Janet Yellen Calls for Crypto Regulation in Landmark Speech. Uncertainty Remains.

Janet Yellen called for regulation covering cryptocurrencies and the business of digital assets on Thursday, addressing the subject for the first time in a landmark speech.

The Treasury Secretary and former Federal Reserve chair offered insight into a timeline for a potential digital dollar, and left no doubt that Wall Street’s move into crypto will be met with new oversight.

Yellen was otherwise light on details, which leaves a fast-growing digital asset industry lacking clarity as a wave of regulation looms and lawmakers remain divided on how exactly to impose rules on the space.

“As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities,” Yellen said American University on Thursday. “New types of intermediaries, such as digital asset exchanges and other digital native intermediaries, should be subject to appropriate forms of oversight.”

Ahead of her speech, Treasury officials told Barron’s that the White House aims to strike a balance between supporting innovation in digital assets and developing rules that protect consumers and investors. The Treasury also will look to ensure that crypto doesn’t destabilize wider financial markets.

Yellen’s speech comes as institutional adoption of crypto picks up pace, with Wall Street increasingly warming to the likes of Bitcoin as investment banks and fund managers look to capture demand for digital assets.

President Joe Biden issued an executive order on crypto in March. The directive tasked federal departments and agencies with developing frameworks for regulating the vast crypto ecosystem, from exchanges and decentralized lending (DeFi) platforms to tokens and stablecoins.

Proposals are expected sometime this summer or early fall. How much can be done without new legislative authority from Congress, where the subject of digital currencies has sharply divided many Democrats and Republicans, is unclear.

In her remarks, Yellen said new regulations should be consistent with risks regardless of technological innovation, outlining a stance that would make the department “technology-neutral.” 

The Treasury secretary targeted stablecoins pegged to fiat currencies—like tether, USD Coin, or terra—as ripe for regulation to ensure financial stability. The White House has called for stablecoin issuers to be regulated like insured depository institutions, such as federally chartered banks.

“We are now working with Congress to advance legislation to help ensure stablecoins are resilient to risks that could endanger consumers or the broader financial system,” she said, adding that the Treasury was collaborating with international authorities.

As for a government version of a stablecoin, a central bank digital currency (CBDC), or digital dollar, Yellen made clear that none would materialize soon, even though Biden’s executive order called for the concept to be explored urgently.

“Issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months,” she said.

Yellen added that issues related to the efficiency of domestic and cross-border payments, which stablecoins or CBDCs could be designed to solve, are already being addressed by the international financial community.

The U.S. is working with the G-20 group of countries on cross-border frictions, and next year the Fed plans to launch an instant domestic payment service that will work 24/7, Yellen said.

Yellen also touched on familiar themes of evolving digital asset regulation, including money laundering, risk disclosure, and taxes.

The possibility of Russia using cryptos to evade sanctions has raised the stakes for law enforcement to follow crypto transactions more closely. Exchanges have frozen some digital wallets associated with sanctioned individuals or entities, but it is unclear whether the Kremlin is using crypto markets to evade sanctions.

The administration is also calling for more disclosures about risks related to investing in crypto, custody of digital assets by exchanges and other intermediaries, and more tax enforcement.

Left unsaid, however, was what entities would be subject to new rules. Digital wallet providers, for instance, don’t verify identities or routinely monitor the flow of transactions from one wallet to another in peer-to-peer transfers. Officials haven’t specified how new oversight would apply to wallet providers. Nor have they indicated how rules would apply to DeFi exchanges that similarly don’t verify customer identities.

Biden’s executive order “provides a good rubric for the kinds of risks we care about—financial stability, consumer and investor protection risks, those things are all important to us,” a Treasury official said.

Such broad principles may set the stage for regulations. It may still be a few months, however, until the rules start to take shape.

Write to Jack Denton at jack.denton@dowjones.com and Daren Fonda at daren.fonda@barrons.com

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