Full text of Treasury Secretary Yellen's speech: Viewing digital asset regulation through the lens of the dollar's status

Original Title: “Remarks from Secretary of the Treasury Janet L. Yellen on Digital Assets”

Original Author: U.S. Department of the Treasury

Translation by: Rhythm BlockBeats

On April 7, 2022, Secretary Janet L. Yellen delivered remarks on digital asset policy, innovation, and regulation at the American University Kogod School of Business. The following is a整理翻译:

President Burwell, thank you for your kind introduction—it's great to be with you again. I am pleased to be at American University, where the changemakers are transforming the world.

Pioneering leaders from government, academia, and business have walked these halls, and I am glad to be here to discuss the official stance on digital assets.

A few weeks ago, President Biden signed an executive order calling for a coordinated and comprehensive approach to digital asset policy. Digital assets have exploded in growth, with a market capitalization rising from $14 billion five years ago to $3 trillion last November.

Digital assets may be relatively new, but they are part of a larger trend of "financial digitization" that has been forming for decades. In 1990, there were fewer than 3 million internet users. Now, there are about 4.5 billion, and we take for granted that many aspects of our financial lives can be managed through small internet-connected devices in our palms.

This growth in digital services has opened a world full of possibilities and risks, which seemed magical decades ago. Financial services, along with most industries, have evolved with exponential advances in computing power and connectivity.

Recently, new technologies have brought the potential to reduce reliance on centralization. In 2008, an individual (or group) using the pseudonym Satoshi Nakamoto proposed a decentralized peer-to-peer system for making and processing payments. A key challenge of digital payments is how to prevent the same asset from being used more than once. The Bitcoin white paper proposed a new method for verifying transactions using cryptography, addressing the so-called "double-spending" problem. This, along with other innovations related to distributed ledger technology, forms the basis for blockchain-based digital assets.

Over time, the price volatility of Bitcoin and other cryptocurrencies has hindered their widespread use in payments. High fees and slower processing times compared to other payment methods may further suppress the use of cryptocurrencies in payments. In fact, it is difficult to use cryptocurrency to buy a sandwich or a gallon of milk. Other digital assets—such as stablecoins or potential central bank digital currencies—may be more widely used as a medium of exchange, increasing potential benefits and risks.

Proponents argue that distributed ledger technology will change other aspects of financial services, such as trading and lending. They propose features like smart contracts: if certain pre-specified conditions are met, it automatically executes the agreement using computer code. As long as the setup is more convenient and costs are competitive with traditional financial services, digital assets have the potential to expand their use.

President Biden's executive order directs officials and experts to conduct a thorough analysis to balance the responsible development of digital assets with the risks they pose. These efforts will be guided by six policy objectives:

First, to protect consumers, investors, and businesses;

Second, to maintain financial stability and avoid systemic risk;

Third, to mitigate national security risks;

Fourth, to enhance U.S. leadership and economic competitiveness;

Fifth, to promote the adoption of safe and affordable financial services; and finally, to support responsible technological advancement, incorporating important factors related to privacy, human rights, and climate change.

In the next approximately six months, the Treasury will work with colleagues from the White House and other agencies to produce foundational reports and recommendations related to these goals. In many cases, the work of the executive order builds on the Treasury's ongoing efforts.

I won’t predict where this work will take us, but that doesn’t mean we are sailing 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 while also facing some unexpected consequences.

Today, I want to share five lessons that apply to how we respond to the opportunities and challenges posed by these emerging technologies. These lessons involve the nature of responsible innovation, appropriate regulatory frameworks, the fundamentals of the financial system, our role in the global economy, and the value of collaboration.

1. Our financial system benefits from responsible innovation

New technologies build on old ones, and over time, a series of innovations have transformed financial services. Seventy years ago, most Americans managed many aspects of their financial lives using coins, cash, and checks. Then, in the 1960s, an engineer at IBM attached a magnetic stripe to a plastic card, creating a new class of payment products: credit and debit cards. These innovations facilitated the development of other technologies, such as ATMs, which allow cash access 24/7. Recently, computers, the internet, and mobile phones have driven explosive growth in electronic payments and online commerce.

While new technologies have 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 created a shared frustration for tens of millions of Americans each week: their employers send out their paychecks, but it can take up to two days for the checks to hit their bank accounts. Delays lead to the use of costly check-cashing services or "payday" loans to get money in time to pay bills.

Some people are forced to withdraw from already low balances and incur overdraft fees. It is estimated that Americans spend $15 billion or more annually on such fees and services—essentially, about $100 for every working American, all attributable to inefficiencies, with low-income individuals bearing a greater burden.

When you look internationally, this system is even more expensive and frustrating.

If you live in a G7 country, you might pay less than 2% in transaction and conversion fees to send money across borders. If you live in a developing country, you might pay as much as 10%. These high costs disproportionately affect the more than 250 million migrants worldwide, who send home an average of $200 to $300 each month. Advocates of digital assets envision a more efficient payment system that enables instant transactions and lowers costs, regardless of where you live.

Will this technology deliver on that promise? I think it is too early to say, as issues like processing times, costs, and access barriers need to be overcome. The U.S. is actively engaged in G20 efforts to address the challenges and frictions of cross-border money transfers. Additionally, the Federal Reserve plans to launch FedNow in 2023, an instant payment service that will enable real-time payments in the U.S. payment system year-round, 24/7.

Some have also suggested that the introduction of central bank digital currencies, or "CBDCs," could help improve the efficiency of payment systems. As a liability of the central bank, a CBDC could become a trusted currency comparable to physical cash while providing some of the expected benefits of digital assets.

According to the executive order, officials will issue a report on the future of money and payments. This report will analyze design choices related to potential CBDCs and their implications for payment systems, economic growth, financial stability, financial inclusion, and national security.

Innovations that improve our lives should be embraced while managing risks appropriately. But we must also be mindful that past "financial innovations" have often not benefited working families and sometimes exacerbated inequality, created illicit financial risks, and increased systemic financial risks.

2. When regulation lags behind innovation, vulnerable populations often suffer the most

We learned this painful lesson during the global financial crisis. The explosive growth of financial institutions and new financial products known as "shadow banking" led to dangerous levels of risk accumulation. Starting in 2007, investors became increasingly aware of these risks, and some large institutions began to wobble. Soon, those who had never heard of "shadow banking" or subprime mortgage-backed securities lost their jobs and life savings. The S&P 500 index fell by more than half, and household net worth plummeted. The resulting economic hardship was most severe and lasting for Black Americans and other people of color. We need to ensure that the growth of digital assets does not create similar dangers or disproportionately impact vulnerable populations.

The Treasury has been working with the President's Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the U.S. central bank to study stablecoins, a type of cryptocurrency pegged to a stable value source (usually the dollar). Stablecoins have raised policy concerns related to illicit finance, user protection, and systemic risk. Moreover, they are currently subject to inconsistent and fragmented regulation.

To peg their stablecoins to the dollar, most issuers claim they back them with safe and liquid traditional assets. This way, when you want to exchange your stablecoin for dollars, the company has the funds to do so. But there is currently no guarantee that this will happen. During times of stress, this uncertainty can lead to runs.

This is not hypothetical. In June 2021, there was a stablecoin run when the prices of the assets backing the stablecoin fell sharply, triggering a feedback loop of redemptions and further price declines.

The PWG's report on stablecoins assessed these risks and proposed specific solutions. Moreover, we are now working with Congress to advance legislation to help ensure that stablecoins can withstand risks that could threaten consumers or the broader financial system. We are also closely collaborating with our international partners to promote consistent regulation across jurisdictions.

Of course, stablecoins are just one part of the larger digital asset ecosystem. Our regulatory framework should aim to support responsible innovation while managing risks—especially those that could disrupt the financial system and economy. As banks and other traditional financial firms become more involved in the digital asset market, the regulatory framework will need to appropriately account for the risks of these new activities. Additionally, new intermediaries, such as digital asset exchanges and other digital-native intermediaries, should be subject to appropriate forms of regulation.

We must also be prepared for potential changes in financial market structure. For example, some believe that distributed ledger technology could reduce the concentration of financial markets. While this may make markets less susceptible to the failure of any particular firm, it is crucial to ensure that we maintain visibility into the potential accumulation of systemic risks and have effective tools to mitigate them when extreme behaviors arise.

President Biden's executive order directs the Financial Stability Oversight Council to identify specific financial stability risks and regulatory gaps posed by various digital assets and to propose solutions. While I do not know what the Financial Stability Council will find or conclude, the following fundamental lesson should apply.

3. Regulation should be based on risk and activity, not specific technologies

When new technologies give rise to new activities, products, and services, financial regulation needs to adapt. However, this process should focus on the relevant risks to households and businesses rather than the underlying technology.

Where possible, regulation should be "technology-neutral." For example, whether an asset is stored on a balance sheet or a distributed ledger, consumers, investors, and businesses should be protected from fraud and misleading statements. Similarly, companies holding customer assets should be required to ensure that those assets are not lost, stolen, or used without customer permission. Moreover, taxpayers should receive the same type of tax reporting for digital asset transactions that they receive for stock and bond trades, so they have the information needed to report income to the IRS. Under the executive order, we will strive to ensure that consumers, investors, and businesses receive adequate protection from fraud and theft, privacy and data breaches, and unfair and abusive practices. At the same time, we must be very careful to ensure that innovation does not cause disproportionate harm to vulnerable populations or exacerbate social, racial, and economic inequalities.

In many cases, regulators have the authority to promote these goals, and the Treasury supports these efforts. If someone breaks the law and exploits others, they should be held accountable. If legislative regulation lags behind, we will propose policy recommendations, including assessing potential regulatory actions and legislative changes. Continuously updating and improving our regulatory framework will support U.S. economic competitiveness and reinforce America's leadership in the global financial system.

The principle of technology neutrality also applies to issues related to tax evasion, illicit finance, and national security—topics that are especially relevant in today's world. Tax evasion, money laundering, or sanctions evasion are illegal, regardless of whether you are using checks, wire transfers, or cryptocurrencies. For nearly a decade, the Treasury has been monitoring innovations in digital assets and updating our rules and guidance to clarify how our anti-money laundering and counter-terrorism financing framework applies in the digital asset ecosystem. We have also been working with our international counterparts to strengthen anti-money laundering/counter-terrorism financing programs abroad to better prevent exploitation by illicit actors.

Moreover, we will continue to take action as appropriate. Just this week, the Treasury's Office of Foreign Assets Control took strong action against Hydra, the largest and most notorious darknet marketplace, and the virtual currency exchange Garantex that supports ransomware. Under the President's executive order, the Treasury and other agency colleagues will identify the major illicit financing risks associated with digital assets based on the recently released national risk assessment. We will also work with our allies and partners to help ensure that international frameworks, capacities, standards, and partnerships are aligned and adequately address risks.

While innovations in the computer field have accelerated the pace of change, even the most fundamental components of our economy—including our currency itself—have undergone significant changes over time.

4. Sovereign currency is at the core of a well-functioning financial system, and the U.S. benefits from the central role of the dollar and U.S. financial institutions in global finance

It took a long time for the United States to establish a unified national currency.

In 1790, Secretary Alexander Hamilton lamented what he called the "serious confusion" of the American monetary system. At that time, Americans relied on a variety of domestic and international currencies circulating simultaneously. The proliferation of different forms of "money" made the economy difficult to operate. To help address these issues, the Bank of the United States was established in 1791 and issued paper currency, providing a relatively stable national currency. The Coinage Act of 1792 was passed, creating the U.S. Mint and sparking a century-long debate over whether the dollar should be pegged to silver or gold.

While these important innovations standardized the dollar's function as a store of value, the Bank of the United States did not receive lasting political support. By the mid-19th century, the country relied on a decentralized paper currency system issued by private banks. The paper currency issued by the New Jersey Bank was different from that issued by New Hampshire or New York. Moreover, because people believed that different banks posed different risks, they valued paper currency differently. This private currency system did work to some extent, but it made transactions expensive and inefficient, leading to decades of bank runs.

A crisis spurred reform. President Lincoln, embroiled in the Civil War, and Treasury Secretary Salmon Chase needed to bring more stability to our financial system. Congress passed the National Bank Act, allowing banks to issue currency backed by the central bank, but banks had to be adequately supervised, and the currency had to be backed by U.S. government bonds. This requirement ensured that a dollar in New Jersey was always as good as a dollar in New Hampshire. Later, the Federal Reserve Act further institutionalized the national goal of a unified currency.

The evolution of our currency to its current form is a dynamic process that spans several centuries. Today, monetary sovereignty and a unified currency have brought clear benefits for economic growth and stability. Our attitude toward digital assets must be guided by an understanding of these benefits.

Some believe that CBDCs may be the next evolution of our currency. A recent report from the Federal Reserve opened a public dialogue about CBDCs and the potential benefits and risks associated with issuing a CBDC in the U.S. The President's executive order requires us to consider this issue from multiple angles. For example, what impact would a U.S. CBDC have on implementing macro-stability policies and creating private credit? Could it make the financial system fairer, more accessible, and more inclusive? How should it be designed to manage risks related to national security and financial crime while incorporating privacy protections? How would a U.S. CBDC interact with existing domestic currencies, foreign CBDCs, or private stablecoins?

We need to consider these important questions against the backdrop of the central role the dollar plays in the world economy.

The dollar is the most widely used currency in global trade and finance. It is the largest currency by trading volume, accounting for nearly 90% of single-side transactions in foreign exchange and more than half of trade invoices. Dollar-denominated assets account for about half of cross-border bank claims and over 40% of outstanding international debt securities. Due to the dollar's strong trade and financial connections—and the U.S.'s strong macroeconomic and monetary credibility—central banks choose 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, the rule of law, and a commitment to freely floating currencies. As citizens of this country, we derive significant economic and national security benefits from the unique role the dollar and U.S. financial institutions play in the global financial system. The President's executive order requires us to consider whether and how the issuance of a public CBDC would support this role of the dollar and U.S. financial institutions in the global financial system.

I do not yet know what conclusions we will reach, but we must be clear that issuing a CBDC could pose significant design and engineering challenges that would require years, not months, of development. Therefore, like the President, I am eager to advance research to understand the challenges and opportunities that CBDCs may present for U.S. interests.

As we consider these significant choices, we must also remember that technology-driven financial innovation is inherently cross-border and requires international cooperation. We have a strong interest in ensuring that innovation does not lead to a fragmentation of the international payment architecture and that the development of digital asset technologies aligns with our values and laws.

5. We need to work together to ensure responsible innovation

Many of our most groundbreaking innovations throughout history have involved all of us: policymakers and businesspeople, 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 biotechnology revolution. All of these innovations have changed the way we live.

When it comes to digital assets, there are a variety of opinions. On one hand, some proponents argue that the technology is such a profound and beneficial transformation that officials should step back entirely and let innovation take its course. On the other hand, skeptics argue that the value of this technology and related products is limited and advocate for a more stringent approach from officials. This divergence of views is often associated with new and transformative technologies.

In my view, the role of officials should be to ensure responsible innovation—innovation that serves all Americans, protects our national security interests and the planet, and contributes to our economic competitiveness and growth. This responsible innovation should reflect thoughtful public-private dialogue and take into account many of the lessons we have learned throughout our financial history.

This pragmatism has served us well in the past, and I believe it is the right approach today.

Thank you again for inviting me, and for the important role American University plays in our nation's civic and academic life.