Janet Yellen’s April 7th remarks from American University’s Kogod School of Business Center for Innovation outlined five “lessons” that apply to opportunities and challenges posed by crypto and digital currencies. These remarks are a first look into President Biden’s Executive Order, its intent and the guiding principles for the subsequent task force organized to review and recommend regulations for digital currencies.
Below is a summary of the five lessons:
- Responsible innovation is beneficial to a financial system
History is a chain of innovations; Digital currency is the newest, and viewed by many to be beneficial by eliminating transaction delay, equalizing access to money transactions across economic class, and minimizing transaction fees. Fixing these issues is even more important outside the U.S. The Fed is planning to launch an instant payment service in 2023, A kind of Federal PayPal. The fact that the Fed is planning to release this quick pay service and is exploring Central Bank Digital Currencies (CBDC) is a statement to the importance of digital currency and its perceived benefits while still acknowledging the need for the types of controls placed on a federal currency.
2. Unregulated innovation harms the marginalized
As digital currencies become more popular, it becomes harder to stabilize the repercussions of this unregulated environment. For example, while stablecoins are generally pegged to the dollar giving them some price stability, they are not required to be backed by hard assets. The uncertainty this causes, may result in a run on stable coins, which could disrupt the financial system, ultimately hurting all consumers. For this reason and others, digital asset exchanges need to be subject to the same government regulations as banks and other financial firms. Although distributed ledger technology will make markets less vulnerable to monopoly-like concentrations, it’s still the role of the government to anticipate possible issues and proactively regulate them.
3. Regulation should be based on risk and activities, not specific technologies
Innovations in technology are constantly changing and regulations need to be able to adapt and change rather than be tied to a specific advancement. Regulations should ensure the security of investors and the responsibility of digital asset custodians, while still being nimble. For example, tax regulations must be consistent and based on transactions, not on the medium of the exchange, but will need to be tracked practically. The Executive Order is intended to protect consumers from being victimized while also preventing tax evasion, money laundering, and other illicit financial activity.
4. The US needs the dollar to continue to be dominant in global finance
The need for a strong centralized currency has been historically proven and the approach to digital assets must be guided by the same principle. Therefore, a CBDC would have to support the dollar as the ultimate international medium of exchange. Consideration will have to be given to how this could disrupt existing financial institutions and the role of the US as a world leader. In any case, a CBDC will take years to design and this must be done carefully to ensure that there are no breakdowns in the international payment network, particularly those that would undermine the standing of the U.S. dollar.
5. Responsible innovation requires cooperation from all stakeholders
It is the government’s responsibility to make sure that innovation helps Americans while supporting our interests, being sustainable and fostering competitive growth while considering all points of view, including institutions that have misgivings about Crypto.
In short, while the treasury understands the importance of exploration and regulation in the realm of digital currencies, protecting the dollar and the interests of the country are high priorities. It is important to continue to monitor these developments because they will undoubtedly have an impact on the world economy.
