As we reach midsummer, Federal Reserve Chairman Jerome Powell made a remarkable appearance before Congress and the House Financial Services Committee. Following the Federal Reserve’s recent pause on rapid and severe interest rate hikes to counter soaring price inflation, Powell stands at a pivotal point of monetary policies and capital requirement decisions. The impending launch of FedNow, an interbank communication system, due next month, adds another dimension to the game.
A Shift to Digital: FedNow and USTs
Akin to the current digitally transacted dollar through platforms like Zelle or Venmo, or the balance in your Bank of America checking account, the methodology behind the transfer of Treasuries and other reserve assets has been stuck in a technological time warp. With FedNow’s launch around the corner, the Federal Reserve gains a more efficient tool to exert 365/24/7 control on overnight banking rates, such as SOFR, dictating the cost of short-term liquidity borrowing among fractionalized private banks.
Privatizing Dollar Creation
Post FTX’s downfall last autumn, the NY Fed initiated their digital dollar pilot program with major participants, including BNY Mellon, PNC Bank, Citi, HSBC, Mastercard, TD Bank, Truist, U.S. Bank, and Wells Fargo. Noteworthy is BNY Mellon’s involvement, the biggest U.S. bank holding treasuries for popular stablecoin USDC, and PNC Bank, a significant shareholder of BlackRock, the world’s largest asset manager. Powell reiterated the importance of private sector banks in continuing the purchase of government-issued debt to generate credit via dollars in retail accounts.
Basel III’s Impact
As Basel III regulatory requirements loom, banks integrating digital assets and dollar-derivatives must assure the public about on-sheet liquidity for speculative action on commodities. This creates a unique opportunity to swing regulation in favor of the dollar, forcing a net-demand for dollars in the U.S banking system, despite an inflationary environment.
Bitcoin ETF: A BlackRock Initiative
The recent application by BlackRock, a firm with $10 trillion in assets under management, has sparked an onslaught of filings from other major institutional asset managers to launch Bitcoin ETFs. This unexpected surge in confidence could be attributed to BlackRock’s exceptional success in getting ETFs approved, with a 575 to 1 success rate.
As regulatory bodies signal a shift towards increased digital dollar creation and amplified purchasing power of the demand-inelastic reserve asset, bitcoin, the entry of prominent institutions into the digital currency world is now inevitable. Welcome to the era of institutional adoption – but remember, no victory dances just yet.