Grygo is the chief content officer for FTF & FTF News.
The concept of digital currencies run by central banks is counter to the chaos-driven cryptocurrency movement. But central bank digital currencies (CBDCs) are now seen in a very favorable light because of the protections and order they could bring to the crypto world.
Even so, Secretary of the Treasury Janet L. Yellen earlier this month issued a reality check on digital assets policy, innovation, and regulation at American University’s Kogod School of Business Center for Innovation.
Essentially, Yellen is urging caution even while acknowledging that “our financial system benefits from responsible innovation,” according to her speech.
Some of the guideposts she mentioned are:
- “When regulation fails to keep pace with innovation, vulnerable people often suffer the greatest harm;
- Regulation should be based on risks and activities, not specific technologies; and
- Sovereign money is the core of a well-functioning financial system and the U.S. benefits from the central role the dollar and US financial institutions play in global finance.”
Yellen acknowledged the urgency of President Biden’s recent executive order for “a coordinated and comprehensive government approach to digital asset policy” especially as digital assets hit a market capitalization of $3 trillion in November 2021 — exponential growth from its $14 billion mark in 2016.
In her speech, Yellen says that over the coming months, “Treasury will work with colleagues in the White House and other agencies to produce foundational reports and recommendations” to help authorities reach the Biden objectives. “In many cases, the work tasked by the executive order builds upon ongoing efforts at Treasury,” Yellen notes.
“I won’t predict where this work will take us, but that does not mean we are navigating without a compass. 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,” Yellen says.
Yellen is asking for a reasoned approach to CBDCs rather than a knee-jerk rejection or blind acceptance.
“Some have suggested a CBDC could be the next evolution in our currency. A recent report by the Federal Reserve opened a public dialogue about CBDCs and the potential benefits and risks that could be associated with issuing one in the US. The President’s Executive Order calls for us to consider this question from several perspectives,” Yellen says.
“For example, what impact would a US CBDC have for implementing macro stabilization policies and private credit creation? Could it make the financial system more equitable, accessible, and inclusive? How could it be designed to manage risks associated with national security and financial crime, while including privacy protections? How might a US CBDC interact with existing national currencies, foreign CBDCs or private stablecoins?” asks Yellen. “We need to consider these important questions in the context of the central role the dollar plays in the world economy.”
Janet Yellen
Yellen is also stressing that it’s wrong to rush the creation and launch of a CBDC.
“I don’t yet know the conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development, not months,” Yellen says. “So, I share the President’s urgency in pulling forward research to understand the challenges and opportunities a CBDC could present to American interests.”
In addition, any and all CBDCs will need cross-border support and international cooperation.
“We have a strong interest in ensuring that innovation does not lead to a fragmentation in international payment architectures and that the development of digital asset technologies is consistent with our values and laws,” Yellen says. “And this underscores my final lesson … We need to work together to ensure responsible innovation.”
My guess is that a crypto crisis rather than bureaucratic altruism will push governments across the globe to actually coordinate and hasten the development of CBDCs.
Let’s hope that any potential crypto crisis will be averted or only just enough to spur change but not enough to cause devastation for millions of people.
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