    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                              THE FUTURE OF MONEY:
                                DIGITAL CURRENCY

    =======================================================================

                                    HEARING

                                   BEFORE THE

                            SUBCOMMITTEE ON MONETARY

                                POLICY AND TRADE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 18, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-111

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                   __________

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    31-510 PDF                  WASHINGTON : 2018

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                         Shannon McGahn, Staff Director
                   Subcommittee on Monetary Policy and Trade

                         ANDY BARR, Kentucky, Chairman

    ROGER WILLIAMS, Texas, Vice          GWEN MOORE, Wisconsin, Ranking
        Chairman                             Member
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    BILL HUIZENGA, Michigan              BILL FOSTER, Illinois
    ROBERT PITTENGER, North Carolina     BRAD SHERMAN, California
    MIA LOVE, Utah                       AL GREEN, Texas
    FRENCH HILL, Arkansas                DENNY HECK, Washington
    TOM EMMER, Minnesota                 DANIEL T. KILDEE, Michigan
    ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
    WARREN DAVIDSON, Ohio                CHARLIE CRIST, Florida
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 18, 2018................................................     1
    Appendix:
        July 18, 2018................................................    23

                                   WITNESSES
                            Wednesday, July 18, 2018

     Garratt, Rodney J., Maxwell C. and Mary Pellish Chair, Professor
      of Economics, University of California Santa Barbara...........     5
     Michel, Norbert J., Director, Center for Data Analysis, The
      Heritage Foundation............................................     7
     Pollock, Alex J., Distinguished Senior Fellow, R Street
      Institute......................................................    10
     Prasad, Eswar S., Tolani Senior Professor of Trade Policy,
      Cornell University.............................................     9

                                    APPENDIX

    Prepared statements:
         Garratt, Rodney J...........................................    24
         Michel, Norbert J...........................................    30
         Pollock, Alex J.............................................    39
         Prasad, Eswar S.............................................    44

                              THE FUTURE OF MONEY:
                                DIGITAL CURRENCY

                                  ----------

                            Wednesday, July 18, 2018

                         U.S. House of Representatives,
                                       Subcommittee on Monetary
                                              Policy and Trade,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2:05 p.m., in
    room 2128, Rayburn House Office Building, Hon. Andy Barr
    [chairman of the subcommittee] presiding.
        Present: Representatives Barr, Williams, Huizenga, Hill,
    Mooney, Davidson, Foster, Sherman, Vargas, and Crist.
        Chairman Barr. The committee will come to order. Without
    objection, the Chair is authorized to declare a recess of the
    committee at any time, and all Members will have 5 legislative
    days within which to submit extraneous materials to the Chair
    for inclusion in the record.
        This hearing is entitled, ``The Future of Money: Digital
    Currency.''
        I now recognize myself for 5 minutes to give an opening
    statement.
        Today, we will discuss the future of money and how digital
    currency may feature in it. When discussing the future of
    money, it is pertinent to have a firm understanding of its
    defining characteristics and history. Economists define money
    as anything that acts as a store of value, a unit of account,
    and a medium of exchange.
        Various objects have been used as money, such as seashells,
    giant stone tablets, and cigarettes in prisoner-of-war camps.
    Commodities such as furs, rice, whiskey, tobacco, and
    corresponding warehouse receipts circulated as money on the
    American continent in the colonial period.
        Prior to America's independence, Americans imported gold
    and silver coins from European countries to use in trade, and
    the colonies issued their own specie before they and the
    continental Congress began experimenting with paper money. Even
    the U.S. dollar has evolved since it was declared the standard
    unit of currency with the passage of the Coinage Act in 1792.
        It has undergone changes in dimensions, design,
    denominations, issuer, and backing, notably with the
    implementation and subsequent abandonment of the gold standard.
    In recent decades, money has been electronically stored in bank
    deposits and transferred with credit cards, mobile phones, and
    the internet.
        Cryptocurrency, however, was designed to be something
    different. Cryptocurrency allows users to potentially store
    value in unlinked--store value unlinked from fiat currency on a
    decentralized ledger and securely transact directly from person
    to person across a peer-to-peer network of computers apart from
    a commercial or central bank.
        The central question before us today is this: Are digital
    currencies simply a new way to hold and transfer value that
    will have a limited impact and niche appeal, or will it, or a
    derivative of it, have a far-reaching transformative effect
    that will change our economy forever?
        Cryptocurrency has existed for a decade, since the
    appearance of Bitcoin in 2009, but has flown under the radar
    for most of its history. For years after its creation, it was
    worth little, had few users, and garnered sparse mainstream
    media attention. However, the media and consumers have been
    taking note. With a stark rise in value in 2017, Bitcoin
    grabbed headlines as it reached a valuation of around 20,000
    USD last December.
        Also reported are controversies such as Bitcoin's
    involvement in purchases on the online black market, The Silk
    Road, and donations funding WikiLeaks, the theft of hundreds of
    thousands of Bitcoins from the exchange Mt. Gox, and reports
    that hackers have stolen $1.6 billion from cryptocurrency
    accounts over the last 7 years.
        Congress must pay close attention to the developments in
    this space. The Capital Markets, Securities, and Investment
    Subcommittee held a hearing examining the cryptocurrencies and
    initial coin offering markets in March of this year, and the
    Terrorism and Illicit Finance Subcommittee held a hearing to
    discuss illicit use of virtual currency and the law enforcement
    response last month.
        As Chairman of the Monetary Policy and Trade Subcommittee,
    I am particularly interested in any impact digital currency may
    have on monetary policy and the international financial system.
    We will discuss its use, both in the United States and abroad.
        Thus far, some countries, like Vietnam and China, have
    banned or restricted it altogether; others, such as Switzerland
    and Malta, have fostered it with a mostly hands-off approach
    and regulatory guidance; and others have adopted it, including
    Tunisia and Ecuador, by issuing their own central bank digital
    currencies.
        How ought the U.S. Government approach this new technology
    is of great importance. Some believe, as former Fed Chairman
    Ben Bernanke highlighted in a 2013 letter to Congress, that
    digital currency innovations, quote, ``may hold long-term
    promise, particularly if the innovations promote a faster, more
    secure, and more efficient payment system,'' unquote.
        Some have suggested that cryptocurrency may be a catalyst
    for the elimination of physical currency, and a foundation for
    a move to a purely cashless society. Others say that
    cryptocurrencies are not suitable replacements for coins and
    bank notes, such as European Central Bank Executive Board
    Member, Benoit Coeure, and the Chair of the Bank for
    International Settlements Market Committee, Jacqueline Loh,
    who, in a joint article in the Financial Times entitled,
    ``Bitcoin Not the Answer to a Cashless Society'' called
    cryptocurrencies, quote, ``something of a mirage,'' unquote.
        Cryptocurrency has attracted advocates, critics, skeptics,
    entrepreneurs, investors, and attention from media, government
    agencies, and law enforcement. Today, there are well over 1,000
    different cryptocurrencies with various characteristics
    together comprising over $250 billion of total market
    capitalization.
        Will cryptocurrency be the future of money? Are they in a
    bubble that will burst, or even just a passing fad? These are
    the sorts of questions we will attempt to address today with
    our witnesses.
        The Chair now recognizes Mr. Foster for 5 minutes for an
    opening statement.
        Mr. Foster. Thank you, Mr. Chairman.
        And thank you to our witnesses.
        I will be brief because I am actually very interested in
    this topic, have been for a while. I look forward to the
    testimony of the witnesses, and hope to hear about currencies
    that are not only pure crypto, but asset-backed crypto, and
    potentially digital fiat currencies, and most significantly,
    digital fiat currencies.
        I am concerned that if a significant central bank could
    issue a digital currency, that it would have the potential to
    supplant the United States dollar now, for many transactions
    and even for--as the reserved currency around the world.
        And despite the reports that they are exploring it,
    countries like Russia or Venezuela are not really credible
    economies that could issue fiat currencies that would supplant
    the dollar. But if, however, the ECB were to issue digital
    euros, then I think the entire world would very rapidly adopt
    that for many digital transactions which would have benefits to
    consumers and a number of risks associated with that as well.
        And if there is really a credible threat that a digital
    foreign currency would supplant the dollar, we have to be
    prepared to respond to that threat.
        I look forward to hearing from witnesses on the economic
    feasibility of another currency supplanting the dollar, and
    whether digitization could be a catalyst in such a transition.
    I also look forward to any thoughts the witnesses might have on
    some of the decision points that have to be made when you
    decide to create, for example, a fiat currency: Whether the
    currencies could be traceable or not; they could be traceable
    only with a court order; whether or not trades could be busted
    in the same sense that a credit card purchase can be broken if
    you convince some entity that the transaction was fraudulent;
    and who makes that call? Under what circumstances?
        These are what I would say are the really important
    decisions that cannot be evaded when we design a digital
    currency. And so, the issue of anonymity is really crucial and
    at the heart of this, as well as what sort of authentication a
    person will have to present to transact that, anything.
        So I look forward to this hearing very much and yield back.
        Chairman Barr. The gentleman yields back.
        And the Chair recognizes for the remainder of the time, Mr.
    Sherman, for an opening statement, 2-1/2 minutes.
        Mr. Sherman. Thank you. loT Chain is a good technology, but
    it can be used to track and transfer sovereign currency. There
    is nothing that can be done with cryptocurrency that cannot be
    done with sovereign currency that is meritorious and helpful to
    society.
        The role of the U.S. dollar in an international financial
    system is a critical component of U.S. power. It brought Iran
    to the negotiating table, and then we argue about whether we
    got a good enough deal or not in the JCPOA. We would have
    nothing had it not been for the role of the dollar. We should
    prohibit U.S. persons from buying or mining cryptocurrencies.
    Mining alone uses electricity, which takes away from other
    needs and/or adds to the carbon footprint.
        As a store--as a medium of exchange, cryptocurrency
    accomplishes nothing except facilitating narcotics trafficking,
    terrorism, and tax evasion. Some of its supporters delight in
    that, that if you can disempower the U.S. Government from being
    able to prevent terrorism, narcotics trafficking, and tax
    evasion, you have somehow struck a blow for liberty. That is
    reason enough to ban it.
        But its role as an investment is at least as bad. We have
    certain animal spirits in our culture, a willingness to take a
    risk to place a bet. This could be harnessed by gambling
    casinos, which, at least pay very high local taxes and created
    a city of Las Vegas out of a desert.
        We can better yet harness those animal spirits to get
    people to invest in risky stocks, startup enterprises, and
    provide the technologies and jobs of the future, or we can see
    those animal spirits spent doing nothing but helping create a
    market for tax evaders, narcoterrorists, and others who find
    that the U.S. dollar is not to their liking.
        At a very minimum, we need investor protection if we are
    going to have people invest in cryptocurrencies and crypto-
    offering memoranda and crypto registrations would be considered
    outright fraud and reason for incarceration if they were issued
    by somebody selling stocks, bonds, or any other investment.
        And finally, there is seigniorage, the money that we make
    as a country because we are the reserve currency, because we
    can issue a greenback that does not yield interest. There are
    people who are alive today because of the profits the U.S.
    Government makes on that, whether it be to fund defense or
    medical research. All of that gets diminished with
    cryptocurrency.
        I yield back.
        Chairman Barr. The gentleman's time is expired.
        Today we welcome the testimony of Dr. Rodney Garratt, who
    holds the Maxwell C. and Mary Pellish Chair in Economics at the
    University of California Santa Barbara. He has served as a
    technical adviser to the Bank for International Settlements, a
    research adviser to the Bank of England, and is a former vice
    president of the Federal Reserve Bank of New York. During his
    time at the Federal Reserve Bank of New York, he co-led the
    virtual currency working group for the Federal Reserve system.
    After leaving the Federal Reserve Bank, he consulted for
    Payments Canada and R3 on Project Jasper, a proof of concept
    for a wholesale interbank payment system. Mr. Garratt received
    his Ph.D. from Cornell.
        Dr. Norbert Michel, who is the Director of the Center for
    Data Analysis at The Heritage Foundation where he studies and
    writes about financial markets, cryptocurrencies, and monetary
    policy. Before rejoining Heritage in 2013, Michel was a tenured
    professor at Nicholls State University's College of Business
    teaching finance, economics, and statistics. Dr. Michel holds a
    doctoral degree in financial economics from the University of
    New Orleans.
        Dr. Eswar Prasad is the Tolani Senior Professor of Trade
    Policy and Professor of Economics at Cornell University. He is
    also a Senior Fellow at the Brookings Institution where he
    holds the New Century Chair in International Trade and
    Economics, and a Research Associate at the National Bureau of
    Economic Research. He is a former head of the IMF's China
    division. His extensive publication record includes articles in
    numerous collected volumes as well as top academic journals. He
    has coauthored and edited numerous books, including on
    financial regulation and on China and India.
        Finally, Mr. Alex Pollock is Distinguished Senior Fellow
    with the R Street Institute--welcome back to the committee, Mr.
    Pollock--providing thought and policy leadership on financial
    systems, cycles of booms and busts, financial crises, risk and
    uncertainty, Central Banking, and the politics of finance. Alex
    joined R Street in January 2016 from the American Enterprise
    Institute where he was a resident fellow from 2004 to 2015.
        Previously, he was president and CEO of the Federal Home
    Loan Bank of Chicago from 1991 to 2004. Alex received his
    masters in philosophy from the University of Chicago and a
    masters of public administration degree in international
    affairs from Princeton University.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your testimony.
        Without objection, each of your written statements will be
    made part of the record.
        Dr. Rodney Garratt, you are now recognized for 5 minutes.

                   STATEMENT OF DR. RODNEY J. GARRATT

        Dr. Garratt. Thank you, Chair Barr, Ranking Member Moore,
    and Members of the subcommittee. The convenience of electronic
    transfers has led to a decline worldwide in the use of cash.
    This is particularly true in countries where systems for
    transferring commercial bank deposits are more advanced.
    Sweden's mobile payment system, Swish, has been adopted by over
    60 percent of the population, and cash use and transactions
    have fallen below 2 percent by value.
        Countries around the world are introducing their own faster
    payment systems, including the recently launched real-time
    payments platform in the United States. At the same time,
    PayPal, Venmo, and other private mobile payment platforms
    continue to improve convenience and speed of person-to-person
    and retail payments by leveraging conventional financial market
    infrastructures.
        It seems likely that the use of cash will continue to fall,
    and it is worth noting that there is a tipping point at which,
    even if consumers seek to use cash, businesses and banks will
    not want to deal with it. What happens then? One possibility is
    that people will be content to transact primarily in commercial
    bank deposits, and things will be business as usual with a much
    smaller cash component to the monetary base.
        Another possibility is that people will demand direct
    access to some form of digital central bank-issued money as a
    replacement for cash. And a third possibility is that people
    will turn to privately issued cryptocurrencies, like Bitcoin.
    These options are not mutually exclusive, nor are they
    independent.
        The adoption rate of Bitcoin will depend not only on its
    performance as a money, but also on the alternative forms of
    digital money that the central bank provides. If consumers
    perceive that they have inadequate access to a cash-like medium
    of exchange, then they may be more inclined to turn to
    alternatives. On the other hand, if the central bank offers a
    digital form of central bank money to the public with
    sufficient cash-like properties, then, perhaps, this will
    appease those who miss cash.
        Central banks are currently evaluating numerous options for
    digital currencies, not just in response to the shift away from
    cash, but also from meeting core objectives and the enhancement
    of financial market infrastructures. Ongoing proofs of concept
    by central banks and private partners consider the use of
    central bank cryptocurrencies in wholesale systems only. These
    applications are driven by efficiency and cost considerations,
    and have minimal monetary policy implications.
        In these opening remarks, I will focus on the merits of a
    widely accessible, retail-oriented central bank cryptocurrency
    that could be used for person-to-person and retail
    transactions. As suggested in blogger J.P. Koning's Fedcoin
    proposal, a retail central bank cryptocurrency could transact
    like Bitcoin.
        However, instead of having a fixed-money supply role, the
    Federal Reserve would control the creation and destruction of
    these coins. Crucially, there would be one-to-one
    convertibility with cash and reserves, and hence, a retail
    central bank cryptocurrency would not suffer from the high-
    price volatility that undermines the usefulness of Bitcoin as a
    store of value and medium of exchange.
        The Fed could also choose to implement a cryptocurrency on
    a permissioned blockchain, which means transaction validation
    could be performed by vetted actors who are accountable for
    their actions without costly proof of work. Proposals to
    increase access to digital central bank money have been made
    before.
        Nobel laureate James Tobin proposed giving the public
    access to deposited currency accounts at Federal Reserve banks
    over 3 decades ago. A number of things have changed since
    Tobin's proposal. As I mentioned, the use of cash has declined,
    a major financial crisis may have changed some people's
    attitudes toward commercial bank deposits, and technological
    advancements offer the potential for issuing digital central
    bank money in a new way with enhanced features.
        I offer two examples: First, the peer-to-peer aspect of
    cryptocurrencies could allow central banks to provide a digital
    money with anonymity properties similar to those of cash.
    Whether or not the central bank would want to do this is a
    complicated issue that requires balancing legitimate demands
    for individual privacy against concerns related to tax evasion
    and other criminal activities.
        Second, there is the potential to improve upon cash by
    creating what advocates of cryptocurrencies call programmable
    money. Programmable money allows trading partners to hardwire
    the terms and conditions of trades into their transactions so
    that they may be executed upon fulfillment of these conditions
    without relying on third parties. This is particularly useful
    for transactions that span multiple legal jurisdictions.
        Any decision to implement a retail-oriented central bank
    cryptocurrency would have to balance potential benefits against
    potential risks. A common objection to expanding access to
    central bank money is that it could disintermediate banks.
    However, it is also plausible that it could produce healthy
    competition. The risk of excessive disintermediation would be
    mitigated by making any new form of central bank money more
    like cash and less like deposits.
        Thank you. And I would be happy to answer any questions.
        [The prepared statement of Dr. Garratt can be found on page
    24 of the Appendix.]
        Chairman Barr. Thank you.
        Dr. Norbert Michel, you are now recognized for 5 minutes.

                     STATEMENT OF DR. NORBERT MICHEL

        Dr. Michel. Chairman Barr, Brett Foster, Members of the
    committee, thank you for the opportunity to testify today. My
    name is Norbert Michel. I am the Director of the Center for
    Data Analysis at The Heritage Foundation, and the views that I
    express today are my own. They should not be construed as
    representing any official position of The Heritage Foundation.
        Cryptocurrencies have rapidly expanded since the
    introduction of Bitcoin in 2008, and their underlying
    technology, a distributed database that allows digital assets
    to be transferred without a third-party intermediary, holds the
    potential to transform the financial industry. This innovation
    should be fostered, not smothered.
        My remarks today will provide four specific points relating
    to the use of cryptocurrencies, cash, and other alternative
    forms of money. First, electronic means of payment have become
    more widespread as technology has changed, but paper currency,
    cash, is still widely--is still a widely used form of payment.
    The demise of cash has been widely and steadily predicted since
    at least the 1970's, yet it remains a preferred method of
    payment for many people.
        Federal Reserve reports show that cash is still the most
    frequently used form of payment in the U.S., and that it plays
    a dominant role for small value transactions. It also remains
    the leading payment instrument for expenditure categories, such
    as person-to-person gift transfers, food and personal care
    supplies, and entertainment and transportation expenditures.
        As the charts in my written testimony show, both the volume
    and value of currency in circulation in denominations,
    including one all the way from $1 to $100 bills have steadily
    increased since the 1990's. That is increased.
        So retail establishments that prohibit customers from using
    cash, as was recently reported in a Washington Post story, do
    so at their own peril. But this danger, this threat of
    consumers using an alternative form of payment, possibly at an
    alternative place of business is exactly as it should be.
    Competitive processes should take place so that businesses and
    consumers can discover the best means of payment. The fact that
    cryptocurrency is a new option for making payments, though it
    is in its infant stages, should be embraced.
        That brings me to my second point, which is that the
    Federal Government should not step in and tilt the playing
    field. It should treat cryptocurrency in all other forms of
    money neutrally. This means that it should not bestow any
    particular legal advantage on any particular alternative form
    of money, and that it should remove all legal barriers to using
    alternative forms of money.
        Removing capital gains taxes from purchases with
    alternative currencies, including cryptocurrencies and foreign
    currencies, would be a major step toward leveling that playing
    field between alternative forms of payment. To further level
    the playing field, Congress should even consider allowing the
    U.S. Postal Service and other government agencies to accept
    these alternatives.
        My third point is that these competitive forces are the
    forces that push entrepreneurs to innovate and improve products
    specifically to satisfy their customers. They also expose
    weaknesses and inefficiencies in existing products. These same
    competitive forces can and should be used to improve money.
        The Federal Government's partial monopoly on money limits
    the extent to which competitive processes can strengthen money,
    and it exposes our money to the mistakes of a single government
    entity. Nothing can provide as powerful a check against the
    Federal debasement of money as a threat of competition from
    viable alternative forms of payment.
        My final point is that centralizing cryptocurrencies within
    any government agency makes little sense. The technology
    promises potential benefits because of its decentralized
    nature. Centralizing the technology at a central bank offers no
    particular advantage over a more traditional electronic
    database. Furthermore, Congress and the administration should
    do all they possibly can to ensure that our central bank never
    offers retail bank accounts to the public, whether via a
    central bank-backed cryptocurrency or via a more traditional
    digital form of money.
        Implementing such a policy would give the Federal
    Government a complete monopoly of money, and effectively
    nationalize all private credit markets. No private entity would
    be able to compete with the Federal Government for funds.
        Even Ken Rogof, a staunch advocate for phasing out cash and
    forcing people to use only one type of digital money, admits
    that the biggest threat to the value of useful currency is
    often the government itself. That Rogof quote is, quite
    frankly, an understatement. Giving the government the power to
    directly take money from its citizens with a few computer key
    strokes in the name of some vague goal of stabilizing the
    economy simply amounts to the death of economic freedom, is a
    terrible idea, and it is Congress' duty to protect Americans
    from those sorts of tyrannical acts.
        Thank you.
        [The prepared statement of Dr. Michel can be found on page
    30 of the Appendix.]
        Chairman Barr. Thank you.
        And now you, Dr. Prasad, you are recognized for 5 minutes.

                    STATEMENT OF DR. ESWAR S. PRASAD

        Dr. Prasad. Chairman Barr and Members of the committee,
    thank you for the opportunity to testify in front of you on the
    implications of digital currency broadly defined for the U.S.
    economy and financial system.
        I should note that 2 years ago I faced an important choice
    one afternoon: Whether to spend that afternoon buying Bitcoin,
    which is not a trivial process, or to start working on a paper
    about Bitcoin and digital currencies. For better or worse, I
    chose the latter. So today I have no Bitcoin, but I do have a
    paper about the implications of digital currency.
        It is useful to frame our discussion around three
    questions: One, should the government or the Federal Reserve
    provide services that the private sector can provide more
    efficiently? That is something that a cryptocurrency, for
    instance, could provide. Second, what are the implications for
    the Fed in terms of its monetary policy objectives of low
    inflation, high employment, and most importantly, financial
    stability if digital currencies become vitally prevalent? And
    third, what are the implications for the U.S. role in the
    global financial system?
        As one looks at the landscape of cryptocurrencies, it is
    useful to keep one distinction in mind, that is, the
    distinction between central bank digital currencies, which
    could use the same cryptographic technology as something like
    Bitcoin, and the nonofficial cryptocurrencies, which are
    essentially created in the ether, are a digital asset with no
    backing behind them, unlike the U.S. dollar, which does have
    backing.
        Now, there are many proponents of the U.S. and other
    economies moving their digital forms of fiat currencies, and I
    think there are some legitimate arguments about how that could
    reduce activity in the shadow economy, reduce illicit
    activities, improve the tax base, and, in some ways, even make
    monetary policy more efficient, even at the lower bound where
    the Fed may not be able to use interest rate policy anymore.
        If all of us were to have noninterest-bearing deposit
    accounts with the Fed, which is fast becoming technologically
    feasible, and this is what Professor Tobin had suggested, this
    would make a certain aspect of monetary policy implementation a
    lot easier.
        But it is worth thinking about money in a broader sense.
    Money is created by the central bank, but also, to a much
    greater extent, by commercial banks. And I think this is going
    to have a serious implication for money creation in the
    economy. Because as new technologies, new financial
    technologies more broadly eat away at the standard business
    model of banks, and as nonbank financial intermediaries start
    playing a major role in the financial system, the question
    remains, what role will banks play, because those are the
    institutions that the Fed has direct control over and that are
    responsible for creating loans, and therefore for creating
    deposits and a very important part of money.
        The other aspect, in terms of thinking about the Federal
    Reserve's digital currency, or any central bank's digital
    currency, is what it does to the payment systems. Right now,
    the Fed has no role in retail payment systems. It has a very
    important role in intermediating financial transactions among
    the major financial institutions in terms of clearing
    unsettlement of the transactions.
        With noninterest-bearing deposit accounts, one could well
    end up in a scenario where the Fed essentially starts managing
    a retail payment system as well. It is not obvious that this is
    the ideal solution, but it is worth thinking about the
    alternative.
        If, in fact, we had a situation where both the retail
    payment systems and also the wholesale payment systems among
    banks are managed through distributed ledger technology, which
    might become feasible, then what happens in a time of crisis of
    confidence? In normal times, it actually might lead to
    significant gains in efficiency. Again, the private sector
    might do far more efficiently in the government, the management
    of these payment systems, but the issue of trust in the central
    bank, especially at a moment of crisis of confidence, becomes
    really important.
        So if you look around the world and think about central
    banks like Sweden that are thinking about introducing a digital
    version of the fiat currency, the objective they have in mind
    is not to include, or reduce innovation, but, basically, to
    provide a backstop to the payment system to make sure that it
    is not all in the private sector and subject to a crisis of
    confidence.
        There are other concerns related to regulatory arbitrage
    and the possibility of cross-border capital flows, again,
    illicit as well as licit that could be facilitated which would
    certainly improve efficiency, but also potentially make
    underground activities easier to execute.
        And finally, on the issue of the U.S. dollar's role as a
    global reserve currency, there I worry less. I think it is
    possible that if other countries were to issue their own
    currencies in digital form, you could have the medium of
    exchange shifting toward nonofficial cryptocurrencies, toward
    other currencies.
        But what preserves the U.S. dollar's role as the argument
    global safe haven is not just the--its role as a medium of
    exchange but its ability to serve as a safe haven, and that
    requires U.S. institutions, which I think are still pretty
    strong and are going to retain foreign investor's trust. So I
    think as store of value, the U.S. dollars will remain secure
    for now. Thank you.
        [The prepared statement of Dr. Prasad can be found on page
    44 of the Appendix.]
        Chairman Barr. Thank you.
        Mr. Pollock, you are recognized for 5 minutes.

                      STATEMENT OF ALEX J. POLLOCK

        Mr. Pollock. Thank you, Mr. Chairman, Mr. Foster, and
    Members of the subcommittee.
        This hearing poses really interesting questions, which, to
    answer, require some speculation and guessing--along with
    thinking, we hope. Among the intriguing question is whether
    Bitcoin or another cryptocurrency could become a successful,
    privately issued fiat currency. That would mean being widely
    accepted, constantly used in payments and settlements, used to
    denominate debt and other enforceable contracts, and people
    going around not asking what is the price of Bitcoin, but what
    is the price of other things in Bitcoin. We are a long way from
    that, but it is imaginable.
        As the Chairman said, the history of money demonstrates a
    wide variety of moneys that have been used. There have been
    numerous historical examples of private currencies. But to my
    knowledge, there has never been a private fiat currency. Those
    are reserved for the power of governments.
        For private currency, as an example, circulating notes of
    U.S. State-chartered banks were common in the 19th century. You
    might have carried, in those days, in your wallet, a $5 bill
    from the Third State Bank of Skunk Creek, for example, or
    hundreds of others. But all such notes were backed by the loans
    and investments and capital of the issuing bank. They were not
    fiat money.
        The dominant historical trend in money has been to create
    an ever more central bank monopoly of currency over several
    centuries of development. Will the new and ubiquitous computing
    power of our time reverse this trend and create more
    competition in currency?
        With Dr. Michel and the famous economist, Friedrich Hayek,
    I think it might be a good idea, but I don't think it will
    happen. Bitcoin theorists imagine it will, but I believe it is
    easier to imagine moving in exactly the opposite direction,
    that is, toward even greater monopoly by the central bank
    through digital money.
        Mr. Foster made the point it is not only our own central
    bank, but other powerful central banks we might think about in
    this context. And many central banks are, indeed, interested in
    having their own digital currency, so the general public, not
    only banks, could have deposit accounts with the central bank
    in addition to carrying around its paper currency, and the
    appeal of this idea to central banks is natural. It would
    greatly increase their size, role, and power.
        With current technology, this would clearly be possible.
    The central bank could have tens of millions of accounts with
    individuals, businesses, associations, municipal governments,
    and anybody else. There is not much standing in the way of that
    in terms of pure financial technique. But would it be a good
    idea? No, it wouldn't. In such a scheme, the Federal Reserve
    would be in direct competition with all private banks, it would
    be a highly advantaged government competitor, and it would be
    regulating its competitors. That is what central bank evolution
    tried to develop out of.
        In the American banking system there are about $12 trillion
    in domestic deposits. Could a Federal Reserve digital deposit
    account system grab, say, half of them? Why not? That would be
    $6 trillion which would expand its balance sheet to $10
    trillion.
        Now, what is key in this is to remember that if you have
    deposits on one side of your balance sheet, you have something
    else on the other side. So what would the Fed do with this
    mountain of deposits? As my friend Dr. Michel said, it would
    have to make investments and loans. It would become, by this
    means, the overwhelming credit allocator in the American
    economic and financial system.
        I think we can safely predict its credit allocation would
    unavoidably be highly politicized and that taxpayers would be
    on the hook for its credit losses. The risk would be directly
    in the central bank, as opposed to central bank support of
    somebody else.
        So as Dr. Michel suggested, I think to have a central bank
    digital currency is one of the worst financial ideas of recent
    times. Still, it is quite conceivable to think of as a
    possibility, and it is good for us to think about it.
        In conclusion, I think if we look at the money of the
    future, digitalization will continue, but I don't think the
    fundamental nature of money will change. It will probably
    continue as the monopoly issuance by a central bank. It might
    be a private currency backed by reliable assets. I don't think
    it will be a private fiat currency like Bitcoin. As we consider
    all this, an increase in the monopoly power of central banks,
    which already have too much, should be avoided. Thank you for
    being able to share these views.
        [The prepared statement of Mr. Pollock can be found on page
    39 of the Appendix.]
        Chairman Barr. Thank you for your testimony.
        And the Chair now recognizes himself for 5 minutes for
    questioning.
        Let me just start with this idea of cryptocurrency
    potentially supplanting or displacing U.S. Federal Reserve
    notes as the world's reserve currency. And this is for anyone
    who wants to chime in. With greater use of electronic payments
    and the advent of digital currencies, do you think demand for
    U.S. Federal Reserve notes will decrease, and what implications
    does that have for the U.S. dollar?
        Dr. Michel. I think if you look at why the U.S. dollar is
    as strong as it is and is in demand as it is, you have to look
    beyond just the fact that we have the Federal Reserve that
    prints Federal Reserve notes. We have an economy with strong
    property rights, especially relative to many other countries in
    the world. We have an incredibly developed--well-developed
    industrialized infrastructure here.
        And as long as you combine those things and have a dynamic
    economy, then the assets of that economy, including the money
    that is predominantly used in that economy, are going to be
    sought after. So that is what you should focus on if you want
    people to want our money, if you want people to want to use our
    money.
        And there is also a downside to being the world's reserve
    currency, and that is that we can basically continue the
    fiction that we can print as much as we want and lend as much
    as we want. And that is, frankly, not a good idea. So that is
    just not the way that I would think of those things.
        Chairman Barr. Anybody else want to comment on that?
        Mr. Pollock. Another way to think about that is that the
    United States does have--has had and continues to have, as my
    old friend, John Makin, used to say, a competitive advantage in
    ``wealth storage services.'' That is an advantage that arises
    out of social infrastructure, all the things that Norbert said,
    rule of law, enforcement of the contracts, a strong financial
    system, and, of course, a powerful government enforcing all of
    that. I think that will continue.
        Concerning bank notes, U.S. dollar paper currency does
    circulate around the world, as we know. Nonetheless, I think
    the electronic forms of money, certainly in the wholesale
    markets, will become ever more dominant. This is despite the
    advantages that paper currency has, in some situations, like
    privacy.
        Chairman Barr. Dr. Prasad, you wanted to--
        Dr. Prasad. It is difficult to see an asset that has no
    intrinsic value and no backing by the government maintaining
    value as a store of value. The initial promise of something
    like Bitcoin might become an effective medium of exchange, and
    that promise hasn't quite panned out because it turns out that
    it is very inefficient and very costly to transact using
    Bitcoins.
        In fact, many of the nonofficial cryptocurrencies that are
    gaining more traction as mediums of exchange are, in fact, ones
    that are backed by fiat currencies or other forms of backing.
    So there is one called Tether, for instance, which is backed
    one-for-one with the U.S. dollar, and that is beginning to get
    traction as a medium of exchange. So ultimately, the U.S.
    dollar, as was just pointed out, is maintained in its dominant
    role to U.S. institutions and the trust in the Federal Reserve.
        Chairman Barr. Let me follow up by basically--well, by
    starting with a more fundamental question. You talked about the
    volatility of digital currency, and maybe that is the principle
    reason why it is not the best medium of exchange right now or
    store of value. But at its very core, are cryptocurrencies
    money? And I invite anyone to chime in on this. And if not, if
    cryptocurrencies are not money, do they substitute as money? Do
    they function as money substitutes? Dr. Garratt.
        Dr. Garratt. Yes. On that point I would point to Hayek, who
    didn't like the word ``money'' as much as he liked the word
    ``currency,'' arguing that that is a property, so a thing can
    have currency to a different extent.
        And so is Bitcoin money? Well, for regulatory purposes, we
    may not want to define it that way. The IRS, CFTC have defined
    it as a commodity, because that is necessary for regulatory
    purposes. But in terms of the conceptual idea of is it money,
    it is to some extent, but it is not currently a very good one
    for the reasons that have been articulated. It is not very good
    as a medium of exchange because the price is so volatile. That
    means that--or a store of value, but as a medium of exchange,
    it is not good because if we think the price is going to go
    down, I don't want to receive it, and if I think the price is
    going to go up, I don't want to spend it. So this volatility
    undermines its features both as a store of value and as a
    medium of exchange.
        Chairman Barr. My time is about ready to expire, but would
    its properties as money improve? Would its quality as money
    improve? Would its volatility decline based on adoption rate?
    Is adoption rate all that is required to improve its qualities
    to get to money? Dr. Garratt?
        Dr. Garratt. Well, yes, people have to start using it for
    transactions. If that happens then the price volatility might
    start to decline.
        Dr. Michel. The adoption rate has a lot to do with it. The
    way Bitcoin itself is set up has a lot to do with its own
    volatility, but that is only one cryptocurrency. But, yes, so I
    would, just in general, say, yes, the adoption rate has a lot
    to do with it.
        Chairman Barr. My time is more than expired.
        I will now recognize Dr. Foster for 5 minutes.
        Mr. Foster. Thank you. And thank our witnesses again.
        Recently, there were reports in the press that estimates of
    about 20 percent of all Bitcoin have been lost, which strikes
    me as implying that whatever government or central bank issues
    digital fiat currency, if that was a representative number, it
    would be a tremendously profitable enterprise to be in, if 20
    percent of your cash number came back to be redeemed. And that
    is in addition to the interest expense, if there is no interest
    paid on these digital instruments. And so it strikes me that
    whatever country starts doing this and becomes the de facto
    standard is going to have a permanent cash cow. And do you see
    anything wrong with that analysis?
        Mr. Pollock. Congressman, I would say, for any issuer of
    currency, you like to have your currency lost or put away
    someplace. You remember American Express Travelers Checques,
    which were kind of currency--
        Mr. Foster. Yep.
        Mr. Pollock. --used to encourage you to put them in your
    attic and save them for the future, which was tremendously
    profitable for American Express.
        Mr. Foster. Yes. And, on the other hand, there has been
    some concern here that somehow there would be a big, evil
    government monopoly taking over all banking functions. It seems
    to me it would be pretty self-limiting. If there was no
    interest paid on these things, the average person would
    maintain just a convenience level amount of this and not have
    all of their net worth and something that paid no interest.
    And, so, it seems like you would just have a reasonable
    fraction of everyone's net worth usable for short-term
    transactions, and then they would separately, in a very
    competitive banking and investment environment, allocate the
    main bulk of their investments elsewhere. Do you see anything
    wrong with that analysis? Yes, Dr. Prasad.
        Mr. Pollock. Yes, I do. I think the Fed would pay interest,
    just as they do--I am sorry.
        Chairman Barr. Yes. Well, as they don't on cash. Yes.
        Dr. Prasad. Just to be clear, the notion that is being
    floated right now is of noninterest-bearing deposit accounts.
    Right now this is not a clear proposal. There are different
    ways of thinking about how to set up a central bank digital
    currency. But the notion of deposit accounts is of noninterest-
    bearing deposit accounts, so the concerns that you could have
    this asset superseding other assets is highly unlikely because,
    again, it would be a zero nominal interest rate yield
    instrument just like cash currently is.
        In regard to your concern about potential technological
    malfeasance, this goes back to the 7th century when paper
    currency was first printed, when counterfeiting was a concern
    and that remains to this day. One could argue that digital
    forms of fiat currency could reduce the concern about
    counterfeiting of paper currency, but they are--on the flip
    side, and in most issues here, there is a one side and the
    other side. The flip side here is that certainly they will make
    them very vulnerable to technological hacks, and this is why I
    think most central banks are very concerned about moving
    forward very aggressively with this because of technological
    vulnerabilities that are potentially out there.
        Mr. Foster. Yes. And so the promise of blockchain is that
    it provides essentially a non-falsifiable ledger that would
    prevent a lot of malfeasance. I think the kind that you still
    will, I think, forever be worried about is the business of
    authenticating the person that has access to move these
    balances around and operate that system, and that remains an
    unsolved problem in the digital world as how you really
    authenticate yourself for different levels of transactions.
        Dr. Garratt, how does Sweden actually handle this issue in
    their proposal? For example, in the Swedish proposal, do swipe
    fees just disappear and that you can pay--how does Sweden deal
    with the problem if someone steals your cell phone or your
    identity somehow and proceeds to spend a bunch of money? Is
    there a mechanism to get your money back when a fraudulent
    transaction has taken it away from you?
        Dr. Garratt. I think if you are referring to the current
    Swish system, this is a system that is run by the central bank
    in cooperation with private banks. So these are still
    centralized accounts. So in the event that your cell phone was
    lost, you would still have access to go to the bank, reveal
    your identity, and get your account reinstated. Or you could
    probably just do that online.
        So the--Sweden has issued something called an e-Krona
    report, where they are considering alternative new technologies
    to deal with the replacement of cash, but those are still just
    proposals. And among those technologies that they are
    considering is a stored value technology.
        Mr. Foster. And in China, which has just massively
    apparently adopted digital transactions for consumers, at
    least, is that essentially an account balance with the two big
    players whose names I forgot, Alipay and whatever the other one
    is. So these are--essentially everyone has a balance on there,
    and I pay you by transferring some of my balance in Alipay to
    you, or is there some government operation behind it or central
    bank operation behind it?
        Dr. Prasad. So WeChat essentially is based on using the
    WeChat platform and the Alipay platform, but with balances that
    are already at your bank account, so you can link it to your
    bank account. What Sweden is considering is two options: The
    register-based system, where you have these electronic deposit
    accounts like I mentioned, or a value-based system that
    essentially download digital cash onto your electronic wallet
    which could be like a credit card. So those are the two options
    in Sweden that are being considered.
        Mr. Foster. Thank you.
        Chairman Barr. The gentleman's time is expired.
        The Chair recognizes the Vice Chairman of the subcommittee,
    Mr. Williams from Texas.
        Mr. Williams. Thank you, Mr. Chairman.
        And thank all of you for today's hearing.
        We are in the exciting first stages of the digital currency
    movement's adaption by mainstream stakeholders, and it has
    become apparent to many that blockchain and other new
    technologies is the digital currency space offer solutions to
    have the potential to drastically alter the financial sector
    that does business.
        As Congress and regulators determine how best to treat
    these emerging products, we must be mindful of the impact our
    actions have on innovation, and the free enterprise. At the
    same time, however, it is important that policymakers keep in
    mind the legitimate governmental interest in preventing the use
    of anonymous digital currency by those who wish to do us harm.
    I look forward to discussing with the experts today on the best
    path forward.
        So my first question, Dr. Michel, is, you state in your
    testimony that Congress should work diligently to eliminate tax
    and other legal impediments to the development of alternative
    currencies as well as new applications for blockchain
    technologies. What are the impediments to development of
    alternative currencies, new applications for blockchain
    technologies, and what can Congress do about them?
        Dr. Michel. Well, I think the main one, honestly, I do
    believe, is capital gains tax. The fact that you have to keep
    track of bases in every single transaction you would make, that
    is a major impediment to using anything other than the U.S.
    dollar for your transactions. So that is the biggest one.
        Otherwise, on a regulatory side, I think if we look at BSA,
    Bank Secrecy Act, anti-money laundering laws, ensuring that
    nothing is treated differently. Yes, it is true that criminals
    have used Bitcoin, but criminals also have used airplanes,
    computers, and automobiles. We shouldn't criminalize any of
    those instruments simply because criminals use them. Those
    components, I believe, are the main barriers to using--to a
    more widespread adoptance of these things in the U.S.
        Mr. Williams. OK. Thank you.
        My next question is to Dr. Garratt. Your testimony presents
    three options for consumers in the event that cash is no longer
    available to them: No. 1, use commercial bank deposits for
    everyday transactions; No. 2, demand direct access to digital
    central bank issued money; and No. 3, turn to privately issued
    cryptocurrencies.
        So what would cause consumers to choose options two and
    three when option one is an existing, familiar technology that
    is already becoming increasingly convenient as a payment
    method?
        Dr. Garratt. So, first of all, let me say that I agree with
    what you said at the end there. There is nothing wrong with our
    current banking system, and people have been very--and as I
    mentioned in my testimony, new means for transferring
    commercial bank deposits are constantly arising. It is
    increasing the ease with which we make not only person-to-
    business payments, but particularly peer-to-peer payments,
    person-to-person payments.
        So in those scenarios I outlined, the first scenario is
    probably the most likely. But as cash actually disappears, that
    starts to create problems in a society. Sweden is currently
    dealing with this. And the Governor of the Riksbank recently
    wrote an opinion piece where he talked about some of the pain
    points that occur when physical cash really starts to disappear
    and when businesses stop receiving it.
        And so, what I am really talking about is that future
    scenario. And at that point, the central bank has to decide if
    it wants to withdraw completely from providing a payment device
    for the general public, or whether it wants to offer some sort
    of digital alternative. And one of those digital alternatives
    could be, possibly down the road, some form of cryptocurrency
    that is offered by the central bank.
        And the primary reasons for doing that, I think, one would
    be if you wanted to allow some type of privacy component within
    transactions of this currency, like is currently possible with
    cash, subject to limits and, as I said, balanced against the
    risks of tax evasion and criminal activity. These are the
    options that the central bank will ultimately face, and my
    argument is that these are something that the--that we should
    be prepared for.
        Mr. Williams. OK. Let me--staying with you, Dr. Garratt,
    with the dozens of digital currencies out there, all the
    different attributes that make classifications difficult, what
    is the appropriate framework for us to use if Congress
    approaches legislation addressing the digital currency?
        Dr. Garratt. Well, that is a very difficult question.
        Mr. Williams. That is why I asked it to you.
        Dr. Garratt. Well, there is--people have the ability to
    issue these private currencies and they are going to exist. And
    I think just like Dr. Michel said, one can't make something
    illegal just because it might be used for illegal purposes.
        What I am arguing is that, I believe that the central bank
    does a good job at providing payment services and not only just
    at the InterBank level but also for small payments by the
    public. And I think the central bank should continue to provide
    the best possible product along those lines.
        And what I am arguing is, is that in the future date, that
    best possible product might involve some of these new
    technologies but issued by the central banks to remain
    competitive with those payment devices as opposed to some of
    these private currencies, which are less able--we are less able
    to monitor and less able to--
        Chairman Barr. The gentleman's time is expired.
        The Chair recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. It seems like some think tanks demand, at
    every turn, that we do things that make the Federal Government
    less able to meet its financial obligations, and then they
    demand that we have an extensive and expensive foreign policy
    that costs well over $1 trillion. There is no way to square
    that unless we abolish Social Security and Medicare.
        We have moved from gold from 2,000 years ago to drafts and
    paper currency, symbolizing gold, to where the paper currency
    itself has value. And now, for many decades, what has value is
    paper that represents the paper. I pay my rent with a check
    which represents paper dollars, which, as recently as the
    1930's, could be converted into gold but can no longer be.
        And we now have an opportunity to disempower the Federal
    Government and to move that power to those hostile to it. We
    need a medium of exchange. We need a unit of value. The
    witnesses have demonstrated that the dollar is much better at
    that for honest citizens. But cryptocurrencies offer
    unparalleled advantages to nations that the U.S. Government
    wants to sanction for their terrorist activities, to tax
    evaders, and to criminals.
        Mr. Pollock, this seems to be a solution looking for a
    problem. What can an honest citizen not do to store value to
    effectuate a transaction? I can be in the smallest hamlet in
    rural India and use my Visa card. I have never had a problem
    paying somebody, unless I didn't have the money. So it is a
    good--we have pretty efficient, mostly digital transfers of
    dollars every day. What is the problem we are trying to solve,
    except for the problem that the narcotics dealers have?
        Mr. Pollock. I think the proposal being made for private
    fiat currencies--which, as I said, Congressman, strikes me as
    an unlikely outcome, a private fiat currency as opposed to a
    convertible currency--is to give optional ways of settlement
    for anybody who--
        Mr. Sherman. But, I have got a means of settlement called
    the dollar. What is the great failure?
        Mr. Pollock. And you have another one called the euro and--
        Mr. Sherman. I have many, many choices, 150 of them at
    least.
        Mr. Pollock. --ounces of gold.
        Mr. Sherman. So what problem do I have that they are trying
    to solve, unless I am a tax evader or a narco-terrorist?
        Mr. Pollock. First of all, I am not pushing, as you know,
    this solution.
        Mr. Sherman. I am trying to illustrate that it is a
    solution only to the problems of tax evaders, criminals, and
    terrorists.
        Mr. Pollock. But my--excuse me. You might--
        Mr. Sherman. It offers an opportunity for profit by
    speculators speculating on a currency whose sole value is to
    help the aforementioned ne'er-do-wells. Go ahead.
        Mr. Pollock. You might argue that people should deserve,
    just as I think Dr. Michel did--and in my written testimony,
    there is a quote from Friedrich Hayek on this--the freedom to
    choose the denomination of the transactions they want to engage
    in.
        Mr. Sherman. We should allow people to own guns in many
    circumstances. But if the sole advantage of a particular gun is
    that it has a special tape on it to prevent fingerprints from
    adhering, and you would say the honest citizen who wants to
    hunt wants to make sure that the deer cannot identify the
    fingerprints of the hunter, I would say the sole benefit of
    that particular tape on that particular gun is to facilitate
    criminals.
        What, other than facilitating criminals and allowing people
    to place bets on the value of a criminal tool--we can speculate
    the value of burglar's tools--what does this do? What problem
    does it solve? Can you identify one? Because I can't.
        Mr. Pollock. I don't know the extent to which
    cryptocurrencies are used in this criminal way. I suspect they
    are, to some extent, but so is cash. And as Dr. Michel says, so
    are a lot of things.
        Mr. Sherman. Well, yes, but rifles are chiefly used for
    hunting. Rifles with design not to have fingerprints on them
    are predominantly used for crime.
        Chairman Barr. The gentleman's time is expired.
        And the bells signal that votes have been called on the
    House floor. We will recess for votes in a moment, but we will
    go to Mr. Hill for 5 minutes of questioning then we will recess
    and we will return. And for Members who have not had an
    opportunity, we will reconvene for the remainder of the hearing
    for your questions after votes.
        At this time, we will ask Mr. Hill for his 5 minutes of
    questions.
        Mr. Hill. Thank you, Chairman Barr. I appreciate the time
    today. Very interesting panel. I was at the U.S. chamber this
    morning talking about Fintech and the advantages of exploring
    how blockchain can change business economics and accounting and
    logistics. Very interesting topic.
        Today, we are talking about something that has, the
    headline which is constant chatter about cryptocurrencies. And
    when I listen to your testimony, I just have flashbacks--not
    personally, of course--to the 1830's. I am thinking about
    Wildcat banking when we had no central bank, thanks to
    President Jackson's insistence that we didn't need that. And
    every State and every business and every town issued script or
    currency.
        I have a book at my house of obsolete script and currency,
    that is a collector's guide, and it is very thick.
        So help me, Mr. Pollock, understand why is this any
    different? I can't imagine that any one privately issued
    cryptocurrency could be any more accepted than another. In a
    big picture sense, why is it not like Wildcat banking of the
    1830's?
        Mr. Pollock. Congressman, I think it is exactly the same,
    as I tried to suggest in my testimony.
        As I said in my written testimony, I have, in my
    collection, a nice copy of a $3 bill issued by the Wisconsin
    Marine and Fire Insurance Company, which acted as a bank in the
    1840's, in this period you are talking about. I think it is
    exactly the same, except those currencies did have a claim on
    the assets of the bank if the bank had good assets.
        Mr. Hill. Thank you for that. And Dr. Michel, I think if I
    remember Article I right, coining money is an enumerated power
    of the Congress, not the Federal Reserve system. Yet, I am
    always--in fact, Chairman Powell got the question this morning.
    Chairman Powell can decide to do cryptocurrencies at the Fed.
        Where is all this--this would still be pursuant, obviously,
    to Congress directing that we do this. And so tell me your
    views on that legally?
        Dr. Michel. Legally, I hate to venture a guess because they
    seem to be able to do quite a bit without legislation.
        Mr. Hill. This is no surprise from your testimony, yes,
    thank you.
        Dr. Prasad, a question for you. You talked about
    potentially, because of blockchain, truly an innovative area,
    that potentially you would make some forms of money or credit,
    I would say, obsolete, like as an account payable receivables,
    for example. People wouldn't necessarily have as big a line of
    credit, so you are concerned about future credit creation and
    open market operations, I assume that is where you were coming
    from in your testimony.
        Dr. Prasad. That is part of it. If you think about the
    previous Congressman's question about what is the point of
    cryptocurrencies, there are many inefficiencies that lurk in
    the financial system, including one certain crisis. But also if
    you think about payments, either using your Visa, or if you
    think about crossbar settlement of transactions, those are
    painfully slow, sometimes quite expensive. And these
    technologies and principles provide a way of getting around
    those issues--in principle, again, I emphasize that--could make
    transactions much easier to verify, to follow through. They
    could ensure finality of settlement of transactions and bring
    down the cost.
        We are not quite there yet, but that is the prospect, and
    that could affect the traditional model of banking, especially
    as non-bank financial intermediaries. We talked about Alipay
    and Alibaba in China. They take over. And that could affect how
    the Fed thinks about financial stability and the transmission
    of monetary policy as well.
        Mr. Hill. Thank you very much. In my time remaining, Mr.
    Chairman, since this is the Monetary Policy Committee, I have
    to commend to our viewing audience and to my colleagues, Mr.
    Pollock's recent writings on the 40th anniversary of the
    Humphrey-Hawkins Act, one of my personal favorite laws.
        And we celebrated today quietly here as we had Chairman
    Powell testifying. And I always find the goals of Humphrey-
    Hawkins odd. You have full employment and price stability.
        So I didn't get to ask my question, and I will let you have
    the last word, Mr. Pollock. How is price stability consistent
    with perpetual inflation, setting a 2 percent inflation target?
        Mr. Pollock. It is not. That is one of the great mysteries
    of the Federal Reserve, how stable prices, which is actually
    the term in the Act, is consistent with their announced
    strategy of perpetual inflation.
        Mr. Hill. Thank you. That is one of the great mysteries of
    finance.
        I yield back.
        Chairman Barr. The gentleman yields back from those good
    questions.
        And I am informed that because this is going to be an
    extraordinarily long vote series on the House floor, we may be
    losing Members. And so I will reverse course and call on our
    colleague from Ohio for the last set of questions for the
    hearing. And that is Warren Davidson, who is now recognized for
    5 minutes for the final question of the hearing.
        Mr. Davidson. Thanks for the bonus time, Mr. Chairman. And
    thank you all for being here.
        I assume you are relieved a bit so you won't be waiting for
    us for 1-1/2 half or 2 to get back over here.
        So thank you for your expertise in this. And I think just
    beginning with the nature of currency, what is our currency.
    And part of the stability of the U.S. dollar lies not just in
    the resources of the United States, but in the resources of the
    world. The petrol dollar.
        Everyone has to settle their current account at some level
    in U.S. dollars because everyone uses crude oil. And so we have
    an effective monopoly on settlement there. And it dealt
    somewhat effectively with the problem of mercantilism involved
    in gold. So it prevented hoarding because the oil isn't
    hoarded.
        Of course, Congress continues to tap the strategic
    petroleum reserves, so I assume eventually maybe we can find an
    end.
        But in the background of that, what creates the stability
    of money? And I guess I want to get at in cryptocurrency, we
    use the word for everything. We use it for crypto-securities
    that are really nothing more than nonvoting shares in companies
    in some cases. This is what the SEC is trying to regulate.
        We have established that numerous of these
    cryptocommodities are effectively commodities, but we are not
    quite sure that they are currencies.
        Mr. Pollock, you summed it well by saying there is a big
    gap between how much is this in bitcoin. And so, I guess that
    is the question I would like the panel to explore.
        Maybe Mr. Michel, would you like to pursue? Dr. Michel.
        Dr. Michel. The question specifically being?
        Mr. Davidson. The nature of money in crypto. So what would
    make a cryptocurrency a currency, not just a commodity, not an
    asset? How do you move from, whether it is bitcoin or
    petrolcoin or Michelcoin--
        Dr. Michel. I like the sound of that one. That was good. If
    we are talking about a medium of exchange, then what we have is
    either a currency or a substitute for currency or a substitute
    for money. If it is all digital, maybe we shouldn't call it
    currency, but the idea is what is the medium of exchange.
        And my whole point is that people should be allowed to use
    whatever medium of exchange that they want to use. The fact
    that many people think that the Fed is great and the Fed is
    fine, and we should just stick to the central bank that we
    have, that is wonderful.
        If nobody else ever believes that way and hardly anybody
    adopts any alternative form of money, then there is no problem.
    Nobody is going to use one, but if somebody comes up with
    something better, then we should allow that to take place,
    because--
        Mr. Davidson. You highlighted earlier, you highlighted
    earlier that the government shouldn't favor one or the other.
    Well, we clearly do. We coin the money. And we have the
    official money. We have the legal tender in the United States.
        Mr. Pollock, how do you see migrating that path for
    something to really become a currency?
        Mr. Pollock. To be a currency, as I tried to suggest in my
    remarks, you have to be readily accepted in settlement of
    payments and debts, and to be a unit, which is used to
    denominate contracts. That means that people in general believe
    that that currency is going to be available and accepted by
    other people, and they have to believe that other people accept
    that. And everybody else has to believe that other people will
    accept that as well.
        It is a strange social creation, money, that comes out of
    belief backed up by sets of enforcement.
        Mr. Davidson. The great history, the history of money.
        Dr. Garratt?
        Mr. Pollock. It is curious to think about.
        Dr. Garratt. I will just build on that. I think what you
    are really getting at with your question is why does bitcoin
    have any value at all?
        And as Mr. Pollock just said, for a currency to have value
    and to function as a currency, it simply has to be the case
    that you accept it from someone on the belief that someone down
    the road will accept it from you.
        Mr. Davidson. Right.
        Dr. Garratt. One of the interesting things that makes that
    work apparently with something like bitcoin is the currency
    supply rule. There is a fixed rule for how the money increases
    over time, but that is known and fixed. And so you don't have
    to worry that the issuer of the currency will behave
    irresponsibly and devalue it.
        So that is a fundamental aspect that gives bitcoin value
    once somehow that process has started, where people have
    started to believe in it. But it also is, it can be problematic
    because it means that you have a fixed rule and you are not
    able to provide currency in a way that might be beneficial in
    general for the economy.
        Mr. Davidson. Thank you so much. I am sorry I couldn't get
    to everyone. And frankly, I couldn't get to nearly all my
    questions.
        But nearly universal liquidity, I think, is the defining
    characteristic, and then we can't get to the store value
    related to petrol. But thank you so much for your time. And
    thanks for your indulgence, Chairman.
        Chairman Barr. Thank you for your questions and thank you
    for yielding back your time.
        And I would like to thank all of our witnesses for their
    testimony today. Again, I apologize for the brevity of the
    hearing. I think we had a lot of Members with a lot of
    interests, but because of the interruption of votes, we will
    have to end this hearing a little bit early.
        But given the fact that digital currencies and
    cryptocurrencies will continue to have a greater and greater
    impact on our financial system and the broader economy. I am
    sure we will be revisiting this issue and exploring this topic
    further in the future.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing is adjourned.
        [Whereupon, at 3:13 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 July 18, 2018

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