Wall Street Breakfast: Digital Dollar

Digital dollar

The crypto world has taken a beating since the FTX disaster, which reverberated through the entire system in recent months, and this week witnessed a solvency crisis at crypto-focused bank Silvergate Capital (SI). However, Bitcoin (BTC-USD) (+34% YTD), Ethereum (ETH-USD) (+29% YTD) and other tokens have managed to shake off the headlines, and talk of a more centralized industry is heating up again. In fact, Nellie Liang, Treasury Undersecretary for Domestic Finance, shed some light on the possible launch of a digital dollar, as she leads a new senior-level working group that will explore central bank digital currencies.

Snapshot: Popularly known as CBDCs, these tokens would represent a nation’s fiat currency, and became notable after President Biden signed an executive order on cryptocurrency policy (see what SA contributor Allard Peng said it would mean for DeFi at the time). Current discussions center around whether a CBDC would preserve the dollar’s global strategic role with regards to the architecture of the international financial system, and benefit U.S. households in terms of lowering transaction and borrowing costs. Other priorities include preserving national security, protecting privacy and preventing illicit financial transactions.

Liang also noted that CBDCs are only one of several options for upgrading the Fed’s legacy capabilities in terms of efficiency and competitiveness. Another one is real time payment systems, like the FedNow Service, which is expected to launch later this year. “There are also risks of a retail CBDC, including the potential for runs into a retail CBDC that could destabilize private sector lending during stress periods,” she added. “The Fed is conducting technology research and experimentation to inform design choices so that it is positioned to issue a CBDC if it were determined to be in the national interest.”

How do CBDCs differ from electronic cash? When money is deposited into a bank account, the commercial entity takes responsibility for the sum. The cash is then held in electronic form and can be used across a variety of platforms, but it’s limited to the bank’s ledger. In the case of CBDCs, the government is the counterparty and takes liability for the money, while the ledger that’s being used (known as the rails) can be a very different structure than a commercial institution. (23 comments)

Seeking rate clarity

Equities gained traction in the middle of session on Thursday following comments from Atlanta Fed President Raphael Bostic, who said the central bank could be in a position to pause rate hikes this summer. Major U.S. equity averages finished higher, allowing the S&P 500 (SP500) and Nasdaq (COMP.IND) to halt a two-session slide. The job market “continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought,” countered Fed Governor Christopher Waller, who added that “wishful thinking is not a substitute for hard evidence in the form of economic data.” Rising interest rates have seen mortgage prices climb this week above their 52-week average, while recent reports suggest that Blackstone (BX) just defaulted on a €531M mortgage-backed bond. (56 comments)

‘Close call’

In the wake of Norfolk Southern’s (NSC) train derailment disaster in East Palestine, Ohio, Transportation Secretary Pete Buttigieg wrote the CEOs of the seven major railroads to ask them to join the Federal Railroad Administration’s Confidential Close Call Reporting System. Despite years of refusing to do so, Association of American Railroads CEO Ian Jefferies just replied to Buttigieg that all seven Class I railroads will join the program. Specifically, AAR wants FRA to improve the quality and speed of reporting, ensure that reports are kept confidential, take steps to prevent employee misuse of the program, and share information in a more timely manner. Earlier this week, Barclays saw upside in rail stocks despite downbeat investor sentiment. (8 comments)

Game on?

Microsoft (NASDAQ:MSFT) is reportedly headed toward European Union antitrust approval of a $69B bid for Activision Blizzard (NASDAQ:ATVI), thanks to its offers to license videogames to its competitors. That suggests what looked like a key hurdle will instead clear the way for Microsoft’s biggest-ever acquisition, and set up a bigger competitive battle with Sony (SONY) and Tencent (OTCPK:TCEHY). SA contributor The Value Analyst called the merger arbitrage opportunity in early February, noting the deal was more likely to go through than not. Microsoft also apparently won’t have to shed assets, which was noted in earlier reports, though it still has a ways to go to allay concerns in the U.S. and the U.K. (16 comments)