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November 3, 2022

National Security Risks of Digital Assets

Better Markets filed a comment letter with the Department of Treasury regarding National Security Risks of Digital Assets.

Why It Matters. The growth and proliferation of digital assets has provided bad actors with a new and efficient means to engage in illicit financial activities, such as sanctions avoidance, money laundering, terrorist financing, and consumer fraud. Such activities using digital assets have been increasing significantly and rapidly. Additionally, the recent the $2 trillion collapse of crypto assets and the crypto carnage caused massive losses for investors, failed crypto companies, and so-called stablecoins proving they are actually un-stablecoins. However, there was no systemic instability or taxpayer bailouts because digital assets have largely been kept out of the traditional financial sector and have not grown large enough to compete with it. That may not always be the case.

What We Said. An increased usage of crypto assets by consumers and businesses could undermine the banking system by draining banks of deposit funding and loan demand. Ultimately, if this were to happen, it could reduce the provision of credit to our economy, make that credit more expensive, and increase overall systemic risks. Additionally, the level of risks for crypto asset companies and activities inherently are much higher due to the nature and design of crypto assets, which compounds and complicates risks.

Bottom Line. Allowing innovation and use of digital assets to continue to grow without appropriate controls, laws, and regulations in place would increase the amount of these activities and pose a serious threat to national security and the security of the American public. This importantly includes the risks to the functioning of our financial system and its ability to support the productive economy.

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