Janet Yellen pushes for new legislation to strengthen regulation of crypto and AI

Treasury Secretary Janet Yellen is urging Congress to implement stricter regulations for cryptocurrencies and to remain vigilant about the use of artificial intelligence (AI) in financial services. She made these remarks during her latest testimony before the Senate Banking, Housing, and Urban Affairs Committee on Feb. 8.

The testimony was part of the Financial Stability Oversight Council’s (FSOC) annual report, where Yellen highlighted the increasing complexity and potential risks within the digital asset sector and the financial industry’s growing reliance on AI technologies. Her statements echoed her sentiments from a Congressional hearing a few days earlier and her overall stance on the sector.

Yellen also addressed broader concerns, including the impact of climate change on financial stability, particularly in the insurance sector, and the strategic challenges posed by U.S. technological investments potentially benefiting foreign military advancements.

Regulatory Gaps

The FSOC, created after the 2008 financial crisis to identify and mitigate systemic risks, is now focusing on the rapid evolution and challenges posed by digital currencies and the digitalization of financial markets.

Yellen expressed specific concerns about stablecoins, digital currencies pegged to traditional assets like the dollar, citing their vulnerability to sudden withdrawals that could trigger financial instability. She emphasized the need for transparent regulatory frameworks to oversee these and other digital assets in order to protect against market manipulation and fraud.

Yellen also highlighted the dual challenges of ensuring financial stability and combating illicit finance through digital platforms. She referenced the use of digital currencies by terrorist organizations to funnel funds and emphasized the need for updated regulatory tools to effectively combat these threats.

Yellen proposed enhancing the Treasury’s capabilities through legislative support to address the regulatory gaps that have emerged in the digital age.

AI in Financial Services

The discussion with Senate members also delved into the use of AI and its implications for the financial sector.

In response to inquiries from committee members, Yellen acknowledged AI’s potential to introduce systemic vulnerabilities and called for a proactive approach to understanding and mitigating these risks.

She emphasized the importance of financial institutions and regulatory bodies enhancing their knowledge and monitoring systems to stay ahead of potential AI-induced market disruptions.

Yellen’s call to action reflects a growing consensus on the need for comprehensive legislative frameworks to address the multifaceted risks presented by the digital economy and the integration of advanced technologies in finance.

As digital assets continue to integrate into mainstream financial systems and AI technologies advance, Yellen’s testimony highlights the critical importance of evolving regulatory measures to safeguard financial stability and national security in an increasingly interconnected world.

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