The takeaway …
Last week, U.S. Senator Ted Budd, Republican of North Carolina, introduced S.3229, the Keep Your Coins Act. The bill prohibits Federal agencies from restricting the use of convertible virtual currency by a person to purchase goods or services for the person’s own use, and for other purposes.
Customers are allowed, under the Act, to maintain custody of their digital assets in self-hosted wallets while avoiding third-party risks. The bill would prohibit any federal agency from proposing a rule that would impair a person’s ability to act as self-custodian of digital assets.
The bill defines a convertible virtual currency as a medium of exchange that has an equivalent value as currency. While it may act as a substitute for currency, it may not have all the attributes of legal tender.
Here is where I am required to become a legal nerd. How does the law define currency? Currency, according to 31 CFR 1010.100(m) is the coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance.
According to 31 USC 5103, legal tender consists of United States coin and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks) and are legal tender for all debts, public charges, taxes and dues.
In short, money, that is permitted by law, to be offered in payment.
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It appears that Senator Budd is attempting to expand the sphere of legal tender. While he admits that a convertible virtual currency may not have all the attributes of legal tender, by prohibiting federal government intervention into a taxpayer’s ability to maintain her own financial ledger, issuance, and distribution of their digital currency, would enabling legislation not in the end provide these attributes?
From an interbank market perspective, the Board of Governors of the Federal Reserve System may be tempted to challenge the statute where convertibility of a virtual currency into real U.S. currency has an impact on money supply. Total global market cap of cryptocurrencies is approximately $2 trillion. That amounts to approximately 36% of US currency in circulation and currency held as reserve balances. When we compare crypto market cap to M1 money supply, crypto market cap accounts for approximately 11% of M1.
Granted, crypto market cap is global and I don’t see crypto investors cashing out all their crypto coin and demanding dollars all at once. The percentages may be a concern, but current crypto currency exchange activity does not seem to have the Federal Reserve in a tizzy.
What may make the Federal Reserve a little antsy is if enough crypto transactions occur without bank intermediation such that America’s payment system sees less demand. I don’t think the Federal Reserve has to worry about that just yet. One of the criticisms against crypto is its use case. I still haven’t bought a cup of coffee with crypto and I don’t know of too many people who have. I would have to see the primary sectors of the economy, i.e., mining, farming, fishing and their various industries accept crypto for major transactions.
Once this happens at a significant scale, I suspect we will see more trade e.g., settlement of contracts, occurring in crypto currency. At that point, however, regulatory agencies such as the Board of Governors and the Commodity Futures Trading Commission may have their interests sufficiently piqued.
Alton Drew
13 November 2023
For more of my take on the political economy, purchase my book at amazon.com/author/altondrew.
The stats …
30-Day Federal Funds Futures and Options: 94.64.
Discount Window rate: 5.50%.
Interest on Reserve Balances: 5.40%.
Effective Federal Funds rate: 5.33%.
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