Even though there will be no policy bombshells in Treasury Secretary Janet Yellen’s first speech focused entirely on digital assets, the need to build better payments rails will be an area of particular focus.
That’s according to Treasury Department officials speaking off the record at a press conference Wednesday night previewing the 10:30 a.m. ET address, which will look at cryptocurrency, stablecoins and the possibility of creating a central bank digital currency (CBDC), a digital dollar, but also at the Federal Reserve’s own instant payments system FedNow.
“The Secretary will be clear about the need for innovation in the context of payments,” one official emphasized.
As it currently exists, the U.S. payments system “is too slow, too costly, and not sufficiently inclusive,” they said, adding that “these are issues that are apparent and [there are] improvements that are can be made. … We want payments to be faster, less expensive, more inclusive. FedNow, depending on how it’s implemented, has the potential to contribute to some of those objectives.”
Along with FedNow, the options for improving the system “include digital assets such as stablecoins. They also include things like a potential CDBC” they said, emphasized “potential.”
As for digital assets and stablecoins in particular, the officials noted that while they have promise, there are not only policy questions about regulatory “guardrails and safeguards” but also potential technical issues to be addressed.
“These questions relate to things like settlement time,” they said, noting that “sometimes these networks are congested when they’re under heavy use.”
Policy Coming Soon
As far as broader policy issues, the officials pointed out that President Joe Biden’s recent executive order on digital assets called for a series of policy discussions across many different agencies over the next six months.
“The secretary tomorrow will not presuppose where that work will go and what conclusions will be drawn by the groups,” they said. She will say that those issues would best be settled with a congressional mandate in the form of legislation rather than regulatory changes.
That said, issues ranging from money laundering, tax evasion and sanctions breaking to crypto-specific crimes like ransomware and the hacking attacks that have drained $14 billion from crypto investors in 2021 alone will be addressed. And the potential for cryptocurrencies and stablecoins in particular to cause financial-stability risks to the U.S. and wider global economy will all play an important role in Yellen’s thinking, they added.
There are “five main principles that the secretary will focus on” based on lessons drawn from historical perspectives, “as well as her own experiences in identifying risks in a variety of different contexts across our financial system and financial markets,” the officials said.
“The financial system benefits from responsible innovation.”
“When regulations fail to keep pace with innovation, vulnerable people often suffer the greatest harm.”
“Regulations should be based off of risks and activities, not specifically tied to certain technologies.”
“Sovereign money is the core of a well-functioning financial system, and the U.S. benefits from the central role the dollar and U.S. financial institutions play in global finance.”
“We need to work together to ensure that responsible innovation takes place along with appropriate assessment of risks and efforts to mitigate those risks.”
In her address, Yellen will say: “We must also be prepared for possible changes in the structure of financial markets. For example, some have suggested that distributed ledger technology could reduce concentration in financial markets. While this could make markets less vulnerable to the failure of any particular firm, it is critical to ensure we maintain visibility into potential build-ups of systemic risk and continue to have effective tools for tamping down excesses where they arise.”