Powell Warns Crypto Investors
MarketWatch reports Fed’s Powell Warns Crypto Investors.
Federal Reserve Chairman Jerome Powell said Wednesday that U.S. is at a ‘critical point’ for regulation of digital currencies, advocating for the application of new rules on some digital payment tools that are similar to those applied to bank deposits and money-market mutual funds.
He made special mention of stablecoins like Tether and USD coin which are pegged to the U.S. dollar and are used to facilitate trading between various cryptocurrencies, including bitcoin ether.
“We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset. We have a pretty strong regulatory framework for bank deposits for example, or money market funds.” Powell said during a virtual hearing before the House Financial Services Committee. “That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don’t have.”
In February, the New York State Attorney General Letitia James banned the use of Tether and an associated crypto exchange, Bitfinex, in the state for making false statements about the currency’s backing.
Powell said the Federal Reserve plans to issue a report in late summer or early fall that will lay out the risks and benefits associated with cryptocurrencies, stablecoins as well as a potential Fed-backed digital dollar. Advocates of a so-called central bank digital currency have argued that a CBDC could function similarly to a stablecoin, but with reduced risk.
Risks of Crypto Stablecoins Attract Attention of Yellen, Fed and SEC
The Wall Street Journal reports Risks of Crypto Stablecoins Attract Attention of Yellen, Fed and SEC
Treasury Secretary Janet Yellen is scheduled Monday to hold a meeting of the President’s Working Group on Financial Markets to discuss stablecoins, the Treasury Department said Friday. The group includes the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
“Bringing together regulators will enable us to assess the potential benefits of stablecoins while mitigating risks they could pose to users, markets, or the financial system,” Ms. Yellen said in a statement.
Tether Ltd., the issuer of the tether stablecoin, said it looked forward to working with officials to support transparency and compliance. Binance Holdings Ltd., issuer of Binance USD, said it sees the meeting as a positive move. Having regulators involved will bring more legitimacy and clarity to stablecoins, Binance Chief Compliance Officer Samuel Lim said.
Stablecoins and the companies that issue them have been criticized as not being trustworthy.
“There are many reasons to think that stablecoins—at least, many of the stablecoins—are not actually particularly stable,” Boston Federal Reserve President Eric Rosengren said in a June speech.
In December, the president’s working group released a statement on the regulatory issues concerning stablecoins. Among other things, it suggested that best practices would include a 1:1 reserve ratio and said issuers should hold “high-quality, U.S.-dollar denominated assets” and hold them at U.S.-regulated entities.
Warning or Blessing?
Are these warnings good news or bad?
Right now it is difficult to say. Regardless, some things in the above articles are amusing, especially reserve ratios.
Fictional Reserve Lending Is the New Official Policy
Powell discussed a need for 1:1 reserve ratio for stablecoins. That means every coin is backed 100% by a dollar.
But what’s backing the dollar?
The money in your checking account is not backed by anything at all. Nor are there any mandatory bank reserves on deposits. The Fed eliminated all reserve requirements for banks on march 26, 2020.
I discussed this in Fictional Reserve Lending Is the New Official Policy
With little fanfare or media coverage, the Fed made this Announcement on Reserves.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Electronic Wizardry
Money in your checking account that is supposed to be available on demand, isn’t there at all. It’s been lent out and has for decades. In 2020, the Fed finally admitted the truth.
Via wizardly of electronics and sweeps, your money is magically in two places at the same time: available for you to spend and the bank to lend overnight or place on deposit at the Fed collecting interest.
What’s Backing Tether?
People have been asking that question for years.
Stuart Hoegner, general counsel at Tether, said the company has a highly liquid portfolio that has been stress-tested. He said the company has a risk-averse approach to managing its reserves and operates in a way to ensure that its dollar peg is maintained.
“Our transparency allows people to decide whether they are happy holding that token or not,” he said.
What a lie. There is no transparency at Tether. There is not even an office you can call.
Interested in Crypto?
If so Please Read the Best Crypto Interview in History.
The interview is a three-way discussion between Grant Williams, Bennett Tomlin, and George Noble.
They take a deep dive into what’s backing Tether and how Bitfinex and Tether commingled client and corporate funds.
Bennett Tomlin stated “The vast majority of Tether holders have no path to redemption. They’re not registered clients of Tether, and there’s no real way for them to become registered clients of Tether because Tether keeps that group relatively small.“
In other words, you can put your money in but not get it out if there was a run on the bank.
Banks can get away with no reserves on deposits thanks to the Fed, but fractional reserves in the crypto space are another matter.
If you are interested in the crypto market please read the article.
100% Reserves
The Fed wants 100% reserves on cryptos. I would like to see 100% reserves on the US dollar in which every dollar is 100% backed by gold on demand.
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places at the same time: available for you to spend and the bank to lend
overnight or place on deposit at the Fed collecting interest.”
It’s institutions using tether, retail doesn’t use it. Retail has the edge in the crypto markets due to the decentralized nature of the ecosystem.I worked at State Street and won’t touch the stock market with a ten foot pole. If I did I’d buy collatoral backed (CDP) positions on liquid crypto networks for exposure that I can self custody. That stock market is an oligopolistic marketing machine scam perpetuated by some cheesy financial industry folks hiding behind regulators and their insecurities because they actually know nothing about free markets. It’s a vestige of a bygone era. Welcome to open source tech, please take a look around, feel free to scrutinize as always, but before you do- I encourage you to have a baseline of understanding about the technology connecting the web 3 movement. Open financial systems is just one little slice of this.