On April 8, 2022, Treasury Secretary Janet Yellen discussed digital assets and regulation at American University’s Center for Innovation. She started with the executive order signed by President Biden mandating the creation of a government approach to cryptocurrency. Yellen noted that digital assets have grown from a $14 billion to a $3 trillion market cap in five years.
Digital Currency Market Cap
In her talk, the Secretary highlighted a number of factors:
o Recognizing the role that technology played, she stated that the broad adoption of the internet paved the way. Smart phones are also one of the reason digital currencies have been able to grow so rapidly.
Number of Internet Users
o Disintermediation is a key function of digital assets like cryptocurrency. We have not heard much, at least by banking regulators, concerning the role cryptos play in eliminating middlemen and banks from transactions.
o The role blockchain plays in facilitating peer to peer transactions that prevent double spending was mentioned.
The Secretary spoke to volatility and suggested this has inhibited crypto's growth and widespread use. This is a little inconsistent, given the rapid growth in market capitalization. I think she fails here to diminish crypto’s appeal. Along these lines, she mentioned extended settlement time for crypto transactions, and stated “you wouldn’t be able to by coffee or sandwich” with digital assets. This is, of course, an overstatement. Developers at the 2022 Bitcoin conference have established facilities and tools to do exactly this. Bitcoin may soon be accepted by McDonald’s and Walmart via the Lightning Network.
It appears that Federal crypto policy is concerned with risks flowing from stable coins, as opposed to crypto currencies like bitcoin, whose value, as noted above, fluctuates wildly. Stable coins are said to have real market value since they are backed on a dollar-for-dollar basis. In other words, one dollar of a stable coin is worth one US dollar (hence the name stable - relative to the US dollar or another fiat currency) coins.
The Biden Administration has prioritized policy goals for digital currency as follows:
o Protect consumer investors and businesses
o Safeguard financial stability from systemic risk
o Mitigate national security risks
o Promote US leadership and economic competitiveness.
o Promote equitable access to safe and affordable financial services
o Support responsible technological advances. These are defined as advances that protect privacy, human rights, and the climate.
Yellen indicated that Treasury will work with the White House and other agencies to produce reports and efforts going on to ensure these policy goals are met. The Office of the Comptroller of the Currency (OCC) will study stable coins and determine which type of cryptocurrency is a stable substitute for the US dollar. Treasury and OCC will analyze systemic risk and financial protection issues. She indicated that Treasury has been monitoring digital assets for years and has been updating anti-money laundering rules and guidance to counter the use of crypto in financing terrorism. Her hope is that the government’s role will ensure innovation and foster competition and growth.
While we appreciate seeing these policy goals, we believe the prioritization is incorrect. Responsible advances should be first on the list. Climate factors should be first, given the primacy of the environment. (If you can’t breathe the air, then protecting investors and businesses, a small subset of the human population becomes meaningless,)
We believe concerns about money laundering are overblown, since the US dollar is the currency used for most illicit transactions. The focus on money laundering may indicate that Treasury fears competition in this area from digital currency.
Further, there is no objective information to support the contention that the nation benefits from “responsible” financial innovation. Those working in the financial services industry may benefit, but the general population does not, especially when the costs of inevitable financial crashes are factored in. In the same vein, there is no evidence to suggest that low income and minority populations will benefit from financial “innovation”, including cryptocurrency innovation.
Finally, the refusal of regulators to recognize that bitcoin was created in direct response to their failure to protect the public in the years leading up to the financial crisis of 2007/2008 means that regulators still risk making policy errors in this area. The government’s role should be to maximize human life, not to foster financial innovation as proposed and initiated by large financial institutions – unless it works for all Americans, not just Wall Street.