Why Crypto Will Not Be Money in the US
But Digital Dollars Most Definitely Will Be
Slamming the Door On Crypto
In two previous posts we outlined the regulatory changes coming to the cryptocurrency markets. First we gave an overview of the changes coming. Next we gave a description of how the CFTC would be involved and the taxation implications. In this third installment of our breakdown we will attempt to show how crypto will be regulated as a security. Since this Bill also is about the Government's proposed Digital Currency, it naturally dovetails into the explanation. Those attributes regulated in crypto will be encompassed by digital dollars.
Crypto will be Regulated as a Security
In addition to being regulated as a commodity, Crypto will also be regulated as a security. How? Pretty easily actually. First, the Securities Exchange Act will be amended to include a “digital asset security” in the definition of security. Next, the act will then define what a digital asset security will be. A digital asset security is going to be "any fundraising or capital formation activity (including initial coin offerings) which is accomplished through the issuance of such a digital asset, issues such digital asset to a holder in return for money (including other digital assets) to fund the development of the proposed service, goods, or platform of the issuer." This puts all crypto squarely under the Securities and Exchange Act. Turns out that implies a lot.
Summary of Securities Regulations:
Crypto projects will be regulated and provide clear financial information for investors to make an informed decision.
Trading of securities will take place on regulated exchanges.
Any new fundraising or capital formation activity (including ICOs) are likely to be securities.
When a crypto is regulated as a security, the entire coin is subject to strict regulations. - In the case of commodities, only specific use cases (futures) are regulated. It is a big difference.
US Congress is taking a leap of faith. It needs identifiable persons to enforce a law upon. Who is going to be held accountable in a decentralized network? Many issuing companies have handed control over to network participants. Perhaps for this reason, Section 12(g) of the Securities Exchange Act of 1934 will be amended to allow the issuer to apply for “desecuritization.”18) But questions remain.
These regulations are not just about crypto. It is clearly part of a wider discussion on the future of money. As shown below, this bill not only changes the definition of money in the US, but also changes how money is created. And that money creation will be digital.
Introducing the Digital USD (or Central Bank Digital Currency/CBDC)
The Federal Reserve Act is amended to provide the Federal Reserve Board with new powers; section 11 will be amended to say:
“(d) To supervise and regulate through the Secretary of the Treasury the issue and retirement of Federal Reserve notes (both physical and digital), except for the cancellation and destruction, and accounting with respect to such cancellation and destruction, of notes unfit for circulation, and to prescribe rules and regulations (including appropriate technology) under which such notes may be delivered by the Secretary of the Treasury to the Federal Reserve agents applying therefor.”22)
In addition, Federal Reserve notes will in the future also be issued digitally; an amendment to section 16 confirms this:
“Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. Notwithstanding any other provision of law, the Board of Governors of the Federal Reserve System is authorized to issue digital versions of Federal reserve notes in addition to current physical Federal reserve notes. Further, the Board of Governors of the Federal Reserve System, after consultation with the Secretary of the Treasury, is authorized to use distributed ledger technology for the creation, distribution and recordation of all transactions involving digital Federal reserve notes. The said notes shall be obligations of the United States and shall be considered legal tender and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.”23
WHAT DOES IT ALL MEAN?
The door is shut for the use of cryptos as legal tender.
The Federal Reserve Board is to be authorized to create and distribute a ledger-based Federal reserve note that could be used for everyday transactions in USD.- its means the end of cash
Digital federal reserve notes will make the “recordation” of all transactions possible. -implications being that which is recorded can be monitored
These amendments significantly increase the power of the Federal Reserve. Contrary to what is widely understood, the Fed does not “print money.” It can only manage the money supply indirectly.24) The private sector “creates” most of what we use as money by issuing credit. - now we can say they literally create money
This amendment could drastically expand the authority of the Fed, by allowing them to create and distribute a “digital USD” directly. - It could change the entire structure of the financial system and potentially have far reaching consequences.
Additionally: The original idea behind the Federal Reserve was for private bank deposits to be combined to provide an emergency line of credit in times of economic stress. But if the Digital Dollar is based on a blockchain, how can it also be based on reserves? And what mechanism will determine how funds (and how much) are added to the economy? And where and how will they be distributed? What about privacy and security? Will all this authority be handed over to a board of seven unelected bureaucrats? This amendment has the potential to change the way the Federal Reserve operates. This deserves a wider discussion by economists and financial experts outside the crypto-space as well. The original excellent complete post is here.
In August Zerohedge wrote a story on this very topic:
The Fed Is Planning To Send Money Directly To Americans In The Next Crisis
The Fed could buy the bonds [EDIT- special new bonds called recession insurance bonds ] quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side."
And that, in a nutshell, is how the Fed will stimulate the economy in the next crisis in hopes of circumventing the reserve creation process: it will use digital money apps (which explains the Fed's recent fascination with cryptocurrency and digital money) to transfer money directly to US consumers.
And the kicker from that article:
"you could actually generate real inflation. It could be beneficial for not only avoiding negative rates but creating a more healthy interest-rate market, a more healthy yield curve."
So there you have it: the one thing that was missing from a decade of monetary tinkering by the Fed, the spark of inflation, will finally arrive as the Fed gives money to those most likely to spend it: the lower and middle classes of society.
Slam the door on Crypto; then open the floodgates on digital dollars.
Next installment we will go through some of the international rules being drawn up.