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

                          THE FUTURE OF MONEY:
                            DIGITAL CURRENCY



                               BEFORE THE

                        SUBCOMMITTEE ON MONETARY

                            POLICY AND TRADE

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                             JULY 18, 2018


       Printed for the use of the Committee on Financial Services

                           Serial No. 115-111



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                    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
TED BUDD, North Carolina

                     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
                            C O N T E N T S

Hearing held on:
    July 18, 2018................................................     1
    July 18, 2018................................................    23

                        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


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 
    I now recognize myself for 5 minutes to give an opening 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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 
    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.


    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.


    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    I yield back.
    Chairman Barr. The gentleman yields back from those good 
    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 
    Of course, Congress continues to tap the strategic 
petroleum reserves, so I assume eventually maybe we can find an 
    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, 
    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 
    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