US Treasury Secretary Janet Yellen speaks about the digitization of the American economy; State regulation of digital assets should be “technology neutral” | Troutman Pepper

On April 7, Treasury Secretary Janet Yellen addressed the Innovation Center at American University’s Kogod School of Business about the Biden administration’s upcoming legislative approach to digital assets, as we discussed here, as well as the digitization of the American economy, which Yellen assesses through the Objectively from five lessons they believe are often implied by new technologies in general: (1) responsible innovation; (2) appropriate crash barriers; (3) monetary sovereignty; (4) technological neutrality; and (5) interagency and international collaboration.

1. Responsible innovation. Yellen noted that financial innovation is nothing new and, when it emerges, can be accompanied by uncontrolled consequences. “Innovations that improve our lives while properly managing risk should be embraced. But we must also remember that the “financial innovation” of the past has all too often failed to benefit working families, sometimes exacerbating inequality, leading to illicit financial risk and heightened systemic financial risk.” Today, many working-class Americans remain on intermediaries like check cashers and payday lenders, to get quick access to their paychecks for high processing fees to avoid the banks’ up to two-day processing time. Instead of using these intermediaries, consumers can overdraw their accounts to access funds, incurring banking fees. Yellen stated that these fees and services equate to approximately $15 billion spent by Americans annually. Will Digital Assets Catalyze Efficiency? Though Yellen believes “it’s too early to tell,” she briefly discussed the Federal Reserve’s plan to launch its proprietary program, FedNow, in 2023. FedNow will allow individuals and businesses to send real-time, instant payments through their custodian accounts we discussed here.
2. Appropriate crash barriers. Citing parallels with subprime mortgage-backed securities implicated in the 2008 financial crisis, Yellen stated that the Biden administration “needs to ensure that the growth of digital assets does not lead to similarly dangerous risks or have a disproportionate impact on.” vulnerable communities leads”. Retail investors often trade stablecoins, a category of digital assets that can be pegged to the US dollar to escape the volatility associated with the broader digital asset market. But as Yellen said today, there’s no way to confirm whether stablecoin issuers are “backing their coins with traditional assets that are safe and liquid.”
3. technological neutrality. According to Yellen, “wherever possible, regulation should be ‘technology neutral’.” Regulations should mitigate the risks associated with the services that the technology underpinning consumers and the broader economy provides to digital assets; The technology should not be over-regulated simply because of its lack of clarity. For example, Yellen stated that “whether assets are stored on a balance sheet or a distributed ledger, consumers, investors and businesses should be protected from fraud and misleading statements.” In addition, Yellen concluded that the principle of technological neutrality also applies to illegal activities such as money laundering, tax evasion and counter-terrorism, and the Treasury Department “will continue to take action where appropriate.”
4. Monetary sovereignty and the US role in the world economy. Yellen believes that “monetary sovereignty and a single currency have brought clear benefits to economic growth and stability.” Many advocates of digital assets have expressed interest in the Federal Reserve designing and developing a central bank digital currency (CBDC) as the next iteration of the US dollar. Additionally, President Biden’s recent executive order asserted that the administration “places utmost urgency on research and development efforts regarding the potential design and deployment options of a US CBDC.” Yellen notes that creating a CBDC poses major challenges that will require years of development. Still, the issuance of a US CBDC will likely depend on the President’s working group developing a solution that allows the dollar to remain prominent internationally while mitigating consumer harm and systemic risk and preserving financial stability.
5. value of cooperation. Because of the internet, the digital asset space is a global financial market. Fostering growth and stability will not only require cooperation among US federal agencies, but the US must also work closely with its international partners to secure consistent regulations across jurisdictions. Yellen explained that the Treasury Department “cooperated [its] international counterparts to strengthen AML/CFT programs abroad to better protect them from exploitation by illegal actors.”

Our opinion. While Yellen gave no explicit insight into the future shaping of the Treasury Department’s regulation of digital assets, she made it clear that these technologies will be adopted with a strong focus on solutions that mitigate the potential financial instability and the risks of illegal activities that these technologies pose However, this does not stifle innovation. As Yellen said, “Digital assets may be new, but many of the problems they present are not. We have enjoyed the benefits of innovation in the past and also faced some of the unintended consequences.”