Chris’ note: Longtime readers will know all about FedCoin. It’s the digital-only dollar the Fed has been planning for years. And last month, with little fanfare or media coverage, it launched a program that brings us one step closer to FedCoin.
That’s why, today, we’re turning to our resident “Fed watcher” at Legacy Research, Nomi Prins. She’s a former Goldman Sachs managing director and Ph.D. economist who’s written two books about the unchecked power of banks.
And as she warns below, FedCoin will replace the cash in our wallets… hand more power to the Fed… and further shred our financial freedom.
If you’re a fan of Nomi, she’s going live in a couple of hours with another important Fed prediction. She says its aggressive rate hikes are moments away from causing a meltdown in the housing market.
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Yesterday, police in the Bahamas arrested Sam Bankman-Fried.
The move came at the request of the U.S. government.
And it’s based on criminal charges over the collapse of his cryptocurrency exchange, FTX, which went belly-up last month.
It’s a fascinating – and still developing – story…
So, I’d forgive you for not noticing the huge news on the digital currency front last month.
The Fed has launched a pilot program for a “crypto dollar” – what it calls a central bank digital currency (CBDC).
It tokenizes U.S. dollars. Then it uses a shared ledger like the bitcoin blockchain to improve financial settlements between banks.
With the CBDC pilot program in motion, the Fed has taken a giant leap toward its goal – a digital-only dollar or “Fed coin.”
So today, I want to pull back the curtain on this massive development and show you what it means for you and your money.
The Fed has partnered with nine global financial giants, plus SWIFT, for its pilot program.
These are all heavy hitters…
SWIFT is the secure messaging service that forms the backbone of the international payments system between banks.
And Amazon Web Services – Amazon’s cloud computing division – is helping provide the technology needed to run the program.
Global payments processor Mastercard is on the list, too. So are banks BNY Mellon, Citigroup, Wells Fargo, and HSBC.
Citigroup’s Tony McLaughlin proposed the project last year in a white paper titled “The Regulated Internet of Value.” He’s part of Citi’s Treasury and Trade Solutions (TTS) business and is involved in new methods of payment.
In a nutshell, the Fed wants to know how using digital-dollar tokens on a blockchain can speed up payments.
So, the idea is to use blockchain tech to make settlements between banks through the bank accounts they have at the Fed.
These accounts are known as reserve accounts. Banks use them to settle transactions with each other at the end of the day.
This currently happens through two clunky electronic funds transfer systems – the Clearing House Interbank Payments System (CHIPS) and Fedwire.
Instead, McLaughlin has proposed these funds transfer over a single blockchain network called the Regulated Liability Network – or RLN.
But that’s not where this project will end…
The Fed says its pilot project “could potentially be extended to multi-currency operations and regulated stablecoins.”
A stablecoin is a cryptocurrency that’s pegged to the value of a government-issued currency such as the U.S. dollar.
Usually, this means the stablecoin issuer backs each tokenized dollar with a dollar in a bank account.
At a time when millions of people have lost access to their funds on FTX… the Fed and its banking pals are swooping in and saying, “We’ll take it from here.”
That’s led a lot of folks to question the timing of the CBDC pilot program.
The theory goes that the government held off on regulating crypto because it wanted it to collapse. This would leave people begging for a Fed alternative.
Regulators were certainly asleep at the wheel with FTX. But I don’t buy this narrative.
If you’ve been following my colleagues at Legacy Research, you’ll know the Fed has been planning a digital dollar for years.
But it’s still excellent timing for the Fed to advance its FedCoin ambitions.
People are wary of crypto right now. That means they’ll likely be more open to the idea of a FedCoin – a crypto dollar backed by the U.S. government.
But there many reasons to be concerned about this development.
First, FedCoin would strengthen central banks’ grip over the financial system. That’s because it would be highly centralized.
This would put your income, your assets, and your privacy under the direct control of the state.
FedCoin would also come in handy if Washington decides to send out more stimulus checks.
President Trump had to send out checks in the mail. With FedCoin, the government could simply “airdrop” coins into digital wallet apps.
This is already common practice with existing decentralized cryptocurrencies.
And as this year’s record inflation has taught us, we hardly need to make it easier for the government to distribute newly created cash.
But advocates of this new monetary technology say this could also make it easier to receive your funds if, say, you’re applying for an emergency loan from the government.
It could even support new business models and provide a foundation to jumpstart innovations in the finance sector.
But do these potential benefits outweigh the risks?
Power and Control
I don’t think so…
FedCoin would help strengthen central banks’ power over the financial system.
Yes, they will use a form of blockchain tech. This is the same as most decentralized digital assets, such as bitcoin.
But FedCoin has different motives – power and control. It will also allow the central bank to track, monitor, and record every single transaction you make.
And if it eventually replaces physical cash, it will end the last shred of financial privacy we have left.
Nonetheless, here’s what Tony McLaughlin – the guy I mentioned above who dreamt up RLN – said on the day the Fed’s pilot launched…
Projects like this that focus on the digitization of central bank money and individual bank deposits could be expanded to take a broader view of the opportunity.
“Broader view of the opportunity”?
This sounds like more financial gobbledygook designed to hide the true nature of the Fed’s playbook.
If you’re skeptical, this could include any number of things to give the banks and government almost unbreakable financial control over your life.
For example, it could program FedCoins so they’re only spendable if the holder of those coins meets certain requirements.
This would allow the government to easily freeze you out of the economic system if it wanted to.
But we still have a way to go before we find out how it will work.
The Fed’s pilot is focused on the wholesale banking segment, as opposed to retail.
The idea is to simplify interbank settlements.
Still, it brings us closer to the rollout of the digital-only dollar and the end of physical cash.
And that digital dollar could be the trigger for more widespread adoption of bitcoin.
Folks may not love the idea of the government being able to collect and monitor all their transactions. And they may also not like the fact that the government can airdrop new Fed Coins into people’s wallets at the push of a button.
Bitcoin, on the other hand, gives you a greater degree of privacy. It’s also impossible to create more bitcoin than the code allows for.
Bitcoin’s new supply is also shrinking over time. That’s in stark contrast to the dollar. Its supply has ballooned over time.
And, with time, as people become more comfortable sending and receiving FedCoin via their digital wallets, it will become easier for them to adopt bitcoin as an alternative.
That said, this still isn’t the time to dive headfirst into bitcoin. With so much uncertainty in the crypto market right now, you’re better off biding your time.
And if you hold bitcoin, my advice is to stay patient and ride out this volatility.
In the meantime, steer clear of centralized cryptocurrency exchanges such as FTX when it comes to storing your crypto.
Whenever possible, store your crypto on a wallet you have control over. And if you choose to store you crypto on an exchange, opt for U.S.-based companies with a high degree of regulator transparency.
At the top of that list for me is Block (SQ). It’s one of our model portfolio holdings at my Distortion Report advisory.
Its Cash App allows you to buy, sell, send, and receive crypto. And, compared with other companies with ties to crypto, it has been relatively unscathed by FTX.
Editor, Distortion Report
P.S. As early as tomorrow at 2 p.m. ET, we could begin to see a complete meltdown in the housing market.
This could be the beginning of a massive wave of bankruptcies on Wall Street. And as Moody’s Analytics says, “It’s going to be brutal.”
That’s why I’m hosting a special strategy session tonight at 8 p.m. ET. I’m going to show you how you can prepare… protect yourself… and profit.
I’ll even give you the name and ticker of an opportunity I believe will be one of the top plays of 2023 – for free. Just go here to reserve your spot with one click. It’s my last event of 2022… I hope to see you there.