Janet Yellen’s crypto speech: Implications for regulation

Crypto isn’t special

Treasury Secretary Janet Yellen just clarified the Biden administration’s view of crypto: “Digital assets may be new, but many of the issues they present are not.” Instead, as her department implements Biden’s recent executive order on cryptocurrencies, the focus will be on risks.

Crypto critics and supporters both found something to cheer about in the Biden order. But Yellen has turned the spotlight on a key question the industry might prefer the government not dwell on: What harm can crypto cause to consumers, businesses and investors?

Yellen says we’ve seen this movie before. “Innovation that improves our lives while appropriately managing risks should be embraced,” Yellen said.

• She cited the examples of credit cards, ATMs, the internet and mobile phones.
• But history has shown repeatedly that financial innovation can hurt working families, she said. In some cases, innovation benefits entrepreneurs and investors, while not leading to better lives for working people.
• New technologies have led to the growth of online payments and ecommerce. But the inefficient U.S. banking system, which slows the arrival of paychecks in workers’ accounts, helped foster the growth of payday lending. Those fees add up to “essentially a tax of about $100 per working American, due mostly to inefficiency, and disproportionately borne by people with lower incomes,” she said.
• The financial crisis of 2008-2009 was caused by institutions that spearheaded “an explosion of new financial products” which led to “dangerous levels of risks,” Yellen said. As a result, ordinary Americans “who’d never heard of a ‘shadow bank’ or a subprime mortgage-backed security ended up losing their jobs and life savings.”

“Regulation should be tech neutral,” Yellen said. Drafting rules for crypto “should be guided by the risks associated with the services provided to households and businesses, not the underlying technology.”

• That’s not how most crypto companies see things. Regulation, they argue, should foster innovation. They worry that the government isn’t doing enough to make this happen. Coinbase is pushing for a new federal regulator dedicated to crypto because, the company argues, it is such a new, groundbreaking technology.
• Yellen pretty much shot that idea down. Consumers should be protected from fraud “regardless of whether assets are stored on a balance sheet or distributed ledger,” she said. Money-laundering and other illicit activity should be deemed illegal, and “it doesn’t matter whether you’re using checks, wires or cryptocurrency.”
• As with the Biden order, crypto critics and advocates saw something to cheer about in Yellen’s remarks. The Treasury secretary is “exactly right” that “we should embrace innovation that leads to better access for all Americans,” Kara Calvert, Coinbase’s head of U.S. Policy, said in a tweet. Santa Clara University law professor Stephen Diamond said Yellen’s comments underscore how the government already has “robust authorities to protect consumers and investors from the very real dangers that crypto schemes pose.”

Crypto regulation isn’t about protecting a $2 trillion industry. It’s about protecting those that unscrupulous or thoughtless actors might hurt. Crypto is growing rapidly and regulation has to keep pace with the innovation. For when that doesn’t happen, Yellen said, “vulnerable people often suffer the greatest harm.”

— Benjamin Pimentel (email | twitter)

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