Treasury Secretary Janet Yellen recently explained the administration’s philosophy to bring crypto companies and products into a regulated framework in response to President Biden’s recent executive order that called for a coordinated and comprehensive approach to digital asset policy.
The work to set digital finance regulation comes as virtual assets have grown rapidly to $3 trillion last November from $14 billion five years prior. While these assets have benefits, regulators fear that they pose risks not only to consumers but also to the broader financial system.
The executive order tasked experts across the federal government to carry out an analysis so that digital assets can be developed responsibly.
“These tasks will be guided by six policy objectives: first, protect consumers, investors, and businesses; second, safeguard financial stability from systemic risk; third, mitigate national security risks; fourth, promote U.S. leadership and economic competitiveness; fifth, promote equitable access to safe and affordable financial services; and, finally, support responsible technological advances, which take account of important design considerations like those related to privacy, human rights, and climate change.” Yellen said in a speech at American University’s Kogod School of Business Center for Innovation in Washington on April 7, 2022.
In the next six months, she said that Treasury will work with the White House and other agencies to come up with foundational reports and recommendations related to the objectives.
“I won’t predict where this work will take us, but that does not mean we are navigating without a compass,” Yellen said. “Digital assets may be new, but many of the issues they present are not. We have enjoyed the benefits of innovation in the past, and we have also confronted some of the unintended consequences.”
To better explain the government’s approach, she discussed five lessons learned.
First, the financial system benefits from responsible innovation, she said.
“Although new technologies have made our financial system more efficient for most Americans, many transactions still take too long to settle,” she said.
Estimates suggest Americans spend $15 billion or more each year on fees and services mostly because of inefficiency. This disproportionately impact people with lower incomes, she said.
She said that it is too early to tell whether new technology will solve the problem. And some have suggested that introducing a Central Bank Digital Currency (CBDC) could help make the payment system more efficient.
“As a liability of the central bank, a CBDC could become a form of trusted money comparable to physical cash, but potentially offering some of the projected benefits of digital assets,” she said.
The executive order asks for a report on the future of money payment, and Yellen said that the report will analyze possible design choices related to a potential CBDC.
“Innovation that improves our lives while appropriately managing risks should be embraced,” she said. “But we must also be mindful that ‘financial innovation’ of the past has too often not benefited working families, and has sometimes exacerbated inequality, given rise to illicit finance risks, and increased systemic financial risk.”
Second, she said that vulnerable people often suffer the greatest harm when regulation does not keep pace with innovation.
Yellen said that America learned the lesson during the 2008 financial crisis when shadow banks and new financial products accumulated dangerous levels of risks. People ended up losing jobs and savings.
“The resulting economic distress was most acute and long-lasting for Black Americans and other Americans of color,” she said. “We need to ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts to vulnerable communities.”
Third, she said regulation should be based on risks and activities, not on specific technologies.
“When new technologies enable new activities, products, and services, financial regulations need to adjust,” she said. “But, that process should be guided by the risks associated with the services provided to households and businesses, not the underlying technology. Wherever possible, regulation should be ‘tech neutral.’”
There may be regulatory gaps in the digital financial ecosphere, and she said the government will make policy recommendations, including potential regulatory actions and legislative changes.
“Continuing to update and improve our regulatory architecture will support U.S. economic competitiveness and reinforce leadership in the global financial system,” she said.
The fourth lesson, Yellen said, relates to sovereign money and the central role of the dollar and U.S. financial institutions play in global finance.
“The development of our currency to its current form has been a dynamic process that took place over centuries. Today, monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability,” she said. “Our approach to digital assets must be guided by the appreciation of those benefits.”
Some think that a CBDC could be the next evolution in American currency. The Federal Reserve has started a discussion about CBDCs, and the executive order also tasked federal agencies to consider it.
“I don’t yet know the conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months,” Yellen said. “So, I share the President’s urgency in pulling forward research to understand the challenges and opportunities a CBDC could present to American interests.”
Her final lesson was the need to work together to make sure there is responsible innovation.
“In my view, the government’s role should be to ensure responsible innovation – innovation that works for all Americans, protects our national security interests and our planet, and contributes to our economic competitiveness and growth,” she said. “Such responsible innovation should reflect thoughtful public-private dialogue and take account of the many lessons we’ve learned throughout our financial history. This sort of pragmatism has served us well in the past and I believe it is the right approach today.”
While the American Bankers Association (ABA) welcomed Yellen’s remarks on digital assets, the group criticized the Federal Deposit Insurance Corp. (FDIC’s) guidance that imposes a new speed bump for bank involvement in digital asset activities.
The guidance, also issued on April 7, “could make it more difficult for highly regulated and supervised banks to engage in crypto markets on behalf of their customers,” ABA President and CEO Rob Nichols said in a statement. “The FDIC’s new ‘prior notification’ requirement for banks interested in or already engaged in digital assets follows a similar move by the OCC [Office of the Comptroller of the Currency], runs counter to the Administration’s intent to foster responsible innovation, and risks tilting the playing field even more in favor of unregulated crypto firms that are not subject to rigorous oversight and supervision that banks face.”
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