A few days ago, incoming U.S. Treasury Secretary (and former Federal Reserve chair) Dr. Janet Yellen addressed the Senate and discussed numerous economic topics. She was asked to discuss her views about “safeguards and regulations for digital and cryptocurrencies.” Her response provides some clues as to what the future of crypto may look like under the new administration.
On the positive side, Yellen replied “I think it’s important we consider the benefits of cryptocurrencies and other digital assets, and the potential they have to improve the efficiency of the financial system.” Conversely, she added, “I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities. If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.”
The fact that she notes the benefits of crypto is certainly more encouraging than having someone who is singularly hostile towards digital currencies. Another promising development is the likely nomination of Michael Barr to lead the Office of Comptroller of the Currency. Barr previously served as Under Secretary of the Treasury and was an advisor for 2 years at crypto firm Ripple Labs. The crypto and fintech communities are rooting for a crypto-friendly chair for this important agency, so Barr is seen as an ideal candidate by many.
However, Yellen’s desire to ‘encourage’ legitimate usage of crypto, as noted in her above-noted Senate testimony is most concerning. Of course, there are certain clear instances of right and wrong uses of any forms of currency. However, problems are more likely to arise when government agencies get involved in encouraging (aka controlling) how crypto is used. The results of this intervention in free markets become unpredictable in a wide range of gray areas.
In general, once government agencies are given the green light to regulate an area of commerce, the tendency is for them to increase regulations beyond their original mandate. While we can all agree that using crypto in ways that hurt people is wrong, the question of what the government considers a legitimate use can become challenging.
For instance, the evolution of DeFi and smart contracts has given rise to new opportunities in finance which never existed previously, such as flash loans on the crypto platform Aave. These loans require no collateral (and no credit check) and allow developers to borrow enormously large amounts of crypto as long as the entire loan plus interest are repaid in a single block transaction, i.e. a flash of a few seconds. A flash loan is issued when a developer codes a smart contract with the sequence of steps in an arbitrage that demonstrate how the flash loan will get repaid.
For example, last year one developer earned approximately $350,000 by using a DeFi flash loan to borrow 10,000 ETH to profit on some crypto trading which followed all rules in place at the time. Some described the event as an attack, while others saw it as arbitrage – profiting from opportunities in different markets.
These kinds of situations will become increasingly more common as advancements in the crypto space expand the limits of possibilities. Government agencies would best serve the decentralized crypto community by encouraging a free market without external centralized control. This approach will allow cyrpto visionaries, like META 1 Coin, to fulfill our mission of driving abundance, freedom and equity for Humanity without external interventions.