Firing of Lisa Cook might bring the end of the financial system as we know it
The United States needs lower interest rates, not as a matter of cyclical stimulus but as a structural necessity. The fiscal architecture no longer supports sustained high yields. With interest payments on the national debt now consuming a larger share of tax revenue than defense spending and with deficits projected to remain above $1.5 trillion annually higher rates mechanically destabilize the sovereign balance sheet. The U.S. government has become a duration mismatch: borrowing short to fund long-dated obligations in an environment where the marginal buyer of Treasuries increasingly demands real return. Meanwhile, the private sector has adapted to the higher-rate regime in ways that complicate the Fed’s position. Households and institutions are now dependent on yield as an income source. Any attempt to cut rates risks pulling income away from money market funds, reverse repo balances, and short-duration Treasury holders, potentially tightening financial conditions rather than easing them. And yet, failing to cut leaves the Treasury vulnerable to rising rollover costs, pushes banks deeper into unrealized losses, and erodes the long-term sustainability of public investment. The Fed is trapped between an economy addicted to the yields it created and a government that can’t afford to pay them.
Whether the FOMC cuts rates later this year or not is increasingly beside the point. What markets and the fiscal apparatus require is not just a cut, but a credible acceleration toward structurally lower funding costs. The pace. not just the direction of rate cuts has become the real constraint. Yet the FOMC, bound by its dual mandate and operating through tools poorly suited to current conditions, is limited in how aggressively it can respond without undermining its credibility or triggering volatility in labor and inflation metrics. This is where attention turns to the Board of Governors, and to the tools that operate below the surface of official monetary policy. The IOR (interest paid on reserves) can be changed by the Board directly, bypassing the FOMC entirely. While the FOMC is composed of 12 voting members (seven governors and five regional bank presidents on a rotating basis), the Board of Governors itself is only seven members. That distinction now matters. With Christopher Waller and Michelle Bowman already favoring rate cuts, and with Miran’s appointment alongside the removal of Lisa Cook, Trump effectively controls a four-member voting majority on the Board. The ability to set IOR and thus exert downward pressure on the fed funds rate no longer sits with Powell. It sits with the White House.
This makes the firing of Lisa Cook far more significant than the media has reported. A divided Board cannot execute policy through the IOR. A Trump-aligned majority can. Lowering IOR would immediately reduce the incentive for banks to park reserves at the Fed, pushing liquidity into the short end of the market and pulling the effective fed funds rate down with it. If followed by a cut to the discount window rate (also under BoG authority) the Fed’s entire operating framework could be bypassed. Bessent wouldn’t need Powell’s approval to change monetary conditions. The Board would control the price of reserves directly, and banks would respond to that price, not to forward guidance or dots. The Fed, in this configuration, ceases to be a policy institution. It becomes a utility.
This is where the more radical opportunity emerges. If domestic interest expenses can be lowered through IOR and discount window arbitrage, foreign interest costs implicit in offshore dollar liabilities can be neutralized through structural neglect. Arthur Hayes has argued that the United States, facing another global dollar squeeze, could choose not to backstop offshore Eurodollar markets as it did in 2008 and 2020. Instead, it could allow that demand to flow into onshore, Treasury-backed stablecoins, products that package T-bills into tokenized instruments and circulate them globally on open rails. These stablecoins, issued by private firms under U.S. jurisdiction, would absorb excess foreign demand for dollar assets without requiring the Fed to extend swap lines or reflate offshore balance sheets. The political calculus is simple: support domestic institutions, ignore foreign banks, and allow global liquidity to rebuild itself around instruments that help the U.S. Treasury finance deficits at the short end.
The implications are far-reaching. Once foreign institutions begin migrating from Eurodollar deposits and interbank lines to tokenized T-bill funds, they cease to participate in the traditional offshore wholesale funding markets. That shift reduces the need for dollar swap lines, Eurodollar derivatives, and other support mechanisms that require Fed balance sheet exposure. At the same time, it creates a new class of investors — global, non-bank entities, who effectively fund the U.S. government directly by holding stablecoins backed by short-term Treasuries. These instruments settle on private blockchains, but the underlying collateral sits at the Treasury. The more they grow, the more front-end demand is met without auction volatility, and the more short-term issuance is absorbed without upward pressure on rates. Bessent, in this scenario, does not just lower interest expense inside the system, he structurally caps it outside as well, by redirecting offshore demand through stablecoin wrappers that act as both money and funding channel. The Fed is not in the loop. And that’s the point.
Such a shift would mark not the end of the dollar, but the end of the Eurodollar system as a functional engine of global credit. The defining feature of that system has never been the dollar itself. It has been the ability of offshore entities to manufacture synthetic dollar liabilities through unsecured wholesale interbank markets, fund them through repo and FX swaps, and create credit without direct exposure to U.S. regulatory oversight. That mechanism depends on a network of dealers, balance sheets, and risk transformations that operate in shadow but bind the global financial system together. If that structure is displaced, if offshore funding is denied a backstop and stablecoin wrappers around T-bills become the primary channel for international dollar liquidity, then monetary authority shifts away from the dealer network and into protocol logic. Stablecoin issuers, by setting redemption terms, velocity, and underlying collateral profile, inherit control over short-end conditions. If those terms are shaped implicitly by BoG actions, then the market ceases to respond to FOMC policy. It responds to token dynamics and bill auctions. The Fed is not removed. It is bypassed.
This reconfiguration introduces a new fragility. The Eurodollar system, for all its opacity, was elastic. It could absorb shocks by expanding balance sheets, layering risk, and redistributing duration. Stablecoin systems, in contrast, are rigid. They cannot create credit beyond the size of the collateral pool. They respond to flows, not forecasts. In periods of inflow, they appear stable. Issuers mint tokens, demand is met, and the short end clears smoothly. But in stress, redemptions force contraction. The money supply shrinks precisely when liquidity is needed most. Without a functioning repo layer beneath them, stablecoins are structurally pro-cyclical. Worse, if their pricing is determined not by central banks but by smart contract auctions, Curve pools, or liquidity provider arbitrage with money funds, then front-end rates become the product of liquidity preference, not monetary policy.
The deeper risk is institutional. A system driven by protocol-administered dollars, priced off tokenized collateral, and distributed globally via stablecoin rails may be efficient, but it is not neutral. It replaces the decentralized opacity of Eurodollar plumbing with centralized issuance under U.S. fiscal authority and global distribution via private technology platforms. The collateral is centralized, the access is decentralized, and the governance is neither international nor accountable. From a geopolitical standpoint, this is combustible. From a regulatory standpoint, it is untested. And from the standpoint of the existing banking system, it is existential.
Offshore banks built around Eurodollar logic, rehypothecation chains, and synthetic dollar exposure would be structurally sidelined unless they re-integrate into a system they were never designed to operate within. Basel rules, already strained by collateral mismatches and risk-weight illusions, would lose relevance. FX swap markets would atrophy. Cross-border liquidity flows would fragment into tokenized and non-tokenized regimes, with the latter increasingly starved of elasticity. The Eurodollar system might still exist but as a legacy format. The real dollar, the one that prices global funding and clears global trade, would be the tokenized version, backed by Treasuries, settled on-chain, and controlled at the margin by the intersection of BoG policy and stablecoin architecture.
The motivation behind this shift is as blunt as it is structural: the United States is trying to solve its funding problem without triggering a crisis. The Treasury cannot afford higher yields. The Fed cannot pivot fast enough. The banking system is constrained, the foreign sector is retreating, and the traditional credit channels are clogged with collateral mismatches and regulatory inefficiencies. The solution is to bypass them. By allowing market demand to re-route through tokenized, Treasury-backed instruments issued domestically and distributed globally, the U.S. gains three critical advantages: it lowers its interest expense by shifting demand to the front end, it absorbs offshore liquidity without absorbing offshore risk, and it reasserts control over global dollar circulation without deploying its balance sheet. This is not a new Bretton Woods. It is a controlled demolition of the Eurodollar framework—executed not through diplomacy or reform, but through financial engineering and regulatory asymmetry.
Other countries will not watch this happen passively. The loss of access to dollar funding, and the strategic leverage it entails, will trigger defensive countermeasures. Some will try to replicate the model issuing their own collateral-backed stablecoins in yuan, euro, or rupee. Others will push for multilateral settlement layers that bypass the dollar entirely — BRICS coins, regional clearing unions, or commodity-indexed digital payment networks. But these alternatives face a coordination problem the dollar does not. They require trust, shared infrastructure, and rule-based issuance none of which currently exist at scale. The more likely path is fragmentation: capital controls, legal barriers to stablecoin access, and taxation regimes designed to penalize tokenized dollar flows. These will slow adoption but not stop it. In jurisdictions with high inflation or fragile banking systems, the demand for tokenized Treasuries will outcompete domestic policy.
If this dynamic unfolds, the market structure will bifurcate. Traditional finance will remain tethered to the legacy plumbing of regulated banks, policy rates, and Basel rules. But liquidity will increasingly pool in tokenized instruments outside that perimeter—assets that settle faster, price in real time, and are interoperable across platforms and borders. These instruments will not replace money. They will replace the yield curve. In crypto markets, this shift will reinforce the base layer narrative: that stablecoins are not transitional bridges, but permanent fixtures of global capital markets. Risk assets will be repriced against collateralized token flows, not macro guidance. DeFi will evolve from speculative sandbox to liquidity infrastructure. The dollar will still dominate, but it will no longer be defined by the institutions that once managed it. It will be defined by the rails that carry it, and the collateral that backs it.
In that sense, the Fed will not lose power by accident. It will give it up until the only monetary institution that matters is the one no longer setting policy, but clearing flows.
