Why would the Federal Reserve have to create FedCoin? Many fear that institution creating a central bank digital currency (CBDC). The question is why would they have to?
Many mistakenly believe the Fed "prints" US dollars? We hear this all the time. The memes appear proclaiming "Printing Press Go Brr".
Well, if that is how it works, do we not already have a CBDC? Isn't the Fed already capable of printing money and pushing it into the economy? Why would they have to create another one?
Obviously, this shows how wrong those who carry that view are. The reality is the Fed does not print US dollars. Sure, it can print up banknotes yet even that is driven by the commercial banking system. If the banks do not want a lot of cash, the Fed doesn't just send it to them.
Therefore, what the Fed creates is not broad economy money. We have stated this repeatedly yet people still believe it is the case. They will then, ironically, proclaim it is going to bring out a CBDC.
Do you see how insane this is?
The bottom line is the commercial banking system is what creates the digital dollars. Under fractional reserve banking, the money supply is expanded through loans.
Now that we got that one the table, here is the cherry on top: the Fed already has a CBDC.
Confused yet?
The Fed has a stablecoin that it creates at will. This is something that is pegged to $1, can be redeemed for a dollar (banknote), and operates only in digital form.
Seems like a stablecoin to me.
This is what reserves are.
When the Fed engages in quantitative easing (QE), it does swaps with depository institutions. Here securities are removed from the balance sheet of the bank and replaced with a reserve. The Fed can create the reserve "out of thin air" although it has to be "bought" with a security.
Effectively, this is the swapping mechanism.
The token, if you will, is housed in the commercial bank's "wallet", i.e. balance sheet. Of course, only select people can have these wallets since this is a wholesale currency. To be eligible, one needs to have a master account. This is something that is only available to member institutions, i.e. banks. Organizations such as pension funds and insurance companies are not even in this select group.
Of course, if we step back, we see this is mostly a useless form of money.
Let us take a look at the Hive Backed Dollar (HBD). As a comparison, think of all the places it can be utilized. Whatever the number of use cases, it outpaces most of what the Federal Reserve's reserves do.
To start, reserves are inter-bank. They can only go back and forth with other member banks. These institutions cannot use them on stock buybacks, bonuses, rent, or even stationary. Reserves are most the settlement layer for the transactions that occur between banks. When people mention central bank liquidity, this is what they are referring to.
HBD is broad economy money. Anyone with a Hive account can utilize it. There is no limitation on what it can be used on or by whom. People can use it for anything desired as long as the party on the other end will accept it.
We see how this is shaping up in Sucre, Venezuela. People are using HBD to pay for everyday products and services. Go into the right location and lunch can be purchased using HBD.
To contract, Jamie Dimon, the CEO of JP Morgan which owns Chase, cannot buy a sandwich with the hundreds of billions in reserves that bank is sitting on.
Another topic we discussed is the idea of creating Hive bonds. This also will make HBD radically different from reserves. The latter cannot be collaterlized, making it mostly worthless to a bank. When the Fed removes securities from the balance sheet of banks and replaces them with reserves, the result is balance sheet contraction. This is catastrophic.
As we can see the use cases for HBD are more extensive than the Fed's reserves. Nevertheless, the Fed has its own stablecoin that is can send out to the member banks' "wallets".
For that reason, why would they have to create another one?
The answer is, they do not. Politicians, on the other hand, they have massive incentive.
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