Sebastian Sinclair

Extended dislocations in crypto markets and ensuing failures of major players should put banks on notice, according to a unit of the US Treasury.&nbsp;



In its semiannual <a href="https://www.occ.gov/publications-and-resources/publications/semiannual-risk-perspective/files/pub-semiannual-risk-perspective-fall-2022.pdf" target="_blank" rel="noreferrer noopener">Risk Perspective report</a>, the Treasury’s Office of the Comptroller of the Currency (OCC) said Thursday that it continues to take a cautious approach to cryptoassets.



The OCC pointed toward several “key risks” financial institutions should keep in mind — including a lack of adherence to best risk management practices and the potential for additional contagion.&nbsp;



“The events of this year in the crypto industry have revealed a high degree of interconnectedness between certain crypto participants through a variety of opaque lending and investing arrangements,” the OCC said.



The regulator also advised national banks and federal savings associations interested in engaging in digital assets to first discuss the activities with regulators.&nbsp;



David Gan, founder and partner at venture capital firm OP Crypto, told Blockworks it’s important to distinguish between the centralized crypto industry — highlighted by the OCC — and a decentralized one.



“While centralized entities have continued to show weakness and a lack of maturity in terms of regulatory stability, decentralized entities have continued to work as intended,” Gan said.



Still, while digital assets share some risks with traditional asset classes, additional pitfalls may show up in new ways, the OCC said.



Stablecoins were also a focus of the regulator’s caution, which it said were susceptible to bank run risks — as seen with Terra’s failed algorithmic UST experiment in May.&nbsp;



At the time, the OCC’s acting director Michael Hsu called UST a “<a href="https://blockworks.co/news/treasury-official-warns-of-systemic-crypto-risks" target="_blank" rel="noreferrer noopener">wake-up call</a>,” before acknowledging no contagion had hit the banking system as a result of UST’s depegging.



This time around though, the OCC’s assessment sat at odds with its director’s view earlier this year.



“The market stresses revealed that crypto participants may be engaging in highly leveraged trading, in addition to providing brokerage, custody, and exchange-like services to customers,”&nbsp; the OCC said. “The result is a high risk of contagion among connected parties.”

US Treasury’s OCC Says Crypto’s ‘Interconnectedness’ Is a Problem

FinCEN, the US Treasury Department&#8217;s financial crimes unit, is zeroing in on DeFi regulation as government agencies scramble for greater industry oversight following the ratification of an executive order on digital assets earlier this year.



Slotted in between remarks on combating fraud and anti-corruption generally, Himamauli Das, the acting director of the Financial Crimes Enforcement Network, said in a <a href="https://www.fincen.gov/news/speeches/prepared-remarks-fincen-acting-director-himamauli-das-during-abaaba-financial-crimes" target="_blank" rel="noreferrer noopener">speech</a> Tuesday his agency was looking at DeFi’s “potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT [anti-money laundering/combating the financing of terrorism] efforts.”



The removal of intermediaries is seen by crypto natives as a <a href="https://blockworks.co/news/the-investors-guide-to-defi" target="_blank" rel="noreferrer noopener">major advantage</a> of DeFi, rendering it more efficient and removing counterparty risks, but FinCEN’s financial surveillance focus positions the existence of intermediaries as a strength of status quo. The unit did not immediately return a request for comment.



“We are engaging with relevant US government stakeholders in this effort, and we welcome engagement with industry — including the banking community — to better understand your assessment of the vulnerabilities and risks,” Das said.



The director was speaking during the American Bankers Association ABA Financial Crimes Enforcement Conference in Maryland, which concluded on Wednesday.



As part of the US Treasury Department, the FinCEN is tasked with combating money laundering and terrorism financing by leveraging the financial intelligence it gathers.



In line with ongoing efforts expected to carry over to the new year, Das said his agency would continue to evaluate the evolution of digital assets to try to discover any gaps in the current AML/CFT framework.



To that end, FinCEN will analyze whether further regulations are needed. Its efforts form part of the <a href="https://blockworks.co/news/biden-signs-crypto-executive-order-promoting-responsible-innovation" target="_blank" rel="noreferrer noopener">executive order</a> on digital assets, which was signed by President Joe Biden in March.



Multiple government agencies have since been exploring ways to ratchet <a href="https://blockworks.co/category/regulation" target="_blank" rel="noreferrer noopener">regulatory oversight</a> of cryptoassets, including the SEC and the CFTC which continue to <a href="https://blockworks.co/news/crypto-regulation-cftc-sec-tag-team" target="_blank" rel="noreferrer noopener">jostle for control</a>.



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FinCEN Invites Bankers To Assess DeFi Risk

Bessie Liu

<div id="highlights-block_631a0e62a012e" class="highlights">
 <ul>
 <li>The Treasury sanctioned cryptocurrency mixer Tornado Cash for facilitating money laundering of more than $7 billion worth of digital currencies</li>
 <li>Six plaintiffs have filed a lawsuit against the Treasury’s Office of Foreign Assets Control</li>
 </ul>
 
</div>



Centralized cryptocurrency exchange Coinbase is funding a lawsuit filed against the US Treasury Department’s Office of Foreign Assets Control (OFAC) by six people affected by the <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">Tornado Cash sanctions</a>.



The lawsuit asks the court to remove Tornado Cash from the US sanctions list — currently, it is <a href="https://cms.blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel/" target="_blank" rel="noreferrer noopener">illegal</a> for any US person to interact with the app.



Calling the move “unprecedented, overboard action” that oversteps the government’s authority, the suit argues the Treasury’s stance “infringes on Plaintiffs’ constitutional rights [and] threatens the ability of law-abiding Americans to engage freely and privately in financial transactions.”



Cryptocurrency mixers such as Tornado Cash allows users to privately deposit assets from a crypto address and withdraw them using a different address. The Treasury says that a DPRK state-sponsored cyber-hacking group has used Tornado Cash to launder more than $7 billion worth of digital currencies.&nbsp;



These sanctions “represent a significant unauthorized expansion of OFAC’s authority,” which have directly “harmed innocent people seeking to legitimately protect their privacy and security using this technology,” Paul Grewal, chief legal officer at Coinbase, <a href="https://blog.coinbase.com/sanctions-should-target-bad-actors-not-technology-cb541ac6839a" target="_blank" rel="noreferrer noopener">said in a statement</a>.



<blockquote class="wp-block-quote">“No one wants criminals to use crypto protocols, but blocking the technology entirely (which is what this sanction essentially does) is not what the people’s elected representatives authorized — especially when there are effective routes to more narrowly target bad actors,” Grewal said.</blockquote>



The lawsuit argues that many users turn to mixers such as Tornado Cash for lawful privacy reasons. Joseph Van Loon, an ordinary American citizen that lives in Texas, used Tornado Cash to avoid the attention of malicious actors. A similar story is true for Tyler Almeida, a senior security risk analyst at Coinbase, who anonymized his wallet address to prevent unwanted airdrops and malicious scammers.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Today I joined five other plaintiffs in challenging the U.S. Treasury’s and OFAC’s sanctions against <a href="https://twitter.com/TornadoCash?ref_src=twsrc%5Etfw">@TornadoCash</a>, a piece of software running on Ethereum. I did not take this decision lightly. Code is speech and free speech is a constitutional right worth protecting.&mdash; prestonvanloon.eth (@preston_vanloon) <a href="https://twitter.com/preston_vanloon/status/1567876494856261632?ref_src=twsrc%5Etfw">September 8, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“The plaintiffs in this lawsuit represent a cross-section of crypto users and developers who used Tornado Cash to protect their privacy and security for various legitimate reasons,” Grewal said.&nbsp;&nbsp;



Coinbase CEO Brian Armstrong wrote in a <a href="https://blog.coinbase.com/defending-privacy-in-crypto-e09db33dece8" target="_blank" rel="noreferrer noopener">statement</a> that sanctioning open source software is similar to shutting down a highway that robbers used to flee a crime scene. 



“It ends up punishing people who did nothing wrong and results in people having less privacy and security,” Armstrong said.&nbsp;



As Tornado Cash is an open source, decentralized, non-custodial privacy protocol on a blockchain, it can not be controlled by any individual or group of individuals. The lawsuit suggests that sanctioning the protocol is essentially sanctioning open source technology, a move which Armstrong said will have “a chilling effect on innovation.”



“Developers are worried that they could be held responsible for something they had nothing to do with, and no ability to control,” Armstrong said. “At a time when we should be encouraging innovation, this kind of fear and uncertainty will do the opposite — making developers wonder if, by pushing the industry forward, they could be putting themselves at risk.”



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Coinbase Backs Lawsuit Against US Treasury

Casey Wagner

<div id="highlights-block_62f6b8cfa0914" class="highlights">
 <ul>
 <li>Chainalysis reports 10.5% of funds ran through Tornado Cash were stolen</li>
 <li>Classifying code as an entity for the purpose of sanctions laws gets complicated, experts say</li>
 </ul>
 
</div>



The Treasury Department’s decision to sanction a second <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">crypto mixing service</a> has sent blockchain enthusiasts and privacy chauvinists in an uproar this week. 



On Monday, <a href="https://cms.blockworks.co/treasurys-tornado-cash-sanctions-have-companies-stepping-back-from-users/" target="_blank" rel="noreferrer noopener">Tornado Cash</a>, a cryptocurrency mixing service allegedly used to launder stolen funds linked to major hacks, was added to the Office of Foreign Asset Control’s Specially Designated Nationals (SDN) list, along with 45 associated Ethereum wallet addresses.&nbsp;



“OFAC’s designation of Tornado Cash is a crucial moment in the fight against cryptocurrency-based crime,” a <a href="https://blog.chainalysis.com/reports/tornado-cash-ofac-designation-sanctions/" target="_blank" rel="noreferrer noopener">report</a> from blockchain analytics firm Chainalysis said. 



Read more: <a href="https://cms.blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">Coin Mixers and Privacy Coins: Can They Resist Censorship?</a>



“For one thing, it’s especially timely: More cryptocurrency is being stolen than ever, and in almost every hack we’ve observed this year, Tornado Cash has received at least some of the stolen funds.”



The Treasury alleges that North Korea-sponsored hacking group <a href="https://cms.blockworks.co/fbi-says-north-korea-behind-625m-ronin-hack/" target="_blank" rel="noreferrer noopener">Lazarus Group</a>, which in March stole over $620 million in cryptocurrency from the Ronin Bridge protocol, attempted to conceal the origin of the funds with Tornado Cash. Chainalysis agrees.&nbsp;



“Lazarus Group is one of the biggest perpetrators of these [decentralized finance] hacks,” Chainalysis said in its report. “Soon after the Ronin Bridge theft, the hackers sent much of those funds to Tornado Cash in order to be laundered.”&nbsp;



<h3>Not the first mixing service to be targeted&nbsp;&nbsp;</h3>



It’s not the first time OFAC has sanctioned a cryptocurrency mixer. In May, officials targeted <a href="https://cms.blockworks.co/us-treasury-sanctions-first-crypto-mixing-service-following-record-hack/" target="_blank" rel="noreferrer noopener">Blender.io</a>, a centralized service Lazarus Group also allegedly used to conceal stolen funds. But Tornado Cash is different, some experts say.&nbsp;



“Blender.io was designated back in May of this year, but it&#8217;s different and in a pretty meaningful way, which is that was a centralized custodial service and this…is just code,” Michael Mosier, former deputy chief in the Department of Justice’s money laundering and asset recovery section, said during a <a href="https://twitter.com/i/spaces/1vOxwyrdLeEGB?s=20" target="_blank" rel="noreferrer noopener">Twitter Spaces</a> discussion Friday.



As a smart contract-based mixing service, Tornado Cash can continue to run without individual actors, those who oppose the sanctions insist. It’s an argument that Tornado Cash co-founder Roman Semenov has long <a href="https://www.bloomberg.com/news/articles/2022-03-10/crypto-obfuscator-tornado-says-sanctions-cant-affect-smart-contracts?sref=3REHEaVI#xj4y7vzkg" target="_blank" rel="noreferrer noopener">used himself</a>, but others have expressed doubt in this line of reasoning.&nbsp;



“I do not think personally, although we&#8217;re still kind of working through arguments…that you can necessarily make a particularly strong argument that Tornado Cash is not an entity,” Peter Van Valkenburgh, director of research at Coin Center, said during the Twitter Spaces. “As far as I know, Blender.io wasn&#8217;t incorporated in any legal jurisdiction, either.”&nbsp;



Some people retain a level of control over Tornado Cash&#8217;s admin keys, Van Valkenburgh said, allowing them to make changes to the code and therefore would be the ‘entity’ in the eyes of the government.&nbsp;



It gets murky though, Van Valkenburgh added, because Tornado Cash, as code, is not in and of itself ‘property.’&nbsp;



“It would be almost like we discovered that Phillips, the person who invented the Phillips head screwdriver, did something very, very bad, and we sanctioned his bank accounts, but then we also said that no one is allowed to use Phillips head screwdrivers anymore,” he said.&nbsp;



The blanket sanctions have collateral consequences, Rebecca Rettig, general counsel at Aave, said during the Twitter Spaces. Targeting every wallet that has come in contact with funds from Tornado Cash, no matter how far removed, is still a hypothetical scenario, but it’s one that could have a significant negative impact, Rettig said.&nbsp;



“The thought process through what all the unanticipated consequences would be was very narrow here, because it seems like a very severe reaction to software that is being used for some illicit activity,” she added.&nbsp;



<h3>Tornado Cash’s compliance responsibility&nbsp;</h3>



OFAC’s decision suggests that all protocols, decentralized or not, are subject to the same compliance obligations, Chainalysis’ report said. It is the responsibility of the mixer itself to stop illicit activity, officials say.&nbsp;



“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” Brian Nelson, the Treasury’s under secretary for terrorism and financial sntelligence, said after the sanctions were announced.&nbsp;



Since its launch in August 2019, Tornado Cash has received over $7.6 billion worth of ether, “a sizable portion of which have come from illicit or high-risk sources,” Chainalysis’ report noted. Of this figure, about 18% of funds came from sanctioned entities, but, the report notes, almost all of the funds were received before the entities were added to the sanctions list.&nbsp;



Less than 11% of funds received by the recently-sanctioned crypto mixing service Tornado Cash were stolen from other cryptocurrency exchanges and protocols, according to Chainalysis.



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Decentralized or Not, Officials Say Tornado Cash Responsible for Illicit Activity

Jack Kubinec

<div id="highlights-block_62f518433a0b7" class="highlights">
 <ul>
 <li>The sanctions are “a lot more serious than I first thought,” MakerDAO co-founder Rune Christensen said</li>
 <li>The risk of uprooting and moving collateral from USD to ETH may overweigh the consequences of DAI&#8217;s depeg</li>
 </ul>
 
</div>



MakerDAO is weighing a Hail Mary move to replace what backs its decentralized stablecoin DAI.&nbsp;



Following the US Treasury’s <a href="https://cms.blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel/" target="_blank" rel="noreferrer noopener">sanctioning of crypto mixer</a> Tornado Cash, <a href="https://cms.blockworks.co/tag/makerdao/" target="_blank" rel="noreferrer noopener">MakerDAO</a> co-founder Rune Christensen wants to uproot USDC from the protocol’s massive $10.9 billion crypto treasury.



Earlier this week, authorities added <a href="https://cms.blockworks.co/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash/" target="_blank" rel="noreferrer noopener">Tornado Cash’s blockchain addresses to the Office of Foreign Assets Control (OFAC) blacklist</a>, making it illegal to interact with those particular addresses.



Many of the newly banned addresses were USDC contract addresses tied to Tornado Cash, and the stablecoin’s issuer Circle toed the US line almost immediately by adding dozens to its own blacklist. Circle’s move automatically rendered any USDC controlled by those addresses — collectively <a href="https://twitter.com/bantg/status/1556712790894706688">around</a> $75,000 — moot, practically valueless.



On MakerDAO’s official Discord channel, Christensen said the consequences of the Tornado Cash sanctions are “a lot more serious than I first thought.”



Even though DAI would very likely depeg from the US dollar if MakerDAO ditches USDC, the risk is “acceptable,” Christensen said.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">And Rune might want to &quot;yolo&quot; the PSM <a href="https://twitter.com/search?q=%24USDC&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$USDC</a> into <a href="https://twitter.com/search?q=%24ETH&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$ETH</a> lmaooo <a href="https://t.co/tVugbNlyaj">pic.twitter.com/tVugbNlyaj</a>&mdash; Westie 🟪 (@WestieCapital) <a href="https://twitter.com/WestieCapital/status/1557736335607500802?ref_src=twsrc%5Etfw">August 11, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



“The market may finally start to reward decentralization to the point where these risks are acceptable, because USDC is no longer the no-brainer it used to be,” Christensen said.



<h3>MakerDAO relies on USDC arbitrage to hold DAI peg</h3>



DAI is the fourth-largest stablecoin by market capitalization, with over $7.6 billion in circulation.



Decisions regarding the token’s backing, alongside everything else, are made by MakerDAO, a decentralized autonomous organization. This contrasts stablecoin giants Tether and Circle, which are both run behind closed doors by centralized teams.



DAI’s dollar-value is inspired by what&#8217;s known as the Price Stability Peg (PSG). Minting DAI usually demands overcollateralization, but the PSG enables USDC holders to mint one DAI for every USDC deposited, opening a lucrative arbitrage opportunity when DAI rises above $1.



But when Circle signaled it would follow the US Treasury in blacklisting any blockchain addresses sanctioned by OFAC, a new hypothetical attack vector had been opened, MakerDAO delegate and crypto researcher Mika Honkasalo <a href="https://cms.blockworks.co/tornado-cash-sanctions-expose-potential-defi-achilles-heel/" target="_blank" rel="noreferrer noopener">explained to Blockworks</a> in a call on Tuesday.



“If that specific USDC ever happens to be on the sanctions list, the value of that USDC is zero,” Honkasalo said. “I suppose there&#8217;s some market price for it, but, in theory, the price is very low, so you lose a lot of your collateral.” USDC currently <a href="https://daistats.com/#/" target="_blank" rel="noreferrer noopener">makes</a> up about 32% of DAI’s backing, representing roughly $2.26 billion.



Ridding MakerDAO of its USDC collateral would mean shedding its stability peg mechanism. But without arbitrage pulling DAI back to $1 when demand is high, the token would ultimately depeg — upwards.



Honkasalo said: “You can just get rid of all of it and be okay with the price going higher. Centralized stablecoins have no actual $1 peg, they have a $1 minimum — the peg can go as high as the collateral itself. If you have a collateralization ratio of 120, technically it can go anywhere between $1 and $120, or whatever the collateral ratio is.”



But while the researcher noted this was technically doable, for MakerDAO it’s a bit more difficult as it still takes engineering. “It’s not an overnight solution,” he said.



<h3>DeFi’s canary in the coal mine</h3>



MakerDAO CEO Christensen is now realizing that by solving the stability problem, using USDC as a conduit, MakerDAO created another — arguably more dangerous — threat: The USDC it receives is, in theory, subject to US government control.&nbsp;



Honkasalo stressed that this is not just a problem for MakerDAO. It’s an issue for every single DeFi protocol that has USDC assets as collateral.



“What if an automated market maker’s USDC smart contract, that&#8217;s actually the market, ends up on the sanctions list?” Honkasalo asked.



“All the lending markets suffer from this equally, people have just realised DAI was a problem because of how it’s backed — but the auto lending markets are just as much backed by USDC as DAI.”



Luca Prosperi, another prominent MakerDAO figure, was very critical of the idea when it was floated in MakerDAO’s Discord. “So let me understand, we have 80%-plus collateral concentration in our balance sheet, and we openly say that collateral is crap.”



Christensen does have considerable sway over MakerDAO governance. He’s been constantly involved in many of Maker’s big decisions, Blockworks Research analyst Ryan West said.



“For example, in the vote for the Lending Oversight Core Unit, which was the largest governance vote in the DAO’s history, he was able to garner 33,70 MKR votes or 11.5% of the total voting power himself,” West said.



Christensen had pushed enough of the community to vote against large venture capital funds and popular delegates such as a16z, BlockTower and Hasu, he added.



The MakerDAO CEO sees this move as essential given the potential for government crackdown.



“This is my thought process: There’s now a demonstrated way to instantly and unconstitutionally nuke any smart contract of all centralized stables at will, with no lead time to take preemptive actions. Countries tend to ban crypto when their economic conditions start tanking.”



David Canellis contributed reporting.



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MakerDAO Co-founder Plans To ‘Yolo USDC Into ETH’

<div id="highlights-block_628d5da8a344e" class="highlights">
 <ul>
 <li>UST&#8217;s collapse highlights areas where the industry needs work, the official said</li>
 <li>The majority of speakers agreed on the need for regulatory clarity </li>
 </ul>
 
</div>



Cryptocurrency is growing dangerous fast, a US Treasury official said Tuesday.&nbsp;



Michael Hsu, acting director of the Office of the Comptroller of the Currency, told attendees at the DC Blockchain Summit that the fallout from the stablecoin UST’s de-pegging from its one-to-one standing with the US dollar should “serve as a wake up call and an opportunity to reset and recalibrate the problems the industry is trying to solve.”



It was promising that there was no contagion to the banking system as a result of the de-pegging, Hsu said, but this further highlights the need for safe havens outside of crypto.&nbsp;



“No banks are under stress, or even rumored to be under stress due to crypto exposure,” Hsu said. “This absence of stress has allowed the traditional banking system to remain a source of strength to households and businesses in the recent financial market volatility.”&nbsp;



Yield farming — in which cryptocurrency holders stake their assets in exchange for fixed-income-like returns — associated with UST was particularly alarming, Hsu said.&nbsp;



“Yield farming today may have more in common with Ponzi schemes than productive innovation,” he said. “Hype-driven economy presents real challenges for those truly interested in productive innovation in protecting consumers.”&nbsp;



While Hsu’s tone was harsher than other speakers, the notion that true innovators want and need to act within regulatory guidelines was shared universally.&nbsp;



“The priority now…is responsible innovation,” said Sulolit Mukherjee, global head of tax at crypto exchange Binance. “Good actors and institutional investors are waiting for more clarity in the space.”



Hsu is eager to clarify the guardrails around the industry, too.&nbsp;



“Although I remain a crypto skeptic, I&#8217;ve come to see its potential and understand why there&#8217;s so much excitement about the industry,” he said. “The OCC will continue to take a careful and cautious approach [with] crypto in order to ensure the national banking system is safe and sound.”&nbsp;



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US Treasury Official: Stablecoin UST’s Collapse “Wake Up Call’ For Crypto

<div id="highlights-block_6154912134d2a" class="highlights">
 <ul>
 <li>Representative Jerry Nadler suggested the US Treasury Secretary mint a $1 trillion coin in order to avoid the US defaulting on its debt for the first time in history</li>
 <li>The idea has been thrown out for decades, and it is perfectly legal </li>
 </ul>
 
</div>



Yes, the United States government has the power to mint a $1 trillion platinum coin to pay off US Treasury Bills, and yes, there is at least one congressman on board.&nbsp;



Representative Jerry Nadler (D-NY) voiced the idea on Tuesday during a House Democratic caucus meeting, according to Speaker of the House Nancy Pelosi.&nbsp;



“Jerry Nadler wants to have a coin, a trillion dollar coin,” she told reporters Tuesday. “That doesn’t even require a congressional act.”



The idea appears to be legally sound under a vague provision of the Coinage Act of 1792, more commonly known as the Mint Act, that authorizes the minting of platinum coins for any amount to be used to finance public debt.&nbsp;



Pelosi is correct, congressional approval is not required. The Treasury Secretary has the authority to &#8220;mint and issue coins&#8230;in amounts the Secretary decides are necessary to meet the needs of the United States,&#8221; according to a 1982 amendment to the Coinage Act.&nbsp;



<blockquote class="wp-block-quote">“On one hand, minting what is ultimately a meme coin to work around national debt limits shows how arbitrary the fiat currency system is in the first place, and wouldn&#8217;t have a major quantitative effect on anything, if performed once,” said Lyn Alden, founder of Lyn Alden Investment Strategies. “On the other hand, going that route can really spook the market by setting a bad precedent, because it basically goes around the intended checks and balances that keep some fiat systems more reliable than ‘banana republic’ fiat systems.” </blockquote>



Under US law, the Treasury can issue bonds to pay its obligations, but Congress is required for authorization on spending and taxes. The Federal Reserve is supposed to be independent of both the executive and the legislative branches, choosing what assets they will buy or sell within their mandate, Alden said.&nbsp;



“The Treasury (executive branch) going around Congress (legislative branch) and the spirit of the law by minting a coin in a loophole, and then encouraging/forcing the Fed to swap for it (i.e. going around the concept of central bank independence to support the Treasury market), basically shows that the Treasury can spend without taxing or issuing debt, and can therefore outright print money,” Alden said.&nbsp;



“Of course that&#8217;s essentially what is happening anyway, but it still needs to be rubber-stamped by a few supposedly separate entities, whereas this approach breaks that illusion of checks, balances, and independence.”&nbsp;



It is not the first time that the idea has been floated. Talks of minting a platinum coin swirled during President Obama’s tenure when a similar debt ceiling crisis was faced. He later described the crisis as one of the scariest points of his presidency and the idea of minting a coin seemed absurd to him.&nbsp;



<blockquote class="wp-block-quote">&#8220;It was some primitive &#8230; it was out of the Stone Age,&#8221; President Obama said during an interview on the “Pod Save America” podcast in 2017. &#8220;I pictured rolling in some coin.&#8221;</blockquote>



As for logistics, the US government could, in theory, deem a coin of any size worth $1 trillion. President Obama admitted that when he pictured the coin, it was quite large.



It is also a common misconception that the coin of such a value would require copious amounts of platinum. In reality, the value of coins minted by the US Treasury is determined by legal tender, not material value.&nbsp;



The coin, if created and sold, would become the property of the Fed. It would likely be kept with other physical assets in the vault in the basement of the Fed Bank of New York in Manhattan.



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A New York Congressman Wants the Treasury to Mint a $1 Trillion Coin to Pay off US Debt

<div id="highlights-block_612680d63c780" class="highlights">
 <ul>
 <li>Foreign debt demand is at the highest level in over a decade</li>
 <li>More than 60% of 2-year notes went to foreign buyers</li>
 </ul>
 
</div>



Despite inflation fears, foreign buyers are purchasing a staggering amount of US debt.&nbsp;



Foreign official entities took home $15.4 billion of the $41 billion, about 38%, available 10-year Treasuries, the latest <a href="https://home.treasury.gov/data/investor-class-auction-allotments" target="_blank" rel="noreferrer noopener">report</a> from the August 11 auction shows. More than 60% of 2-year notes went to foreign buyers, the highest in more than a decade. 



The increase in foreign buyers, many of which were likely foreign central banks, might be due to the fact that foreign central banks are eager to offload their foreign-exchange reserve currency (USD), one analyst said.&nbsp;



“The United States’ biggest export is inflation, which means our biggest export is dollars,” said Steve Van Metre, founder of Steve Van Metre Financial. “Foreign banks accumulate dollars, and when the banks have too many dollars they convert them with&nbsp; foreign central banks to get local currency. As dollars pile up in a foreign central bank they become inflationary.”&nbsp;



Foreign central banks take foreign US dollars and exchange them for treasury securities, which pay small amounts of interest, but are not inflationary, Van Metre said.&nbsp;



In a surprise move, this month’s 10-year sale awarded notes at 1.34%, more than three basis points lower than the yield level prior to the auction. This is the highest premium since 2012.&nbsp;



Two-year notes also sold two basis points higher from the previous auction in late July at an auction-high yield of 0.24%. The Fed Funds target rate is between 0% and 0.25%.&nbsp;



“When the global economy is expanding, you actually see an increase in purchases from foreign investors, because they have too many dollars, and the opposite is also true,” said Van Metre.&nbsp;



“When the global economy is contracting, and foreign economies need dollars, they will sell the Treasury securities, you have to think of the Treasury securities almost as a foreign central bank savings account.”&nbsp;



The rate is not a major concern for foreign central banks because they intend to hold the treasuries rather than sell for the foreseeable future, Van Metre said. Given the current state of the global economy and due to the existing repurchasing facilities, foreign players purchasing high amounts of US debt is a trend likely to continue at future auctions.&nbsp;



“The Fed announced two stand-in repo facilities, domestic and foreign,” said Van Metre. “If you own any Treasury or agency-backed security, you need cash, it’s like a payday loan. Go to the Fed, and for a quarter percent for a year, that&#8217;s the interest cost, they will loan you cash on an overnight basis.”&nbsp;



Because bonds now have liquidity, there is little reason to anticipate lower rates of foreign debt purchasers. Refunding sales is a trend more commonly seen with 10-year bonds as opposed to shorter-dated treasuries, such as 2-year notes.



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