Notes 9/21: FOMC and Bitcoin Price, Retail CBDCs, and Tether In Trouble Again

It was unthinkable some years ago.

Fed Day – a day when the Federal Reserve Open Markets Committee (FOMC) meets – is fast becoming an important ritual in bitcoin’s calendar because it determines the cryptocurrency’s future price trajectory. Cryptocurrency markets are poised in anticipation of Fed Chairman Jerome Powell’s announcement his afternoon regarding interest rate hikes.

Last month, Chairman Powell indicated that consumers should be prepared for more pain ahead as his agency amps up the interest rate ammunition to bring inflation under control. That address led to speculation that the Fed will increase interest rates by 100 basis points, instead of the 75 basis points expected by the market.

But more investors are discounting the possibility of an aggressive stance as the timing of Powell’s announcement draws near. As of this writing, 83% think the Fed will raise interest rates by 75 basis points according to the CME’s Fed Watch tool. Yields on the 10-year Treasury note were at their highest level since 2011 yesterday while stocks, which fell yesterday, are eking out modest gains in the morning session.     

What Happens to Bitcoin Price?

Regardless of the percentage by which the Fed raises interest rates, the prognosis does not hold good for Bitcoin price. It has tumbled in the aftermath of Powell’s previous address because a further economic contraction means less funds available to consumers to trade Bitcoin.

The cryptocurrency’s price fell below $19,000, a psychological threshold according to some, yesterday. It has since recovered and is currently changing hands at $19,243.48, relatively unchanged from its price 24 hours ago.

Typically, during times of economic turmoil and uncertainty, safe haven assets become popular. However, the currently extraordinary economic circumstances have meant that even gold, an established haven asset and one to which Bitcoin is frequently compared, has risen only marginally.

Given the almost certain downward trajectory of bitcoin price, the most important question for investors in the cryptocurrency are its support level. Estimates vary and range from an optimistic $18,500 to a bearish $12,000.

Rep. Jim Himes Doesn’t Think Retail CBDCs Are a Good Idea

Retail central bank digital currencies (CBDCs), or digital dollars available directly, minus intermediaries, to US residents through accounts with the central bank, might not be such a good idea, according to Representative Jim Himes (D-CT).

“I do think that the notion that we’re going to take the Federal Reserve, who already has massive regulatory duties, and by the way, needs to run our monetary policy and say, “now, you’re going to be the banker to 320 million Americans,”…is not likely,” he told Coindesk, adding that the move would “wipe out” the banking sector. “There may be those who think it’s a good idea, but I think they’re in a pretty small minority,” he said.

Himes’s comments are not surprising. Retail CBDCs make sense in developing economies, where a significant percentage of the population does not have access to financial infrastructure due to the tremendous costs associated with setting up retail banks.

While it is not perfect, the United States has a sophisticated banking system – that is also the world’s envy – and one that reaches an overwhelming majority of its residents. Dismantling the system (and industry) to hop onto the CBDC wagon will be a foolish exercise. That leaves us with the other option of wholesale CBDCs. They will speed up interbank transfers domestically and internationally.

But it is still too early to predict the final form that CBDC regulation will take since their effect on the economy is still being explored.

Tether in Trouble Again

It is happening again, to quote that famous line from Twin Peaks.

With unerring regularity, the calls for Tether, the world’s biggest stablecoin by market cap, are repeated. And, like clockwork, the stablecoin’s executives deflect those calls with rudimentary explanations or press releases.

This time around, a New York court Judge has asked the stablecoin to disclose its general ledgers, balance sheets, income statements, cash-flow statements, and profit and loss statements.’ It was made as part of a case that was filed last year alleging that it propped up the price of Bitcoin by increasing its production of Tether and using them to purchase the cryptocurrency. In response to the judge’s request, the company’s executives have said that the requirements are “overbroad, unduly burdensome and untailored to the parties’ claims and defenses in this action.”

A Controversial Stablecoin

Tether’s financials have long been the subject of speculation. The stablecoin’s critics say that it does not have adequate reserves to back up its circulating supply. It has also paid penalties without admitting or denying guilt.  

In the past, the company has brushed off the criticism. Lately, it has begun producing periodic attestation that divulge the composition of its reserves at the time that the document was prepared. But the attestations are not audits, which are more comprehensive. This means that it may not matter if Tether is not fully backed when the firm preparing the attestation is not looking.

Will this time be any different? Considering Tether’s current market capitalization and importance to the crypto ecosystem, it seems unlikely that there will be progress. Tether’s comeuppance, meanwhile, is happening through market forces. Its market share and market capitalization have declined significantly this year.

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