The Breakdown - Janet Yellen’s Shifting Tone on Crypto

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, April 12th, and today we are recapping Janet Yellen's speech about crypto from last week and what it means in the context of the industry. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it wherever you listen to podcasts, give it a rating, give it a review, or if you want to get deeper into the conversation, come join us on the breakers discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. Now, as we dig into this topic, you may be asking yourself, wait a second, it's Tuesday. We just got the inflation print for last month, and it was really, really high. Why are you not talking about that? The short answer is that there are two answers. The first is that I'm on the last day of some travel and had this show prepared and needed to do it this morning just based on time

Starting point is 00:01:20 constraints. But the second answer is that there are a lot of really interesting narratives and counter-narratives flying around right now. People were really, really ready to be super, super upset at this inflation print. And there were a lot of folks who were wondering if we were going to actually hit double digits. Now, in the minutes after the inflation print has come in and hit almost exactly what consensus predictions were, with month-over-month CPI being even lower than expected, there's now a ton of jockeying for the narrative. And I want to give it a little bit of time to settle so that when I bring you that show tomorrow, the narrative battle lines are a little bit more clearly drawn. I think that's going to be the most valuable show. Also, for what it's

Starting point is 00:02:02 worth, I think that this speech was actually quite significant from Yellen, so I did want to make sure that we took some time to get into it. So this speech came from American University last Thursday, and it had no title. It was just Janet Yellen on digital assets. And the TLDR that I'd like to convey on this speech is that it marks a shift in tone from Janet Yellen, the Treasury Secretary of the United States, of course. While Yellen has always previously given some amount of lip service to the potential for digital asset innovation, the tone from her speeches, her public comments, has always been about needing to wrangle it, to get it within the government's purview, to fight the crime around it. In fact, I think you could argue that at the beginning of the

Starting point is 00:02:42 administration, she did a lot of work to resuscitate that crypto is for criminals' narrative. Something now has clearly shifted, and I think there are a couple possibilities. The first is, of course, the Biden executive order. It has set a different type of tone for the administration overall, and there's probably some amount of getting in line with that. The second is the Russian war in Ukraine. The Treasury Department has, in the context of this conflict, had to go deep into on-chain analysis as relates to sanctions and have come out publicly over and over again, saying that crypto isn't being used for sanctions evasion. There's been a sense in the crypto industry for a while that the national security apparatus

Starting point is 00:03:21 of the United States has long been much more fine with the state of blockchain traceability than perhaps other offices have. And maybe that line of thinking is winning in the context of an applied situation where people's worst fears about crypto aren't being realized. Anyway, let's get into the specifics and then we'll come back to this discussion

Starting point is 00:03:40 about why this change might have happened. So the setup of the speech is basically the executive order itself. Yellen says that we're going to be spending the next six months exploring the digital asset space guided by six policy objectives, protecting consumers, investors, and businesses,

Starting point is 00:03:55 safeguarding financial stability from systemic risk, mitigating national security risks, promoting U.S. leadership and economic competitiveness, promoting equitable access to safe and affordable financial services, and supporting responsible technological advances, which, quote, take account of important design considerations like those related to privacy, human rights, and climate change. Now, an important part of this intro section is that she also upsizes the narrative of crypto by connecting the dots to larger internet changes. She says digital assets may be relatively new, but they are part of a larger trend, the digitization of finance that has been in the making for decades.

Starting point is 00:04:32 In 1990, there were fewer than 3 million internet users. Now there are about 4.5 billion, and we take for granted that many aspects of our financial lives can be managed from small internet-connected devices that fit into the palms of our hands. Again, if you're trying to diminish crypto, you don't make that explicit connection to the larger internet trend. You just sort of view it and try to isolate it in its own terms. From there, Yellen constructs the speech around five lessons. She says, I won't predict where this work, the work of the next six months around the executive order, will take us, but she says that does not mean we are navigating without a compass. And here are her five lessons. The first is one,

Starting point is 00:05:09 our financial system benefits from responsible innovation. There are two important things that she does in this section. The first is recognizing the importance of private sector innovation on the financial system. She says in the 1960s, an engineer from IBM attached a magnetic strip to a plastic card and sparked a new category of payment products. Those innovations facilitated the growth of other technologies like ATMs, which made cash available 24-7. More recently, computers, the internet, and mobile phones have driven the explosive growth of electronic payments and online commerce. One of the arguments that you hear most consistently from advocates for crypto and digital assets role in the larger financial system is this recognition that in the U.S., financial innovation

Starting point is 00:05:52 has tended to come from the private sector and then be absorbed in some way meaningfully into the public sector. This is something that Jeremy Aller from Circle talks about constantly. Yellen is giving lip service, at least, to that sort of sentiment. The other important part of this first section is that it is an explicit recognition of some of the problems of the existing system. She says that transactions take too long to settle and calls it a combination of technological factors and business incentives that have, quote, produced a common frustrating experience shared by tens of millions of Americans every week. Their employer sends the paycheck, but it takes up to two days for the check to hit their bank

Starting point is 00:06:28 account. The cost of that is, of course, payday lenders. And Yellen points to estimates that Americans spend $15 billion or more, which she calls a tax of about $100 per working American due mostly to inefficiency and disproportionately borne by people with lower incomes. She also makes the jump from those payday lenders in America to the challenges of intermediaries in the context of remittances as well. Again, one shift here is that in the past, you've seen some of the official institutions of power actually reify and validate the importance of intermediaries in the financial system. And while Yellen hasn't turned away from that entirely, she's definitely identifying that there are some intermediaries who should be disrupted.

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Starting point is 00:08:32 fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. Her second lesson that she thinks can help serve as a compass as the government figures out its digital asset strategy is, too. When regulation fails to keep pace with innovation, vulnerable people often suffer the greatest harm. This section, I like a lot less. She says, we learned this painful lesson during the global financial crisis. Financial institutions called shadow banks and explosion of new financial products allow dangerous levels of risk to accumulate.

Starting point is 00:09:19 She's not wrong that there were a set of dangerous new financial products, but it wasn't just from shadow banks. It was from the most vaunted and storied and prominent institutions in U.S. finance writ large. Still, the legacy of the great financial crisis looms large. She says the S&P 500 fell by more than half and household net worth dropped precipitously. The resulting economic distress was most acute and long-lasting for black Americans and other Americans of color. We need to ensure that the growth of digital assets does not allow similarly dangerous risks to emerge or lead to disproportionate impacts to vulnerable communities. And then she makes what I think is the most arguable statement in the entire piece.

Starting point is 00:09:55 She's talking about the systemic risks of stablecoins and says this is not hypothetical. A stable coin run occurred in June 2021, when a sharp drop in the price of the assets used to back a stable coin set off a negative feedback loop of stablecoin redemptions and further price declines. Blockwork says the Treasury Secretary was presumably referring to Iron Finance's Titan token, which fell to near zero from a high of $65 in mid-June 2021 after the Iron Stablecoin lost its peg to the U.S. dollar. It's not that I think it's illegitimate to look at a very small asset's crazy death spiral as a risk factor in the crypto industry or the stablecoin space specifically. What I take issue with is the way that it's set up clearly to make people think that she's talking about Tether or USDC or one of these other multi-billion dollar stablecoins, which just isn't the case. Still, I think if we're just looking at this in the context of this speech, it's very clear that stable coins are still in the skeptical spotlight. But then we get back on track in this positive shift in tone. Bullet three, regulation should be based on risks and activities, not specific examples.

Starting point is 00:11:01 She says, wherever possible regulation should be tech neutral. For example, consumers, investors, and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger. Similarly, firms that hold customer assets should be required to ensure those assets are not lost, stolen or used without the customer's permission. And taxpayers should receive the same type of tax reporting on digital asset transactions that they receive for transactions and stocks and bonds, so that they have the information they need to report their income to the IRS.

Starting point is 00:11:29 This doesn't seem bullish outwardly, but it actually is quite meaningful. This is a principle that puts crypto and digital assets on an equal footing with financial assets, and in that way says that they are no worse than those assets. There is also an implicit and explicit focus in this section on prosecuting bad actors rather than targeting the industry as a whole. The principle of tech neutrality, she says, is also applicable to concerns related to tax evasion, illicit finance, and national security,

Starting point is 00:11:57 topics that are particularly pertinent in the world today. It's illegal to evade taxes, launder money, or avoid sanctions. It doesn't matter whether you're using checks, wires, or cryptocurrency. This is something that crypto advocates have been saying forever, that these behaviors are the things that are criminalized and people can use any asset to launder money. In fact, the U.S. dollar is the world's most popular asset for laundering money. To me, this section feels like the one that has had the biggest shift based on what they've seen and learned during the sanctions affair around the Russia-Ukraine war. Bullet 4. Sovereign money is the core of a well-functioning financial system and the U.S.

Starting point is 00:12:32 benefits from the central role of the dollar and U.S. financial institutions play in global finance. This section starts with a four-paragraph reflection on the history of the U.S. monetary system, but I think the real thing here is that Yellen and the administration are getting more comfortable just being clear about the real context for central bank digital currencies, which is the role of the dollar in the world. Quote, the dollar's international prominence is strongly supported by U.S. institutions and policies, U.S. economic performance, open deep in liquid financial markets, rule of law, and a commitment to a free-floating currency. As citizens of this country, we derive significant economic and national security benefits from the unique role the dollar

Starting point is 00:13:09 in U.S. financial institutions play in the global financial system. The president's executive order asks us to consider whether and how the issuance of a public CBDC would support this role. The fifth bullet is we need to work together to ensure responsible innovation, and it's sort of not as significant as the other ones, except in the point where the U.S. government is now positioning itself as something of a neutral arbiter between the people who are skeptical of crypto and the people who view it as radically and beneficially transformative. Indeed, they say, quote, such divergence of perspectives has often been associated with new and transformative technologies, which to me suggests that they lean inherently towards the positive side. So I gave you my take right at the beginning

Starting point is 00:13:49 in terms of what I think it reflects as a shifting in tone, but let's see what some others in the community think. Jake Chivinsky, the head of policy at the Blockchain Association, said Secretary Yellen gave a speech on crypto today and it was dot-da-dot really good. She showed a nuanced understanding of the benefits and risks of responsible innovation, a firm to tech-neutral approach to regulation, and clearly isn't trying to rush hasty new rules. Kristen Smith, who's the executive director of the blockchain innovation, has a similar take, saying transformative isn't a word you often hear from government officials talking about crypto, but Secretary Yellen defined her view on digital assets that way in a speech today. In our view, it's vital and necessary that

Starting point is 00:14:25 Treasury speaks on these issues, but if you're in the skeptic to anti-crypto crowd, this speech, plus the Biden executive order should provide a nudge away from Fudd and into the camp of those who would like to see crypto thrive in the U.S. Tony Edward, the founder at Thinking Crypto News, says with Biden's crypto executive order, Janet Yellen now focused more on innovation than FUD, Gary Gensler asking other regulatory agencies for help, and Senator Lummis and Gillibrand's bill, we are seeing Senator Warren and Brad Sherman being disarmed. We're moving in the right direction. Now, I don't want to overstate the positivity here. There are still a lot of critiques, questions, inherent criticisms, this is far from a full-throated embrace of digital assets. What's more, we still have

Starting point is 00:15:05 the lingering question about how much the central bank digital currency discussion is going to subsume and overwhelm the private, non-sovereign, peer-to-peer cryptocurrency discussion. There are big assertions that I disagree with, like those that I pointed out around stable coins, but with all of that said, the shift in tone is real. I didn't even mention it, but she talked at length about Satoshi's innovation solving the double spend problem. and acknowledging what that opens up as possibilities for a less intermediated system. To me, it reinforces that we are in a very liminal in-between moment when it comes to crypto policy in the United States. There is still a lot of push and pull and give and take

Starting point is 00:15:45 and a lot of opportunity to drive things in a beneficial way. Anyways, I'll wrap there, guys. Like I said, I'm really excited to dig into the inflation stuff with you tomorrow, but I do think this was the Treasury Secretary of the United States, having, if not a 180, still a meaningful shift in tone around the digital asset space. And I think it was worth going in depth. So either you agree or you didn't and you want your 20 minutes back, but I can't help you there and I can only say that I appreciate you listening. I want to say one more quick thanks again to my sponsors, nexus.io, Arculus and FTX.

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The Breakdown - Janet Yellen’s Shifting Tone on Crypto

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