In a comprehensive speech on regulating cryptocurrencies, Treasury Secretary Janet Yellen made the case that regulation should be based on risks, not technologies, balancing between the improvements digital assets could offer our payment system and the hazards they present.

“Wherever possible, regulation should be ‘tech neutral,’” Secretary Yellen said in a speech before American University’s Kogod School of Business Center for Innovation. “Consumers, investors, and businesses should be protected from fraud and misleading statements regardless of whether assets are stored on a balance sheet or distributed ledger.”

Yellen’s comments come after President Biden signed an executive order last month calling for a whole-of-government approach to study how to regulate crypto, tasking the Treasury with leading many of the studies. Yellen laid out her thinking and Treasury’s approach to digital assets and its work as part of the president’s order.

“I won’t predict where this work will take us, but that does not mean we are navigating without a compass,” Yellen said, referencing key lessons learned from tech throughout history. “Digital assets may be new, but many of the issues they present are not.”

U.S. Treasury Secretary Janet Yellen testifies before the House Committee on Financial Services April , in Washington, DC. Yellen spoke on the state of the international financial system during the hearing. Photo by Win McNamee Images

Yellen warned that while we should embrace its innovation, we need to ensure that the growth of digital assets does not allow calamities similar to those that emerged with the financial crisis in that lead to disproportionate impacts on the economy and financial system.

Yellen said we must be prepared for possible changes in the structure of financial markets, pointing to suggestions that distributed ledger technology could diminish concentration in financial markets.

“While this could make markets less vulnerable to the failure of any particular firm, it is critical to ensure we maintain visibility into potential build-ups of systemic risk and continue to have effective tools for tamping down excesses where they arise,” she said.

She highlighted that crypto exchanges cannot ensure that if you trade your stablecoin back into a dollar, it will be done on demand and in times of stress, potentially leading to a run on the stablecoin.

The Treasury will make policy recommendations both through regulation and legislation based on gaping risks. It is already working with Congress to push legislation forward to regulate stablecoins and tamp down on risks that could endanger the financial system.

Yellen said Treasury’s work and the administration’s studies on crypto, many of which the department is spearheading, will be studied through a prism of protecting consumers, investors, and businesses; safeguarding the financial system from risks; mitigating national security risks; and promoting the U.S. global economic leadership.

The secretary emphasized firms that hold customer assets should be required to ensure those assets are not lost, stolen, or used without the customer’s permission—something the Securities and Exchange Commission is actively working on. She also said taxpayers should receive the same type of tax reporting information on crypto transactions that they receive for stocks and bonds, so they can properly report their income to the IRS.

Digital assets have grown explosively, reaching a market cap of $ trillion last November from $ billion just five years before that. They’ve since pulled back and are around $ trillion in market cap now.

INDIA – : In this photo illustration, a Bitcoin logo seen displayed on a Smartphone with a background of American dollar currency notes. Photo Illustration by Avishek DasSO ImagesLightRocket via Images

Referencing the onset of the Internet in the early s as an analogy for crypto, Yellen said while digital assets may be relatively new, they are part of the larger trend of the digitization of finance that has been in the making for decades.

And though Yellen said advocates of digital assets believe they can help create a more efficient payment system with instantaneous transactions and lower costs, she thinks it’s too early to tell whether the technology will deliver.

“Will the technology live up to that promise? I think it’s too early to tell,” Yellen said. “Issues like processing time, cost, and technological barriers to access will need to be overcome.”

For the time being, Yellen said volatile prices of bitcoin and other cryptocurrencies have stopped them from becoming widespread payments. Yellen also cautioned high fees and slower processing times could make using cryptocurrencies as payments less practical.

“As a practical matter, you’d have a hard time using cryptocurrency to buy a sandwich or a gallon of milk,” she said, noting, however that stablecoins or potential Central Bank Digital Currencies could succeed at being more widely used as a means of exchange, raising potential benefits and risks.

In painting how the Treasury is looking at a Central Bank Digital Currency, Yellen said a CBDC could help create a more efficient payment system and could become a form of trusted money comparable to physical cash.

Yellen says the U.S. needs to consider whether to adopt a CBDC in the context of the central role the dollar plays in the world economy. The dollar is the mostly widely used currency for global trade and finance. It accounts for nearly % of one side in foreign exchange transactions and U.S. dollar-denominated assets account for about half of cross-border bank claims.

“I don’t yet know the conclusions we will reach, but we must be clear that issuing a CBDC would likely present a major design and engineering challenge that would require years of development — not months,” Yellen said. “So, I share the President’s urgency in pulling forward research to understand the challenges and opportunities a CBDC could present to American interests.”

Under the direction of the president’s executive order, the Treasury is leading a report to be published on the future of money and payments. The report will analyze design choices for a potential CBDC and implications for payment systems, economic growth, financial stability, financial inclusion, and national security.