Janet Yellen, the OCC, Bitcoin and banking

Janet Yellen’s recent confirmation as President Joe Biden’s Treasury Secretary opens up an era of great challenges and even greater opportunities for Bitcoin. 

Yellen’s recent comments as recorded in her Senate confirmation hearings were widely reported as posing an extremely negative outlook for cryptocurrencies. 

Selective reporting of Yellen’s comments around 20 January 2021 focused, of course, on the gloomy and the pessimistic. 

Bearish headlines like this, from influential tech publications Ars Technica and WIRED — “Janet Yellen Will Consider Limiting the Use of Cryptocurrency” — caused a stir as they were picked up worldwide.

When questioned by Senator Maggie Hassan about the crypto’s use in terrorism and illicit financing, Yellen responded: “Cryptocurrencies are a particular concern. I think many are used — at least in a transactions sense — mainly for illicit financing. [I would like to] examine ways in which we can curtail their use and make sure that doesn’t occur through those channels.”

The comments as reported sent a shockwave through the crypto community. 

bitcoin dumps

In the days that followed, Bitcoin witnessed a 16% price correction from around $36,000 to almost $30,000.

In truth, this had been coming. Bitcoin’s incredible bull run from $10,500 in mid-October 2020 to more than $40,000 by 8 January 2020 had occurred without substantial price retracement. So a healthy correction and retesting of support was well overdue. 

And as cryptocurrency hedge fund manager Anatoly Crachilov told The Guardian: “Any price correction, however deep, is just an interim datapoint in the structural multi-year growth of this asset class.” 

As an aside,  the extent to which cryptocurrency is used in illegal activity is widely disputed. In fact, on-chain analysts Chainalysis revealed on 19 January 2021 that cryptocurrency’s use in criminal acts actually fell 83% between 2019 and 2020, to just 0.34% of transactions. 

Blockchain analysis remains something of an arcane art which is not often followed by the financial old guard, so that these figures have not yet permeated the Federal Reserve is perhaps not surprising.

Of greater interest were Janet Yellen’s wider comments about cryptocurrencies. A much more positive spin emerged as journalists dug deeper into her actual statements, beyond the initial rush of pessimistic headlines. 

Bitcoin and other digital and cryptocurrencies are providing financial transactions across the globe,” she told the Senate committee hearing. 

Like many technological developments this offers potential benefits for the US and our allies. 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.”

What a difference a couple of days makes. 

going over the OCC

One of the most significant points missed by some observers is that Bitcoin and cryptocurrencies welcome, not avoid, regulatory scrutiny. 

And parsing Yellen’s text it appears obvious that the “benefits…to improve the efficiency of the financial system” refers to stablecoins and recent rulings from the US federal banking regulator on their use. 

Earlier in 2020, and again just a couple of weeks before Yellen took the stand, the Office of the Comptroller of the Currency (OCC) had bombshell guidelines that firmly embedded stablecoins and cryptocurrencies into the financial architecture of the US banking system. 

It began in June last year with Interpretive Letter 1170, which ruled that federally regulated banks could custody cryptocurrency. 

Then on 4 January 2021 came perhaps the most significant regulatory update to hit the industry in a decade. OCC Acting head Brian Brooks released Interpretive Letter 1174. This allows banks to participate as nodes in blockchain networks and to use stablecoins for payments settlement. 

The guidance letter makes the point that the market demand for faster and more efficient payments using blockchains is increasing. And that stablecoins could pose a brilliant solution, tying together the stability of sovereign fiat currencies and the “efficiency, speed, low cost and interoperability” of cryptocurrencies. 

“Our letter removes any legal uncertainty about the authority of banks to connect to blockchains and thereby transact stablecoin payments on behalf of customers,” said the OCC. It is this kind of regulatory clarity which has lit a fire under Bitcoin markets in recent months. 

As entrepreneurs and business owners can attest: clear and unambiguous language from regulators for any industry helps shape all legal business policy and creates wealth, jobs and fortunes alike. 

So: the structural underpinning of a bullish Bitcoin outlook hangs not just on the words of one (admittedly extremely powerful) person, but a seismic change in the way that the mainstream financial system views and interacts with cryptocurrences and cryptoassets. Nowhere is this more clear to see than in these OCC rulings. 

what the future holds

More US economic aid is on the horizon, beginning with a potential $1.9 trillion Covid relief package for business and consumers. 

With interest rates at historic lows, the smartest thing we can do is act big,” Yellen told Committee chairman Senator Chuck Grassley in her opening statement.

Interest rates will stay at historic lows worldwide for years to come. This is no simple conjecture. The Bank of England’s monetary policy committee, for example, moved to hold British interest rates at 0.1% in December 2020, has said it could institute negative interest rates in 2021 in line with the European Central Bank and the Bank of Japan, and has added that it will continue its record £745bn quantitative easing plan. 

This lack of return on cash will continue to push more money into the stock market and indeed any highly liquid asset class that yields more than 0.1%. Today, that means bonds, and to a far greater extent, Bitcoin.  

infinite QE vs bitcoin scarcity

Looking wider, let’s briefly consider the notorious claim made by the head of the Federal Reserve Bank of Minneapolis, Neel Kashkari, in a March 2020 interview. These words reverberated around the world as Kashkari spoke to the investigative programme CBS 60 Minutes: “There is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system.” 

Less than a day after Kashkari’s norm-breaching interview, the Fed announced it would carry out open-ended buys of US Treasuries and mortgage backed securities “in the amount needed”. To onlookers and analysts, this effectively translated to never-ending quantitative easing (QE) and spawned a slew of memes about the Fed’s infinite money-printer.

The Federal Reserve’s balance sheet has exploded in the months since, and could soon reach $10 trillion, more than double the peak it hit in the wake of the 2008-2009 financial crisis. This, remember, was the very same crisis that heralded the creation of cryptocurrency in the first place. 

With no significant plans in place to every pay off this massive money-printing exercise, Bitcoin — with its inherent scarcity — could not be better placed to profit. 

At the same time, Kashkari himself has wasted no time tearing into cryptocurrencies as a “giant garbage dumpster fire”.

Yellen will have to work with outspoken critics like Kashkari, as he was reconfirmed for a five-year term as the president of the Minneapolis Federal Reserve on 21 January 2020, along with the rest of the Federal Reserve Board.

But our prediction? Bitcoin will outlast Kashkari and the naysayers. Whether the doom-mongering old guard like it or not, with the OCC’s rulings means cryptocurrencies and stablecoins are now an inherent part in the architecture of the US financial system.