Many traders and portfolio managers began their careers on the Cash desk. This is a place where you can learn the markets without getting into too much trouble. Cash is variously defined as fixed income securities with maturities ranging from 91 days for the most secure portfolios out to 397 days for portfolios with slightly more flexibility. The short maturity and the dominance of government securities in the Cash markets make the sector low risk. After 6 months or a year on the Cash desk boredom sets in and the traders/PMs gravitate to the more exciting markets that get them into trouble…
Money Market Funds are critical to the Fed’s policy implementation
Money Market Funds (MMFs) are the quintessential example of this boring asset class. MMFs, however, are extremely powerful investors that virtually control the Reverse Repo Market (basically they lend money to the US Federal Reserve). MMF’s account for roughly $2Trillion of short term investments whereas Reverse Repo weighs in at $500billion, meaning that the Fed relies on MMF’s to successfully execute their monetary policy actions. Unlike the Primary Dealers, who largely do what the Fed wants by virtue of their privileged position, MMFs are completely independent of the Fed and under no compulsion to trade at the levels the Fed chooses. It is a little known fact that the Fed was concerned with the systemic risk of a run on the MMFs during the Financial Crisis (there was no panic in hindsight) and the MMFs were also a wildcard in the Fed’s plans to wind down the Quantitative Easing policy as well as its ability to raise interest rates by borrowing from the MMFs.
Uh-oh…MMFs just went crypto
Last week, the boring old MMF suddenly became the future for crypto and with it the Fed’s public enemy #1. Franklin Templeton’s “Blockchain Enabled US Government Money Fund” sought registration with the US Securities and Exchange Commission. The Fund is identical in all respects to Franklin’s existing MMF, including all the administration functions recording subscriptions, redemptions and balances. The only difference is the addition of a blockchain feature shadowing the centralised primary records. [In the event of a discrepancy between the blockchain records and the centralised records, the latter prevail.] The “Blockchain enabled” MMF has been created entirely within the established regulatory framework. While there is no intention to issue a token to each investor at present, the structure clearly anticipates a….
…STABLECOIN ! This is a massive step forward for the general acceptance of a private currency. The standout aspects of the structure are (i) the MMF pays interest (this knocks Libra off the shelf), (ii) the MMF is registered to deal directly with the Federal Reserve (iii) the use of traditional record keeping together with blockchain record keeping.
Franklin Templeton are part of the establishment. They are not techno-zealots or crypto-crusaders. They simply recognise that electronic transactions between their MMF account holders can be facilitated on the blockchain (Anne’s MMF pays Bob’s MMF) rather than through the traditional route (Anne’s MMF pays Anne’s bank Anne withdraws cash to pay Bob cash Bob deposits cash in Bob’s bank and transfers to Bob’s MMF).
So what does this mean for the Fed?
Franklin Templeton might be first to market but my guess is that every other MMF provider will follow and eventually club together so that i can buy coffee using my MMF provider transferring to the cafe’s MMF provider over blockchain. This transaction completely bypasses the existing payments system, cutting out the banks and the Fed’s control.
The subtle implication is that the MMF blockchain effectively replaces the traditional payment system while at the same time continuing to trade with the Federal Reserve. This is starkly in contrast with any other attempt at stablecoin that held deposits with some unheard of custodian or dodgy bank account in Malta.
So here’s the rub: MMFs operate outside of the Fed’s official influence yet are a critical element of the Fed’s funding programs and the Fed’s ability to implement monetary policy. MMFs have $2Trillion of existing power at their disposal and they could easily push the Fed around. Whereas the Fed has been hostile toward the other stablecoins by refusing access to the payments system and directing their primary dealers not to engage, the Fed now finds itself borrowing from an established main stream crypto currency and this will only become more prevalent over time. The Fed becomes hamstrung in its ability to influence the money supply since the demand for its reverse repo is driven by MMF flows rather than forced on primary dealers. When the Fed wants to drain liquidity by selling reverse repo the primary dealers dip into bank reserves. MMFs on the other hand only agree if they have the cash to invest and the interest rate is competitive. Put another way, unlike banks, MMFs are not in the business of creating money so that the Fed will lose control of monetary policy.
…the end of fiat money is nigh
The next step in crypto development is for the established Fund houses to offer blockchain enabled mutual funds which can also be used for day-to-day purchases. This is the ultimate fully convertible currency backed by a market portfolio of claims to real assets. That is the logical extension of the private currency market and will drive the demand for fiat currency of any kind (traditional fiat and digital fiat) to zero. Franklin Templeton, Blackrock, ( even First Degree!) will have their role to play in the reform of the international monetary system.
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