Janet Yellen’s Five Lessons For A Digital Asset Future

April 11, 2022
Responsible innovation and the need for US leadership in the crypto space have been the key messages in the Treasury Secretary’s first speech on digital assets.

Responsible innovation and the need for US leadership in the crypto space have been the key messages in the Treasury Secretary’s first speech on digital assets.

In a speech delivered at the American University (April 7), Treasury Secretary Janet Yellen has for the first time discussed in detail her views regarding cryptocurrencies, stablecoins and a central bank digital currency (CBDC).

Building on President Joe Biden’s executive order, Yellen reiterated the need to reinforce US leadership in the global financial system via responsible innovation and regulation tailored to digital assets.

Although she stressed that in-depth analysis has to be done to balance the responsible development of digital assets with the risks they present, her speech, in general, supported further acceptance of the emerging technology and helped build the trust necessary for mainstream adoption.

"If you are in the sceptic-to-anti crypto crowd, this speech, plus the Biden executive order should provide a nudge away from fear, uncertainty and doubt (FUD) into the camp of those who would like to see crypto thrive in the US," Nisa Amoils, managing partner at crypto investment firm A100x, told VIXIO.

Amoils, who also sits on the board of Global DCA, a self-regulatory association for the digital asset and cryptocurrency industry, said "it’s a positive that she is having a speech on the topic, although the Treasury hasn’t always been a friend to the industry. The argument about sanctions pushed them to defend crypto."

Yellen pointed out five lessons learned from US history on how to deal with what she calls “new and transformative technologies”, such as digital assets.

“I won’t predict where this work will take us, but that does not mean we are navigating without a compass. 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,” Yellen said.

Lesson one

The US financial system “benefits from responsible innovation”.

It is often cited that Americans pay the highest fees for financial services in the developed world. Estimates suggest Americans spend $15bn each year on such fees and services with cross-border transactions fees ranging from 2 percent to 10 percent.

Supporters of digital assets and a CBDC believe these assets could solve this issue by creating a more efficient payment system that enables faster and cheaper transactions.

“Will the technology live up to that promise? I think it’s too early to tell,” Yellen said while stressing that "innovation that improves our lives while appropriately managing risks should be embraced”.

However, she warned that the US must be mindful that financial innovation of the past has “too often not benefited working families and has sometimes exacerbated inequality”.

Lesson two

For this reason, Yellen said “when regulation fails to keep pace with innovation, vulnerable people often suffer the greatest harm”.

The US needs to ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts on vulnerable communities.

For instance, to address the potential risk of stablecoin runs in times of distress, the Treasury is now working with Congress to advance legislation to help ensure stablecoins are resilient.

Meanwhile, as banks are getting more involved in digital asset markets, regulatory frameworks must also be adjusted to appropriately reflect the related risks and ensure appropriate oversight of new types of intermediaries, such as digital asset exchanges.

Lesson three

Regulation should be based on risks and activities, not specific technologies.

“Wherever possible, regulation should be ‘tech neutral’,” emphasised Yellen.

For example, consumers, investors and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger.

In line with the executive order, Yellen said the Treasury will work to make sure consumers, investors, and businesses have adequate protections from fraud and theft, privacy and data breaches, and unfair and abusive practices.

To the extent there are gaps, we will make policy recommendations, including an assessment of potential regulatory actions and legislative changes, she added.

Lesson four

The US should consider that “sovereign money is the core of a well-functioning financial system and the US benefits from the central role the dollar and US 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,” Yellen said.

“Our approach to digital assets must be guided by the appreciation of those benefits."

Yellen stressed she shares “the President’s urgency in pulling forward research to understand the challenges and opportunities a CBDC could present to American interests”.

Lesson five

Collaboration is key.

Yellen called for collaboration with international parties to ensure responsible innovation and the development of digital asset technologies is consistent with US values and laws.

“In my view, the government’s role should be to ensure responsible innovation,” Yellen concluded and that “such responsible innovation should reflect thoughtful public-private dialogue and take account of the many lessons we’ve learned throughout our financial history”.

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