Janet Yellen Shares 5 Crypto Lessons

Check out our four-minute guide to Yellen's latest crypto speech.

Ever since President Biden announced his executive order on crypto, the industry has been on tenterhooks for more detail. People were initially cautiously optimistic because the president recognized cryptocurrency's potential as well as the risk it poses. However, the details will be what matters -- and those will become clearer in the coming months.

In this light, Treasury Secretary Janet Yellen's address to the American University’s Kogod School of Business Center for Innovation took on additional significance. Often portrayed as a crypto skeptic, Yellen's speech echoed Biden's approach. She stressed the potential benefits of innovation and weighed them against the need to protect consumers and the economy.

These are the five lessons Yellen believes apply to this evolving regulatory framework.

1. Responsible innovation can drive positive change

Yellen reminded her audience how much financial services have changed in the past 70 years. Recent developments include the evolution of credit cards and electronic payment systems. Nonetheless, she recognized that inefficiencies in the current system cost Americans money.

She used the example of the transaction times. It often takes two days for paychecks to hit employees' accounts, which can drive people to payday or other high-cost lenders. "Estimates suggest Americans spend $15 billion or more each year on such fees and services -- essentially a tax of about $100 per working American, due mostly to inefficiency, and disproportionately borne by people with lower incomes," Yellen said.

2. It's often society's vulnerable who suffer most in economic crisis

Pointing to the economic crisis that followed the subprime mortgage meltdown, Yellen said, "The resulting economic distress was most acute and long-lasting for Black Americans and other Americans of color." She continued, "We need to ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts to vulnerable communities."

Yellen clearly has stablecoins in her crosshairs. Stablecoins are cryptocurrencies whose value is pegged to another commodity such as the U.S. dollar. Authorities have been concerned for some time that these cryptos are acting like banks without following bank-like regulations. A stablecoin collapse could have a negative impact on the whole economy, so Yellen wants to see legislation that makes these coins more resilient.

She explained that most issuers say their coins are backed by traditional assets, meaning consumers can easily exchange stablecoins back into, say, U.S. dollars. The issue is that there's no way to be sure they have enough in reserve. "In times of stress, this uncertainty could lead to a run," she said.

3. Regulation should be tech neutral -- it's about the risks and activities, not the underlying technology

Yellen hit back at those who argue crypto needs to be handled differently, stressing that things like fraud laws, tax requirements, and privacy rights apply across the board. "It's illegal to evade taxes, launder money, or avoid sanctions. It doesn't matter whether you're using checks, wires, or cryptocurrency," she said.

The process of forming a solid regulatory framework will be driven by understanding the risks, identifying gaps that people are exploiting, and looking for ways to close them.

4. Sovereign money is key to a well-functioning economy

Some crypto extremists believe Bitcoin (BTC) may one day actually replace the dollar. Yellen's brief race through the evolution of the dollar and its importance shows this scenario to be unlikely. She raised several questions related to the creation of a digital dollar and how it would be managed, pointing out that if the U.S. does launch a central bank digital currency or CBDC, the process would take years rather than months.

Yellen took viewers back to the 1700s when the dollar was created to solve the myriad problems created by having various forms of money. She said it had taken centuries to get the dollar to its current form and argued that changes need to be viewed through this lens. "Today, monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability," she said. "Our approach to digital assets must be guided by the appreciation of those benefits."

5. It'll take collaboration and dialogue to move forward

Yellen sought to turn the polarized views that cryptocurrency can generate into a positive. She said that widely diverging perspectives are often associated with transformative technologies. The key, she thinks, is to encourage a thoughtful public and private dialogue between various groups. "Many of the most groundbreaking innovations in our history have involved all of us: policymakers and businesspeople, advocates, scholars, inventors, and citizens," she said.

Bottom line

Yellen's speech didn't reveal any great insights into what shape crypto regulation in the U.S. might take. But it did reveal a lot about the thinking and dialogue that will direct its formation. It's about cautiously embracing the benefits, while also protecting against any fallout.

As Yellen put it: "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."