Janet Yellen says crypto-currencies are not sufficiently regulated and FTX’s collapse is a “Lehman moment”

U.S. Treasury Secretary Janet Yellen says the collapse of crypto-currency exchange FTX shows that the crypto-currency industry “really needs proper regulation.“She adds, “This is a Lehman moment within crypto, and crypto is important enough that we have had substantial damage with investors.“

Treasury Secretary Janet Yellen on the FTX implosion and the need for proper regulation of crypto.

U.S. Treasury Secretary Janet Yellen spoke about the need for proper regulation of crypto-currencies following the collapse of crypto-currency exchange FTX at a New York Times Dealbook event Wednesday. She stated:

I was skeptical, and I remain quite skeptical.

While stressing the importance of ensuring that crypto-assets have adequate protections for customers, the Treasury Secretary noted that it is also important to remain open to financial innovations, especially those that could reduce cross-border transaction costs and help improve financial inclusion.

Janet Yellen then commented on the collapse of FTX, which filed for bankruptcy on November 11. The crypto-currency exchange owes its top 50 creditors more than $3 billion, and an estimated one million customers and other investors face billions of dollars in total losses due to its collapse. She stated:

I think everything we’ve been through in the last two weeks, but also before, shows that this is an industry that really needs proper regulation. And it doesn’t.

The Treasury Secretary also revealed that the U.S. is discussing the regulation of crypto-currencies with its allies and that the Treasury Department has identified concerns “important” regarding crypto-currencies. She noted that protecting customer assets and segregating those assets are among the top priorities.

Janet Yellen compared the FTX implosion to the collapse of Lehman Brothers. The investment bank filed for Chapter 11 bankruptcy protection in 2008, triggering a huge stock market downturn and leading to a $700 billion bailout by the U.S. government. Janet Yellen described:

This is a Lehman moment within crypto, and crypto is big enough that we had substantial damage with investors.

Nevertheless, she noted that the collapse of FTX “did not spill over into the banking sector“, pointing out that “banking regulators have been very cautious about crypto.“

Earlier this month, Janet Yellen said that the FTX failure reinforced her view that the crypto market requires “very careful regulation“, noting that “this shows the weaknesses of the whole sector.“She explained, “In other regulated exchanges, you would have segregation of customer assets. The idea that you could use customer deposits from an exchange and lend them to a separate company that you control to make leveraged and risky investments – that would not be something that would be allowed.“