The Intersection of FedNow, SOFR, Basel III, and CBDCs: Unveiling the Fed’s Real-Time Control of the Financial System – Is This Our GCR?

I would be untruthful if I said I knew where all of this is going…

I am not ready to speculate and claim that all of these changes to the Financial System indicate that Our GCR is about to be unveiled. The convergence of FedNow, SOFR, Basel III, and CBDCs marks a significant transformation in the financial system, granting the Federal Reserve real-time control over the economy, including private citizens. How do these interconnected changes shape the future of monetary policy and regulation?

On June 21^st of this year, Fed Chair Jerome Powell addressed Congress and the House Financial Services Committee, navigating the complexities of monetary policy, regulation, and capital requirements amidst the impending launch of FedNow, the digital dollar system. Let’s break down the profound implications of the inter-connectedness between FedNow, SOFR, Basel III, and CBDCs, unraveling the Federal Reserve’s ability to exercise real-time control over the financial system and the real economy, extending its influence to private U.S. citizens.

The New Dollar: FedNow & USTs, Not Retail CBDCs

The digitization of the dollar has been underway for some time, with platforms like Zelle and Venmo facilitating transactions in retail accounts. However, the underlying mechanisms for transferring Treasuries and reserve assets have remained antiquated. While retail stablecoins operate on centralized banker rails or Ethereum-based ERC-20 tokens, U.S. Treasuries remain the world reserve asset. These bonds, issued by the U.S. Treasury and sold to the private sector, incentivize the creation of dollars based on yields determined by the Federal Reserve’s federal funding rate. Concerns over surveillance and currency seizure have hindered the adoption of retail CBDCs, yet the existing financial surveillance by banks and their power to censor and expose retail to counterparty risk often goes unnoticed. The digitization of currency and reliance on centralized payment rails enable these actions, but the interbank communication network for asset trades has been slow and inefficient—until now.

FedNow: A Digital Lever for Real-Time Control

FedNow, set to launch next month, serves a multitude of purposes, but its most crucial function is to provide the Federal Reserve with a highly efficient lever for 365/24/7 control over overnight banking rates, such as SOFR. This control enables the Fed to influence the cost of borrowing short-term liquidity between fractionalized private banks, ensuring they can meet depositors’ withdrawal demands. Through reverse repo agreements, banks lend cash to each other, collateralized by assets such as U.S. Treasuries. FedNow, facilitated by the internet, grants the Federal Reserve centralized control over the overnight rate for borrowing dollars and the seamless transfer of Treasuries between banks. This initiative aims to bring dollar-denominated activities back to the United States from the Eurodollar market, placing them under the purview of the Fed and the Treasury.

Private-Entity Dollar Issuance – No CBDC for Public/Retail Use

Jerome Powell emphasized the Federal Reserve’s opposition to central bank digital currencies (CBDCs) for individuals, proposing that any CBDC should be intermediated by banks. Last fall, following FTX’s collapse, the NY Fed launched a digital dollar pilot program involving major banks and cooperating with SWIFT. Notably, BNY Mellon, the largest U.S. bank, holds Treasuries for the popular stablecoin USDC, and PNC Bank, a former owner of BlackRock, filed for a spot Bitcoin ETF. The SEC’s actions against Binance and Coinbase have reshaped the stablecoin landscape. Powell acknowledged stablecoins as a form of money, asserting the need for a robust federal role in their regulation. The U.S. government’s direct policy influence and regulatory oversight extend to offshore dollar creation, selectively choosing entities empowered to issue digital dollars.

Basel III: A Capital Requirement Amplifying Dollar Demand

As American banks embrace digital assets and stablecoins, ensuring on-sheet liquidity becomes vital. Basel III proposes that any bank holding bitcoin or other digital assets must also hold an equivalent value of dollars. This international capital requirement creates a net demand for dollars within the U.S. banking system, even in a high inflationary environment. To offset inflationary effects through alternative reserve assets like bitcoin, banks and investment vehicles would need to increase their dollar liabilities. The interplay between bitcoin and the dollar mirrors the petro-dollar system, as the Fed and SEC focus on regional banks and stablecoin issuers. Basel III ensures a permanent demand for dollars, even in a scenario of “hyperbitcoinization.” While specifics on capital requirements remain forthcoming, proposals are expected later this summer.

BlackRock ETF: Institutional Adoption and Digital Dollar Creation

BlackRock’s recent application filing for a bitcoin exchange-traded fund (ETF) has ignited a flurry of filings from other institutional asset managers. With a track record of success in ETF approvals, BlackRock’s involvement signals a potential increase in digital dollar creation and the purchasing power of bitcoin as a reserve asset. The disclosure in BlackRock’s filing indicates the use of Coinbase for bitcoin custody and an affiliate’s equity interest in the issuer of USDC. The SEC’s shift hints at a significant shift in regulatory treatment, potentially bolstering the adoption of digital dollars. As the most influential investment firm and banking entity, BlackRock and Bank of New York Mellon’s actions have far-reaching implications, while the Fed and SEC hold substantial power over the global economy.

The Financial System Is Changing Dramatically in Real Time! It Is Unprecedented. Is This Our GCR Or Not?

The convergence of FedNow, SOFR, Basel III, and CBDCs signifies a paradigm shift in the financial system, endowing the Federal Reserve with real-time control over the economy, including private U.S. citizens. Through the seamless operation of FedNow, the centralization of overnight banking rates, the manipulation of dollar liquidity, and the imposition of capital requirements, the Federal Reserve gains unprecedented influence. As institutional adoption gains momentum, the future unfolds with a transformed financial landscape, driven by interconnected systems that redefine the relationship between monetary policy, private banks, and the real economy.

Based on the information above, it is not accurate to speculate that these combined changes in the financial system are setting up a digital US Dollar backed by gold, bitcoin, and other commodities.

While there are ongoing discussions and developments in the realm of digital currencies, including central bank digital currencies (CBDCs), it is important to note that the information available does not suggest a direct link between the changes mentioned and the establishment of a digital US Dollar backed by gold, bitcoin, and other commodities.

The changes mentioned primarily revolve around the digitization of the financial system, real-time control mechanisms, interbank communication networks, regulatory oversight, and capital requirements. These changes aim to enhance efficiency, improve monetary policy tools, and provide greater oversight and control over the financial system.

While certain institutions and entities may be exploring the use of digital assets like bitcoin and stablecoins, and there are discussions around the role of gold and other commodities in the financial system, it is not clear from the information provided that these changes are specifically leading to a digital US Dollar backed by these assets.

It’s important to approach speculation with caution and rely on concrete evidence to form accurate conclusions about the direction of the financial system.

The Rise of a New Petro-Dollar Alternative?

The reference to the Fed creating a new alternative to the petro dollar suggests a potential parallel between the petro-dollar system and the evolving financial landscape. The petro-dollar system, which emerged after the closure of the gold window, involved the U.S. pegging its inflating dollar to the demand for oil, essentially making oil transactions reliant on U.S. dollars.

In the context of the information provided, it is implied that the changes in the financial system, such as the increased demand for dollars through Basel III regulations and the potential influence of stablecoins, could create a similar dynamic. This would mean that the digital dollar could become a widely used reserve asset, backed by commodities like gold, bitcoin, and potentially other assets.

However, it’s important to note that the information provided does not explicitly state that the Fed is actively creating a new alternative to the petro dollar. It suggests that the regulatory landscape, along with institutional adoption and the interplay between digital assets and the dollar, may result in a similar effect.

Speculating on the specific outcome and the extent to which these changes will lead to a digital dollar backed by commodities requires careful consideration and further analysis. The evolution of the financial system is complex, and multiple factors can influence its direction.

The Bottom Line is that These Changes Enable Financial System Control Beyond Anything in Modern Economic History

Yes, the digitization tools and changes in the financial system mentioned above have the potential to allow near total control by central banks and governments over the global monetary system. Here’s an analysis of how these tools can contribute to that potential:

1. FedNow and Real-Time Control: FedNow, as a real-time interbank communication platform, can provide the Federal Reserve with greater control over overnight banking rates and the cost of borrowing short-term liquidity. This control allows central banks to manage liquidity, influence economic conditions, and regulate financial markets more effectively.
2. Basel III and Capital Requirements: Basel III regulations, particularly the requirement for banks to hold reserves in proportion to their investments in digital assets like bitcoin, can ensure that central banks and governments have increased oversight and influence over the financial system. By linking capital requirements to specific assets, authorities can shape the behavior and risk-taking of financial institutions.
3. Central Bank Digital Currencies (CBDCs): The rise of CBDCs can enable central banks to have more direct control over monetary policy and financial transactions. With CBDCs, central banks can track and monitor transactions in real time, potentially increasing financial surveillance. Additionally, CBDCs could provide governments with tools for implementing fiscal policies, such as programmable money and targeted stimulus measures.
4. Intermediation of Digital Currencies: The emphasis on intermediation of digital currencies through banks, as mentioned by Jerome Powell, allows central banks to maintain a degree of control and oversight over the issuance and circulation of digital currencies. This approach ensures that private entities are subject to regulatory frameworks, reducing potential risks associated with direct issuance by central banks.

While these tools have the potential to enhance control over the global monetary system, it is important to note that they also raise concerns regarding privacy, surveillance, and individual financial autonomy. Striking a balance between effective monetary management and preserving individual rights and freedoms remains an ongoing challenge. The extent to which these tools will be utilized and the impact they will have on the global monetary system will depend on various factors, including both public acceptance and international cooperation.

It is going to get very interesting from here on out for sure!