Crypto Global

Janet Yellen's stance on cryptocurrencies

Jan 26, 2021

Back in 2018, the former Federal Reserve Chairwoman and future Treasury Secretary Janet Yellen said she was "not a fan" of the abundance of cryptocurrencies. Since then, Yellen has been able to soften her tone a bit, as the Federal Reserve may be investigating the development of its own stable coins. During a hearing last week, however, Yellen said again that one really needs to look at cryptocurrencies and investigate that they are being used for illegal activities.

Janet Yellen offered the Senate a more nuanced view of crypto, and it was communicated this way: "...while cryptocurrencies can be used to finance terrorism and other illicit activities, they also have the potential to “improve the efficiency of the financial system." That seems pretty reasonable. Of course, the same rules should apply to the crypto world as to the fiat world. However, cryptocurrencies are not bad per se, but are used, among other things, for illegal business. The same applies to fiat currencies.

We would like to remind you again that if Bitcoin is banned in one country, it gives a big advantage in other countries where it is still legal. In short, the Bitcoin ban is like banning the internet. If you try to ban the Internet, you are likely to have a major technological disadvantage compared to other countries. So that is the basic background. Money as well as wealthy people are very mobile and can move anywhere. Bitcoin is even more of a mobile good because you can memorize the private key by remembering the 12-seed recovery phrase and go anywhere in the world with it.

Recently, there have been many studies showing that the number of illegal transfers in Bitcoin used to be much higher than it is today. Bitcoin is a completely open, transparent ledger. If you want to "launder" money, it is better to do so with suitcases full of fiat currencies. And that's simply because you can do a "chain analysis" with Bitcoin. And if you have data from the real world about someone who can be linked to a public address, you can follow the path of that bitcoin. Many people have gotten into trouble this way because they have engaged in illegal activities.

The basic game theory of Bitcoin is that you want to hide Bitcoin as well, regardless of whether you are a company, an institution or an individual. Even if you are a country or a central bank. For this and other reasons, one of the main use cases of Bitcoin is to hedge against current central bank guidelines. If we already had some good form of fiat money, Bitcoin would be superfluous.

The only thing that really bothered us about Janet Yellen's comments - however, we don't think this will ever happen - is her terrible suggestion, namely the possibility of taxing unrealized capital gains through a "mark-to-market" mechanism. Typically, in the US, until the end of the year, capital gains tax is not paid until after the stock, bond, or bitcoin is sold. For example, if you bought a stock for $100 earlier in the year and it had risen to $200, you would say you had an open, unrealized capital gain of $100 that was taxable. We believe this would be devastating to the stock market, and it's also hard to imagine Wall Street would allow such a thing to happen.