Why is Wall Street afraid of the crypto dollar?

Imagine logging into your own account at the Federal Reserve. Using a laptop or mobile phone, you can use cash anywhere instantly. There is no middleman, no fees, no waiting for deposits or payment settlement.

This vision sums up the appeal of the Crypto dollar, the dreams of futurists, and the bane of bankers. It is not the Bitcoin brothers and other cryptocurrency fans who are driving this disruptive idea, but the financial and political elites in the United States. Federal Reserve Chairman Jerome Powell promised to present new research and a series of policy issues for Congress to think about this summer. J. Christopher Giancarlo, the former chairman of the Commodity Futures Trading Commission, is seeking support through a non-profit Crypto dollar project in partnership with consulting giant Accenture Plc. In order to continue American values ​​such as free enterprise and the rule of law, “we should modernize the dollar,” he recently told the U.S. Senate Banking Subcommittee.


Giancarlo. Photo: Andrew Haller/Bloomberg

At present, the US dollar is still the primary global reserve currency and the preferred legal tender for international trade and financial transactions. But a new flavor of cryptocurrency may dominate this dominance, which is partly because the Federal Reserve Bank of Boston has threatened the work of developing a prototype Crypto dollar platform, Massachusetts Institute of Technology. Other governments, especially the Chinese government, are leading the way in currency digitization. In these countries, regulators worry that as more people accept cryptocurrencies, the possibility of fraud is increasing exponentially.

Former President Donald Trump’s Secretary of the Treasury Steven Mnuchin said he believes there is no immediate need for a Crypto dollar. His successor, Janet Yellen, expressed interest in studying it. Support for the virtual dollar crosses the partisan boundaries of Congress, and Congress will have a say in whether it becomes a reality. At the June hearing, Democratic Senator Elizabeth Warren of Massachusetts and Senator John F. Kennedy, Republican of Louisiana, expressed their openness to this idea. Warren and other Democrats emphasized the potential of Crypto dollars to provide free services to low-income families who are now paying high bank fees or are completely excluded from the system.

Kennedy and other Republicans believed that the space race between the United States and the Soviet Union was financially equivalent to a war for prestige, power, and first-mover advantage. This time the opponent is China, and China announced this month that more than 10 million citizens are now eligible to participate in the ongoing DC/EP trial.


A Crypto RMB sign on a self-checkout counter in a supermarket in Shenzhen, China. Photo: Yan Cong/Bloomberg

Bai Ze’s Note:

The name of the Crypto renminbi “DC/EP” has two meanings. DC is Crypto currency and EP is electronic payment. This means that “DC/EP” can be either a Crypto currency based on blockchain or distributed accounting technology, or a technology evolved on the basis of existing electronic payments.

The strongest opposition to the virtual dollar will come from Bank of America. They rely on $17 trillion in deposits to fund most of their core business, profiting from the difference between the interest they pay to account holders and the fees they charge for loans. Banks also earn billions of dollars each year from overdrafts, ATMs, and account maintenance fees. By creating a Crypto currency, the Fed is actually competing with banks for customers.

In a recent blog post , Greg Bell, president of the Banking Policy Institute, which represents the industry, warned that if the Fed violated the interests of the private sector, homebuyers, businesses and other customers would find it more difficult and expensive to borrow. Historical central role in finance. “The Federal Reserve will have extraordinary powers,” wrote Bell, the former Assistant Treasury Secretary of the Clinton Administration.

Some economists warned that the Crypto dollar could destabilize the banking system. The federal government provided $250,000 in insurance for bank depositors, a plan that has successfully prevented bank runs since the Great Depression. But in the 2008-style financial panic, depositors can withdraw all their savings from the bank with a single click and convert it into direct debt of the US government. “In a crisis, this may actually make things worse,” said Esval Prasad, a Cornell University professor and author of a book about cryptocurrencies that will be published in September.

Whether a virtual dollar is needed is still to be discussed. For large companies, cross-border inter-bank payments have been fast, limiting the attractiveness of cryptocurrencies. Early adopters of Bitcoin may have gained an investment windfall because of its soaring value, but its volatility does not make it a reliable substitute for government fiat currencies such as the U.S. dollar.

However, there is a new type of cryptocurrency, called stablecoins, which may pose a threat to the dominance of the dollar. Similar to other cryptocurrencies, it is essentially a string of codes tracked and verified through an online ledger. But it has a key difference from Bitcoin and its similar products: its value is linked to sovereign currencies such as the U.S. dollar, so it provides stability and privacy.

In June 2019, Facebook Inc. announced that it was developing a stablecoin called Libra ( renamed Diem ). The social media giant has 2.85 billion active users worldwide, which is a huge test market. “This changes the rules of the game,” Prasad said. “This has acted as a catalyst for many central banks.”


Powell. Photo: Al Drago/New York Times/Bloomberg

Regulators are also concerned about consumer protection. A stablecoin is only as stable as a network of private participants who manage it on the network. If something goes wrong, the holder may find himself empty-handed. This prospect puts pressure on the government to propose their own alternatives and solve the problems caused by stablecoins.

Although the Fed has been studying the idea of ​​a Crypto dollar since at least 2017, key details including what role private institutions will play remain unresolved. In the Bahamas, the only country that has a Crypto currency of the Central Bank, financial institutions authorized to provide electronic wallet to deal with sand dollars , sand dollar is the currency Bahamian Dollar virtual correspondence.

If depositors flock to virtual dollars, banks will need to find another way to fund their loans. Advocates of the Crypto dollar have raised the possibility of the Federal Reserve lending to banks so that they can issue loans. To help banks retain deposits, the government can also set an upper limit on how much Crypto currency citizens can hold. In the Bahamas, the upper limit is US$8,000.

Lev Menand, an adviser to the Obama administration’s Treasury Department, warned against such compromises, saying that the priority should be to provide unrestricted central bank Crypto currency or CBDC. Menand, who now teaches at Columbia Law School, said that because this idea may need to pass legislation, Congress faces a major decision: to create “a robust CBDC or a product such as skimmed milk as a countermeasure for big banks.” A blessing, this product has been watered down.”

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