#crypto

12 05, 2025

Karen Petrou: Why Stablecoin Hegemony Could Cost Too Much

Shane Smith2025-05-12T09:49:18-04:00May 12th, 2025|The Vault|

In the battle over stablecoin regulation, defenders of the pending legislation make much of the need for the U.S. to become the dominant global leader. That’s fine, but what if the new stablecoin framework gives the U.S. crypto preeminence at the cost of U.S. bank resilience and macroeconomic growth? That would be a high price to pay, but it’s nonetheless the Faustian bargain lurking in the latest legislation.

As our analyses have made clear, the House and Senate bills address only payment stablecoins – i.e., digital assets used by consumers and companies to settle financial accounts or to purchase goods and services. The idea is to make regulated stablecoins as reliable a medium of exchange as dollars, with the bills’ reserve-asset requirements meant to ensure that one stablecoin dollar always equals one U.S. dollar. This is fine as far as it goes, but that’s not far enough to ensure payment-system finality, ubiquity, and equality. A more robust stablecoin also does little but make it still more likely that regulated banks will be disintermediated as deposits move from the current, fractional system into a new, “narrow bank” model that does little for anyone but stablecoin issuers, their affiliates, and parent companies such as giant tech platforms.

A dollar’s worth of stablecoins is little more than an abstraction until one knows how it moves across the payment system. If the payment rails are weak or the engineer is negligent, then armored boxcars just make an even bigger, harder bang when they derail.…

31 03, 2025

Karen Petrou: The President Ditches the Dollar

Eliza Allen2025-03-31T10:49:46-04:00March 31st, 2025|The Vault|

Given the controversies aroused by many of last week’s executive orders, it’s understandable that those redesigning Treasury’s payment system generally escaped notice. They shouldn’t. On purpose or not, President Trump has mandated that digital currency henceforth counts along with the dollar as U.S. fiat currency. That is a very, very big decision with consequences far beyond the ostensible goal of speeding Treasury payments and, yet again, ending waste, fraud, and abuse.

As I laid out in my book, there is nothing preordained about the dollar serving as the U.S. “fiat” currency. The medium of exchange a sovereign demands to honor its obligations is the fiat currency, but nothing forces the citizenry to accept it if the sovereign state is weak, the fiat currency is of dubious value, or options such as gold – the centuries-old go-to or a digital alternative – are better. As the U.S. gained economic power at home and abroad, the fiat currency Lincoln selected to fund the Civil War – the dollar – came to dominate U.S. transactions, especially those with the federal government. Now, the dollar is the dominant fiat currency not only at home, but is also the reserve currency around the globe. This “exorbitant privilege” is preordained by the United States; it was earned.

Now though, the U.S. is stepping back from the once “almighty dollar.” The President said it will accept alternatives to the dollar for tax and all other payments to and apparently also from the Treasury. The executive order …

24 02, 2025

Karen Petrou: How the White House Could Have Fun with the Fed

Shane Smith2025-02-24T09:11:47-05:00February 24th, 2025|The Vault|

President Trump has an awesome ability to keep even his closest allies perplexed by nonstop announcements that often break precedent, accepted norms, and even the law. Just as opponents begin to rally against one initiative, the White House launches another, sending dissenters off in a different direction, leaving the actions they initially targeted unchanged or even forgotten. Still, several policy themes are coming through loud and clear through all these different actions that have far-reaching financial-market cumulative impact. One is the sheer volatility all this chaos creates; another to which I turn here is the President’s sure and certain effort to make the Federal Reserve a tool of the executive branch, going beyond setting interest rates to turn it into America’s sovereign wealth fund.

As we noted, The President’s executive-order barrage includes one demanding a U.S. sovereign wealth fund (SWF). The tricky bit here is not the lines that would quickly blur between public and private enterprise, an historic U.S. economic principle that won’t slow Mr. Trump down for a minute. Instead, it’s where the money funding the SWF comes from given the lack of a nationalized commodities enterprise such as Norway’s and the Administration’s hell-bent campaign to reduce the federal deficit. Solution? The Fed.

U.S. law is seemingly an obstacle to deploying the Fed as an SWF since it allows the Fed to hold only direct obligations of the U.S. Treasury and its agencies as well as – a Fed sleight of hand in the 2008 crisis – Fannie …

16 12, 2024

Karen Petrou: The Likely Banking-Agency Rewrite

Shane Smith2024-12-16T09:09:18-05:00December 16th, 2024|The Vault|

Will the Trump Administration and an agreeable Congress really make sense of U.S. bank regulation? I’m not sure that what they do will indeed make sense, but there’s so little sense in the current system that I’m confident they’ll have no qualms about vaunting the institutional barricades that have thwarted due-process reformers since a Senate Banking chair proposed to create a “Federal Banking Commission” in the early 1980s. Little in the U.S. regulatory colossus is in as much need of creative disruption as banking; the tricky bit will be to ensure that tearing down the current framework doesn’t leave it in ruins.

One reason for decades of inaction is the federalist structure of U.S. bank regulation, which allows for choice among a federal, state, or hybrid (state member) charter. Whatever is done to federal bank regulation and federal charters, there is no way Congress will even try to redesign the state-based option. It might expand preemption, but that’s as far as even this group of radicals will go because Congress will not allow each Member’s state to lose much in the federal reform many of them otherwise want.

Congress will also tread softly on one political demand: that from small banks for a regulator more likely to listen to their pleas. Right now, that’s the FDIC, which owes its supervisory role over the decades to small banks despite numerous grievous FDIC mistakes along with the agency’s tunning inability to resolve banks bigger than a bread box.

New leadership may remove …

18 11, 2024

Karen Petrou: Why Banks Need More Than Just New Capital Rules

Shane Smith2024-11-18T09:27:52-05:00November 18th, 2024|The Vault|

Bankers complain with considerable fervor about a “tsunami of new rules.” There has certainly been a flood of standards indirectly implemented by supervisors, simply demanded by the CFPB, proposed, and finalized. It’s thus understandable that bankers think they’re drowning. But, as forest fires rage in Brooklyn and much of the nation is conserving water, it’s important to recall that too little rain is also dangerous. Which brings me to the strategic hazard banks run if deregulation, while alleviating a bit of bank burden, leaves untouched all the regulatory asymmetries that make it easy for shadow banks to dominate still more profitable activities once considered core banking services. If shadow banks offer better products, so be it. However, much of their market power derives only from adroit regulatory arbitrage. That’s not just bad for banks; it’s also dangerous to financial consumers, investors, and stability.

Regulators can go only so far in easing banks’ burden because the law requires many of the rules that bind them. Nonbanks are not governed by much federal law and there are scant state safety-and-soundness standards. Tech-platform companies are outside the law unless federal regulators use their inter-connection and antitrust powers to rein them in. That these nonbanks have their eyes on core intermediation and payment services is now indisputable. That banks will end up as little more than bedraggled “partners” or ancillary-service providers to nonbanks is inevitable unless necessary bank-regulatory reform comes with long-overdue nonbank safety-and-soundness and resolution standards.

Our forecasts of financial policy under President …

8 11, 2024

FedFin Assessment: Are Crypto’s Wins the Banks’ Losses?

Arezou Rafikian2024-11-08T14:57:19-05:00November 8th, 2024|The Vault|

One of the more striking results of the election is the enormous win crypto firms got for their $135 million of Congressional-campaign spending: victories so far in every race it entered. Much of this is due not just to crypto’s lure; instead, it reflects choices based not only on a candidate’s crypto sentiments, but also on the opponent’s vulnerability. As a result, at least some of crypto’s luster could fade when Congress gets back to work. However, Donald Trump campaigned on a pro-crypto platform, endorsing legislation such as the Lummis (R-WY) bill to create a “strategic reserve” for bitcoins…

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

6 11, 2024

FedFin Assessment: Trump II Financial-Policy Outlook

Arezou Rafikian2024-11-06T10:55:18-05:00November 6th, 2024|The Vault|

Given the likelihood of a Trump win, we turn in this report to our outlook for federal financial policy in a very different Administration than the one that has set it for the last four years. We will refine this outlook when final tallies determine Congressional control, but slim margins will dog both parties and thus significantly complicate the legislative outlook. Congress, like the White House, will also be preoccupied with nomination battles, immigration, geopolitical risk, and acute fiscal-policy challenges in areas such as the new president’s budget, planned tax breaks, and tariffs.

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

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28 05, 2024

Karen Petrou: Why Regulators Fail

Eliza Allen2024-05-28T12:38:29-04:00May 28th, 2024|The Vault|

Last week, the House voted on a bipartisan basis to stick its collective fingers in the SEC’s eye over its cryptoasset jurisdiction. And, in recent weeks, the Vice Chair of the Federal Reserve has been forced to concede that the end-game capital rules that are his handiwork as much as anyone’s will get a “broad, material” rewrite. What do these two comeuppances have in common? Each results from regulatory hubris so extraordinary that even erstwhile allies abandoned the cause. For all MAGA fears about an omnipotent “administrative state,” these episodes show that those seeking sweeping change without plausible rationales are still subject to the will of the people even if the people’s will befuddles those in the government’s corner offices.

First to the SEC. Chairman Gensler’s position on cryptoassets over the past three years is that many ways to use them are securities and anything that’s a security is his for the enforcing. I’m not even going to venture a conclusion on who’s right or wrong when it comes to abstruse Supreme Court rulings on complex definitions. What underpins the SEC’s downfall – temporary though it may be – is that any question as big as what’s a cryptoasset and who can do what with it should be answered by rules subject to public notice and comment, not episodic enforcement actions meant to teach everyone else a lesson.

Most people would learn the lesson if a coherent regulatory policy spelled it out. When policy is set by whack-a-mole instead of …

11 08, 2023

FedFin on : Stablecoin/Tokenization Activities

Arezou Rafikian2023-08-11T16:25:47-04:00August 11th, 2023|The Vault|

In conjunction with issuing a new supervisory policy for “novel” activities, the FRB has instituted a new process requiring non-objection letters before state member banks proceed with stablecoin or dollar-tokenization activities. Although the new non-objection process makes it clear that Fed approval will require clear adherence to a raft of policy and legal obligations, the non-objection process clears the way for state member banks to offer products with a growing role in retail and wholesale payment, settlement, and clearing activities.

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

6 03, 2023

Karen Petrou: Why Way-Woke Won’t Work in 2023

Arezou Rafikian2023-03-06T16:31:48-05:00March 6th, 2023|The Vault|

The fact that both the House and Senate passed a Congressional Review Act resolution overturning the Department of Labor’s ESG standards makes it clear that striking an anti-woke blow is deemed good politics by red and purple politicians. The President’s certain veto also makes it clear that a blue man sees matters quite differently, as did 204 House Democrats and 46 of their Senate colleagues. This stalemate will continue for changes to federal law, but it won’t stop Republicans from taking a lot out on financial regulators and big banks that they can’t get into the law books. Thus, anyone deemed even a bit woke-ful will get an earful.

Even if all these excoriations are only rhetorical, they will prove meaningful because even federal regulators immune from the appropriations process are susceptible to political influence – as well they should be if they are not also to be unaccountable. That anti-wokeness is already making its mark is evident in many ways, most recently in the inter- agency crypto-liquidity risk statement at great pains to refute any Republican suggestion that tough new standards amount to a blanket ban on engaging in any form of legal cryptoasset activity. In essence, the new statement says, “banks can do crypto if it’s legal, but they almost surely shouldn’t do crypto because it’s way risky and we’re watching.”

To be sure, anything crypto isn’t always toxic. Another way the agencies will handle accusations that they are conducting a stealth-woke anti-crypto campaign is to make it …