Yellen Shrugs Off Bitcoin as “Full-Blown Financial Stability Risk.” In Other Words, No Fed Bailout when Prices “Fluctuate”

As long as banks are not exposed to bitcoin.

Bitcoin, after ludicrously dominating the financial media, even invaded the Federal Open Market Committee’s press conference on Wednesday. During the Q&A, Fed Chair Janet Yellen was asked about bitcoin by three different emissaries from major media operations.

Those weren’t questions about bitcoin itself but about the broader “cryptocurrency” mania – “cryptocurrency” in quotes because bitcoin doesn’t, as Yellen put it so elegantly, “constitute legal tender” – and the risk it might pose to “financial stability.”

This is code for a distinction: When “financial stability” is at risk, when the banking system is on the verge of collapse or when credit is freezing up or some such thing, the Fed will step in; if financial stability is not at risk, the Fed will let it go. Here’s what Yellen said:

“Bitcoin at this time plays a very small role in the payment system, it’s not a stable store of value, and it doesn’t constitute legal tender.

“It’s a highly speculative asset, and the Fed doesn’t really play any role, any regulatory role with respect to bitcoin, other than assuring that banking organizations that we do supervise are attentive that they are appropriately managing any interactions they have with participants in that market, and appropriately monitoring anti-money laundering Bank Secrecy Act responsibilities that they have.”

A few minutes later came the next salvo. In response to another participant’s question about the Fed’s coming up with its own cryptocurrency, Yellen made a distinction between “digital currency” and “cryptocurrency,” with central banks only looking at digital currencies.

“There might be a central banker or two that might go in that direction. But I really want to caution that this is not something that the Federal Reserve is seriously considering at this stage.”

“While we’re looking at research on this topic, there are, I think, to my mind, limited benefits from introducing it, a limited need for it, and some substantial concerns,” she said. “So I would doubt that the Federal Reserve would soon go in that direction.”

And then, at the very end of the press conference she got badgered again, ever so gently, about “bitcoin as a potential threat to financial stability” – again that term. Was the Fed ignoring the threats from bitcoin just like the Bernanke Fed had ignored the contagion from subprime mortgages before the Financial Crisis? “So are we underestimating the risk,” the question went.


“I certainly agree that it’s important for the Fed to attempt to understand emerging risks to financial stability, and to be looking not just in the banking system but outside it for developments that could pose financial risks, and we are doing that….

“When you ask about bitcoin, I still see the financial stability risks from it as limited.

“Often risks threatening financial stability arise when there is exposure of the banking system to fluctuation in asset valuations, and I really don’t see any significant exposure of our core financial institutions to threats from bitcoin if its value were to fluctuate.”

The term “fluctuate” is central-bank speak for “crash.”

“I don’t see a threat to the core of our financial institutions. So undoubtedly, there are individuals who could lose a lot of money if bitcoin were to fall in price, but I really don’t see that as creating a full-blown financial stability risk.”

And there you go. If cryptocurrency hotheads are counting on a Fed bailout – such as the bond market, the stock market, the housing market, and other asset classes received since the Financial Crisis via QE and zero-interest-rate monetary policy – they’ll be disappointed.

That’s what Yellen indicated at what was her last Fed press conference before she rides off into the sunset in February. There won’t be a bailout of any asset class unless they threaten to trigger another Financial Crisis. But with cryptocurrencies that’s not going to happen because banks are not exposed. So the Fed will let them go to heck. That was the message.

Bitcoin takes over the media, in ten practically funny pictures. Read… Peak Bitcoin Media-Mania Yet?

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  61 comments for “Yellen Shrugs Off Bitcoin as “Full-Blown Financial Stability Risk.” In Other Words, No Fed Bailout when Prices “Fluctuate”

  1. Ppp says:

    What happens when financial stability undermines financial stability?

    • Shawn says:

      “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” – Donald Rumsfeld

      • MCH says:

        Praise be to the Ex CEO of Gilead Sciences before he was shanghaied by Cheney and Bush.

        From what I can tell, Bitcoin is basically getting out before the music stops. The last guy holding it is the sucker. Everyone else is a genius.

      • Tom says:

        What is interesting to me is the fact that a certain % of cripto’s are lost forever. If there is truly a finite number ,eventually there will be one coin left.It would seem that many a coin will reside in the grave of the origional holder. Who said you can’t take it with you?

  2. fjcruiserdxb says:

    If banks are speculating on bitcoins, it will most certainly be off balance sheet. The TBTF banks won’t supposed to speculate on derivatives either and yet they all did prompting the largest financial rescue in history. The Fed can only react to event once they happen. The TBTF banks will be saved once more when the bitcoin bubble explodes.

    • Joan of Arc says:

      The TBTF banks won’t be able to handle the crashing bit coin fallout. The Fed will have to step in and save the whole financial system again.

    • hendrik1730 says:

      Yes, the TBTF banks could use special purpose vehicles ( SPV ) to do so. SPV’s don’t show in their balance sheets.

  3. Joan of Arc says:

    After bitcoin tops $1 trillion in total market cap and starts crashing, the Fed will step in and bail it out because it could destabilize the stock and bond markets. How will the Fed do this? Why , it will simply start buying bitcoins and keeping the total float value between $500 billion and $1 trillion.

    • Wolf Richter says:

      It’s precisely those hopes that the Fed is trying quash.

    • van_down_by_river says:

      The would have no reason to bail out any crypto currencies. I’m certain cryptos are seen by the Fed as a threat to their monopoly on the U.S. monetary system. No doubt the Fed is hoping cryptos will dry up and blow away and be looked upon as a 2017 mania that people will look back on with nostalgia.

      Cryptos show no sign of going away but the real threat to the Fed is their own money printing. We all know who is going to fund the new tax cuts – the Fed. We all know who guarantees a bid at U.S. treasury auctions – the Fed. We all know who will pay the enormous U.S. debt – the Fed.

      What I would like someone to ask Janet at a presser is this: “how long do your models show people will maintain confidence in central bank currencies if you all continue to print it with no concern with regards to diluting the supply?”

      • flying monkey says:

        That is just one of at least three ways money is created

        The Government prints money every time it issues a bond as it trades just like money too.

        The fractional reserve lending system also creates money out of thin air.

      • Jon says:

        The increase in the valuation of crypto currencies is proportional to the decrease of faith in the Fed
        If FED keep printing away $$, debasing the currency, cryptos would keep increasing… like other assets..

  4. Jason says:

    Any cryoto-coin holder (it’s not a currency !) will quickly discover that their “wealth” is defined in Fiat currency. They will be begging for Fiat currency when the inevitable collapse arrives and it will!

    Oh the sweet IRONY when that day comes, all the brainwashed cult followers will be desperately demanding fiat for their silly toy coins that have no value as a form of exchange for mundane and useful things like food, shelter and transportation. You cannot use bitcoin to buy anything of basic necessity.

    I pity the fools that are transferring their home equity into flaky exchanges that will crash when there is a race for the exits. Just google the horror stories of people attempting to move money from an exchange back to their bank and you will discover how screwed these people are when the panic erupts.

    Bank runs are very scary, they destroy banks and will likely shutter the exchanges for good, especially when the FBI raids their cooked books. Thanks to the Fed bank runs rarelt happen the vast majority of ordinary Americans are protected via FDIC under $250k – good enough for the average family.

    So to all those Cryto zealots, who will protect you when there are no more exits..?

    Fed / Central bank money is the result of thousands of year experimentation. It is imperfect but has propelled global GDP to record levels, so it’s not the worst!

    You can’t have a money system that conditions paricpiants to hoard – it’s deflationary.. and doesn’t work. Just google it.

      • MC01 says:

        Given the glut of real estate in Miami (and there’s far more where that came from) that’s a good way to get attention and especially free publicity.

        • alex in san jose AKA digital Detroit says:

          It’s a great way to get rid of a condo that’s going to have a few inches of water all the time in the bottom floor, and to transport a lot of money out of the US without having to declare it.

      • Is there sometimes barter involved in transactions using Bitcoin?

    • nicko2 says:

      Preach it! :)

    • Pragmatic Static says:

      In the history of mankind, How many fiat currencies have been successful? Just Google the horror stories of people who worked their whole life only to have their savings plundered by Central Bank policies.

      Trusting a system where every aspect of monetary policy is rigged and manipulated, and over-printing of unbacked fiat currency leads to unsustainable debt.

      The sentence should read, “It is imperfect and has propelled global debt to record levels, and so it can’t get any worse”

      Google it. And if you are posting at 12:38 am…….get a job!

      • Jason says:

        Ok, so let’s not confuse a payment system with a store of value.

        Your example of how many hours it takes for a worker to buy the S&P is compelling. Use that same logic on Bitcoin and your argument crumbles it’s own weight.

        I don’t think fiat currency is a great store of value, quite the opposite, I believe it to be the most proven method of sustaining a payment method to support growth.

        Forget about me and you. Think about generations down the line that will need inflation to support their economic activity. Do you expect them to buy bitcoins for $100k? $1m?

        The payment system will never switch to crypto scams because you cannot price in a deflationary currency. It doesn’t work.

        • Jason says:

          If you want Gen Z, AA, BB, etc to support your appreciating bitcoin you will be begging for fiat inflation. It’s how the system discourages hoarding.

          The future generation won’t want bitcoin anyway. They will use their fiat currency to buy into another Ponzi scheme that promised instant wealth – denominated in Fiar currency!

          The whole theses behind crypto coins is that it will buy you more fiat currency in excess of inflation thanks to the power of ponzi. Fascinating that it’s all based on the chase for more Fiat.

          Face it you love fiat. That’s how you measure your crypto “wealth”

    • van_down_by_river says:

      The “brainwashed cult followers” who will suffer are those with wealth saved in Electronic Federal Reserve Tokens. The value of those tokens are “fluctuating” (crashing) worse than bitcoin likely ever will.

      It now takes 120 hours for the typical American to buy one share of the S&P 500. Typically in the past the average American could have purchased one share with 40 hours of work and would have been paid dividends between 3% to 6%. Today the S&P pays a dividends of under 2%. The dollar is getting crushed, its purchasing power is withering but the Fed’s plan to address this crisis is to increase inflation.

      Good plan! At least wealthy investors, able to borrow cheap dollars, can buy up all the assets and pay back the debt in diluted (worthless) dollars. So, you see, in our trickle down world we all win, yeah!

    • Kraig says:

      Bitcoin is not deflationary. in fact it begin with inflation rates at almost Venezuelan levels which is why the early investors made so much no one looks at inflation adjusted returns. The rate of inflation is right there in the block chain

  5. BreAvo says:

    Ha! That was funny! – “cryptocurrency hotheads counting on a Fed bailout” – The last thing the cryptoheads want anything to do with is the Fed!
    They want Fed-fiat to as finely “regulated” and secure as crypto. :-)
    And traditional banking ? – Well, that can go the way of the dinosaurs.

    • Si says:

      Quite. If I’d read this comment first I wouldn’t have bothered posting mine!

      • BreAvo says:

        Thanks but I wrote it too fast and dirty. I agree with your comments below also. I think we are headed toward a new reserve currency one way or another – and it could very well be one of the cryptos! The Fed may actually have no choice – because they may not actually be capable of regulating and securing INTERNATIONAL reserves (we still seem to still think everything is about the US$). We are in a paradigm shift… ( – which means even the most absurd scenarios are in play.) Diversify folks.

  6. Kasadour says:

    I don’t see why the FED would have to bail out Bitcoin in the case of price “fluctuation”. Just as the FED prints more dollars, Tether Ltd can and does print up more USDT at a ratio of 1:1 to the USD. it’s happenes every time there is a pull back on Bitcoin.

  7. d says:

    “But with cryptocurrencies that’s not going to happen because banks are not exposed. ”


    But with cryptocurrencies that’s not going to happen because banks are not YET HEAVILY exposed.

    People are borrowing to Speculate in Scam coin.

    Therefor “Bank’s” are exposed. Even if not directly.

    Should to many Borrow to Speculate in Crypto scam’s, then Bank Exposure, must rise.

    The Potential. For “Crypto Scam’s” to create a “Domino Effect”. Exists. It is, a yet, not very large.

    Nether was the Financing in Tulip bulb’s, The Mississippi Bubble, or the South Seas bubble. To begin with.

    Credit agents in America and china are far to willing to lend, on anything.

    Based on Perceived ability to pay, as opposed to hard freehold assets, held.

    • MC01 says:

      Banks, especially in Asia, have already started offering their customers various cryptocurrency-related services. Banks aren’t exposed for a penny: their customers are when they sign the agreement telling them cryptocurrencies are “highly speculative assets”.
      I am so far unaware of banks offering leveraged trading on cryptocurrencies: at the moment that appears to be the domain of other “financial entities”, but it cannot be ruled out it’s happening in the Chinese shadow banking system as we speak. Always remember this cryptocurrency explosion has been chiefly driven by Asian investors: the fireworks started in The Philippines, Indonesia and Malaysia.

      I suspect Fed officials consider cryptocurrencies well below their dignity (and rightly so) but were asked by politicians to say something about them. Most politicians have an extremely poor grasp of all hi-tech issues but as Bitcoin is making the news they just need to be seen doing something, anything about it. Something all law-abiding citizens should be terrified of.

      • d says:

        “Banks, especially in Asia, have already started offering their customers various cryptocurrency-related services. Banks aren’t exposed for a penny: their customers are when they sign the agreement telling them cryptocurrencies are “highly speculative assets”.”

        And when the Crypto Scam crashes, and the customer cant pay the bank, and has no assets for the bank to foreclose on.

        How does the bank Recover its Advances??

        Hence the bank is indirectly exposed, to Crypto Scam risk.

        Banks Particularly in china lend to shadow bankers, who lend to Crypto scam speculators.

        chinese Shadow banking is very much, heads we win, Tails everybody else looses.

        These are the peopel who used the same metals to secure multiple, loans from chinese and American banks. Then sold then metal. Before defaulting on the loans. As they had paid of the CCP, nothing ever happened to them.

    • Wolf Richter says:

      In my understanding of the Fed’s understanding, banks are “exposed” when they accept cryptos as collateral for loans.

      When the price of cryptos drop, these loans might get in trouble, and then the collateral vanishes, leaving banks with a big loss.

      Banks can handle cryptos and service people and companies that trade cryptos, they just have to be careful accepting cryptos as collateral.

      • Man i just fell out of my chair laughing, “careful accepting cryptos as collateral”? Yes real collateral comes out of thin air, cryptos have to plugged into a power source.

        • Kraig says:

          Actually they don’t. Paper bitcoin are around. There’s a guy who makes coins with bitcoin value and they can be stored in a hard drive. They do need power to be created but then electric is used to mine gold

      • d says:

        “In my understanding of the Fed’s understanding, banks are “exposed” when they accept cryptos as collateral for loans.”

        Thats Direct Exposure.

        Indirect Exposure:

        Bank lends on House’s, Borrower’s Speculate in Scam Coin, and lose everything. Along with Liquidity from other assets, they liquidated, to Speculate in Scam coin.

        Borrowers total Debt, exceeds Equity.

        Bank/Financial industry is “indirectly exposed” to losses in Scam Coin.

        When their is an unrecoverable Debt. Direct or Indirect exposure, to the “Root of Default (Scam Coin)”, is Academic.

        Financial Institution’s are still faced with a “Write off ” .

  8. Patrick says:

    The Dollar and other major fiats are already digital. That paper in your wallet is nothing more than an offline representation of a digital currency.

  9. Mike R says:

    Oh the Central Banks are interested in cryptos, rest assured.
    But only from the standpoint that cryptos may become a haven (safe?) from fiat. Like gold.
    Should buying cross over into more of that realm, then goodbye cryptos, the CBs will act.
    Right now, it’s likely all speculative fever. The cryptos will crash on their own.

  10. Martin says:

    Everytime BitCoin goes up silver goes down, which eventually will to tell ya’ what percentage of the price is held up by margin buyers. Silver going back to say $5/oz before bouncing back to say $45/oz will be the 2018 story.

    • Frederick says:

      Five dollars an ounce and I’m backing up the truck Doubt very much we will see that price again

    • Harambe says:

      I noticed a funny thing the other day. Spot silver had fallen below $16, so I figured I’d pick up a few more ounces. Couldn’t find an online dealer that would sell me random year eagles for less than $20 each. Tried APMEX, Kitco, etc. All the same deal, so I bought gold instead.

  11. Mel says:

    If I understand the scene rightly
    The fact that Yellen was asked over and over and over again about Bitcoin shows that Bitcoin is so hot that the banks are going to expose themselves to it even if they’re not exposed now. Margin loans on these shiny new investment vehicles maybe?
    Bitcoin owners won’t be bailed out. When the FED bails an entity out, the FED digitally adds USD to the entity’s reserve account. Anyone who doesn’t have a reserve account can’t and won’t be bailed out.

  12. GSH says:

    There is a lot of money to be made in cryptos (at least for now). Investment banks will NOT be able to stay away from this money trough. They will lever it up with derivatives, CCOs (collateralized crypto obligations) and CDSs until there is systemic risk in banking. And then the Fed will bail them out again.

  13. Si says:

    “If cryptocurrency hotheads are counting on a Fed bailout”…
    I can assure you, Wolf, that a Fed bailout would be anathema to the vast majority of people involved in cryptocurrency. Far from counting on it, it is the last thing they would want.

    • Wolf Richter says:

      That’s easy to say now. But when the taken-for-granted wealth suddenly vanishes and real pain sets in, any bailout would be welcome by the recipients with open arms.

      • Rates says:

        Exactly. This country hates responsibility, and getting a bailout is consistent with that behavior.

        • Si says:

          Taking responsibility for their own money is precisely what cryptocurrency users are consciously doing by entering the market.

  14. RangerOne says:

    Maybe I am just too young but I just don’t see how Bitcoin could be a bomb like suborime mortgages were.

    Mortgages were terrible for banks because they were traded enmass as low risk entities. And the story was convincing since no one wanted to believe that housing values could implode causing mass defaults. They thought wrapping up multiple subprimes into one massive investment would protect a holder from default of a few. But clearly mortgage defaults can become a common trend during a bubble pop.

    On the flip side if US banks are buying cryptos, I can’t see anyone believing these are anything but a massive gamble. Their is no veil of diversification. It’s a pure bet on the life and death of a single unregulated currency with no formal backing.

    My gut therefor is that you have to be nuts to think the US Fed will do anything if bitcoin went tits up tomorrow.

    But it’s probable that a glaring hole in my knowledge of how Bitcoin has changed over the last couple years is the reason I think this.

  15. It would be up to Congress to enforce counterfeiting laws. It would be up to Treasury to enforce money laundering regulations. Still this does add “credit” to the system, albeit a few billion is not one days worth of QE, it has the potential to tip the markets in a deflationary direction if the credit collapse gets into housing, which involves the banks, in a shadowy way. For the moment its no more worry that say a speculative surge in PMs.

  16. Mike Earussi says:

    People are irrational by nature, especially the young. Every generation has to learn the hard way not to be stupid. It’s been that way at least regarding money since the tulip bulb craze almost 400 years ago. Bitcoin is merely the latest tulip bulb. They will bid it up, it will crash, they will get burned, they will learn. And in 20 years from now it will be something different.

    • Petunia says:

      I don’t disagree with you in the least, but I will offer you another view from the younger generation. The financial crisis is the defining event in their lives. They view the entire economy as a casino and a collection of scams. Crypto’s potential problems are irrelevant to them because they don’t trust the financial system anyway.

      • Thomas R Kauser says:

        She is going to make bank talking bank cypto and she told president trump to find some new flunky cause she is going to be rich? Faster to a billion than Dimon and our youth should trust no one over thirty?

    • Thomas R Kauser says:

      We need you to get in the time machine and take this briefcase full of old money and speed a million years into the future in the hope you can calm your pissed off great great great great……

    • Rates says:

      LOL. How about the stock market? It happens every 10 years. Every generation has to learn the hard way? My take is that nobody can learn because of FOMO (Fear of Missing out). It’s better to crash with friends than being the lone voice of reason in the wilderness. Most people can’t beat loneliness.

  17. Bob says:

    I wonder if one or some of the three-letter agencies that run the gov’t (behind the scenes, that is) is behind this Bitcoin craze.

    Here’s something revealing from John McAfee from Sept. of this year:

    OTOH, I don’t know if I’d trust this guy when he says something like this:

    • mean chicken says:

      Assuming I understand correctly and the number of bitcoin are limited to a finite quantity then by definition, no amount of mining can create them?

      Perhaps this is a result of too many people walking around high on legalized drugs.

      • RangerOne says:

        Yes most cyrptos, but not all, have a built in max discoverable quantity which get progressively harder to mine. They usually have a write up explain why and how they expect the mining process to change how the coins spread to the public.

        For potential holdings by people though the cap on quantity doesn’t mean too much since the coins are infinity divisible so in theory you could reach a point where no one owns a whole coin.

  18. timbers says:

    Fed announces interest rate increase and a doubling of it’s montlly balance sheet normalization, and the stock markets open today climbing higher (although it’s down a tiny bit as I check this very moment).

    • mean chicken says:

      Perhaps the more things change, the more they remain the same. Yield curve was flattening last I checked.

      So anyway, assuming the FED’s employers have offloaded their bad debt and overpriced junk onto the masses, surely prices are headed back into the circular bowl. When that scheduled event occurs, nobody but the insiders know.

      Rinse and repeat, watch the learning impaired rats run for their lives.

  19. Julia says:

    Wolf – perhaps a story about the mercurial nature of the exchanges would enlighten and discourage would be crypto investors from taking the plunge.

    How much credit card debt is being used on the exchanges to bid up these coins. What are the daily/weekly/monthly limits on purchases and withdrawals from the exchanges. How often to they crash and fail to meet customer demands.. etc.

    When the price action reverses I anticipate a a melt-down of the exchanges of epic proportions. That is where the newly minted coin billionaires will descend on Washington with their private jets and beg hat in hand for a bailout.

    • d says:

      “How much credit card debt is being used on the exchanges to bid up these coins. What are the daily/weekly/monthly limits on purchases and withdrawals from the exchanges. How often to they crash and fail to meet customer demands.. etc.

      When the price action reverses I anticipate a a melt-down of the exchanges of epic proportions.”

      Credit card Debt. = Indirect Exposure of lender to Crypto Scam.

      Many Crypto Scam Exchanges. Will be the same as the binary options fraud’s.

      Almost impossible to get money out of especially just before the crash.

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