Sen. Elizabeth Warren (D-MA) asked Treasury Secretary Janet Yellen to consider regulating cryptocurrencies.
Writing to Yellen, who is chair of the Financial Stability Oversight Council, Warren said that the rising popularity of cryptocurrencies — which are not controlled by any central bank or other monetary authority — demands federal regulation.
The lawmaker’s letter explains:
I have become increasingly concerned about the dangers cryptocurrencies pose to investors, consumers, and the environment in the absence of sufficient regulation in the United States. However, as the demand for cryptocurrencies continues to grow and these assets become more embedded in our financial system, the Council must determine whether these trends raise concerns beyond investor and consumer protection and extend to broader systemic vulnerabilities that could threaten financial stability.
Warren noted that 27% of hedge funds have cryptocurrency holdings, while banks’ holdings of digital assets create “liquidity, credit, market, and operational risks.” She also pointed to vulnerabilities introduced by “decentralized finance,” by which users can “engage in a variety of financial activities — including lending, borrowing, and trading derivatives to take on leverage — without an intermediary like a bank.”
The letter continues:
These examples demonstrate the extent to which cryptocurrencies currently touch or can ripple through nearly every corner of the financial system. As such, it is essential that the policy response to the risks posed by these assets is coordinated and holistic, rather than fragmented amongst individual financial agencies…
FSOC should review this matter and determine whether it is appropriate to utilize its statutory authority to contain the systemic risks posed by the growing cryptocurrency market. The longer that the United States waits to adapt the proper regulatory regime for these assets, the more likely they will become so intertwined in our financial system that there could be potentially serious consequences if this market comes under stress.
Beyond the Biden administration, policymakers in the Federal Reserve have their eye on the growing cryptocurrency market.
During a congressional hearing two weeks ago, Fed Chair Jerome Powell explained that the central bank is weighing the creation of a “digital dollar” that would replace cryptocurrencies and stablecoins, which are digital assets that peg themselves to another asset such as gold or the dollar.
Central bank digital currencies are in various stages of development and implementation in nations such as China, Ecuador, Thailand, and Saudi Arabia. CBDCs mimic cryptocurrencies — such as bitcoin, ethereum, and dogecoin — through their use of blockchain technology, with the potential added benefits of stability and widespread acceptance. However, users of CBDCs could lose the benefits of the decentralization offered by other cryptocurrencies.