Treasury Secretary Janet Yellen urged U.S. lawmakers to pass legislation regulating cryptocurrencies and stablecoins, testifying Thursday that the mushrooming digital asset sector poses increasing risks to financial stability.
Her abbreviated appearance before the Senate Banking Housing and Urban Affairs Committee—postponed from Wednesday—was to deliver the annual report of the Financial Stability Oversight Council, established after the 2008 global financial crisis.
"The council is focused on digital assets and related risks, such as from runs on crypto asset platforms and stablecoins, potential vulnerabilities from crypto asset price volatility, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations," Yellen told the committee. “Congress should pass legislation to provide for the regulation of stablecoins and of the spot market for crypto assets that are not securities.”
Stablecoins are designed to maintain a steady value, often $1 per coin, but secrecy around reserve assets and other risks make them vulnerable to destabilizing runs, she noted.
The committee also addressed the role of cryptocurrency in financing terrorism, a threat frequently cited by Sen. Elizabeth Warren (with caveats).
"We know that terrorist groups like Hamas, al Qaeda, and Hezbollah have used digital assets to raise and transfer funds, [and] we have important tools to counter illicit finance, but most of them date back to the post-9/11 era," noted committee chair Sen. Sherrod Brown. "As terrorists continue to innovate, do we need to update our counterterrorism tools to respond to the risks created by digital assets?”
“We do have many authorities that enable us to act, but we've identified a number of holes in our authorities and have composed a list of suggestions for ways in which Treasury's authorities could and should be strengthened,” Yellen replied. “We look forward to working with you to try to accomplish that.”
“We will work with you on that,” Brown agreed. “Some of it you can do as the Secretary of Treasury, [but] much of it needs congressional authority, [and] we will absolutely work with you.”
Regulating AI in financial markets
Sen. Mark Warner (D-Va.) asked Yellen about the risks posed by the rapid adoption of artificial intelligence in finance.
Yellen called AI “a vulnerability that could create systemic risk” and said the council she chairs is “working very hard to deepen our understanding” of emerging hazards.
“Financial institutions, regulators, and market participants should continue deepening their expertise and monitoring capacity in this area,” she advised.
Warner suggested coordinated action is urgently needed to get ahead of threats like AI-enabled market manipulation before it is too late.
Yellen said “the administration would welcome a congressional initiative in this area.”
Climate, China also discussed
Sen. Jack Reed (D-R.I.) asked Yellen whether climate change would have an impact on the availability and affordability of property insurance coverage.
“We’re very concerned about the developments that you just cited... the absence of insurance or being priced out of insurance, as these climate risks have intensified, is harming the well-being of households and the cost of living,” Yellen responded. “It’s also creating risks to financial stability.”
Sen. Chris Van Hollen (D-Md.) asked about the possibility of U.S. investor funds going toward technology development efforts by the Chinese military.
“We have export controls and other controls, but these outbound investments can be a way of providing aid to China’s military or other countries of concern that need to be closed down,” Yellen told Van Hollen.