The FMOC discussed cryptocurrencies for the first time

The FMOC discussed cryptocurrencies for the first time; according to our cursory search of previous meetings, virtual currencies didn't seem to have been ever addressed in the FOMC meeting minutes before. Here's the exact quote:

Some participants cited various potential risks to financial stability including the risks associated with expanded use of (virtual currencies) or the risks associated with collateral liquidity at central counterparties during episodes of market stress. In connection with the former set of risks, a few of these participants highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely, and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products.”

There is even speculation that Powell will dedicate at least part of his Jackson Hole speech on cryptocurrencies. This could be wrapped up in a discussion about a US central bank digital cryptocurrency. This is enough to make you want to grab a flying field trip of this space.

The success of cryptocurrencies - There are three points to consider

#1: The total dollar value of all cryptocurrencies ($1.9 trillion) is now roughly equal to the total amount of US physical currency ($2.2 trillion).

It's worth noting that there are only 289 billion "transactional" bills ($1-20) in circulation since the majority of the value is in $50 or $100 notes ($1.75 trillion total, $1.6 trillion just in $100s).

Bottom line: this is a good enough reason on its own for the US central bank to finally pay attention because cryptocurrencies have gone from curiosity to a multi-trillion-dollar ecosystem that rivals the Fed's own "printing press."

Yes, it is the Treasury, but the "Federal Reserve Note" still appears.

#2: Although there are more than 11,000 cryptocurrencies in the wild (1,305 to be exact), the system's total value is $1.9 billion. However, 80 percent of its value is held in 10 names and +50 percent in 2 names.

There are no prizes for naming them both: The one that begins with "B," which we cannot name without a spam email warning, is 44% of the total. Ethereum is 19%.

It is worth noting that the Fed seems to be more focused on stablecoins, which are tied to the US Dollar, than the most well-known/largest virtual currency.

These funds are money market funds that function in cryptocurrencies. We have previously covered them. The Fed is rightly focusing on stablecoins, mindful of the legacy left by the Reserve Fund, which was one of the matches that sparked the 2008 Financial Crisis. We suspect that regulation will increase their appeal.

#3: When the Fed focuses on something new, one can ask, "fine, but when?"

The first question about the cryptocurrencies market's size is answered. But so is its complexity and (even more significant) global reach. The Fed must recognize that stablecoins have slowly become an alternative digital currency to the US central bank.

Summarizing: We've said it before, but it bears repeating: the Federal Reserve is the incumbent within the traditional paradigm of disruptive innovation. Cryptocurrencies are the upstarts seeking a product/market match with their tech-enabled products.

This doesn't mean that the Fed-backed dollar will soon be extinct. Macy's is still around today. Amazon is just a lot bigger.

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