Yellen Urges Congress to Regulate Crypto Assets and Stablecoins

U.S. Treasury Secretary Janet Yellen has highlighted the risks posed by crypto assets and stablecoins to the financial system and called for legislation to address them. In a testimony before the House Financial Services Committee on Tuesday, Yellen said that the rapid growth and volatility of crypto assets, as well as the proliferation of platforms operating outside of or in violation of existing laws and regulations, could undermine financial stability and consumer protection.

Crypto Assets and Related Risks

Yellen said that the Financial Stability Oversight Council (FSOC), which she leads, is focused on digital assets and related risks, such as:

• Runs on crypto-asset platforms and stablecoins, which could trigger liquidity crises and contagion effects.
• Potential vulnerabilities from crypto-asset price volatility, which could affect investor confidence and market functioning.
• The use of crypto assets for illicit financing, such as money laundering, terrorist financing, and tax evasion.

Yellen said that the FSOC is monitoring these risks and coordinating with other regulators and international bodies to address them.

Need for Legislation and Enforcement

Yellen also urged Congress to pass legislation to provide for the regulation of stablecoins and of the spot market for crypto assets that are not securities. She said that applicable rules and regulations should be enforced, and that platforms acting outside of or out of compliance with existing laws and regulations should be held accountable.

Yellen said that the Treasury Department is working with other agencies to develop a comprehensive framework for crypto regulation, which would include:

• Enhancing reporting and recordkeeping requirements for crypto transactions and entities.
• Establishing minimum standards for stablecoins and their issuers, such as capital, liquidity, and governance requirements.
• Implementing anti-money laundering and countering the financing of terrorism (AML/CFT) rules for crypto service providers.
• Promoting international cooperation and coordination on crypto regulation and supervision.

Other Financial Stability Issues

In addition to crypto risks, Yellen discussed the broader financial landscape and the Biden Administration’s efforts to bolster economic recovery. She said that the U.S. economy is rebounding from the pandemic, but still faces significant challenges, such as:

• The uneven impact of the pandemic on different sectors and groups, especially low-income and minority communities.
• The persistent inflationary pressures, which are expected to ease as supply and demand imbalances are resolved.
• The potential spillovers from global developments, such as geopolitical conflicts, climate change, and cyberattacks.

Yellen said that the FSOC is also monitoring other systemic risks to maintain financial stability, such as:

• Vulnerabilities in the commercial and residential real estate sectors, which could pose credit and liquidity risks to lenders and investors.
• The exposure of the financial system to climate-related risks, such as physical and transition risks.
• The implications of technological innovations, such as artificial intelligence, biometrics, and quantum computing, for the financial system and its resilience.

Yellen said that the FSOC is committed to enhancing the oversight and regulation of the financial system, and to promoting financial inclusion, diversity, and equity.