Full text of the U.S. Treasury Secretary's speech: Crypto Volatility Hinders Payment Applications, Regulation Targets Risks Rather Than Specific Technologies, Will Be Guided by Six Major Policies

On April 7, 2022, Treasury Secretary Janet L. Yellen delivered a speech at the University of Chicago Booth School of Business Innovation Center on digital asset policy, innovation, and regulation. The article is authorized to be reproduced from Block Beats. Original text can be found [here](https://www.theblockbeats.info/news/30061). President Zimmer, thank you for your kind introduction—I am delighted to be with you again. I am thrilled to be at the University of Chicago, where changemakers are reshaping the world. Pioneering leaders from politics, academia, and business have walked through these halls, and I am excited to be here to discuss the official stance on digital assets. A few weeks ago, President Biden signed an executive order calling for a coordinated and comprehensive approach to digital asset policy. The market value of digital assets exploded, growing from $140 billion five years ago to $3 trillion in November last year. Digital assets may be relatively new, but they are part of a larger trend of "financial digitization" that has been evolving over decades. In 1990, there were fewer than 3 million internet users. Now, there are approximately 4.5 billion, and we take for granted that many aspects of our financial lives can be managed through handheld internet-connected devices. The growth of digital services has opened up a world full of possibilities and risks, which seemed magical decades ago. Financial services and most industries have evolved exponentially with advances in computing power and connectivity. Recently, new technologies have brought the potential to reduce reliance on centralization. In 2008, an individual (or group) using the pseudonym Satoshi Nakamoto proposed a decentralized peer-to-peer system for conducting and processing payments. A key challenge in digital payments is preventing the double spending of the same asset. The Bitcoin whitepaper introduced a new method of using cryptographic verification of transactions, solving the so-called "double-spending" problem. This, along with other innovations related to distributed ledger technologies, has laid the foundation for digital assets based on blockchain. Over time, the prices of Bitcoin and other cryptocurrencies have fluctuated greatly, hindering their widespread use in payments. High fees and slower processing times compared to other payment methods may further inhibit the use of cryptocurrencies in payments. In fact, it is challenging to use cryptocurrencies to purchase a sandwich or a gallon of milk. Other digital assets—such as Stablecoins or potential central bank digital currencies—may be more widely used as a medium of exchange, increasing potential benefits and risks. Supporters believe that distributed ledger technology will change other aspects of financial services, such as transactions and lending. They propose functionalities like smart contracts: if certain pre-specified conditions are met, it automatically executes protocols using computer code. With more convenient setups and costs competitive with traditional financial services, digital assets have the potential to broaden their utility. President Biden's executive order tasks official experts with conducting in-depth analyses to balance responsible development of digital assets and the risks they pose. These efforts will be guided by six policy objectives: 1. Protect consumers, investors, and businesses. 2. Maintain financial stability and prevent systemic risks. 3. Mitigate national security risks. 4. Enhance America's leadership and economic competitiveness. 5. Promote the widespread adoption of secure and affordable financial services. 6. Support responsible technological progress by considering important factors such as privacy, human rights, and climate change. Over the next approximately six months, the Treasury Department will collaborate with colleagues from the White House and other agencies to develop foundational reports and recommendations related to these objectives. In many cases, the work of the executive order builds upon the ongoing efforts of the Treasury Department. I will not predict where this work will lead us, but that does not mean we are sailing without a compass. While digital assets may be new, many of the questions they bring are not. In the past, we have enjoyed the benefits of innovation while also facing some unforeseen consequences. Today, I want to share five lessons learned that apply to addressing the opportunities and challenges brought by these emerging technologies. These lessons involve the nature of responsible innovation, appropriate regulatory structures, the fundamentals of the financial system, our role in the global economy, and the value of collaboration.

1. Our Financial System Benefits from Responsible Innovation

New technologies are built on old ones, and over time, a series of innovations have transformed financial services. Seventy years ago, most Americans managed much of their financial lives with coins, cash, and checks.

Then, in the 1960s, an IBM engineer attached a magnetic stripe to a plastic card, creating a new class of payment products: credit and debit cards.

These innovations spurred the development of other technologies, such as ATMs, enabling cash to be available 24/7. More recently, computers, the internet, and mobile phones have driven explosive growth in electronic payments and online commerce.

Although new technologies have made our financial system more efficient for most Americans, many transactions still take a long time to settle. The combination of technological factors and business incentives has led to a common frustration experienced by tens of millions of Americans each week:

"Their employer sends their wages, but the check takes up to two days to hit their bank account. Delays lead to using high-cost check cashing establishments or 'payday' loans to get money in time to pay bills."

Some are forced to withdraw from already low balances and incur overdraft fees. It is estimated that Americans spend $15 billion or more each year on such fees and services—essentially every working American bears about $100 for this, which can be attributed to inefficiencies, with lower-income individuals bearing more.

Looking internationally, this system is even more costly and frustrating.

If you live in a G7 country/region, you may need to pay less than 2% in transaction and exchange fees for cross-border remittances. If you reside in a developing country, you might have to pay fees as high as 10%.

These high fees disproportionately affect over 250 million migrants worldwide who remit an average of $200 to $300 to family members each month. Supporters of digital assets envision a more efficient payment system that enables instant transactions and reduces costs regardless of where you live.

Will this technology deliver on this promise? I believe it is too early to say at this point, as challenges such as processing times, costs, and access barriers need to be overcome. The U.S. is actively engaged in G20 efforts to address the challenges and frictions of cross-border fund transfers.

Furthermore, the Federal Reserve plans to launch FedNow in 2023, an instant payment service enabling around-the-clock real-time payments within the U.S. payment system.

Some have also suggested that introducing central bank digital currencies or "CBDCs" could help improve the efficiency of the payment system. As a liability of the central bank, CBDCs could become a trusted currency on par with physical cash while offering some anticipated benefits of digital assets.

By executive order, officials will issue a report on the future of money and payments. The report will analyze design choices related to potential CBDCs and their impacts on payment systems, economic growth, financial stability, financial inclusion, and national security.

Innovations that improve our lives should be embraced while appropriately managing risks. However, we must also be mindful that past "financial innovations" have often not benefited working families, sometimes exacerbating inequality, leading to illicit financial risks, and increasing systemic financial risks.

2. When Regulation Lags Behind Innovation, Vulnerable Groups Often Suffer Most

We learned this painful lesson during the global financial crisis. The explosive growth of financial institutions known as "shadow banks" and new financial products accumulated risky levels of risk.

Starting in 2007, investors became increasingly aware of these risks, and some large institutions began to crumble. Soon, those who had never heard of "shadow banking" or subprime mortgage-backed securities lost their jobs and lifelong savings.

The S&P 500 index dropped by over half, and household net worth plummeted. The resulting economic hardship was most severe and enduring for Black Americans and other people of color in the U.S. We need to ensure that the growth of digital assets does not lead to similar risks or disproportionately impact vulnerable groups.

The Treasury has been collaborating with the President's Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Federal Reserve to study Stablecoins, a type of cryptocurrency pegged to a stable value source (often the U.S. dollar).

Stablecoins raise policy concerns involving illicit finance, user protection, and systemic risks, among others. Furthermore, they are currently subject to inconsistent and disjointed regulation.

Most issuers claim to back their stablecoins with secure and liquid traditional assets to peg them to the dollar. This ensures that the company has funds for redemption when you want to convert stablecoins back to dollars. However, there is no guarantee that this will always happen. This uncertainty can lead to runs under pressure.

This is not hypothetical. In June 2021, there was a stablecoin run when the asset prices supporting stablecoins plummeted, triggering redemptions and further price declines in a negative feedback loop.

The PWG's report on Stablecoins assesses these risks and proposes specific solutions. Additionally, we are now working with Congress to advance legislation to help ensure that Stablecoins can withstand risks that could threaten consumers or the broader financial system. We are also closely collaborating with our international partners to promote consistent regulation across jurisdictions.

While Stablecoins are just a part of the broader digital asset ecosystem, our regulatory framework should aim to support responsible innovation while managing risks—especially those that could disrupt the financial system and economy.

As banks and other traditional financial firms increasingly participate in the digital asset market, the regulatory framework will need to consider the risks of these new activities appropriately. Additionally, new intermediaries, such as digital asset trading platforms and other digital-native intermediaries, should be subject to appropriate forms of regulation.

We also need to prepare for potential changes in the financial market structure. For instance, some believe that distributed ledger technology can reduce the concentration of financial markets. While this may make the market less susceptible to the failure of any particular company, it is crucial to ensure that we maintain visibility of potential systemic risk accumulation and have effective tools to curb extreme behavior when it arises.

President Biden's executive order directs the Financial Stability Oversight Council to identify specific financial stability risks and regulatory gaps associated with various digital assets and propose solutions. While I do not know what conclusions or recommendations the Financial Stability Oversight Council will reach, this fundamental lesson should apply going forward.

3. Regulation Should Be Based on Risks and Activities, Not Specific Technologies

As new technologies drive new activities, products, and services, financial regulation needs to adjust. However, this process should focus on the risks associated with providing services to households and businesses, rather than the underlying technology.

Regulation should be "technology-neutral" where possible. For example, whether assets are stored on a balance sheet or a distributed ledger, consumers, investors, and businesses should be protected from fraud and misleading statements.

Similarly, companies holding customer assets should be required to ensure that these assets are not lost, stolen, or used without customer permission. Taxpayers should receive the same type of digital asset transaction tax reporting they receive in stock and bond transactions to provide them with the information needed to report income to the IRS.

By executive order, we will work to ensure that consumers, investors, and businesses are adequately protected from fraud, theft, privacy and data breaches, and unfair and abusive practices. We must also be very careful to ensure that innovation does not disproportionately harm vulnerable groups or exacerbate social, racial, and economic inequality.

In many cases, regulatory agencies have the power to promote these goals, and the Treasury supports these efforts. Those who violate the law, exploit others' interests, should be held accountable.

If legislative regulation falls behind, we will propose policy recommendations, including assessing potential regulatory actions and legislative changes. Continuing to update and improve our regulatory framework will support America's economic competitiveness and solidify the U.S.'s leadership in the global financial system.

The technology-neutral principle also applies to issues related to tax evasion, illicit finance, and national security—topics that are particularly relevant in today's world. Tax evasion, money laundering, or evading sanctions are illegal, whether you use checks, wire transfers, or cryptocurrencies.

For nearly a decade, the Treasury has been monitoring digital asset innovation and updating our rules and guidance to clarify the application of our anti-money laundering and counter-terrorism financing framework in the digital asset ecosystem. We have also been working closely with our international counterparts to enhance foreign anti-money laundering/counter-terrorism financing programs to better prevent exploitation by illicit actors.

Furthermore, we will continue to take action as needed. Just this week, the Treasury's Office of Foreign Assets Control took strong action against the world's largest and most notorious darknet market Hydra and a cryptocurrency exchange platform supporting ransomware, Garantex.

Based on the President's executive order, the Treasury and our colleagues in other departments will identify major illicit finance risks associated with digital assets based on the recently released national risk assessment. We will also work with our allies and partners to help ensure international frameworks, capabilities, standards, and partnerships remain consistent and adequately address risks.

While innovations in the field of computing accelerate the pace of change, even the most fundamental components of our economy—such as our currency itself—have undergone significant transformations over time.

4. Sovereign Currency is the Core of a Well-Functioning Financial System, and the U.S. Benefits from the Core Role of the Dollar and U.S. Financial Institutions in the Global Financial System

Establishing a unified national currency in the U.S. took time.

In 1790, Secretary of State Alexander Hamilton lamented the "great confusion" in what he called the U.S. currency system. At the time, Americans relied on multiple domestic and international currencies circulating simultaneously. The proliferation of different forms of "money" made the economy difficult to operate.

To help address these issues, the First Bank of the United States was established in 1791, issuing paper currency, providing a relatively stable national currency. In 1792, the Coinage Act was passed, creating the U.S. Mint and sparking a century-long debate on whether the dollar should be pegged to silver or gold.

While these crucial innovations regulated the savings function of the dollar, the First Bank of the United States did not receive lasting political support. By the mid-19th century, the nation relied on a decentralized paper currency system issued by private banks.

Banknotes issued by banks in New Jersey differed from those issued in New Hampshire or New York. People valued these banknotes differently as they perceived varying risks associated with different banks. This private currency system did play a role to some extent, but it made transactions expensive and inefficient, leading to decades of bank runs.

A crisis spurred reform. President Lincoln and Treasury Secretary Salmon Chase, embroiled in the Civil War, needed to bring more stability to our financial system. Congress passed the National Banking Act, allowing banks to issue central bank currency, but banks had to be subject to proper supervision, and the currency had to be backed by U.S. government debt.

This requirement ensured that a dollar in New Jersey was always as good as a dollar in New Hampshire. Subsequently, the Federal Reserve Act further institutionalized the national goal of a unified currency.

Our currency's evolution to its current form has been a dynamic process spanning several centuries. Today, currency sovereignty and a unified currency have brought significant benefits to economic growth and stability. Our attitude towards digital assets should be guided by an understanding of these benefits.

Some believe that CBDCs could be the next evolution of our currency. A recent Federal Reserve report has initiated a public dialogue on CBDCs and the potential benefits and risks of issuing CBDCs in the U.S. The President's executive order requires us to consider this issue from multiple perspectives.

For instance, how would a U.S. CBDC impact implementing macroeconomic stability policies and fostering private credit? Could it make the financial system fairer, more accessible, and more inclusive? How should it be designed to manage risks related to national security and financial crime while including privacy protections? How would a U.S. CBDC interact with existing domestic currencies, foreign CBDCs, or private Stablecoins?

We need to consider these critical questions against the backdrop of the core role played by the dollar in the global economy.

The dollar is the most widely used currency in global trade and finance. It is the most traded currency by volume to date, accounting for nearly 90% of one-way flows in foreign exchange transactions and over half in trade invoices. Dollar-denominated assets represent about half of cross-border bank debt and over 40% of outstanding international debt securities.

With its strong trade and financial connections—along with the robust macroeconomic and monetary reputation of the U.S., central banks choose to hold nearly 60% of their foreign exchange reserves in dollars.

The dollar's international status has been supported by U.S. institutions and policies, the performance of the U.S. economy, open, deep, and liquid financial markets, the rule of law, and strong support for free-floating currencies. As citizens of this nation, we have derived significant economic and national security benefits from the unique role played by the dollar and U.S. financial institutions in the global financial system.

The President's executive order requires us to consider whether and how issuing a public CBDC would support the role played by the dollar and U.S. financial institutions in the global financial system.

I do not yet know what conclusions we will reach, but we must be clear that issuing a CBDC may pose significant design and engineering challenges that require years, not months, of development. Therefore, like the President, I am eager to advance research to understand the challenges and opportunities a CBDC may bring to U.S. interests.

As we consider these significant choices, we must also remember that technology-driven financial innovations are inherently transnational and require international cooperation. We have a strong interest in ensuring that innovation does not lead to a fragmentation of the international payment architecture and that the development of digital asset technology aligns with our values and laws.

5. We Need to Collaborate to Ensure Responsible Innovation

Many of our most groundbreaking innovations in history have involved all of us: policymakers and businesspeople, advocates, scholars, inventors, and citizens. Think about the development of the national highway system, the space race, the creation of the internet, or the ongoing biotech revolution. All of these innovations have changed the way we live.

When it comes to digital assets, people have a variety of opinions. On one hand, some supporters believe that the technology is so thorough and beneficial that officials should step back entirely and let innovation take its course. On the other hand, skeptics believe the value of this technology and related products is limited and advocate for officials to take a more stringent approach. This divergence in views often relates to new and disruptive technologies.

In my view, the role of officials should be to ensure responsible innovation—innovation that serves all Americans, protects our national security interests and the planet, and contributes to our economic competitiveness and growth. This responsible innovation should reflect thoughtful public-private dialogues and take into account the many lessons we have learned throughout financial history.

This pragmatism has been helpful to us in the past, and I believe it is the right approach for today.

Once again, thank you for inviting me, and thank you to American University for playing a vital role in the civic and academic life of our nation.