On April 7, in front of American University’s Kogod School of Business Center for Innovation, Treasury Secretary Janet Yellen addressed the Biden administration’s upcoming legislative approach to digital assets, as we discussed here, as well as the digitalization of the US economy, which Yellen assessed through the prism of five lessons she suggests are often implied by emerging technologies in general: (1) responsible innovation; (2) appropriate guardrails; (3) monetary sovereignty; (4) technological neutrality; and (5) interagency and international collaboration.
- Responsible innovation. Yellen noted that financial innovation is not new and, when it occurs, can come with unintended consequences. “Innovation that improves our lives while managing risks appropriately should be embraced. But we must also keep in mind that the “financial innovation” of the past too often failed to benefit working families and sometimes exacerbated inequality, gave rise to illicit financial risks and increased systemic financial risk. Today, many working-class Americans remain dependent on intermediaries, such as check cashers and payday lenders, to gain quick access to their paychecks in exchange for high processing fees to avoid the processing time of up to two days from banks. Instead of using these intermediaries, consumers can overdraw their accounts to access funds, which incurs bank charges. Yellen said these fees and services are equivalent to about $15 billion spent by Americans each year. Will digital assets catalyze efficiency? Although Yellen thinks “it’s too early to tell,” she briefly touched on the Federal Reserve’s plan to launch its proprietary program, FedNow, in 2023. FedNow will allow individuals and businesses to send instant payments and in real time through their depository institution accounts, as we have discussed here.
- Appropriate guardrails. Drawing on parallels to the subprime mortgage-backed securities involved in the 2008 financial crisis, Yellen argued that the Biden administration must “ensure that the growth of digital assets does not allow the emergence of such dangerous risks or results in disproportionate impacts on vulnerable communities”. Retail investors often trade in stablecoins, a class of digital assets that can be pegged to the US dollar, to escape the volatility associated with the broader digital asset market. But as Yellen stated, today there is no way to confirm whether stablecoin issuers are backing “their coins with safe and liquid traditional assets.”
- Technological neutrality. According to Yellen, “Whenever possible, regulation should be ‘technology-neutral’. » Regulation should reduce the risks associated with the services that the technology underlying digital assets provides to consumers and the economy at large; technology shouldn’t be over-regulated simply because it’s obscurity. For example, Yellen explained that “consumers, investors, and businesses must be protected against fraud and misrepresentation, whether assets are stored on a balance sheet or in a distributed ledger.” In addition, Yellen concluded that the principle of technological neutrality also applies to unlawful actions, such as money laundering, tax evasion and counterterrorism, and that the Treasury “will continue to take action as appropriate.” optionally”.
- Monetary sovereignty and the role of the United States in the world economy. Yellen believes that “monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability.” Many proponents of digital assets have expressed interest in the Federal Reserve designing and developing a central bank digital currency (CBDC) as the next iteration of the US dollar. Additionally, President Biden’s most recent executive order affirmed that the administration is placing “the highest urgency on research and development efforts into potential options for designing and deploying a CBDC in the United States.” Yellen notes that creating a CBDC presents major challenges that will require years of development. Nonetheless, the issuance of a US CBDC will likely depend on the President’s Task Force designing a solution that allows the dollar to remain predominant internationally, while simultaneously mitigating consumer harm and systemic risk and maintaining financial stability.
- Value of collaboration. Due to the internet, the digital asset space is a global financial market. Not only will cooperation among US federal agencies be necessary to foster growth and stability, but the United States will also need to work closely with its international partners to enforce consistent regulation across all jurisdictions. Yellen said the Treasury “is working with [its] international counterparts to strengthen AML/CFT programs abroad to better protect against exploitation by illegal actors.
Our catch. While Yellen did not provide any explicit insight into how the Treasury will shape the regulation of digital assets in the future, she clarified that these technologies will be adopted with a focus on solutions that mitigate potential financial instability. and the risks of illicit activity that these technologies pose, but do not stifle innovation. As Yellen said, “Digital assets may be new, but many of the problems they present aren’t. We’ve reaped the benefits of innovation in the past, and we’ve also faced to some of the unintended consequences.”