Coppola Comment

Proof of reserves is all the rage on crypto platforms. The idea is that if the platform can prove to its customers' satisfaction that their deposits are fully matched by equivalent assets on the platform, their deposits are safe. And if the mechanism they use to prove this uses crypto technology, that's even better.  Crypto tech solutions have surely got to be much more reliable than traditional financial accounts and audits - after all, FTX passed a U.S. GAAP audit .  No, they aren't. Proof of reserves as done by exchanges like Binance does not prove that customer deposits are safe. It is smoke and mirrors to fool prospective punters into relinquishing their money, just like claims that exchanges and platforms are "audited" or have "insurance". There are no audits in the crypto world, there is no insurance, and as I shall explain, proof of reserves proves absolutely nothing. The biggest crypto exchange, Binance, uses a Merkle tree proof of reserves. H...

  It's now widely accepted, though still not universally, that banks create money when they lend. But it seems to be much less widely known that they also create money when they spend. I don't just mean when they buy securities, which is rightly regarded as simply another form of lending. I mean when they buy what is now colloquially known as "stuff". Computers, for example. Or coffee machines.  Imagine that a major bank - JP Morgan, for example - wants to buy a new coffee machine for one of its New York offices (yes, it has more than one). It orders a top-of-the-range espresso machine worth $10,000 from the Goodlife Coffee Company, and pays for it by electronic funds transfer to the company's account. At the end of the transaction JP Morgan has a new coffee machine and Goodlife has $10,000 in its deposit account.  What exactly is this money, and how is it created? I had a long argument with people on twitter who insisted that JP Morgan would pay for the coffee ma...

Tether has issued what it calls a “ breakdown of its reserves ”. It actually consists of two pie charts. Here they are: Seriously, this is all Tether has seen fit to reveal.  Furthermore, the pie charts only purport to show the breakdown of Tether’s reserves on the 31st March 2021. We do not know whether Tether’s reserves still have the same composition now.  Nonetheless, the crypto world took these charts as an indication that Tether was, if not fully cash-backed, at least mostly. “76% of its reserves are in cash or cash equivalents, whereas banks only have 10%!”, crowed several people. In both the reserve report and the monthly attestation , Tether takes “reserves” to mean total consolidated assets. The monthly attestations from Moore Cayman essentially say:  1. Tether’s total consolidated assets exceed its consolidated liabilities  2. Tether’s total consolidated liabilities exceed the quantity of tokens in issue  3. Therefore Tether’s reserves exceed the quan...

Mainstream media get this wrong all the time. The latest to go down the "paying banks not to lend" rabbit hole is Binyamin Appelbaum in the New York Times. Because he didn't understand how IOER works, he didn't understand the Fed's strategy, and wrote a post that gets it quite seriously wrong. So I've written a Forbes post attempting to set things straight. Here's a taster: The FOMC has decided not to raise interest rates – for now. But it’s still widely expected that rate rises will come soon, possibly by the end of the year. Some people think that QE should be unwound first, but  the Fed’s plan  is to raise rates first. The Fed will unwind QE gradually as the securities it has purchased mature.  This creates a problem. Because of QE, the banking system is awash with reserves. Banks have more cash on deposit at the Fed than they need to settle customer deposit withdrawals (payments), and they therefore don’t need to borrow funds from each other a...

The FOMC June meeting minutes reveal an interesting discussion about the conduct of monetary policy in an era of excess reserves. The principal policy tools are to be interest on excess reserves (IOER) and the Fed's new overnight reverse repo facility (ONRRP). IOER has already become the principal tool for controlling short rates, and there was some discussion as to whether ONRRP is really needed as well. But in a world where USTs perform the same function for non-banks as reserves do for banks, it makes sense to control both. The FOMC do at last appear to have accepted that excess reserves are here to stay for the foreseeable future. They still talk about “normalisation” of policy: some members clearly still hanker after a speedy return to the “old ways”, wanting target ranges for the Fed Funds rate still to be published and hoping that overnight reverse repos (ONRPP) will eventually be phased out. But ten years from now, when the system still has excess reserves (it wil...

Me, at Forbes . No, banks don't lend out reserves. They don't lend out deposits, either. And excess reserves due to QE don't "crowd out lending". We are not "paying banks not to lend". With sincere thanks to Sober Look, whose work I love. Sadly he did get this one wrong. But he's certainly not the only one.