Regulatory Update | Deputy Secretary of the Treasury submits written responses to the hearing, still claims cryptocurrencies are used for illegal activities, but acknowledges their potential to improve the financial system

Following her appearance at the Senate confirmation hearing on January 19, U.S. Treasury Secretary nominee Janet Yellen submitted a written response to the Senate hearing on the 21st. In addition to reiterating the role of cryptocurrencies in illicit activities, she also mentioned the potential benefits brought by these emerging technologies.

Cryptocurrencies Used for Illegal Financing Activities

As previously reported, Yellen, when questioned by Democratic Senator Maggie Hassan on Tuesday 1/19 about combating terrorism financing, stated that this is an issue that will evolve with technological iterations and requires increasing attention. She noted:

Cryptocurrency is a particularly concerning issue. I think many transactions are primarily used for illegal financing, and we need to ensure that fundraising methods that evolve with technology changes, prevent illegal money laundering activities from taking place through these channels.

Recognizing Cryptocurrencies for Improving the Financial System

In her written response, Yellen pointed out that besides being used for illegal money laundering and terrorist financing, these emerging technologies have the potential to enhance the efficiency of the financial system. The senator asked:

Cryptocurrencies like Bitcoin are facilitating financial transactions, which benefits the United States and its allies, but also allows non-state actors to evade the financial system, thereby harming U.S. interests, such as China's issuance of central bank digital currency. What potential benefits and threats do these emerging technologies pose to national security? Do we need to take more measures to establish relevant regulations for cryptocurrencies?

In response, Yellen stated:

I believe it is crucial to consider the advantages of cryptocurrencies and their potential to improve the efficiency of the financial system, but we also understand that they can be used to fund terrorism, engage in illegal money laundering, threaten national security, and the international financial system. Efforts should be made to encourage their use in legitimate activities while reducing illegal activities. I will closely collaborate with the Federal Reserve, the Treasury Department, and regulatory agencies to discuss how to effectively regulate the above and financial innovations.

Illegal Activities Account for Less than 1% of Total Transactions

Although Yellen slightly balanced her previously entirely negative views, continuously equating cryptocurrencies with illegal activities clearly does not align with the facts. The annual report from blockchain data tracking firm Chainalysis indicated that illicit activities related to cryptocurrencies dropped to 0.34% in 2020.

Even in 2019, illegal activities only accounted for 2.1% of $21.4 billion, and the 0.34% in 2020 is approximately $10 billion, indicating a year-on-year decline in illegal activities in the cryptocurrency field and occupying a relatively low proportion.