What Janet Yellen Gets Wrong About Bitcoin

In brief

• Treasury Secretary Janet Yellen made negative comments about Bitcoin using too much energy and being primarily used for illicit transactions.

• Critics say her energy consumption critique relies on a faulty comparison to legacy payment systems.

• There's little evidence that Bitcoin is a main channel for illicit activity.

Janet Yellen has again blasted Bitcoin, but critics say several of her assumptions about the cryptocurrency are inaccurate.

At the New York Times‘ DealBook DC Policy Project today, the US Treasury secretary reiterated to journalist Andrew Ross Sorkin that she’s no big fan of Bitcoin, this time taking aim at its energy consumption and potential use for illicit financing.

“I don‘t think that Bitcoin is widely used as a transaction mechanism,” Secretary Yellen said in response to a question about whether the Treasury Department needed to be paying more attention to the asset. “To the extent it’s used, I fear its often for illicit finance.”

The illicit finance line is an old saw, but it isnt backed up by much in the way of hard data, said Anderson Kill partner Hailey Lennon for Forbes last month. According to blockchain tracking firm Chainalysis, criminal activity accounted for 0.34% of cryptocurrency transaction volume, down from 2.1% in 2019. And a Rand Corporation report noted that “an estimated 99 per cent of cryptocurrency transactions are performed through centralised exchanges, which can be subject to AML/CFT regulation similar to traditional banks or exchanges.”

Moreover, Coin Metrics co-founder and chairman Nic Carter told Decrypt, “She can't just brazenly assume that $10b/ day of transactions are invalid.”

He pointed out that Bitcoin isnt just for buying things. “Exchange transactions which are normally written off by critics could represent anything”—from remittances to international trade.

But Yellen had more to say about Bitcoin.

“It‘s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering,” said the Treasury Secretary, who has supported policies such as a carbon tax.

That statement seems geared toward towing President Bidens line on climate policy. Biden has emphasized addressing climate change to a far greater degree than his predecessor, Donald Trump, naming former secretary of state John Kerry as special presidential envoy for climate.

But, Carter pointed out, the transactions arent the energy-intensive part of Bitcoin mining. Issuing new Bitcoins as part of the mining process and, to a lesser extent, maintaining consensus are what use energy.

Although that might seem like splitting hairs to passive observers, who see BTC transactions and issuing Bitcoins as all part of a single networks operating costs, Carter told Decrypt that comparing Bitcoin to a legacy payment system is problematic.

“In the long term it doesnt make sense to compare today's energy expenditure—which is primarily issuance driven—to a fee-based expenditure, which will have different dynamics.” Because 18.6 million of the total 21 million BTC have already been issued, energy expenditures should go down over time.

Further into the interview, Yellen warned that Bitcoin is a “highly speculative” and “extremely volatile” asset. Well, given that the currency experienced its biggest-ever price drop today, shedding about 20% of its value in about an hour, well, well give her that one.