Long reads

Will Yellen’s Treasury 'invest' in the future of digital currency?

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

Having officially been appointed Treasury Secretary, the digital currency world has its gaze fixed on Janet Yellen to determine precisely what her strategy around cryptocurrency, stablecoins, and digital banking will be.

During her confirmation hearing on 22 January, Yellen raised concerns around the use of cryptocurrencies, stating “cryptocurrencies are a particular concern. I think many are used – at least in a transactions sense – mainly for illicit financing.”

While some have jumped on these comments and to suggest that cryptocurrency under Yellen will be governed with a more hard-line approach, (understandable, given her historic expressions of distaste toward them), her written testimony to the Senate Finance Committee may be viewed as a little more promising for crypto enthusiasts.

“I think it’s important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system.”

In parallel to consideration of the potential benefits, her testimony acknowledges the concern that cryptocurrencies can be used to finance terrorism, facilitate money laundering and support malign activities that threaten U.S. national security interest and the integrity of the U.S. and international financial systems.

“I think that we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities. If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective framework for these and other fintech innovations.”

Reference to the implementation of frameworks which would govern the sector seems to show an openness to the area that we had not previously seen from Yellen, and this more nuanced take on the potential of digital currency for legitimate activities is likely encouraging for crypto players.

Simon Peters, market analyst for the retail trading platform eToro says that Yellen’s future decisions regarding further pandemic-related stimulus packages would bear an impact on cryptocurrency prices.

He explains that fiscal and monetary stimulus from governments and central banks respectively has always been a driver of bitcoin price ever “since the first bitcoin block was mined and the text ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’ was written into the code.”

He furthers that, by design, bitcoin is intended as a currency without central bank interference, therefore, when the topic of potential fiat currency devaluation is brought about, bitcoin often sees a positive price move.

“Fiscal stimulus discussions that started last year and are continuing into 2021, are one of the main drivers of crypto price increases we’re currently seeing. In fact, many are starting to see bitcoin as an inflation hedge, and this is evidenced by more and more institutions buying up the cryptoasset.

Going forward, with Joe Biden and his government looking at pushing for more stimulus, I envisage further positive price action.”

What of a US stablecoin?

While Peters believes that a US Central Bank Digital Currency (CBDC) is “on the cards”, he believes the development of a digital dollar lags behind other countries’ efforts across Europe and Asia to create a digital version of their fiat currency.

“Currently, the Federal Reserve is investigating the use of blockchain and distributed ledger currencies, but no further findings have as yet been reported. It could be, should we see significant uptake from other nations, that the US could put the pedal to the metal and speed up the development of a CBDC.” However, he notes that as the dollar is a globally trusted currency, it doesn't seem likely the US will look to cede control easily.

When asked about her plans to ensure that the US remains a “cutting edge leader” in global financial services in reference to China’s CBDC pilot in late 2020, Yellen didn’t provide a direct comment about the potential for a US equivalent. The Treasury Secretary elect (at the time) stated: “I believe the United States must be a leader in the digital asset and financial technology areas.”

In a vein similar to that taken when questioned about cryptocurrencies in her testimony, she continued that “this requires us to develop a regulatory framework that fosters innovation and promising new technologies while addressing legitimate concerns about the use of such technologies to finance terrorism and engage in other malign activities that threaten U.S. national security and pose risks to the financial system.”

On the topic of establishing a US CBDC, Yellen may have company in Jerome Powell, chair of the Federal Reserve. He recently commented that “we don’t feel an urge or need to be first…Effectively, we already have a first-mover advantage because [the U.S.] dollar is the reserve currency.”

Will Brian Brooks’ last ditch crypto-efforts stick?

Michael Barr has been tipped as the new head of the Office of the Comptroller of the Currency (OCC), but whether he will champion the cause of digital currencies with the same fervour as his predecessor, Brian Brooks, remains to be seen. Also, whether Yellen will lean-in to or away from engaging with the implications of a suite of documents Brooks’ office pushed through before stepping down, on 14 January 2021, is equally unknown.

Banks are increasingly interested in stablecoin markets and the opportunities they present, and on 4 January, the OCC threw them a golden nugget. The publication of its Interpretive Letter 1174, addressed and confirmed that federally regulated banks can use stablecoins to conduct payments and other activities.

Peters says the OCC’s interpretive letter is hugely significant and predicts that it could end up being the biggest on-ramp move in crypto so far. 

“It is not beyond the realms of imagination that we might see banks providing their customers with the ability to convert fiat currency to a stablecoin in their personal banking apps. Being able to convert to, say, ‘USDC’ with minimal fees would then give consumers the opportunity to move that USDC to a wallet or exchange and trade it for other cryptoassets within the ecosystem.”

Peters suggests that the impact of the OCC’s interpretive letter on the crypto sector could be wide ranging, as investors and consumers are able to move from fiat to crypto more efficiently, which would encourage widespread adoption and investment in a range of different cryptoassets.”

Soon after the interpretive letter on stablecoins was published, Anchorage Trust Company’s (Anchorage) application to become a national trust bank was approved conditionally, making it the first virtual currency firm to become a federally regulated banking institution.

As law firm Gibson Dunn explains, it is significant that the approval of Anchorage relied on another Interpretive Letter (1176) published by the OCC on 11 January, which substantially increases trust powers of a national bank, “making them a more attractive business model generally and particularly for fintech firms.”

Given these developments it will be interesting to observe what comes of the Conference of State Bank Supervisors’ (CSBS) new lawsuit to block the OCC’s approval of Figure Bank’s national bank charter. DLA Piper explains that the complaint states the OCC has gone beyond its legal authority to charter institutions that conduct the “business of banking”, which requires an institution to receive deposits and obtain federal agencies.

When asked directly her opinion regarding a legal interpretation of the National Bank Act, specifically, whether under the National Bank Act a federal charter requires deposit taking institutions to engage in the “business of banking”, Yellen’s response may be revealing as to how she plans to interact with the OCC during her term.

Yellen states: “You raise an important question about the legal interpretation of the National Bank Act by an independent federal financial regulator, the Office of the Comptroller of the Currency. I respect the independence of the Comptroller of the Currency and I understand the importance of the question you are raising with respect to the OCC’s interpretation of the National Bank Act.

“If confirmed as Treasury Secretary, I look forward to discussion with you on these important topics that have consequential implications for the future of banking and how we think about what banking is and should be.”

It seems we will have to wait and see.

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