On April 7, in front of American University’s Kogod School of Business Center for Innovation, Secretary of the Treasury Janet Yellen addressed the Biden administration’s forthcoming legislative approach to digital assets, as we discussed here, as well as the digitization of the American economy, which Yellen assessed through the lens of five lessons she suggests are often implicated by emerging technologies generally: (1) responsible innovation; (2) appropriate guardrails; (3) monetary sovereignty; (4) technological neutrality; and (5) interagency and international collaboration.

  1. Responsible Innovation. Yellen noted that financial innovation is not novel, and when it presents itself, may be accompanied by unattended consequences. “Innovation that improves our lives while appropriately managing risks should be embraced. But we must also be mindful that ‘financial innovation’ of the past has too often not benefited working families, and has sometimes exacerbated inequality, given rise to illicit finance risks, and increased systemic financial risk.” Today, many working-class Americans remain dependent upon intermediaries, such as check cashers and payday lenders, to obtain swift access to their paychecks in exchange for large processing fees to avoid the up to two-day processing time of banks. Instead of using these intermediaries, consumers may overdraft their accounts to obtain access to funds, incurring bank charges. Yellen stated these fees and services equate to approximately $15 billion spent by Americans annually. Will digital assets catalyze efficiency? Although 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 enable individuals and businesses to send instant, real-time payments through their depository institution accounts, as we discussed here.
  2. Appropriate Guardrails. Drawing from parallels of subprime mortgage-backed securities involved in the 2008 financial crisis, Yellen advanced that the Biden administration must “ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts to vulnerable communities.” Retail investors often trade stablecoins, a category of digital assets that can be pegged to the U.S. dollar, to escape the volatility associated with the broader digital asset market. But as Yellen stated, today, there is no way to confirm whether stablecoin issuers back “their coins with traditional assets that are safe and liquid.”
  3. Technological Neutrality. According to Yellen, “Wherever possible, regulation should be ‘tech neutral.'” Regulations should curb the risks associated with the services that the technology underlying digital assets provide to consumers and the broader economy; the technology should not be overregulated simply due to its obscurity. For example, Yellen explained that “consumers, investors, and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger.” Additionally, Yellen concluded that the principle of technological neutrality likewise applies to illegal actions, such as money laundering, tax evasion, and counterterrorism, and the Treasury will “continue to take action when appropriate.”
  4. Monetary Sovereignty and the US’ Role in the Global Economy. Yellen believes that “monetary sovereignty and uniform currency have brought clear benefits for economic growth and stability.” Many proponents of digital assets have conveyed interest in the Federal Reserve designing and developing a central bank digital currency (CBDC) as the next iteration of the U.S. dollar. Furthermore, President Biden’s most recent executive order asserted the administration is placing “the highest urgency on research and development efforts into the potential design and deployment options of a United States CBDC.” Yellen notes that the creation of a CBDC presents major challenges that will require years of development. Nevertheless, issuance of a U.S. CBDC will likely hinge on the President’s Working Group devising a solution that enables the dollar to remain internationally prominent, while simultaneously mitigating consumer harm and systemic risk and upholding financial stability.
  5. Value of Collaboration. Due to the internet, the digital asset space is a global financial market. Not only will cooperation between U.S. federal agencies be necessary to foster growth and stability, but the U.S. will also have to work closely with its international partners to effectuate consistent regulations across jurisdictions. Yellen stated that the Treasury has “been working with [its] international counterparts to strengthen AML/CFT programs abroad to better protect against exploitation by illegal actors.”

Our Take. Although Yellen did not provide any explicit insight into how the Treasury will shape digital asset regulation moving forward, she made clear that these technologies will be embraced with keen focus on solutions that mitigate the potential financial instability and illicit activities risks these technologies pose, but do not stifle innovation. As Yellen said, “Digital assets may be new, but many of the issues they present are not. We have enjoyed the benefits of innovation in the past, and we have also confronted some of the unintended consequences.”

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Photo of Keith J. Barnett Keith J. Barnett

Keith’s experience representing clients in the financial services industry as a litigation, compliance, regulatory, investigations (internal and regulatory), and enforcement attorney spans 20 years. Keith represents clients against government regulators (CFPB, FTC, SEC, CFTC), industry regulators (FINRA), and private litigants in federal courts…

Keith’s experience representing clients in the financial services industry as a litigation, compliance, regulatory, investigations (internal and regulatory), and enforcement attorney spans 20 years. Keith represents clients against government regulators (CFPB, FTC, SEC, CFTC), industry regulators (FINRA), and private litigants in federal courts, state courts, and before arbitration and administrative law panels in the financial services industry.

Photo of Kalama Lui-Kwan Kalama Lui-Kwan

Kalama represents parties in complex commercial disputes arising out of M&A deals. He also has a national litigation practice representing consumer-facing companies in class actions and regulatory investigations.

Photo of Ethan G. Ostroff Ethan G. Ostroff

Ethan Ostroff’s practice focuses on financial services litigation and consumer law compliance counseling. Ethan is part of the firm’s national practice representing consumer-facing companies of all types in defense of individual and class action claims and counseling them on compliance with federal and

Ethan Ostroff’s practice focuses on financial services litigation and consumer law compliance counseling. Ethan is part of the firm’s national practice representing consumer-facing companies of all types in defense of individual and class action claims and counseling them on compliance with federal and state laws.

Photo of Carlin McCrory Carlin McCrory

Carlin is a regulatory, compliance, and payments attorney with experience representing financial institutions, fintechs, lenders, debt collectors, payment processors, neobanks, virtual currency companies, and mortgage servicers.

Photo of Addison Morgan Addison Morgan

Addison is an associate in the firm’s nationally recognized Consumer Financial Services Practice Group. He has represented several of the nation’s preeminent financial institutions in litigation arising under the Fair Credit Reporting Act (FCRA), the Telephone Consumer Protection Act (TCPA), the Fair Debt…

Addison is an associate in the firm’s nationally recognized Consumer Financial Services Practice Group. He has represented several of the nation’s preeminent financial institutions in litigation arising under the Fair Credit Reporting Act (FCRA), the Telephone Consumer Protection Act (TCPA), the Fair Debt Collection Practices Act (FDCPA), the FTC Holder Rule, and other consumer protection state analogs.