Stories Driving the Week
Unstablecoin: Coinbase’s False Notion of Cash Backing Reveals Hidden Risk
Cryptocurrency exchange Coinbase claimed that each USD Coin, a stablecoin offered by Circle Internet Financial, could be redeemed for $1. But a recent Circle disclosure detailing the assets backing the stablecoins showed that the promise was false; the assets actually included things like commercial paper (short-term loans to companies) that carry default risk, as covered by Bloomberg. This episode shows the risks inherent in crypto entities claiming to be backed by “reserves” or risk-free assets without the comprehensive oversight that governs banks, as demonstrated by Kraken, Avanti and Tether. It also brings to mind the business model of a money-market fund, as pointed out by Andrew Ross Sorkin on CNBC.
Broader Crypto Tax Oversight Prevails in Senate-Passed Infrastructure Bill
A bipartisan amendment that would narrow reporting requirements to the IRS on crypto transactions failed to proceed as part of the bipartisan Senate infrastructure package as the chamber passed the bill this week, leaving the original broad cryptocurrency tax reporting requirements expected to raise $28 billion in revenue intact in the legislation, according to Bloomberg. The amendment was a compromise measure after lawmakers diverged on a bipartisan basis over the definition of a cryptocurrency “broker,” but it failed to garner the unanimous consent needed to move forward, leaving it to the House to decide whether to amend the provision or not although a bipartisan group of House members have said they too will seek changes to the crypto reporting requirement. The debate over crypto tax reporting comes as Democrats are proposing new IRS reporting requirements on financial services account inflows and outflows.
The House will still need to take up the infrastructure package sometime this fall, although Speaker Pelosi has stated that the House will not take up the infrastructure package until after the Senate approves a reconciliation bill. The Senate this week approved a $3.5 trillion budget resolution, which will set up the procedure for drafting and considering the reconciliation bill, and the House has stated they will return from recess the week of Aug. 23 in order to approve their own budget resolution.
White House to Nominate NY Fed’s Frost to Treasury Financial Markets Post
President Joe Biden announced his intent to nominate Joshua Frost to serve as the Treasury Department’s Assistant Secretary for Financial Markets, a key role in Treasury market oversight. Frost is currently detailed to Treasury from the Federal Reserve Bank of New York, where he has worked for more than 20 years. At the New York Fed, he has worked on issues such as the Secured Overnight Financing Rate, a key LIBOR replacement benchmark; Treasury debt auctions; and the liquidity risk program for large bank supervision.
Discount Window Stigma: We Have Met the Enemy, and He is Us
The stigma of borrowing from the Federal Reserve’s discount window is illustrated well by former Fed Governor and bank CEO Betsy Duke’s description: “Borrowing from the discount window is like borrowing from your parents. You’ll do it if you have to, but nobody wants to.” What is not widely known is that the stigma is of the Fed’s own making, and it has real economic consequences, disabling a valuable tool to implement monetary policy and respond to a financial crisis, according to a new BPI blog post by Chief Economist Bill Nelson. The stigma may also lead banks to seek more costly, less efficient sources of funding amid liquidity problems, rather than the discount window serving as a necessary safety valve and a viable option embedded in banks’ liquidity contingency plans. The issue may not seem pressing now amid the Fed’s extremely large balance sheet, but it could present challenges as it tapers. The Fed could reduce stigma and increase transparency by making it clear that banks are encouraged to borrow and loans will be offered, no questions asked; on the other hand, it could revise the relevant Regulation A to state clearly that discount window borrowing should truly be a last resort.
WSJ: Cash is Flowing Into Short-Term Markets Like Never Before. Is That a Bad Sign?
A Wall Street Journal article this week quoted BPI Chief Economist Bill Nelson on the recent heavy uptake in the Federal Reserve’s overnight reverse repurchase agreement facility. Nelson said in the article that such a trend increases the systemic importance of money-market mutual funds, a sector the Fed sees as risky to financial stability. “From its conception up to the great financial crisis, the Fed borrowed mostly from the public in the form of currency. After the crisis. the Fed has also been borrowing from banks in the form of reserve balances,” he said. “Since March, the Fed is borrowing heavily from money funds.”
In Case You Missed It
American Banker: Will AML Rules Be Extended to Crypto?
As cryptocurrency firms look to expand their financial services offerings, policymakers could subject them to additional anti-money laundering requirements, according to a recent American Banker article. FinCEN has increased its focus on crypto risks, including by hiring its first chief digital currency advisor, Michele Korver. Future policy changes could include extending prescriptive customer identification program requirements to crypto firms and potentially extending the full universe of regulations that apply to banks to crypto firms as currently they may receive more AML scrutiny if they were to seek a bank charter.
Consulting Giant Accenture Hit by Ransomware Attack
Global consulting firm Accenture has been targeted by a ransomware attack, CNN reported this week. The LockBit ransomware gang, which threatened to publish Accenture’s encrypted files on the dark web if the company does not pay the ransom, claimed responsibility for the hack. Ransomware is increasingly posing a threat to businesses large and small, including critical parts of the nation’s supply chain.
Former Acting OCC Chief Brooks Quits Top U.S. Binance Job
Former Acting Comptroller Brian Brooks, who oversaw approval of national bank charters with light-touch regulation for FinTechs, resigned from his position as CEO of Binance.US according to Reuters. Brooks’ tenure at Binance, a cryptocurrency exchange facing probes from several U.S. and global regulators, lasted only three months.
JPMC Launches Real-Time Payments Service
JPMorgan Chase has launched a new “request for pay” real-time payments product that allows corporate clients to send payment requests to retail clients who use its app or website, according to Reuters this week. The new “request for pay” product uses the Clearing House’s RTP system to clear and settle the payments. The bank has invested heavily in its digital payments business. The service began a pilot phase with its first corporate client last week.
Goldman, Other Financial Firms Fund Mentorship, Hiring Program to Boost Industry Diversity
Goldman Sachs, Bloomberg LP and Centerbridge Partners are launching a new partnership with the City University of New York to train, mentor and hire students from diverse backgrounds – particularly women and minorities — for financial industry careers, according to The Wall Street Journal. The program, which will support internship opportunities, career development and post-college hiring, will begin this fall at Brooklyn College, City College and Lehman College and will aim to expand to other schools over time. The firms plan to invest millions of dollars in the program over three years.
Wells Fargo’s Noski to Retire
Wells Fargo Chairman Charles Noski will retire, to be succeeded by Steven Black, the bank announced this week. Black has served as co-CEO of private equity firm Bregal Investments since 2012. The board also appointed Wayne Hewett to serve as a member and to lead the Governance and Nominating Committee.