Janet Yellen, President-elect Joe Biden's nominee for treasury secretary, suggested on Tuesday that lawmakers "curtail" the use of cryptocurrencies such as bitcoin over concerns that they are "mainly" used for illegal activities.
There has been a surge in interest in bitcoin; its price has soared by about 300% in the past year. Bitcoin was down 7.59%, to $34,183.57, on Wednesday, while Ethereum was down 9.74%, to $1,259.97, after hitting an all-time high of more than $1,430 on Tuesday.
Yellen's comments suggested the incoming Biden administration could be hostile to cryptocurrencies and ramp up regulation. Watchdogs around the world, from the European Central Bank to the UK's financial regulator, have recently expressed concerns about cryptocurrencies like Bitcoin.
Sen. Maggie Hassan asked Yellen during her confirmation hearing on Tuesday about the dangers of terrorists using cryptocurrencies.
"You're absolutely right that the technologies to accomplish this change over time, and we need to make sure that our methods for dealing with these matters, with terrorist financing, change along with changing technology," Yellen said.
"Cryptocurrencies are a particular concern. I think many are used - at least in a transaction sense - mainly for illicit financing.
"And I think we really need to examine ways in which we can curtail their use and make sure that money laundering doesn't occur through those channels."
Yellen's comments echoed those of ECB President Christine Lagarde, who said last week that Bitcoin had been used for some "totally reprehensible money-laundering activity."
Major investors have expressed similar worries. Warren Buffet said last year that "Bitcoin has been used to move around a fair amount of money illegally." He said investors should "go short suitcases," as criminals would no longer need them to carry cash.
Cryptocurrencies are digital currencies that have no physical form and are not controlled by a centralized authority such as a central bank. This means they are largely unregulated and untraceable, making them appealing to criminals.
But their advocates say the lack of central control makes them attractive in other ways. For example, they argue that Bitcoin can protect against the debasement of national currencies when central banks launch huge stimulus programs.
Bitcoin bulls are hugely excited by the recent jump in the cryptocurrency's price.
"The king of crypto is the base layer for an emerging alternative financial system," said Paolo Ardoino, the chief technology officer at the crypto exchange Bitfinex.
"Bitcoin is providing a solid foundation for a staggering array of projects, some of which will fundamentally change the nature of money by the end of the decade," Ardoino added. Bitcoin products include funds and options.
Regulators have urged caution. Earlier this month, the UK's Financial Conduct Authority said that people who invest in cryptocurrencies like Bitcoin and Ethereum could well "lose all their money."