Is the Federal Reserve not allowed to own BTC?

Source: Liu Jiaolian

Overnight this morning, the Federal Reserve's December interest rate meeting ended as scheduled. The result was in line with market expectations, with a further 25bp rate cut. This result exceeded the expectations of some who had speculated that the rate cuts would stop. Since the second half of 2024, the Federal Reserve has now cut rates three times, totaling 100bp or 1%, bringing the US federal rate down from 5.5% to 4.5%.

This brings the interest rate back to the level at the beginning of 2023.

Interest rate cuts are implemented. The three major U.S. stock indexes and the cryptocurrency market all experienced a sharp decline. Why is this? It's because the expected interest rate cuts have already been anticipated and priced in by the market. This has turned the positive news into a bearish sentiment, but the mountains are still there, and the sunset is still beautiful.

Of course, the reasons for the callback are somewhat related to the attitude of the chairman of the Federal Reserve, indicating that policy adjustments next year may need to be more cautious. After all, this is somewhat inconsistent with the aggressive expectations of some market participants for a continued rapid interest rate cut next year.

After all, in this period of global radicalism during the Keynesian depression, being slightly less radical will be criticized as conservatism. To reduce interest rates inadequately is to not reduce them at all.

As a moderate, standing in the middle, you will be criticized by the people on your right for being too left, and criticized by the people on your left for being too right. The so-called middle ground is not acceptable to either side.

Why does Chinese philosophy like to talk about the Doctrine of the Mean? It's called filling in the gaps. The ancient Chinese philosophers saw through it early on, that society is prone to evolve into an 'M-shape', and the bravest are those who stand in the middle. Without courage, they dare not stand in the middle. Not strong enough, they will be torn to pieces standing in the middle.

It's either black or white, left or right, heaven or hell. In the blink of an eye, it can go from enlightenment to ghostly. Today is the blockchain revolution, tomorrow it could be a tulip scam.

Playing tricks is easy. Being a great person who stands tall and walks between the heavens and the earth is difficult. Blindly catering to the popular mood of praising or criticizing wildly is easy. It is difficult to objectively and impartially look at new things and seize historical opportunities.

Not knowing her goodness is because you haven't been with her. Once you've been with her for a while, you'll know her goodness.

In the early morning press conference, a statement from Powell in response to a reporter's question went viral.

The reporter asked about the US national BTC strategic reserve.

Powell responded: The Fed is not allowed to own Bitcoin. We are also not seeking legal changes related to this.

What he said does indeed correspond to the current situation.

But this statement is quite general, summary, and vague. We need to carefully analyze it.

First of all, what is BTC's nature in Powell's mind?

Looking back at the EduChain article 'Bitcoin Wind Rises Again, Breaking the Hundred Thousand Dollar Mark' on December 5, 2024, Powell recently publicly stated that BTC is more like gold. He said, 'It is not a competitor to the US dollar, but a competitor to gold.'

In other words, he believes that BTC is a tangible asset.

So, can the Federal Reserve directly "own" physical assets? Obviously not.

Take gold as an example. The United States' gold reserves are actually owned by the US Department of the Treasury, while the actual storage and custody are dispersed in reserves across the United States, such as the Federal Reserve Bank of New York. According to the Gold Reserve Act of 1934, the Department of the Treasury issues gold certificates to record the value of the gold it owns. These gold certificates issued by the US Department of the Treasury are legal proof of the gold reserves.

Can the Federal Reserve own physical gold? No. The Federal Reserve can only own gold certificates as financial assets.

However, even if you want to own gold certificates, you still need to act in accordance with the law. The key here is to legally include the value of financial assets in the Federal Reserve's balance sheet.

According to the Federal Reserve Act of 1913, the Fed can include gold certificates in its balance sheet as part of its reserve assets. Gold certificates are recorded at nominal value on the Fed's balance sheet, representing the promised gold value by the Treasury Department.

In accounting, the price of gold reserves is set by the International Monetary Fund Agreement Act of 1973, with each ounce of gold priced at $42.22, rather than the market price. On this pricing, in the article 'How Much Gold Does the United States Actually Hold?' published by Gate.io on 2023.11.14, detailed discussion has been made, and it will not be repeated here.

However, this pricing is not a one-size-fits-all rule. Like our central mother, the price is adjusted according to the market price.

Okay, after understanding these, we need to examine two questions in sequence:

First, can the newly elected US President authorize the Treasury Department to reserve BTC (big pie) and issue "big pie vouchers" solely based on presidential power?

Second, can the Federal Reserve include "big pancake coupons" on its balance sheet without amending the Federal Reserve Act of 1913 in urgent situations?

For the first question. The 35th President of the United States, John F. Kennedy, has set an example.

On June 4, 1963, President Kennedy signed an executive order, Executive Order 11110. The executive order authorized the U.S. Treasury to issue 'Silver Certificates' based on the silver reserves held by the Treasury in accordance with the Silver Purchase Act of 1920.

Essentially, a silver certificate is a form of US currency that can be exchanged for an equivalent amount of physical silver.

President Kennedy was assassinated on November 22, 1963.

The voice of a female singer seemed to come from the radio:

• "I want to ask if you dare / to love me like you said /*

Wanna ask if you dare / To be as crazy for love as I am

I want to ask if you dare / to love me like you said before./

*What would you think of me, who's so crazy for love?

Regarding the second question. The Federal Reserve has already demonstrated it personally.

During the 2008 financial crisis, the Federal Reserve implemented a series of unconventional monetary policies, including the purchase of MBS and other financial assets, to provide liquidity and support the US economy. This policy is known as Quantitative Easing (QE).

Section 14(2) of the Federal Reserve Act of 1913 stipulates that the Fed can purchase government bonds (such as US Treasury bonds) to manage the money supply and stabilize the economy, but the Act does not explicitly authorize the Fed to purchase private assets unrelated to the government, such as mortgage-backed securities (MBS).

The core question is: Does the power of the Federal Reserve belong to public authority or private authority?

After all, the exercise of public power must be authorized by law. If the law does not explicitly authorize the Federal Reserve to personally purchase MBS, then its direct purchase of MBS is suspected of being illegal.

However, the Federal Reserve, as the central bank of the United States and even the central bank of the world, is a bug-like existence. In fact, the Federal Reserve is a private institution rather than a public sector. And private rights are allowed if not prohibited by law.

So, this can be flexibly interpreted.

The usual explanation is this:

On the one hand, the Federal Reserve Act of 1913 did not explicitly prohibit the Fed from purchasing specific types of assets.

On the one hand, the Federal Reserve has found other legal endorsements for its 'necessity being the law' argument, including laws such as the Emergency Banking Act of 1932 and the Financial Stability Act of 2008. These laws authorize the Federal Reserve to adopt more unconventional monetary policies in specific emergency situations, and are considered as legal basis for the Federal Reserve's purchases of MBS during a crisis.

In a nutshell, in short, the Fed explained that the purchase of MBS is necessary for monetary policy and financial stability, and is an emergency measure taken to address the special circumstances of the financial crisis. Therefore, although these measures do not comply with the literal provisions of the Federal Reserve Act of 1913, the government has provided a legal basis for these measures through new authorization.

In fact, US courts at all levels did not explicitly rule that these actions violate the 1913 Federal Reserve Act, but treated them as emergency measures.

Therefore, the conclusion is that, despite the existence of legal gray areas, this move is not considered a direct violation of the Federal Reserve Act of 1913.

Jiao Chain has repeatedly mentioned that the Federal Reserve has been quietly replacing its 'grey' MBS positions with legitimate US Treasury positions.

This shit, it has been wiping since 2008 until today.

Therefore, even without seeking legal changes, the Federal Reserve can find legal basis for what it does or does not do by flexibly interpreting its own nature of power.

Finally, it is worth mentioning that the global central banks also have an international coordinating organization called BIS (Bank for International Settlements). This is part of the international financial order after World War II.

BIS's members are mainly composed of central banks from around the world, with about 60 members currently. These members include the central banks of important global economies, such as the Federal Reserve of the United States, the European Central Bank of Europe, and the People's Bank of China. It was established in 1930, headquartered in Basel, Switzerland, and can be called the central bank of central banks.

In 1974, the Bank for International Settlements (BIS) established the Basel Committee on Banking Supervision (BCBS) to develop regulatory standards and guidelines for the international banking industry.

The main function of the Basel Committee is to develop international standards related to bank capital adequacy, risk management, and bank supervision, especially regulations on capital adequacy ratios, liquidity requirements, risk-weighted assets, etc. It usually issues a series of regulatory standards and recommendations for reference and adoption by financial regulatory authorities worldwide to ensure the health and stability of the banking system.

In 1988, the Basel Committee introduced Basel Accord I, the first standardization of global banking capital adequacy requirements.

In 2004, the Basel Committee released Basel II, which is a further improvement and expansion of Basel I.

In 2010, after the global financial crisis, the Basel Committee introduced Basel III, which aimed to improve the capital quality of banks and enhance the banking system's ability to resist risks in crises.

It is evident that the BIS (Bank for International Settlements) and the Basel Committee play crucial roles in global banking regulation. The Basel Committee, established through the BIS, is responsible for developing regulatory standards for the global banking industry, with the Basel Accords (I, II, III) representing the specific embodiment of these standards.

Central banks around the world, including the Federal Reserve, usually need to establish standards for the exposure of certain assets to risk, i.e. incorporating them into their balance sheets, through the BIS in the Basel framework and then act accordingly according to this standard.

The Basel Accords are called accords rather than laws because they rely on the self-discipline of their members, rather than being enforced by violent agencies like laws.

Coincidentally or not, as early as December 2022, BIS released a report stating that central banks around the world will be allowed to allocate no more than 2% of Bitcoin starting from 2025.