A journalist asked about the U.S. national BTC strategic reserves.
Powell replied: The Federal Reserve is not allowed to own Bitcoin. We are not seeking any legal changes.
He indeed speaks in accordance with the 'current' situation.
However, this statement is relatively vague and general. We need to break it down carefully.
First of all, what is Powell's view of the nature of BTC?
Looking back at the article from the teaching chain on December 5, 2024, Powell recently stated that, in his view, BTC is more like gold. He said, 'It is not a competitor to the U.S. dollar, but a competitor to gold.'
In other words, he believes BTC is a tangible asset.
So, can the Federal Reserve directly 'own' tangible assets? Clearly, it cannot.
For example, gold. The U.S. gold reserves are actually owned by the U.S. Treasury. The real storage and custody are dispersed in reserve vaults across the U.S. (such as the New York Federal Reserve Bank). According to the Gold Reserve Act of 1934, the Treasury issues gold certificates to record the value of the gold held. These gold certificates issued by the U.S. Treasury serve as legal proof of the gold reserves.
Can the Federal Reserve own gold as a tangible asset? No. The Federal Reserve can only hold gold certificates as financial assets.
However, even to hold gold certificates, one must act according to the law. The key here lies in legally accounting for the value of financial assets on the Federal Reserve's balance sheet.
According to the Federal Reserve Act of 1913, the Federal Reserve can account for gold certificates on its balance sheet as part of its reserve assets. Gold certificates are recorded on the Federal Reserve's balance sheet at nominal value, representing the gold value promised by the Treasury.
In accounting, the price of gold reserves is set by the International Monetary Fund Agreement Act of 1973, fixing the price of each ounce of gold at $42.22 rather than the market price. This pricing has been discussed in detail in the article 'How Much Gold Does the U.S. Actually Hold?' on November 14, 2023, and will not be elaborated on here.
However, this pricing is not fixed. For example, our central bank adjusts pricing based on market prices.
Alright, after understanding these, we need to examine two questions in sequence:
First, can the new President of the United States authorize the Treasury to hold BTC (Bitcoin) and issue 'Bitcoin certificates' solely based on presidential power?
Second, can the Federal Reserve, without amending the Federal Reserve Act of 1913, account for 'Bitcoin certificates' as part of its balance sheet?
Regarding the first question. The 35th President of the United States, John F. Kennedy, has already set an example.
On June 4, 1963, President Kennedy signed an executive order, Executive Order 11110. This order authorized the U.S. Treasury to issue 'Silver Certificates' based on the silver reserves held by the Treasury under the Silver Purchase Act of 1920.
Essentially, silver certificates are a form of U.S. currency that can be exchanged for an equivalent amount of physical silver.
On November 22, 1963, President Kennedy was assassinated.
It seems as if the voice of a female singer is coming from the radio:
"I want to ask you if you dare / To love me as you said /
I want to ask you if you dare / To be as crazy in love as I am
I want to ask you if you dare / To love me as you said /
Like me, madly in love / What would you think in the end?"
Regarding the second question. The Federal Reserve has already demonstrated this personally.
During the 2008 financial crisis, the Federal Reserve adopted a series of unconventional monetary policies, including purchasing MBS and other financial assets, to provide liquidity and support the U.S. economy. This policy is referred to as Quantitative Easing (QE).
Article 14, Section 2 of the Federal Reserve Act of 1913 stipulates that the Federal Reserve may purchase government bonds (such as U.S. Treasury bonds) to manage the money supply and stabilize the economy, but this act does not explicitly authorize the Federal Reserve 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 rights or private rights?
After all, public power cannot be exercised without legal authorization. If the law does not explicitly state that the Federal Reserve can personally buy 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 of the world, is a bug-like existence. In fact, the Federal Reserve is a private institution rather than a public sector entity. And private rights can be exercised as long as they are not prohibited by law.
Thus, this can be flexibly interpreted.
The usual explanation is as follows:
On one hand, the Federal Reserve Act of 1913 does not explicitly prohibit the Federal Reserve from purchasing specific types of assets.
On the other hand, the Federal Reserve has found other legal bases to endorse its 'emergency measures', 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, which are considered to provide legal grounds for the Federal Reserve's purchase of MBS during crises.
In summary, the Federal Reserve explains that purchasing MBS is due to the needs of monetary policy and financial stability, and it is an emergency measure taken to respond to specific circumstances during a financial crisis. Therefore, although these actions 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 authorizations.
In fact, U.S. courts at all levels have not explicitly ruled that these actions violate the Federal Reserve Act of 1913, but rather viewed them as emergency response measures.
Therefore, the conclusion is that, despite the existence of legal gray areas, this action has not been regarded as a direct violation of the Federal Reserve Act of 1913.
The teaching chain has repeatedly mentioned that the Federal Reserve has been quietly replacing its 'gray' MBS positions with legitimate Treasury positions.
This mess has been lingering since 2008.
So, even without seeking legal changes, the Federal Reserve can find legal basis for what it does or does not do through flexible interpretations of the nature of its powers.
Finally, the teaching chain needs to mention that global central banks have an international coordination organization called the BIS. This is part of the international financial order established after World War II.
The BIS is primarily composed of central banks from around the world, with about 60 members currently. These members include the central banks of major global economies, such as the Federal Reserve of the United States, the European Central Bank, and the People's Bank of China. It was established in 1930 and is headquartered in Basel, Switzerland, known as the bank for central banks.
In 1974, the Bank for International Settlements (BIS) established the Basel Committee (BCBS, Basel Committee on Banking Supervision) to set international regulatory standards and guidelines for the banking industry.
The main function of the Basel Committee is to develop international standards related to bank capital adequacy, risk management, and banking supervision, particularly regarding capital adequacy ratios, liquidity requirements, and risk-weighted assets. It typically publishes a series of regulatory standards and recommendations for global financial regulatory agencies to reference and adopt to ensure the health and stability of the banking system.
In 1988, the Basel Committee launched Basel I, which was the first standardized requirement for capital adequacy for global banks.
In 2004, the Basel Committee released Basel II, which further improved and expanded upon Basel I.
In 2010, following the global financial crisis, the Basel Committee introduced Basel III to improve the quality of bank capital and enhance the banking system's resilience to risks during crises.
It is evident that the BIS and the Basel Committee play a crucial role in global banking regulation. The Basel Committee, established through the BIS, is responsible for setting global regulatory standards for the banking industry, while Basel Agreements (I, II, III) are the specific manifestations of these standards.
Central banks around the world, including the Federal Reserve, if they want to include any assets in their balance sheet, known as exposing themselves to certain risks, usually need to establish standards through the BIS within the Basel framework, after which each member central bank can act accordingly.
The Basel Agreement is called an agreement rather than a law because it relies on the self-discipline of its members, rather than being enforced by coercive means like laws.
Coincidentally, back in December 2022, the BIS released a report stating that central banks would be allowed to allocate no more than 2% of Bitcoin starting in 2025.