Yellen: crypto regulation needs to be ‘tech neutral,’ CBDC to take years to develop

(Kitco News) Any new crypto regulation needs to be “tech neutral” and should be based on risk, said U.S. Treasury Secretary Janet Yellen in her first major speech to the cryptocurrency industry.

Yellen gave a comprehensive overview of her outlook on crypto regulation, including stablecoins and central bank digital currencies (CBDCs), when speaking at an American University event in Washington Thursday.

“The government’s role should be to ensure responsible innovation – innovation that works for all Americans, protects our national security interests and our planet, and contributes to our economic competitiveness and growth,” Yellen said. “We must also be prepared for possible changes in the structure of financial markets.”

When discussing the type of regulation needed for digital assets, Yellen maintained that the overall framework needs to be based on risks rather than specific technologies.

“The process should be guided by the risks associated with the services provided to households and businesses, not the underlying technology, she said. “Wherever possible, regulation should be ‘tech neutral.’ For example, consumers, investors, and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger.”

Yellen stressed that sovereign money is at the core of a well-functioning financial system. This is important when considering her take on stablecoins and a potential CBDC.

“The U.S. benefits from the central role the dollar and U.S. financial institutions play in global finance,” she said. “The dollar is the most widely used currency for global trade and finance … Monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability. Our approach to digital assets must be guided by the appreciation of those benefits.”

Stablecoins — cryptocurrencies that have their value pegged to fiat currency — raise a number of policy concerns, including illicit finance, user protection, and systemic risk, Yellen noted. And the current oversight is inconsistent and fragmented, she added. Very concerning is that in times of stress, there could be a run on stablecoins.

“Most issuers say they back their coins with traditional assets that are safe and liquid. This way, whenever you want to trade your stablecoin back into a dollar, the company has the money to make the exchange. But, right now, no one can assure you that will happen,” she explained.

The U.S. Treasury is currently working on legislation that would help ensure that Stablecoins are resilient to these risks.

#Yellen on #stablecoins: we are working to advance legislation to help ensure stablecoins are resilient to risks and to promote consistent regulation and supervision across jurisdictions.

— Kitco NEWS (@KitcoNewsNOW) April 7, 2022

When it comes to developing a CBDC, the design and implementation will take years, not months, according to the U.S. Treasury Secretary.

“I don’t yet know the conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months. So, I share the President’s urgency in pulling forward research to understand the challenges and opportunities a CBDC could present to American interests,” she said.

A CBDC would potentially become a form of “trusted money comparable to physical cash.” Yellen plans to publish a report on the future of money and payments to analyze possible design choices and potential implications.

Overall, updates to the U.S. regulatory crypto architecture will support U.S. economic competitiveness and leadership in the global financial system, Yellen pointed out. There is a great transformation impact that distributed ledger technology could have on financial services, including trading, borrowing, and lending.

“They point to capabilities, like smart contracts, which use computer code to automatically execute an agreement if certain prespecified conditions are met. To the extent that setup is more convenient, and costs are competitive with those required for traditional financial services, digital assets offer the potential to expand access,” she said.

Yellen’s speech comes less than a month after U.S. President Joe Biden signed an executive order, calling on key government agencies to identify the risks and benefits of cryptocurrencies and the hazards associated with creating the central bank digital dollar.

On Tuesday, Securities and Exchange Commission (SEC) Chair Gary Gensler also addressed the $2 trillion crypto market, promising greater oversight and improved investor protection.