Treasury Secretary Yellen Calls for Stablecoin Regulation Despite not Being “Systemic Risk”

U.S. Treasury Secretary Janet Yellen testified before the House’s Financial Services Committee. Topics like cybersecurity risks, coordination efforts among regulatory agencies, the role of AI in the financial sector, and cryptocurrency regulation were discussed. Stablecoins had a central role during the hearing, with Yellen stressing the need for lawmakers to pass regulations specifically tailored to the industry.

In her opening statement, Yellen stressed the importance of enforcing existing regulations on crypto assets and stablecoins while also calling for lawmakers to take action.

The Secretary also referred to the “proliferation of platforms acting out of compliance”, the risks of crypto/stablecoin platforms, and the volatility of crypto as the main focus of the Financial Stability Oversight Council (FSOC) she oversees.

Stablecoins Remain a Major Concern

Most of Secretary Yellen’s focus during the hearing was set on stablecoins. Yellen noted that while “no stablecoin at this point may yet have achieved the scale it would pose a systemic risk”, this could change in the future if their use became widespread.

As such, the FSOC called for lawmakers to create a regulatory framework that helps avoid such risks in the future. Such regulatory framework should focus on filling the gaps in which no clear regulatory authority exists, as these are where consumer investor protection and financial stability risks exist according to Yellen.

Yellen cited the lack of regulatory authority by the Commodity Futures Trading Commission (CFTC) in the spot markets for commodities like Bitcoin and stablecoins as an example of these gaps. While states like New York have allowed companies to issue stablecoins and operate legally by complying with local regulations, no such framework exists at the federal level.

Stablecoins Are Not the Enemy

While Secretary Yellen has been critical of cryptocurrencies in the past and called Bitcoin “extremely inefficient”, she didn’t call for an outright bank nor a crackdown on crypto during the hearing. I

n fact, her statements make it clear that she considers many cryptocurrencies not to be securities and her calls for a regulatory framework for these coins could bring further clarity in an increasingly hostile financial environment.

During the hearing, Rep. Ritchie Torres referenced a PWG report that suggested that stablecoins issuers should be subject to regulation similar to that of banks.

When Torres asked if “stablecoins operate differently from a bank, why not regulate it differently?”, Yellen agreed by saying “Perhaps it should”.

To Yellen, the urgency seems to be on regulating the risks and making sure “the deposits are channeled into safe assets”. This is something many stablecoin issuers already do, as pointed out by Representative Warred Davidson when referring to four stablecoin issuers certified by the New York Department of Financial Services.

According to Davidson, however, the lack of regulatory clarity has prompted to move offshores because of the U.S. Government’s “failure to regulate our own markets”.

Stablecoin Regulations Might be Coming Soon

During the hearing, Yellen proposed the development of a “regulatory floor” that would provide a basic framework to all states and operators. She also suggested that a federal regulator would have “the ability to decide if a stablecoin issuer should be barred”.

Such regulation wouldn’t be targeted at stablecoins only but a variety of crypto-related products and services so wide that it would include wallets. In this regard, Yellen said it was “critical to enact regulatory protections” as these wallets are a “critical part of the stablecoin ecosystem” that can result in “significant losses”.

U.S. lawmakers seem to agree with Yellen on the urgency, with the issue being more about reaching a consensus. Senator Cynthia Lummis recently said that “pretty delicate” negotiations were taking place around the topic, with these being an everyday matter despite the apparent slow progress.

Senator Lummis told CoinDesk that she remained optimistic, stating that legislation could be seen as soon as “the first half of this calendar year”. As a member of the banking committee and one of the most vocal supporters of stablecoins in Congress, Lummis has played a central role in the push for regulatory clarity.