As seen in RealClearMarkets.
When the invasion of Ukraine began last February, Russian people eager to avoid entrapment in a war that vandalized reason turned to dollars. Get it? Not only do dollars liquefy a fair amount of exchange inside Russia, they were also a way out of Russia for citizens who weren’t going to hand over their lives to Vladimir Putin. Notable about the dollar’s acceptance as a medium of exchange is that what’s much circulated in Russia is similarly circulated in Ukraine.
While the dollar has many demerits (more on them in a bit), it remains money par excellence to much of the rest of the world such that it’s the main currency in the parts of the world where the local money isn’t trusted. The world is dollarized care of market forces, and it’s long been that way.
At which point it’s worth stressing once again what’s important about this global dollarization: it wasn’t engineered or planned by the simple minds at the Federal Reserve as much as reasonably trusted money can always and everywhere be found circulating wherever goods and services are on offer. In a real world generally not understood by economists who populate central banks, money flows signal the exchange of products for products. And since producers of goods and services don’t want to be ripped off, the money circulating as proxy for goods and services is yet again reasonably trusted money. When we bring goods to market, we want to get something roughly equal in return. Which explains yet again why dollars are everywhere there’s production around the world, and as though an “invisible hand” put them there. Rest assured that this invisible hand is not the Fed.
All of which brings us to Custodia Bank. The Cheyenne, Wyoming-based financial institution aims to create a much better banking future by virtue of it bringing private money into the banking equation. Though the dollar as mentioned liquefies the vast majority of global exchange, $10 trillion worth of daily currency trading is indicative of just how turbulent the dollar and other globally circulated currencies can be. Enter private, or crypto money.
Cryptocurrencies like BitcoinBTC and other forms of private money were arguably given life by the instability of government-issued currencies. This isn’t to say that private monies have already improved on the dollar (at present BTC’s volatility plainly exceeds that of the greenback), but it is to say that the arrival of private money speaks loudly to a much greater currency future.
As I note in my book The Money Confusion, governments have been devaluing money as long as they’ve been involved with it. Please think about this truth relative to private money only to ask a question: what if AmazonAMZN issued a currency? Could it devalue in the way that the U.S. Treasury periodically has since 1971, or in the way that monetary authorities in Iran, Venezuela and Lebanon (to name three) have routinely? Hopefully the question answers itself. Private businesses want repeat business. If Amazon were to issue AMZNs, or if Twitter were to circulate TWTRs as I speculate it will, devaluation would lead to the disappearance of both as exchange mediums.
All of which signals the importance of innovators like Custodia. Working to make it possible for holders of private money to transact and finance in costless fashion sans expensive friction (this would include people in war zones like Ukraine), the bank’s foe is shamefully the Federal Reserve. In fact, last week the central bank denied Custodia a master account at the Fed after a two-year wait. Stop and think about this. A digitally-focused bank bent on pulling the banking system into the 21st century (amid a long-term decline for bank market share in the credit space) had its application denied by an entity charged with maintaining the health of the banking system.
Where it gets more interesting concerns the timing. It took two years for the Fed to deny Custodia’s application despite approval normally taking ten days. Only for it to grow fishier. Denial from an allegedly non-political entity came in concert with the Biden administration releasing a rather skeptical statement about cryptocurrencies: “Roadmap to Mitigate Cryptocurrencies’ Risks.” Please read on as it becomes more ridiculous. And obnoxious.
The Fed is excusing its alleged caution about Custodia given the “significant risks associated with cryptoassets and the crypto-asset sector.” Oh dear. Can they be serious? Better yet, do the regulators at the Fed think anyone is fooled here? While it should be stressed again that the dollar is broadly trusted globally, its own instability clearly loomed large in the rollout of crypto and/or private monies. If readers doubt this, imagine if the dollar had a stable definition. If so, consider whether the long-term prospects for private or crypto monies would be better or worse?
It’s all a reminder that in hiding behind “significant risks associated with cryptoassets” the Fed and the White House are ignoring the why behind crypto in the first place. It’s a response to “significant risks” associated with government money, plain and simple.
Which is why the Fed should enjoy its obnoxious abuse of power while it can. Indeed, as the flow of dollars around the world hopefully attests, good money always and everywhere replaces the bad. Except that private issuers eager to achieve global circulation will sooner rather than later circulate money that’s much more trustworthy than the dollar. Put another way, the capitalist system demands money that has measuring stick qualities that governments have been prone to violate.
What this means for Custodia is that with or without the Fed, it’s going to innovate around it along with the living-in-the-past banks that the Fed caters to. In other words, markets always have the last word. The Fed can deny reality, only for Custodia and other banks like it to re-shape it for them.