The Magic of the USD Global Reserve
Everybody loves a good magic show. Seeing magic up and close is very impressive. I’ve seen many shows at the Magic Castle in Hollywood and always loved the private showings in the small bar for up and close magic. From card trips to coin tricks. My favorite has always been any trick with money such as coins or bills. The most intriguing part is how its done.
The hot topic in DC is the CBDC (Central Bank Dollar Bank Currency)1. From partisan to non-partisan, there’s different point of views on the good, bad, and the ugly of the CBDC. Regardless of the pros and cons of the CBDC, the magic show has begun. The Federal Reserve has a definition of the CBDC2 on their site giving a description of what a CBDC according to the Fed. An important detail to observe is the CBDC is a digital liability of the Federal Reserve vs a USD currency being a liability to a commercial bank. This is important to note because the current digital dollars are distributed by existing US banks. This is very important for fractional reserve lending and its continuation. Fractional reserve lending allows the expansion of the USD. Here’s a picture of the M2 supply3 with its massive runup starting in 2020.
A proposed CBDC issued by the US government will prevent the current use of fractional reserve lending from the commercial banks. The Federal Reserve consist of banks. To continue the expansion of the USD global reserve its important to expand into the crypto markets for global dominance via banks and not the US Government. The Petro Dollar4 did this in the 1970's and continues with the Euro Dollar market which has scaled the USD world dominance as a global reserve dollar. Recent estimates of the Eurodollar market from 2016 is $13.83 Trillion vs. 1985 of $1.66 Trillion.5
With the introduction of the BRICS or China Petro dollar, the US is losing dollar trade demand. An alternative for the US is to expand into the crypto markets with fractional reserve lending. This will help keep the global dominance of USD as a global reserve currency.
We will continue to see the banks acting as new distribution of the CBDC on behalf of the Federal Reserve. Pick your favorite stable coin and it will go through the same typical banking compliance of AML and KYC as any other new bank account or transaction.
The difference between the CDBC and stable coins will be their risk. CBDC will be backed by FDIC and a stable coin will be back by treasuries, or some asset with potential private insurance such as Lloyd of London.
Both CBDC and stable coins will be highly regulated with the current financial regulations with the potential of more regulation. Typically when new financial innovations occurs, instead of less regulation they add more regulation. An example of can be seen in a law I specialized in called Reg NMS.678
What’s interesting about the crypto markets, as they become more decentralized and the introduction of Decentralized Exchanges (DEX) they actually got more centralized because they became more dependent upon USD stable coins.
Welcome to the Magical USD global reserve. This is a magic trick from the US Federal Reserve unbeknownst to the general public. Contact us today to make sure your financial portfolio performance has a standing ovation.
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https://fred.stlouisfed.org/graph/?g=1q54R
https://www.newyorkfed.org/newsevents/news/research/2007/rp070103.html
https://en.wikipedia.org/wiki/Eurodollar
https://www.investopedia.com/terms/r/regulation-nms.asp
https://www.sec.gov/files/rules/final/34-51808.pdf
https://www.sec.gov/newsroom/press-releases/2024-32