#cryptocurrency – Federal Financial Analytics

10 01, 2023

American Banker, Tuesday, January 10, 2023

Arezou Rafikian2023-01-11T11:01:42-05:00January 10th, 2023|Press Clips|

Silvergate Bank loaded up on $4.3 billion in FHLB advances

By Kate Berry

When depositors began pulling money out of Silvergate Capital Corp. following the collapse of cryptocurrency exchange FTX, the California bank shored up its liquidity by tapping a quasi-government agency not typically known as a lender of last resort. Silvergate received $4.3 billion from the Federal Home Loan Bank of San Francisco late last year, company filings show….”What the $4.3 billion to Silvergate went to in terms of mission is a very intriguing question,” said Karen Petrou, managing partner at Federal Financial Analytics. “The housing mission of the Home Loan banks is apparently long gone, since this has nothing to do with housing. It has to do with supplementing wholesale funding sources for banks that can’t happen any other way or at greater cost.”

https://www.americanbanker.com/news/silvergate-bank-loaded-up-on-4-3-billion-in-fhlb-advances

…

5 12, 2022

Karen Petrou: Bank Canaries in the Crypto Mineshaft

Arezou Rafikian2022-12-05T16:34:33-05:00December 5th, 2022|The Vault|

Just because crypto hasn’t triggered a systemic collapse doesn’t mean that it won’t be the perpetrator of quiet banking crashes. We would do well to remember that the 2008 calamity came shortly after the collapse of small subprime-mortgage finance companies. These would have been proverbial dead canaries had anyone looked down the mineshaft. And, even as the U.S. subprime crashes formed into a single, torrential crisis, bank regulators confidently foretold no systemic impact because they comfortably believed that no bank had undue exposure to high-risk mortgages. So bank regulators still say now when it comes to crypto and let’s hope the outcome is different this time. However, bits and pieces of bank wreckage are already to be found in FTX’s rubble and may well surface as the crypto tide continues to ebb. No bank shipwrecks have emerged, but some of the wreckage has the look of a sizeable hull.

The most tantalizing bit of banking wreckage is a super-tiny Washington State bank which FTX appears to have surreptitiously acquired. As the New York Times reported, one of FTX’s affiliates last March invested more than double all the capital previously held in Farmington State Bank, doing so in a carefully-structured way to avoid triggering legal control thresholds. The bank is the nation’s 26^th smallest and, after this generous investment, it deposits went up about 600 percent from its initial $10 million level via four new accounts. Sill more intriguingly, Farmington’s crypto ties via shadow owners appear to go back to …

21 11, 2022

Karen Petrou: What Will Be Done, Not Just Said, To Fix FTX

Arezou Rafikian2022-11-22T13:18:11-05:00November 21st, 2022|The Vault|

The only question left unanswered about FTX is whether it was a purposeful scam as more than a few clients conclude or a case of implacable forces ending the era of easy money that just got the better of another wunderkind whose awesome skills turned out to be largely confined to costumery conveying inspired innovation to all too many vulnerable investors and gullible politicians. No matter which it is or even – as I think – if it’s a bit of both, FTX is a debacle that will change U.S. financial policy for the better unless FTX drives still more crypto chaos that then spills over to core financial infrastructure and intermediation. I’ve gotten a lot of questions about crypto policy after my brief discussion in last week’s talk on the midterm’s policy impact. Here, more on both the legislative outlook and what regulators may finally bring themselves to do even if Congress can’t get itself together any better next year than in so many before it.

First more on why stablecoins are the cryptoasset most likely to come under a new federal gun. This isn’t because they deserve it more than any other cryptoasset – although they might – but because policy thinking about what to do with stablecoins is most advanced and, thus, bipartisan negotiations in the House are closest to the finish line.

That said, even stablecoin standards aren’t going to be easy. The clearest articulation of how new law might work is S. 4356, the Lummis-Gillibrand …

5 10, 2022

FedFin on: FSOC: Cryptoassets Demand Top-Down Standards, Securities Regulation, Banking-Agency Cooperation

Arezou Rafikian2022-10-05T14:51:32-04:00October 5th, 2022|The Vault|

In this report, we build on our initial assessment of FSOC’s conclusion that cryptoassets now pose systemic risk and the Council’s recommendations about what should be done to curtail it. Unsurprisingly, the FSOC report reiterates Treasury’s conclusion that cryptoassets have few, if any, natural uses (see Client Report CBDC14), characterizing this asset class as largely speculative and/or focused on benefiting insiders. Specific recommendations are detailed in this FedFin report, with FSOC focusing as much on inter-agency cooperation…

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

21 09, 2022

FedFin Analysis: Treasury Sees Few Crypto Benefits, Much Risk to Contain and Control

Arezou Rafikian2022-09-30T12:11:23-04:00September 21st, 2022|The Vault|

We follow our prior in-depth analysis of Treasury’s CBDC and payments report (see Client Report CBDC14) with a detailed assessment of the Department’s assessment of overall cryptoasset policy. We noted on Friday key recommendations and turn here to a more in-depth assessment of Treasury’s reasoning, recommendations, and likely action. This section of the response to the President’s executive order (see Client Report CRYPTO26) is notably uncharitable to cryptoassets, observing that broader use cases beyond trading and lending within the crypto verse have yet to materialize and may never do so….

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

12 09, 2022

Karen Petrou: When Crypto Arrogance is Criminal Contempt

Arezou Rafikian2022-10-17T15:44:34-04:00September 12th, 2022|The Vault|

Bankers are often said to live in isolated splendor. There’s truth to this, but banker insularity is nothing compared to the astonishing effrontery of cryptoasset executives who think their self-assured brilliance puts them above not just the law, but even concern for the public good. Nothing argues more compellingly for immediate, stringent crypto regulation than the outrage with which crypto companies have greeted Treasury’s demands – request failed to work – that they cease facilitating the kind of dark-money transactions that fund Russian war crimes, North Korean nuclear-obliteration threats, and webs of human trafficking, narcotics smuggling, and general evil around the world. These companies clearly cannot govern themselves and they must thus be quickly and sharply made to do so for everyone else.

What brought this issue to a head is the self-righteous fury with which crypto companies view Treasury’s efforts to make them comply with the same sanctions rules demanded of anyone dealing in any other form of money. Somehow, money in digital form is money that can do no wrong because, we are told, those who use crypto-currency – apparently unlike users of any other form of a medium of exchange — have a right to do so as they wish.

This omnipotent perspective is clearly evident in last week’s Coinbase suit against the U.S. Treasury on grounds that sanctioning a crypto “mixer”, Tornado Cash, trampled on so many First Amendment rights that press stories giving its side of the case had space only to list a few. …

14 06, 2022

FedFin On: U.S. Digital-Asset Framework

Arezou Rafikian2023-01-27T15:30:30-05:00June 14th, 2022|The Vault|

After protracted negotiations and much public attention, bipartisan senators have introduced a far-reaching bill designed to encourage digital-asset use without undue risk to consumers, investors, or the financial system. The bill decides most, if not all, of the outstanding regulatory barriers to digital-asset use in favor of digital assets and their providers. Provisions in many cases go farther than public discussion has so far noted – for example, the measure not only expands the ability of digital-asset providers to reach retail and wholesale customers, but also gives them access to FDIC resolution without the cost of paying insurance premiums or coming under many of the rules that govern insured depositories…

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

23 05, 2022

Karen Petrou: The Moral Obligation of Stablecoin Issuers

Arezou Rafikian2023-02-21T14:07:43-05:00May 23rd, 2022|The Vault|

At the height of what proved his fleeting power, the founder of a now-evaporated stablecoin said, “I never debate the poor.” And, perhaps he doesn’t have to – his was not among tall the fiat-currency wallets emptied in the course of this high-flying venture. Those were mostly in the virtual pockets of young and often minority households. Regardless, this statement is stark evidence of the difference between the social-welfare obligations demanded of banks and the get-it-while-you-can ethos embodied by this entrepreneur, Elon Musk, and all their acolytes. We demand much of banks because they take other people’s money. The same obligations should bind stablecoins because they also take other people’s money and thus need to be governed not just for safety and soundness, but also for equality and equity.

It might be argued that a community-service rationale isn’t warranted for crypto-currency because stablecoin issuers are not intermediaries – indeed, this was a defense against new rules laid out at a recent hearing and it’s the rationale behind the Toomey draft bill to craft a federal stablecoin construct, which eschews most prudential and any community obligations for nonbank stablecoin issuers.

Leaving aside the competitive inequity of a two-tier regulatory framework for the same business, there are three compelling public-welfare arguments for subjecting stablecoins and many other virtual currencies to critical components of bank regulation even if they don’t emulate every aspect of a full-service bank.

First, taking money from other people and promising that they can get it back …

14 03, 2022

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

Arezou Rafikian2023-04-03T15:09:21-04:00March 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

Arezou Rafikian2023-04-04T12:29:27-04:00March 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 …