1/ NEW ARTICLE abt why USD-collateralized #stablecoins shld be backed 100% by cash deposited at Fed. Even T-bills don't work--bc they settle next day, but last wk a stablecoin collapsed w/in hours. Need *real-time* liquidity (only avail at Fed).@RiskDotNet
risk.net/comment/794869…
2/ This is another in a long collaboration w/ Dr. Manmohan Singh of @IMFNews about financial sector plumbing. He has taught me so much over past decade.

Sum:
* D.C. policymakers are moving away from view that #stablecoins should be issued only by insured depository institutions
3/ That's good IMHO bc deposit insurance funds should be insulated from crypto--bc settlement differences are too big (could trigger runs on banks at financial system core). Policymakers r moving toward ring-fencing the risk as they should IMHO

* Next ?=back w/ T-bills or cash? Image
4/ The credit risk in T-bills & cash on deposit at Fed is equal, but
(a) v diff liquidity profile. T-bills settle next day, which is too slow amid a #stablecoin run +
(b) using T-bills creates collateral silos, exacerbating periodic collateral shortages in wholesale funding mkts
5/ Article dives into plumbing of intraday bank liquidity (gets wonky). Some types of intraday liquidity for T-bills r only avail to big banks tho & as more community banks (that do maturity transformation) hold #stablecoin deposits for issuers, system-wide liquidity risk goes up
6/ * Next ?=bank or non-bank?

Article goes into why Federal Reserve Act only makes Fed master accounts avail to *depository institutions* (not non-banks) & how system-wide intraday liquidity programs have been fine-tuned to the term structure of bank liabilities in status quo.
7/ As the term structure of bank liabilities shrinks from days (ACH) & hours (Fedwire) to just minutes (#stablecoins + soon #FedNow), banks will inherently need more intraday liquidity. This means the fine-tuning for system-wide intraday liquidity will inherently need to change.
8/ It was fun to write this over the past few weeks & see how it fits into real-time market events & the evolution of D.C. policymaker conversations. Lots of learnings. Lots of downside to getting policy wrong on this point. Enjoy! Image

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More from @CaitlinLong_

Apr 8
1/ REMARKABLE SPEECH by US federal bank regulator abt #stablecoins (even cites yours truly at footnote 20). He discusses potential special-purpose, ring-fenced, non-lending banks as stablecoin issuers--ie, what #Wyoming SPDIs are. + nods to state efforts.
occ.gov/news-issuances…
2/ This feels like the moment when another national group (the ULC), which had initially been critical of #Wyoming jumping ahead to recognize digital assets in its commercial laws, started to replicate some of Wyoming's good ideas. The ULC later saluted Wyoming as a pioneer. 🙏🤠
3/ While I wouldn't ever expect the federal bank regulator to salute #Wyoming as pioneer here (there's a long history of fighting between the federal & state bank regulators), the nod he gives to the **IDEAS** is remarkable.

Here are snippets from OCC Acting Commissioner Hsu:
Read 8 tweets
Apr 1
STILL THINKING abt the SEC's staff acctg bulletin abt #crypto custody. It's an ENORMOUS change that disadvantages custody of crypto vs custody of securities, commodities, art, etc, for which many of the same issues exist. @HesterPeirce--can the SEC simply overrule FASB by fiat?
To illustrate just how staggering a change like this could be, here are State Street's numbers from its latest 10-K (2021):
* assets under custody: $43.6 trillion (TRILLION!!)
* on-balance sheet assets: $314.6 billion
* shareholders' equity: $27.3 billion
Read 5 tweets
Mar 31
1/ THE SEC's new staff accounting bulletin on #crypto custody brazenly violates "same activity/same regulation" principle. There are similarly huge counterparty risks in securities custody, but the SEC doesn't require extra disclosure of those, or on-balance sheet acctg treatment
2/ Can you imagine if securities custody banks like State Street/BONY/etc had to account for securities custody on-balance sheet + hold 5% tier 1 capital against those huge liabilities? They'd be staggeringly undercapitalized. Yet that's what SEC now requires of crypto custodians
3/ It's a SHOCKING double standard, esp when the SEC knows that securities custody entails many of the VERY SAME RISKS! For ex, there are huge differences in the treatment of assets under custody in receivership that depend on whether your custodian is a bank vs. a trust company.
Read 5 tweets
Mar 15
MORE on the below 🧵. There's so much inconsistency in #tradfi collateral posting rqmts (eg, most govts & corporates aren't req'd to post while trading firms are but with v diff collateral thresholds). It's all obfuscated. I lament that these derivative games are now in #crypto😢
There's no question derivatives games put a lid on #bitcoin's price appreciation in recent cycle, just as the same #WallSt derivatives games do same to #tradfi mkts. But when the epic short squeeze inevitably finally hits you get #LME-type games (yep, even in regulated mkts).
And derivatives can debauch otherwise strong balance sheets VERY fast in unexpected ways when BIG moves happen.

Little known fact: big banks' interest rate trading books often have BIG swaps receivables from state/local govts & swaps payables to corporates--UNCOLLATERALIZED.
Read 6 tweets
Feb 19
I LEARNED interesting things at #ETHDenver2022#DAOs are organizing under either coop or LLC laws🤠, & despite testing all the thousands of attendees for COVID a staggeringly low # were testing positive. I hope the latter is basically over🤞—the former seems to be taking off tho.
For #DAOs that choose to register there’s a race btwn using state cooperative laws vs state LLC laws. WY’s #DAO LLC law is hot but so is CO’s coop law. Our panel didn’t have time to dive into the differences in how each limits liability for members. #crypto lawyers—pls debate it!
Here's a blog on the topic of limiting member liability for coops. I'm hoping #crypto lawyers pick this thread up & start discussing bc there are likely differences between state coop laws & state LLC laws when used by a #DAO. I find the topic interesting. cooperativesfirst.com/blog/2020/08/0…
Read 6 tweets
Feb 10
1/ SO MANY TRUTH BOMBS in this terrific blog post.🧐MUST READ for US customers of #crypto exchanges/custodians (hint:😱, if yours goes bankrupt). Note @AdamLevitin analysis applies US-wide *EXCEPT* in #Wyoming bc it mostly fixed the very issues he lays out creditslips.org/creditslips/20…
2/ Truth bomb #1: "I do not think customers understand the legal nature of the custodial relationships, and exchanges have no incentive to make the legal treatment clear to customers." ...
3/ "In bankruptcy, it is likely to be treated as a debtor-creditor relationship, not a custodial (#bailment) relationship. That means that customers are taking on REAL CREDIT RISK with the exchanges, which is a particular problem because of the opacity of the exchanges..."🎯
Read 25 tweets

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