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Janet Yellen Calls For Crypto Crackdown: Prepares To Unleash Regulatory Heat

Last Updated February 6, 2024 12:10 PM
Teuta Franjkovic
Last Updated February 6, 2024 12:10 PM

Key Takeaways

  • Highlighting concerns about stablecoin instability, Yellen urged stricter regulations and cooperation with Congress.
  • Lawmakers consider overturning a rule requiring companies to treat client crypto holdings as liabilities.
  • A recent joint resolution reflects growing opposition and potential policy changes regarding crypto asset custody.
Treasury Secretary Janet Yellen is set to share her concerns about the cryptocurrency industry’s potential risks to the financial system during her testimony before Congress.
In an excerpt  released on Monday, Yellen outlines her views on the matter, which include the instability of stablecoins, the possibility of bank runs on crypto platforms, and the inherent volatility of cryptocurrency prices.

Warning Congress of Crypto Risks, Highlighting Stablecoins and Platform Runs

Yellen’s appearance before the House Financial Services Committee comes as the Financial Stability Oversight Council (FSOC), which she chairs, has increasingly scrutinized  the crypto sector. The FSOC, responsible for identifying and mitigating financial risks, views the crypto industry as a potential source of vulnerability and has placed it high on its watchlist.

In the prepared testimony, posted on the committee’s website, Yellen wrote :

“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 affirmed her commitment to collaborate with Congress on developing and refining crypto-related legislative measures.

She added :

“Applicable rules and regulations should be enforced, and Congress should pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.”

While her concise statements don’t unveil any fresh initiatives, Yellen’s inclusion of digital assets among her primary concerns ensures that the crypto sector remains under the scrutiny of U.S. governmental financial oversight.

Lawmakers Weigh Overturning SEC’s “Illogical” Rule on Custody

During the upcoming hearing with the House Financial Services Committee, a key topic of discussion is anticipated to be a legislative proposal aimed at overturning  a staff bulletin  from the Securities and Exchange Commission (SEC). This appeal is a significant part of the committee’s agenda, as detailed in the memorandum for the hearing.

The contentious bulletin, known as SAB 121 and released in March 2022, mandates that companies holding cryptocurrencies for customers must reflect these holdings as liabilities on their financial statements. This requirement has been met with resistance and criticism from various stakeholders within the crypto community.

Some have labeled the bulletin as “illogical ,” while others argue that it should have been established through a more formal rule-making process. Despite the backlash, SEC Chair Gary Gensler has maintained his support for the bulletin, emphasizing its importance in protecting customer interests, particularly in bankruptcy proceedings.

In a notable development last week, Sen. Cynthia Lummis (R-Wyo.), along with Reps. Mike Flood (R-Neb.) and Wiley Nickel (D-N.C.), introduced a joint resolution aimed at nullifying the bulletin—notably, both Reps. Nickel and Flood are members of the House Financial Services Committee, highlighting the bipartisan interest and involvement in this issue.

SEC Faces Congress Disapproval for Bypassing Formal Procedures in Crypto Guidance

The Government Accountability Office (GAO) last year pointed out a significant procedural misstep when it identified that the Securities and Exchange Commission (SEC) had overstepped its bounds.

The issue at hand is how federal regulators employ staff guidance. Ideally, such guidance is meant to clarify and aid in interpreting existing policies.

The SEC faced criticism for using this guidance as a tool to introduce new policies, a move that did not sit well with Congress. The GAO  specifically noted that the SEC should have properly introduced this new policy as a formal rule, adhering to the established regulatory processes and protocols, thereby ensuring appropriate legislative oversight and adherence to procedural norms.

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