The Fed just admitted a dollar could count twice in M1

If you spend any time watching money supply data, you know stablecoins have always been the awkward guest. They're not in M1. Not in M2. The Fed just hasn't known what to do with them. So I got curious when a staff note landed on Sept. 4 that actually tries to solve the puzzle.

The short version: it's possible in theory. But the math gets weird fast.

The double counting problem

Here's the core issue. A payment stablecoin like USDC holds reserves at a bank. Those reserves are already sitting inside M1 or M2. Cash in a money market fund, bank deposits, that's all counted. So if you add stablecoin circulation on top of that, the same dollar gets counted twice.

The Fed staff note acknowledges this directly. Their framework would require adjustments before gross circulation could enter either measure. That's not a small footnote. That's the whole ballgame.

What makes this tricky is the reserve overlap. Stablecoin reserves aren't locked in a vault somewhere. They're reinvested in Treasuries, repo, sometimes bank deposits. Those instruments already have a home in the monetary aggregates. Pull them out and count the stablecoin instead, fine. Count both, and you've invented money that doesn't exist.

The note attempts to thread that needle. Classification would depend on economic use, not just issuance. A stablecoin used for payments looks different than one used as collateral or held for settlement. That distinction matters.

But there's a second problem the note flags: offshore circulation. A huge share of stablecoin supply sits outside the United States. That's not U.S. money supply by any reasonable definition. So the framework would need to separate domestic circulation from global circulation. No easy task when stablecoins move across borders in seconds.

Why this matters beyond the arcane stuff

Here's what the street is missing. This isn't just an accounting exercise. If the Fed ever moves stablecoins into M1 or M2, it changes how everyone reads liquidity data. Money supply figures inform rate decisions, risk models, inflation forecasts. A misclassified dollar distorts all of it.

Think about institutional adoption for a second. Treasurers and asset managers are already looking at stablecoins as cash equivalents. The Fed formally recognizing them as money would accelerate that. It's a stamp of legitimacy that no regulatory lawsuit or state license can replicate.

Of course, there's also the uncomfortable reverse scenario. If stablecoins get counted and the sector grows to $500 billion or $1 trillion in circulation, that's a massive swing in measured money supply. The Fed would effectively be outsourcing part of its monetary statistics to private issuers. Is that a risk anyone wants?

My honest read

I'll be straight with you. This note is intellectually honest in a way most Fed documents aren't. It doesn't pretend the classification problem is solved. It lays out the obstacles in plain sight.

The reality is we're years away from stablecoins showing up in official money supply readings. The staff note isn't a policy commitment. It's groundwork. But groundwork tells you where things are heading.

So what should you do with this? Watch the next steps. If the Fed starts refining this framework or issuing follow-up research, that's your signal. The numbers tell the story. Right now they're telling us the Fed is taking stablecoins seriously as a monetary phenomenon, not just a regulatory one.

That alone is worth your attention.