US Treasury Secretary Janet Yellen Warns of Risks from Crypto and AI
The finance sector is undergoing a digital transformation, prompting U.S. Treasury Secretary Janet Yellen to express caution regarding its implications. At a recent event, Yellen highlighted the risks associated with crypto assets and digital innovations that could threaten the stability of the U.S. financial system.
In 2024, while the U.S. economy appears stable due to lower inflation and low unemployment, challenges persist, particularly related to cryptocurrencies and a fragile commercial real estate market.
Cryptocurrency: Innovation Without Limits?
Yellen noted that crypto assets have transitioned from niche investments to significant market players. Despite their potential benefits in facilitating faster payments and cross-border transactions, such as stablecoins pegged to the U.S. dollar, she cautioned against their capacity to destabilize traditional financial systems.
Stablecoins, in particular, lack a clear regulatory framework, which Yellen believes could create vulnerabilities in the global financial landscape. She urged lawmakers to implement federal legislation to regulate stablecoin issuers, emphasizing the need for oversight in line with technological innovation to maintain U.S. leadership in digital finance.
Yellen's concerns also encompass artificial intelligence (AI), which is transforming finance through algorithmic trading and risk assessments. However, she warned that AI poses significant risks, including exacerbating biases in lending practices. The Financial Stability Oversight Council (FSOC), under her leadership, indicated that opaque AI systems could worsen discrimination.
Additionally, AI may heighten risks in cryptocurrency markets by automating complex decision-making processes. A report from Bitget Research suggested that crypto investors might face losses totaling $25 billion in 2024 due to deepfake scams and AI-related threats.
Yellen advocates for a balanced approach to foster innovation while managing associated risks. She calls for enhanced inter-agency collaboration to monitor these developments proactively.
Navigating Crypto's Regulatory Horizon
As the Biden administration concludes its term, Yellen emphasizes the urgency of establishing clear regulations for cryptocurrencies, warning that the absence of such laws leaves the U.S. susceptible to volatility in the digital market.
The rapid growth of risks—from Decentralized Finance (DeFi) platforms to unregulated crypto exchanges—exceeds the pace of regulatory responses. These risks include increased fraud, cyber threats, money laundering, and systemic instability.
As Yellen prepares to depart from her role, she leaves a framework for future financial regulation, highlighting the importance of balancing digital innovation with maintaining financial stability.