hockey game for the fights or NASCAR races for the next fiery crash.  Does any of this carnage really matter?  Not much when it comes to vital, urgent financial policy questions such as what money has come to be in the United States.  With Congress mired in a never-ending cock fight, regulators hold the fate of finance mostly in their own fierce grip.  Even without deployment of the Fed’s nuclear CBDC option, two developments last week show clearly how much power regulators have to redefine U.S. digital currency.

First, there was outgoing FDIC Chair McWilliams’ offhand suggestion in her final remarks that stablecoins have all the characteristics of fiat currency deposits and thus could be eligible for FDIC insurance under current law.  As soon as he took the helm, Acting FDIC Chairman Gruenberg demanded tough cryptocurrency regulation, but he didn’t rule out deposit status for at least some stablecoins if the agency was satisfied with their stability.

The impact of an FDIC decision deeming at least some stablecoins to be deposits is hard to over-estimate.  As I detail in my book, what’s actually in a bank deposit isn’t what most people think they hold, i.e., a virtual pile of dollars.  In fact, money in the bank is …

8 02, 2022

FedFin: Partisan Impasse Suggests Small Chance for Stablecoin Statutory Change

2023-04-05T12:06:36-04:00February 8th, 2022|The Vault|

Today’s HFSC hearing on stablecoins makes it clear that the bipartisan legislation Chairwoman Waters (D-CA) prefers is at best a long way off. Democrats generally agreed with the President’s Working Group stablecoin report (see Client Report CRYPTO21), with Under-Secretary Liang today not only describing its findings but reinforcing the need for rapid regulatory intervention in concert with substantive statutory change.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

31 01, 2022

Karen Petrou: CBDC’s Big Empty

2023-04-05T16:20:36-04:00January 31st, 2022|The Vault|

Anyone looking for even a scintilla of a clue buried in a hint of an intention in the Fed’s CBDC discussion draft hunted in vain for guidance on the most consequential strategic inflection point for the U.S. financial-services industry, the financial system, the global payment system, and even the future of money.  Once, we all would have had to wait for augers from the on-high Fed to see the fate the imperium decreed.  Now, the Fed still thinks it rules all it surveys even though it doesn’t.  Soon, it may find out the hard way that fast-moving companies crafting digital money care as little for the central bank’s wishes as they did for those of the media, hotel, and retailing magnates they have already supplanted.

This is not to say that we must necessarily have a central-bank digital currency.  As I noted in my book, a democracy must ensure privacy and competition in ways China, for one example, disregards.  Rather, it’s to say that the U.S. will not have a secure store of value or sound medium of exchange without a payment system on which the economy stands firm.  Payment-system finality, accessibility, ubiquity, and cyber-security are all at risk if the Fed cedes the CBDC field without first and fast establishing the new framework it knows we need.

Nor am I saying that CBDC is inevitable because stablecoins are a certainty.  Libra’s ignominious demise is ample evidence of the power regulators still have to set the terms of payment …

27 01, 2022

FedFin on: U.S. Central Bank Digital Currency

2023-04-11T16:11:59-04:00January 27th, 2022|The Vault|

Months after initially promising to release a discussion draft on central bank digital currency (CBDC), the Federal Reserve is now seeking comment on whether and how it might create one. Reflecting the hesitancy of several FRB leaders, Chairman Powell included, the draft emphatically states that the Board has made no decision to issue a CBDC and, should it do so, it will seek at least tacit approval from both Congress and whichever Administration is in charge at the time.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

11 01, 2022

FedFin Assessment: Powell Sidesteps Many Challenges, Promises Much

2023-04-24T15:54:45-04:00January 11th, 2022|The Vault|

As promised yesterday (see Client Report FEDERALRESERVE66), we listened closely today to gauge the extent to which Chairman Powell faces a serious challenge to reconfirmation. At least as far as Senate Banking Members are concerned, he doesn’t. Although Sen. Warren (D-MA) and other Democrats lambasted Mr. Powell over insider-trading allegations and what they called the Fed’s unresponsiveness, all still were cordial and seemed generally to blame the problem on institutional failures, not the chairman. Sen. Menendez (D-NJ) called the Fed’s diversity policy “outrageous,” but also does not seem inclined….

The full report is available to retainer clients. To find out how you can sign up for the service, click here.…

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