Cryptocurrencies enjoy a much higher social relevance and acceptance than they did a few years ago. The record high season on the crypto market has not escaped the watchdogs either. For the first time ever, crypto assets are featured in a Federal Reserve report on the stability of the financial system.
Every six months, the Federal Reserve (Fed) submits its assessment and assessment of the stability of the financial system and the associated fiscal policy challenges to the US Congress. For the first time, crypto assets are also making their debut in the 60-page magazine Monetary Policy Report. Although only a side note, its mention shows that the currency watchdogs attribute an ever-increasing importance to the crypto market in the macroeconomic context.
Gambling affinity among crypto investors
When asked about the effects of the pandemic on the financial markets, the Fed sums up that “some financial vulnerabilities have increased since the last monetary policy report”. In essence, however, “the institutions of the financial system remain resilient”. In a climate in which “downside risks to employment and inflation have increased”, however, risky asset classes in particular have seen increased demand, with corresponding dangers for investors. This applies to bonds and stocks as well as the still young class of cryptocurrencies.
For the Fed, this explains the explosive growth in the crypto market in the first half of the year: “The rise in the prices of various crypto assets also partly reflects the increased willingness to take risks”. The fact that the demand for alternative asset classes is increasing could set the monetary watchdog in motion a dangerous downward spiral: “The prices of assets can fall significantly if the risk appetite of investors declines, interest rates rise unexpectedly or the recovery falters”.
Only an extra in the risk balance
It is the first time that the Fed has named crypto assets as part of the “Risky Assets” in its semi-annual report. The fact that these are dealt with in a few sentences shows that crypto currencies only play a subordinate role in the general “risk balance” from the perspective of central bankers. The fact that crypto currencies are mentioned at all also underlines the increasing interest that the crypto market is attracting in financial policy.
This is not least due to the fact that the intersection of crypto investors is getting bigger and bigger. Meanwhile, cryptocurrencies cover a large part of society. Crypto is becoming mainstream, the corona crisis has accelerated this process again. Efforts to create a central bank digital currency (CBDC) are also likely to have put cryptos on the Fed’s agenda.
CBDC talks in the back room
A recent meeting between Fed Chairman Jerome Powell, former US House Speaker Paul Ryan, and Coinbase CEO Brian Armstrong caused a stir. It is not known what the discussions were about in detail. How Bloomberg reported, but it could have been about the development of a CBDC, in whose development the Fed Powell wants to play “a leading role” according to.
Coinbase may also play a role in the considerations, at least in an advisory position. A few days later, Powell stated that the Federal Reserve had committed itself to “hearing a wide range of voices on this important issue.” The central bank wants to publish a thesis paper on the risks and benefits of a CBDC this summer.