Treasury Secretary Janet L. Yellen spoke on digital asset policy, innovation and regulation at the Center for Innovation at American University’s Kogold School of Business.
President Burwell, thank you for your kind introduction – it was a pleasure to be with you again. I am delighted to be at American University, where changemakers are changing the world. Groundbreaking leaders in government, academia, and business have walked through these halls, and I am delighted to be here to discuss the Biden administration’s approach to digital assets.
A few weeks ago, President Biden signed an executive order calling on the government to take a coordinated and comprehensive approach to digital asset policy. Digital assets have exploded, reaching a market cap of $3 trillion in November from $14 billion five years ago.
Digital assets may be relatively new, but they are part of a larger trend that has been shaping up for decades – the digitization of finance. In 1990, there were fewer than 3 million Internet users. Now, with around 4.5 billion, we take for granted that many aspects of our financial lives can be managed from small internet-connected devices that fit in the palm of our hand.
This growth in digital services has opened up a world of possibilities and risks that seemed miraculous a few decades ago. Financial services, and most industries, have grown with exponential advances in computing power and connectivity.
More recently, new technologies have increased the possibility of reducing reliance on centralized intermediaries such as banks and credit card companies. In 2008, a person (or group of people) using the pseudonym Satoshi Nakamoto proposed a decentralized peer-to-peer system to make and process payments. A key challenge for digital payments is preventing the same assets from being reused. The Bitcoin white paper proposes a new method of verifying transactions using cryptography, solving the so-called “double-spending” problem. This and other distributed ledger technology-related innovations are the foundation of blockchain-based digital assets.
The price of Bitcoin and other cryptocurrencies has fluctuated widely over time, preventing their widespread use in payments. High fees and slow processing times may further inhibit the adoption of cryptocurrencies compared to other payment methods. In fact, you’d be hard-pressed to buy a sandwich or a gallon of milk with cryptocurrency. Other digital assets—such as stablecoins or potentially central bank digital currencies—may succeed in being used more widely as a means of exchange, increasing potential benefits and risks.
Proponents argue that distributed ledger technology will transform other aspects of financial services such as trading, lending and borrowing. They point to features like smart contracts, which use computer code to automatically execute an agreement if certain pre-specified conditions are met. Digital assets offer the potential to expand access to the extent that they are easier to set up and cost competitive with those required by traditional financial services.
President Biden’s executive order tasked experts in the federal government with conducting an in-depth analysis to balance the responsible development of digital assets with the risks they pose. These missions will be guided by six policy goals: first, to protect consumers, investors, and businesses; second, to safeguard financial stability from systemic risks; third, to reduce national security risks; and fourth, to enhance U.S. leadership status and economic competitiveness; fifth, promote equitable access to safe and affordable financial services; and finally, support responsible technological progress that takes into account important design considerations related to privacy, human rights, and climate change. Over the next six months or so, the Treasury Department will work with colleagues in the White House and other agencies to produce underlying reports and recommendations related to these goals. In many cases, the mandate of executive orders builds on the ongoing efforts of the Treasury Department.
I don’t predict where this work will take us, but that doesn’t mean we’re navigating without a compass. Digital assets may be new, but many of the questions they raise are not. In the past, we have enjoyed the benefits of innovation and faced some unintended consequences.
Today, I want to share five lessons that apply as we address the opportunities and challenges presented by these emerging technologies. These lessons touch on the nature of responsible innovation, the structure of appropriate guardrails, the fundamentals of the financial system, our role in the global economy, and the value of collaboration.
The first lesson is…
Our financial system benefits from responsible innovation
New technology builds on old technology, and a series of innovations have transformed financial services over time. Seventy years ago, most Americans used coins, cash and checks to manage most aspects of their financial lives. Then, in the 1960s, an IBM engineer attached magnetic strips to plastic cards and sparked a new category of payment products: credit and debit cards. These innovations have led to the development of other technologies, such as ATM machines, which provide 24/7 access to cash. The recent explosion of electronic payments and online commerce has been fueled by computers, the Internet, and cell phones.
Even though new technology has made our financial system more efficient for most Americans, many transactions still take a long time to settle. A combination of technological factors and business incentives has produced a frustrating experience shared by tens of millions of Americans every week: Their employers send their paychecks, but it takes up to two days for checks to hit their bank accounts . Delays result in the use of high-cost check tellers or “payday” lenders to get money in time to pay bills. Some were forced to withdraw from already low balances and were charged overdraft fees. Estimates suggest that Americans spend $15 billion or more annually on such fees and services—essentially about $100 in taxes per working American, largely due to inefficiencies,
The system is even more expensive and frustrating when you zoom out and look internationally.
If you live in a G7 country, you may be charged a transaction and conversion fee of less than 2% to send money across borders. If you live in a developing country, you may pay up to ten percent. These high costs disproportionately affect the more than 250 million migrants worldwide, who remit an average of $200 to $300 a month to their families. Proponents of digital assets envision a more efficient payment system that enables instant transactions and lower costs no matter where you are.
Will the technology deliver on that promise? I think it’s too early to tell. Processing time, cost, and technical barriers to access need to be overcome. The US has actively participated in the G20’s work on addressing challenges and frictions in cross-border capital transfers. And, in 2023, the Fed plans to launch FedNow, an instant payment service that enables real-time payments 24/7 within the U.S. payment system.
Some have also suggested that the introduction of a central bank digital currency, or “CBDC,” could help make payments systems more efficient. As a liability of a central bank, CBDC could become a trusted currency comparable to physical cash, but could offer some of the expected benefits of digital assets.
Under the executive order, the government will release a report on the future of money and payments. The report will analyze possible design options related to a potential CBDC and implications for payment systems, economic growth, financial stability, financial inclusion, and national security.
Innovations that improve our lives while appropriately managing risk should be embraced. But we must also note that past “financial innovations” have often not benefited working households, and have sometimes exacerbated inequality, triggered illicit financial risks, and increased systemic financial risks.
This brings me to my next lesson…
Vulnerable groups often suffer the most when regulation fails to keep pace with innovation
We learned this hard lesson during the global financial crisis. The explosion of financial institutions and new financial products known as “shadow banking” has allowed dangerous levels of risk to accumulate. Beginning in 2007, investors became increasingly wary of these risks, and some large institutions began to falter. Soon, those who had never heard of “shadow banking” or subprime mortgage-backed securities ended up losing their jobs and life savings. The S&P 500 has more than halved, and household net worth has fallen sharply. The resulting economic hardship is most severe and enduring for Black Americans and other people of color. We need to ensure that the growth of digital assets does not expose similarly dangerous risks or lead to disproportionate impacts on vulnerable communities.
The Treasury Department has partnered with the President’s Task Force on Financial Markets, the FDIC and the OCC to study stablecoins, cryptocurrencies that are pegged to a stable source of value, usually the U.S. dollar. Stablecoins raise policy questions, including those related to illicit finance, user protection, and systemic risk. Moreover, they are currently subject to inconsistent and decentralized oversight.
To peg their stablecoins to one dollar, most issuers say they back their coins with safe and liquid traditional assets. That way, every time you want to exchange your stablecoin back for a dollar, the company has the funds to do the exchange. However, at the moment, no one can assure you that this will happen. During times of stress, this uncertainty can lead to running.
This is not an assumption. A stablecoin run occurred in June 2021, when the price of the asset used to back the stablecoin fell sharply, triggering a negative feedback loop of stablecoin redemptions and further price declines.
The PWG report on stablecoins assesses these risks and proposes specific solutions. And, we are now working with Congress to advance legislation to help ensure stablecoins are resistant to risks that could endanger consumers or the wider financial system. We also work closely with our international partners to facilitate consistent regulation across jurisdictions.
Of course, stablecoins are just one part of a larger digital asset ecosystem. Our regulatory framework should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and the economy. As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities. And, new types of intermediaries, such as digital asset exchanges and other digital-native intermediaries, should be subject to appropriate forms of oversight.
We must also prepare for possible changes in the structure of financial markets. For example, some believe that distributed ledger technology can reduce the concentration of financial markets. While this can make markets less vulnerable to the failure of any particular company, it is crucial to ensure that we maintain visibility into the potential buildup of systemic risk and continue to have effective tools to curb excesses that arise.
President Biden’s executive order calls on the Financial Stability Oversight Board to identify specific financial stability risks and regulatory loopholes posed by various types of digital assets and to make recommendations to address them. While I don’t know what the FSOC will find or conclude, there is one basic lesson that should apply…
Regulation should be based on risk and activity, not specific technologies
Financial regulation needs to adapt as new technologies enable new activities, products and services. However, the process should be guided by the risks associated with the services provided to homes and businesses, not the underlying technology.
Where possible, regulation should be “technology neutral”. For example, consumers, investors and businesses should be protected from fraud and misleading representations, whether assets are stored on balance sheets or distributed ledgers. Likewise, companies that hold client assets should be required to ensure that those assets are not lost, stolen, or used without the client’s permission. And, taxpayers should receive the same types of tax reports for digital asset transactions that they receive on stock and bond transactions so they have the information they need to report income to the IRS. Under the executive order, we will work to ensure that consumers, investors, and businesses have adequate protections from fraud and theft, privacy and data breaches, and unfair and abusive practices.
In many cases, regulators have powers that can be used to further these goals, and the Treasury Department supports these efforts. If someone breaks the law and exploits the interests of others, they should be held accountable. If gaps exist, we will make policy recommendations, including an assessment of potential regulatory action and legislative changes. Continuing to update and improve our regulatory architecture will support U.S. economic competitiveness and strengthen leadership in the global financial system.
Technological neutrality also applies to issues related to tax evasion, illicit finance and national security – topics that are particularly relevant in today’s world. Tax evasion, money laundering or evasion of sanctions are illegal. It doesn’t matter whether you’re using a check, wire transfer, or cryptocurrency. For nearly a decade, the Treasury Department has been monitoring digital asset innovation and updating our rules and guidance to clarify the application of our AML/CFT framework to the digital asset ecosystem. We have also been working with our international counterparts to strengthen AML/CFT programs abroad to better prevent exploitation by illegal actors. And, we will continue to take action in due course. Just this week, the U.S. Department of the Treasury’s Office of Foreign Assets Control took strong action against Hydra, the world’s largest and most prominent darknet marketplace, and Garantex, a virtual currency exchange that supports ransomware. Under the President’s executive order, colleagues at the Treasury Department and across the government will identify key illicit financing risks associated with digital assets based on a recently released national risk assessment. We will also work with our allies and partners to help ensure that international frameworks, capabilities, standards and partnerships are aligned and risks are adequately addressed. Colleagues from the Treasury and government will identify key illicit financing risks associated with digital assets based on a recently released national risk assessment. We will also work with our allies and partners to help ensure that international frameworks, capabilities, standards and partnerships are aligned and risks are adequately addressed. Colleagues from the Treasury and government will identify key illicit financing risks associated with digital assets based on a recently released national risk assessment. We will also work with our allies and partners to help ensure that international frameworks, capabilities, standards and partnerships are aligned and risks are adequately addressed.
While innovations in computing have accelerated the pace of change, even the most basic components of our economy — including our currency itself — have changed dramatically over time.
This is related to my next lesson…
Sovereign currencies are at the heart of a well-functioning financial system, and the U.S. benefits from the central role played by the U.S. dollar and U.S. financial institutions in global finance
It will take time for the United States to establish a unified national currency.
In 1790, Secretary of State Alexander Hamilton bemoaned what he called the “gross disorder” of the U.S. monetary system. At the time, Americans relied on multiple domestic and international currencies in circulation at the same time. The proliferation of different forms of “money” makes it difficult for the economy to function. To help solve these problems, the Bank of America was established in 1791 and issued notes that offered a relatively stable national currency. In 1792, the Mint Act was passed, creating the United States Mint and starting a century of debate over whether the dollar should be pegged to silver or gold.
While these important innovations helped to standardize the backing of the dollar, U.S. banks did not have lasting political support. By the mid-1800s, the country relied on a decentralized system of paper money issued by private banks. Notes issued by Bank of New Jersey are not the same as those issued by New Hampshire or New York. And, because different banks are perceived to be taking the same risk, people value notes differently. This private monetary system did work to some extent, but it made transactions expensive and inefficient, and led to decades of bank runs.
A crisis gave birth to reforms. Embroiled in the Civil War, President Lincoln and Treasury Secretary Salmon Chase needed to bring more stability to our financial system. Congress passed the National Banking Act, which allows banks to issue national bank notes, subject to sufficient oversight of the banks, and the notes must be backed by U.S. Treasury securities. This requirement ensures that a New Jersey dollar is always as good as a New Hampshire dollar. Later, the Federal Reserve Act further institutionalized the national goal of a unified currency.
The development of our currency to its current form has been a dynamic process spanning centuries. Today, monetary sovereignty and a single currency offer clear benefits for economic growth and stability. Our approach to digital assets must be guided by an awareness of these benefits.
Some believe that a CBDC could be the next evolution of our currency. A recent report by the Federal Reserve opened up a public conversation about CBDCs and the potential benefits and risks associated with issuing CBDCs in the United States. The President’s Executive Order requires us to consider this issue from several angles. For example, what impact does a US CBDC have on implementing macro-stabilization policies and private credit creation? Can it make the financial system fairer, more accessible and more inclusive? How can it be designed to manage risks associated with national security and financial crime, while including privacy protections? How does a U.S. CBDC interact with existing domestic currencies, foreign CBDCs, or private stablecoins?
We need to consider these important issues in the context of the central role of the dollar in the world economy.
The US dollar is the most widely used currency in global trade and finance. It is by far the most traded currency, accounting for nearly 90% of forex traded legs and more than half of traded invoices. Dollar-denominated assets account for about half of cross-border bank claims and more than 40% of outstanding international debt securities. With the dollar’s strong trade and financial links — and the strong US macroeconomic and monetary credibility — central banks have chosen to hold nearly 60% of their foreign exchange reserves in dollars.
The international status of the dollar is strongly supported by U.S. institutions and policies; U.S. economic performance; open, deep, and liquid financial markets; legal rules; and a commitment to a free-floating currency. As citizens of this country, we derive enormous economic and national security benefits from the unique role that the U.S. dollar and U.S. financial institutions play in the global financial system. The President’s Executive Order asks us to consider whether and how issuing a public CBDC supports this role.
I don’t know yet what conclusions we’ll come to, but we must be clear that issuing a CBDC could present significant design and engineering challenges that will take years, not months, to develop. Therefore, I agree with the urgency of the President to advance research to understand the challenges and opportunities that a CBDC may present to American interests.
When considering these major options, we must also remember that technology-driven financial innovation is inherently cross-border and requires international cooperation. We have a keen interest in ensuring that innovation does not lead to fragmentation of the international payment architecture and that the development of digital asset technology is consistent with our values and laws.
This highlights my last lesson…
We need to work together to ensure responsible innovation
Many of the most groundbreaking innovations in our history involve all of us: policymakers and businessmen, advocates, scholars, inventors and citizens. Think of the development of the national highway system, the space race, the creation of the Internet, or the ongoing biotech revolution. All these innovations have changed the way we live.
There is a wide range of views on digital assets. On the one hand, some proponents argue that the technology is such a radical and beneficial change that governments should step back entirely and let innovation take its course. Skeptics, on the other hand, see limited, if any, value to the technology and related products, and advocate a more restrictive approach by the government. This divergence of views is often associated with new and transformative technologies.
In my view, the role of government should be to ensure responsible innovation—innovation that works for all Americans, protects our national security interests and the planet, and contributes to our economic competitiveness and growth. Such responsible innovation should reflect thoughtful public-private dialogue and take into account the many lessons we have learned throughout financial history.
This pragmatism has served us well in the past, and I believe it is the right thing to do today.
Thank you again for inviting me and for the important role American universities play in the civic and academic life of our country.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/us-treasury-secretary-yellen-on-the-biden-administrations-attitude-towards-digital-assets/
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