Secretary Yellen Discusses Digital Assets At House Financial Services Hearing

Highlights from today’s U.S. Treasury Secretary Yellen‘s appearance in front of the House Financial Services Committee for the hearing, “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.”

Digital assets were discussed during the Q&A with Secretary Yellen by several Members of Congress. Video is here.

Click below or scroll down for a selection of what was said:

(lightly edited for clarity)

REP. HILL (R, AR): The FSOC (The Financial Stability Oversight Council) report  recommended that Congress passed legislation to provide regulators authority over stock markets for digital assets as well as legislation we could regulators more authority to have visibility into or supervise digital asset companies. We’re working on that here in Congress. Are those recommendations from late summer’s FSOC report (see the report) still the recommendations of FSOC… still the view of FSOC?

SEC. YELLEN: Yes, remains the view of FSOC that there are some gaps like spot markets for crypto assets that are not securities. We would like to see your regulatory framework over those markets. And there are gaps in regulations. I would point out specifically stablecoins. And I do believe that we need a comprehensive federal prudential framework and would be pleased to work with you, with Congress, to see if we can develop such a framework.

REP. SHERMAN (D, CA): … We have recently adopted tax laws dealing with crypto. The Inflation Reduction Act said you’ve got to report on Form 1099. In December of last year Treasury announced that crypto brokers, however, wouldn’t have to report until final regulations were issued. These final regulations have been approved by the OMB but remain on an issue. Rep. Stephen Lynch (D, MA) and I sent you a letter just recently urging you. The SEC has proved they’re not afraid of the crypto bros. I know you’re not afraid of the crypto bros. I hope the IRS is not afraid of them. When are we going to see these regulations so that if you make a profit on selling your crypto you at least have to pay taxes on it?

SEC. YELLEN: We will get back to you on that shortly.

REP. FOSTER (D, IL): [What about using digital dollars or digital euros] that would remain traceable to identify corruption for a period of time until the Ukraine reconstruction is completed and the corruption has faded a concern?

SEC. YELLEN: It’s an interesting suggestion. I mean… Ukraine doesn’t have a central bank digital currency. It’s a major enterprise to introduce such a thing.

In the case of the United States, we’re looking at it, but it’s something that can take years. We are very focused on corruption, traceability and accountability for funds that are transferred to Ukraine. Right now, US aid is being handled through the World Bank that has very rigorous standards for verifiability and accountability…

REP. FOSTER: But, it’s still a struggle. I mean, look at all the money we attempted to inject into Afghanistan and it just disappeared into corruption.

SEC. YELLEN: I honestly don’t believe anything like that is happening and USAID has hired a US accounting firm to do independent checks and to review World Bank records. The IMF program for Ukraine focuses heavily on corruption and putting in guard safeguards and structural reforms to make sure that corruption is…

REP. FOSTER: I understand. It just seems like there may be an acceptable bargain here that – yes, we will provide a tremendous amount of assistance for those who are willing to go back to Ukraine and rebuild the country. But, the price for that will be a heightened level of visibility to the international community that’s providing it.

SEC. YELLEN: I believe that’s absolutely right. Certainly we demand accountability on the government of Ukraine’s part.

REP. DAVIDSON (R, OH): As the founder of the Sound Money Caucus, I certainly appreciate efforts to preserve the role of the dollar as the reserve currency and, frankly, I am concerned about the role of money being corrupted as a tool for coercion and control rather than a means of exchange and a store of value.

And frankly, that seems at the heart of Central Bank Digital Currencies (CBDCs), but it transcends down to one of the big developments globally, where the United States dominates capital markets in terms of invested capital. In the space of FinTech and cryptocurrencies, 75 to 90% of the liquidity is offshore.

As you know, it seems like there’s an effort to not trust our American citizens in this, which is if you can’t really stop it all together, you at least want to keep it account-based, because you can control third parties, you can use them as intermediaries. That seems to be a feature to some of the people’s thinking. Are you familiar that in December 2022, FinCEN issued a request for comment on a potential rule that would ban self-custody, which is essentially the ability for individuals to own their own assets and have a permissionless payment system?

SEC. YELLEN: I’m not familiar with the details of that rule, but certainly we are concerned about the use of cryptocurrencies and digital assets for illicit activity.

REP. DAVIDSON: But the question is, are you trying to stop individuals from having self-custody? Because there seemed like that that was an effort that was underway under the end of the Mnuchin time as Secretary. So is that something that has risen to your own level of concern?

SEC. YELLEN: I haven’t had discussions.

REP. GOTTHEIMER (D, NJ): In a recent interview, you said that you “see some holes in the system where additional regulation would be appropriate.”Do you mind elaborating a little bit on that statement? Where do you see the holes? Where do you think additional clarity is needed for digital assets?

SEC. YELLEN: One hole pertains to the supervision of spot markets where digital assets are not regarded as securities. There needs to be regulatory authority there. And then I would say that stablecoins is a type of digital asset that really requires a full-blown federal regulatory framework. I think this is an area where congressional legislation is appropriate to create an appropriate prudential framework.

REP. GARCIA (D, TX): Where are we on the development of the digital dollar?

SEC. YELLEN:  The White House is running a task force which includes the Federal Reserve and other agencies to look at whether or not it’s in the United States interest to develop the digital dollar as central bank digital currency.

It’s a complex situation where there are both benefits and costs. We continue that work and hopefully we’ll be able to consult with Congress and recommend a way forward.