In a recent statement, the Federal Reserve Chairman, Jerome Powell, declared his support towards AMBERIBOR, which utilizes the Ethereum blockchain, as an alternative to LIBOR.
Ethereum Based AMERIBOR Vs LIBOR
Cryptocurrencies have existed for more than a decade now. However, last year has been quite significant for the industry as it welcomed several big companies into the playing field. Facebook’s announcement of its crypto venture, Libra had stirred the entire globe as officials from different regions were probing digital assets. While several countries have been developing their own digital currency, most of them remain hostile towards Bitcoin and other cryptocurrencies.
Times are evidently changing as the US Federal Reserve Chairman, Jerome Powell recently inclined towards an Ethereum blockchain-based interbank lending rate system, AMERIBOR, as opposed to LIBOR.
On one hand, the London InterBank Offered Rate (LIBOR) has been the standard interest that global banks have been using while lending short-time loans to one and another. LIBOR is governed by the Intercontinental Exchange (ICE). AMERIBOR, on the other hand, is facilitated through the American Financial Exchange (AFX). AMERIBOR utilizes the Ethereum blockchain consensus to determine rates. However, Ethereum uses proof-of-work, whereas this LIBOR alternative uses proof-of-authority further giving AFX a degree of control over the transactions. The CEO of AFX, Richard Sandor had stated that AMERIBOR was AFX’s “first major blockchain initiative” and even believes that blockchain possesses the capabilities to modify electronic trading and the monetary world.
Powell’s inclination towards AMERIBOR instead of Secured Overnight Financing Rate (SOFR) came into light while he was reverting to a question put forth by Senator Tom Cotton. This question follows the Fed Chairman’s testimony to the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs. While this took place back on 12 February 2020, the Senator questioned,
“In today’s hearing, you spoke about the transition from LIBOR and how a number of banks have said they’d like to work on a rate that is separate from SOFR, i.e. a rate that is credit-sensitive (as is LIBOR). I was glad to hear you mention that the Federal Reserve is working with those banks to support their efforts to use a credit-sensitive rate. Is Ameribor appropriate to use for institutions for whom it more accurately represents their cost of funding?”
To which the Chairman wrote a statement on 28 May 2020, suggested that the Federal Reserve was in full support of the Alternative Reference Rates Committee (ARCC), and even considered SOFR as a sturdy choice. Powell further stated,
“However, we have been clear that the ARRC’s recommendations and the use of SOFR are voluntary and that market participants should seek to transition away from LIBOR in the manner that is most appropriate given their specific circumstances.”
Further speaking about AMERIBOR, Powell pointed out that this reference rate by AFX met the monetary benchmarks and norms of the International Organization of Securities Commission (IOSCO) as it was devised based on a “cohesive and well-defined market.” He added,
“While [AMERIBOR] is a fully appropriate rate for the banks that fund themselves through the American Financial Exchange (AFX) or for other similar institutions for whom AMERIBOR may reflect their cost of funding, it may not be a natural fit for many market participants.”
While several major companies have been exploring the fruits of the blockchain technology, the Federal Reserve seems to have jumped into the same bandwagon.