The Fed warned about crypto for the first time in its review of financial risks

• The Fed warned about cryptocurrencies for the first time in its Monetary Policy Report.
• It was a single sentence in the 75-page semi-annual report published Friday.
• "The surge in the prices of a variety of crypto assets also reflects in part increased risk appetite," the report said.

The Federal Reserve warned about cryptocurrencies and their price volatility for the first time in its Monetary Policy Report published Friday.

"The surge in the prices of a variety of crypto assets also reflects in part increased risk appetite," the report, written by the board of governors, said.

The lone sentence in the 75-page semi-annual report was inserted in the middle of a discussion of risky assets, which the central bank said have generally increased in the first half of 2021.

Risk appetite of investors has been buoyed by the accelerating pace of economic reopening, equity market indexes reaching record highs, the ratio of prices to forecasts of earnings remaining elevated, and yields on corporate bonds and leveraged loans remaining low, among others, the report said.

Still, the central bank said it is confident markets will withstand future headwinds.

"While some financial vulnerabilities have increased since February, the institutions at the core of the financial system remain resilient," the report, meant to be presented to the US Congress, added.

Like many central banks around the world, the Fed is still figuring out the most sustainable and effective ways to approach the rapidly evolving $2 trillion cryptocurrency space.

Fed Chair Jerome Powell met with Brian Armstrong, the CEO of Coinbase, on May 11, as well as crypto backer Christopher Giancarlo the next day, according to an entry in his monthly calendar.

Powell on May 20 also revealed that the Fed has taken further steps in its exploration of a digital currency and will be releasing a discussion paper this summer outlining its current thinking on digital payments.

Cryptocurrencies, after breaching record highs earlier this year and seeing a massive crash in May, have been trading sideways in recent weeks.

The largest and most popular cryptocurrencies are still up for the year. Bitcoin and ether are up 250% and 777% respectively in the last 12 months.