[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]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
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
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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
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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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