[Senate Hearing 116-104]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 116-104


 EXAMINING REGULATORY FRAMEWORKS FOR DIGITAL CURRENCIES AND BLOCKCHAIN

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                                   ON

     EXAMINING THE DIFFERENT TYPES OF DIGITAL CURRENCIES AND THEIR 
  INFRASTRUCTURE, THEIR APPLICATION IN THE FINANCIAL SYSTEM, AND THE 
               POTENTIAL BENEFITS AND DETRIMENTS OF EACH

                               __________

                             JULY 30, 2019

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                Available at: https: //www.govinfo.gov/
                
                
                
                               __________

                      U.S. GOVERNMENT PUBLISHING OFFICE
                      
38-950 PDF                 WASHINGTON : 2020 
                















                
                


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska                  JON TESTER, Montana
TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona              DOUG JONES, Alabama
JERRY MORAN, Kansas                  TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                     Gregg Richard, Staff Director
                Laura Swanson, Democratic Staff Director
                      Joe Carapiet, Chief Counsel
                  Lexi Hall, Professional Staff Member
                Brandon Beall, Professional Staff Member
                 Elisha Tuku, Democratic Chief Counsel
           Corey Frayer, Democratic Professional Staff Member
                      Cameron Ricker, Chief Clerk
                      Shelvin Simmons, IT Director
                    Charles J. Moffat, Hearing Clerk
                          Jim Crowell, Editor

                                  (ii)




































                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 30, 2019

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    28

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2
        Prepared statement.......................................    28

                               WITNESSES

Jeremy Allaire, Cofounder, CEO, and Chairman, Circle Internet 
  Financial Limited, on behalf of the Blockchain Association.....     4
    Prepared statement...........................................    29
    Responses to written questions of:
        Senator Warren...........................................    59
        Senator Cortez Masto.....................................    60
        Senator Sinema...........................................    61
Rebecca M. Nelson, Specialist in International Trade and Finance, 
  Congressional Research Service.................................     6
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Warren...........................................    61
        Senator Cortez Masto.....................................    68
Mehrsa Baradaran, Professor of Law, University of California 
  Irvine School of Law...........................................     8
    Prepared statement...........................................    50
    Responses to written questions of:
        Senator Cortez Masto.....................................    73

              Additional Material Supplied for the Record

Statement submitted by the Chamber of Digital Commerce...........    76
Letter submitted by the National Association of Federally-Insured 
  Credit Unions..................................................    91
``Go Slow on Libra. Speed up on Faster Payments'', by Jennifer 
  Tescher, Forbes................................................    92
``A Former Bank CEO Named His Boat `Overdraft'. Now That Bank Is 
  in Hot Water Over the Fees'', by Jonelle Marte, Washington Post    95

                                 (iii)

 
 EXAMINING REGULATORY FRAMEWORKS FOR DIGITAL CURRENCIES AND BLOCKCHAIN

                              ----------                              


                         TUESDAY, JULY 30, 2019

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will come to order.
    Last Congress, this Committee held two hearings examining 
the digital currency ecosystem.
    In those hearings, we heard about some of the developments 
that have occurred within the digital currency marketplace 
since the creation of bitcoin in 2008; the potential benefits 
of digital currencies; and concerns about value stability, 
fraud and illicit uses, market manipulation, and privacy.
    Since then, Facebook announced its intentions to launch a 
blockchain-based payment system and digital currency, libra, 
that will be governed by an association comprised of up to 100 
financial and nonfinancial members, including Facebook's 
digital wallet service, Calibra.
    Facebook's Libra project has generated renewed interest in 
digital currencies and blockchain generally, including how they 
interact with U.S. and international regulatory frameworks, the 
potential benefits and challenges they pose, and concerns 
around issues like anti- money-laundering and counterterrorism 
efforts, including data privacy, consumer protections, 
commerce, and monetary policy.
    A few weeks ago, the head of Calibra, David Marcus, joined 
the Committee to provide an update on Facebook's proposed 
digital currency.
    During that hearing, Mr. Marcus emphasized some important 
points and commitments, including that there are a number of 
regulators globally that are currently engaged on the Facebook 
project, including the Federal Reserve, FSOC, FinCEN, Financial 
Conduct Authority, the G7, and more; Calibra and the Libra 
Association will have the highest standards when it comes to 
data privacy, and no financial data or account data that is 
actually collected in Calibra will be shared with Facebook; and 
that the Libra Association will be headquartered in Geneva, 
Switzerland, but will still register with FinCEN and have 
oversight from U.S. regulators.
    Though while Libra may have begun this conversation, the 
blockchain and cryptocurrency system is diverse. It seems to me 
that these technologies and other digital innovations are 
inevitable; they could be beneficial; and I believe the U.S. 
should lead in their development. That cannot happen without 
clear rules of the road. As the U.S. develops a more 
comprehensive regulatory approach, care must be taken in 
determining what gaps may be present in the existing framework.
    In mid-July, Treasury Secretary Mnuchin said, ``To be 
clear, the U.S. welcomes responsible innovation, including new 
technologies that may improve the efficiency of the financial 
system and expand access to financial services. That being 
said, with respect to Facebook's libra and other developments 
in cryptocurrencies, our overriding goal is to maintain the 
integrity of our financial system and protect it from abuse.''
    He also noted that Treasury has serious concerns regarding 
the growing misuse of digital currencies by money launderers, 
terrorist financiers, and other bad players.
    As digital currency efforts move forward, I am particularly 
interested in better understanding how these technologies may 
impact individuals' ability to exercise control over their 
data, including the right to receive information about and 
access their data, correct inaccuracies, and delete their data.
    During this hearing, I look forward to learning more about 
how the market for digital currencies has grown and evolved 
over the last decade; different types of digital currencies in 
the marketplace, including their differences with Facebook's 
proposed digital currency; how other countries are approaching 
the regulation of digital currencies and blockchain technology, 
and what we might learn from their successes and failures; 
potential gaps in existing regulatory frameworks; whether 
distributive ledger technology can help to facilitate 
meaningful privacy for individuals' data; and approaches 
Congress should consider in developing a comprehensive 
regulatory regime for digital currencies, including ensuring 
individuals have real control over their data.
    With the appropriate balance of regulation, digital 
currencies and their innovative underlying technology could 
provide meaningful benefits, and I look forward to learning 
more about the ecosystem during this hearing.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Chairman Crapo, and welcome to 
our three witnesses. Thank you all for joining us, some of you 
more than once. Thank you.
    At this Committee's hearing earlier this month, many of us 
of both parties, as you could hear from the Chair, voiced 
concerns, serious concerns about Facebook's plan to run its own 
currency out of a Swiss bank account.
    By and large, we mostly heard deflections and dodging. It 
is exactly what we mean when we say Facebook does not 
understand accountability.
    Facebook has proven over and over, through scandal after 
scandal, that it cannot be trusted. But they just do not care.
    They move fast, they break things--you know, minor things 
like our political discourse and journalism and relationships 
and privacy. Now they want to break our currency and payment 
systems, hiding behind the phrase ``innovation.''
    They want to ``innovate'' Americans right out of their 
hard-earned paychecks.
    Look around at what happens with big corporations say they 
want to ``innovate.''
    Before they blew up the economy in 2008, bankers were 
pitching an innovative new product called ``subprime 
mortgages.''
    Just like Facebook, which claims its new currency will help 
the unbanked and the underbanked--a bit of an afterthought, I 
think, as they were selling it--these mortgages were supposed 
to help people who never had access to credit achieve the 
American dream of home ownership.
    In reality, those mortgages ripped off millions of families 
who ended up losing their homes, they wrecked the economy, and 
they made the staggering inequality in this country even worse.
    The only innovative thing about the financial crisis was 
how the banks managed to stick everyone else with the bill--not 
exactly the kind of innovation most of us were hoping for.
    So I am all for innovation--especially if that innovation 
delivers on its promises of improving people's lives. But big 
tech companies and Wall Street banks are hiding behind 
innovation as an excuse--as an excuse--to take over important 
public services that we all benefit from and should all have a 
say in.
    There are some things--our currency, our payments system, 
the protection of our savings accounts--that everyone in the 
country has a stake in. We should not be handing those kinds of 
public resources over to wealthy special interests so they can 
squeeze more profits out of ordinary Americans.
    Think how hard it is to get quality service from Comcast, 
to know how your privacy was invaded by Facebook, or to know 
how much of your personal data was leaked by Equifax, and, we 
just learned in the last 24 hours, Capital One. And who is 
next? We do not know.
    So we should be a little suspicious when someone tells us 
that only big corporations can be trusted to provide critical 
public services.
    I recently moved into a new office. It was John Glenn's 
office when he, obviously, served Ohio in the Senate. And I 
moved there because he and Annie are long-time friends. We have 
known each other for 30 years. John Glenn spoke at my Eagle 
Scout dinner in Mansfield, Ohio, 50 years ago. But I moved into 
that office primarily because he was an innovator. He was the 
first American to orbit the Earth, as we know, as part of the 
Mercury Project, which would be followed by the Gemini and 
Apollo Missions that would eventually put Americans on the 
Moon. Many of us who are old enough joined in the celebrations 
of the 50th anniversary--at least some of us on this podium are 
old enough--joined in the 50th anniversary--we all did that, 
but we remember the day 50 years ago just this month.
    None of the astronauts did it alone. It took the hard work 
of thousands of innovating scientists and engineers, most of 
them unknown, people like famed mathematician Katherine Johnson 
or immigrants like engineer Miguel Hernandez. These Americans 
did not do it for profit. They did it to serve their country, 
and their successes were shared by every American who saw ``U-
S-A'' emblazoned on the side of Apollo 11.
    It is a reminder that some infrastructure works better as a 
public good, and we should not let big banks or big tech get 
their hands on those public goods.
    The Federal Reserve and other watchdogs need to continue to 
be leaders in banking innovation.
    And if we do not move quickly to improve important 
infrastructure--not just roads and bridges, and highways and 
water sewer systems, but our payments systems, too. If we do 
not move quickly to improve it, we will end up with big 
corporations that have broken our trust again and again and 
again, and that does not make any sense.
    I look forward to hearing from our witnesses today about 
which of these technologies might actually help regular 
Americans. Thank you.
    Chairman Crapo. Thank you, Senator Brown.
    Today's witnesses are Mr. Jeremy Allaire, cofounder, 
chairman, and CEO of Circle, on behalf of The Blockchain 
Association; Dr. Rebecca M. Nelson, specialist in international 
trade and finance at the Congressional Research Service; and 
Professor Mehrsa Baradaran, professor of law at the University 
of California Irvine School of Law.
    I would like to assure each of you your written testimony 
has been entered into the record. We encourage you to try to 
follow our 5-minute rule by watching that clock in front of you 
so that we have time to ask you our questions. And, with that, 
let us begin in the order in which I introduced you. Mr. 
Allaire.

  STATEMENT OF JEREMY ALLAIRE, COFOUNDER, CEO, AND CHAIRMAN, 
CIRCLE INTERNET FINANCIAL LIMITED, ON BEHALF OF THE BLOCKCHAIN 
                          ASSOCIATION

    Mr. Allaire. Thank you, Chairman Crapo, Ranking Member 
Brown, and the Members of the Committee. It is my pleasure to 
appear before you today to testify about the promise of digital 
assets and blockchain technology.
    I have spent the past 25 years helping building internet 
technology platforms and companies in the United States, 
serving millions of businesses and hundreds of millions of 
consumers. In 2013, I cofounded Circle, a global digital 
currency company, seeking to make it much easier for people and 
businesses everywhere to create and exchange value with the 
same ease that we create and share information and content on 
the internet.
    I would like to start by touching on some of the challenges 
I see in the global financial system today. Billions of people 
lack basic access to financial services. Those who do have 
access face a system with exorbitant fees and excessive risk.
    Our banking system is riddled with money laundering and 
crime, with annual illicit proceeds laundered through our 
financial system exceeding $2 trillion, and with 99 percent of 
laundering going undetected.
    Our financial system is also overwhelmed with privacy 
violations and data breaches. Cybercriminals and hostile 
Nations continue to take aim at our financial infrastructure. 
The costs of this are spiraling, and the situation seems to be 
getting worse.
    Access to capital for small businesses is extremely 
limited, with capital markets reserved for only the largest 
companies and those with access to venture capital, and very 
few people have a chance to even invest in these startup 
companies.
    There absolutely can be a better future ahead, one built on 
digital assets and blockchains. These technologies represent 
one of the most significant innovations in modern history. I 
believe that blockchains and digital assets will be viewed as 
more impactful than the rise of joint stock corporations, 
double entry bookkeeping, and modern banking.
    In the coming decade, we will see a series of profound 
changes. Digital currencies will proliferate and become usable 
by billions of people on mobile devices. Payments will become a 
commodity free service on the internet. A new set of internet-
based global capital markets built on digital assets will 
emerge, opening up capital markets for businesses and investors 
everywhere, scaling from today's thousands of companies to a 
world where every person and business can directly access 
global capital markets with the same ease that they access e-
commerce marketplaces.
    Commerce relationships will increasingly be running on 
blockchains, providing a commerce environment with greater 
security, efficiency, transparency, and enforceability, and new 
decentralized forms of digital identity will become available, 
allowing for much safer use of digital services and which will 
radically improve our privacy while more effectively thwarting 
financial crime. As a new fundamental layer of internet 
infrastructure, blockchains will transform the global economic 
system.
    With respect to the policy and regulatory issues facing the 
world, with the growth in digital assets, there are significant 
issues at stake. In the United States, regulatory uncertainty 
and the application of laws that do not contemplate digital 
assets has led to the loss of significant opportunity. The 
Securities and Exchange Commission, for example, is forced to 
apply Federal laws written in the 20th century to technologies 
created in the 21st. This has had a material impact on the 
competitiveness of U.S. companies, with Asian-based companies 
beginning to dominate the market, and is backward--rather than 
forward--looking. Congress should consider new laws that 
protect consumers while not causing companies to fixate on 
nearly century-old definitions.
    The result of the uncertain and restrictive regulatory 
environment has led many digital asset projects and companies 
to domicile outside of the United States and to block U.S. 
persons and businesses from accessing products and 
technologies. In Circle's case, we have received a license 
under Bermuda's forward-looking Digital Asset Business Act, 
which provides a comprehensive regulatory framework for 
companies in the industry, and we are in the process of moving 
our international-facing products and services out of the 
United States.
    It is vital that we allow innovators room to grow in the 
United States. Congress should adopt national policies that 
define and establish digital assets as a new asset class, 
including appropriate rules and exemptions. Without a national 
policy framework for digital assets, I am concerned that the 
United States will not be the world leader in this critical new 
technology, that it will continue to fall behind, and that it 
will not fully reap the benefits of economic transformation 
that digital assets will bring.
    Thank you for your increased interest and attention to this 
significant area of opportunity, and I look forward to hearing 
your questions and opinions.
    Chairman Crapo. Thank you, Mr. Allaire.
    Dr. Nelson.

  STATEMENT OF REBECCA M. NELSON, SPECIALIST IN INTERNATIONAL 
       TRADE AND FINANCE, CONGRESSIONAL RESEARCH SERVICE

    Ms. Nelson. Good morning, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. Thank you for inviting the 
Congressional Research Service to testify on ``Examining 
Regulatory Frameworks for Digital Currencies and Blockchain''. 
My testimony focuses on the international landscape of digital 
currencies. I will summarize my statement with these brief 
remarks.
    In 2009, bitcoin was launched as the first cryptocurrency. 
Cryptocurrencies are digital representations of value. They are 
generally administered using distributed ledger technology and 
have no status as legal tender. Cryptocurrencies strive to make 
payments cheaper and faster. Today more than 2,200 
cryptocurrencies are in circulation. In terms of market size, 
however, cryptocurrencies are a small niche market.
    Some central banks and large multinational corporations are 
looking to take cryptocurrencies into the mainstream. If these 
initiatives move forward, there could be numerous policy 
implications for the United States, including for its financial 
stability, the role of the U.S. dollar, consumer protections, 
money laundering, privacy considerations, and sanctions policy.
    I will make three points today: first, the patchwork of 
cryptocurrency regulations around the world; second, the 
growing interest of central banks in cryptocurrencies; and, 
third, Facebook as a potential game changer for the market.
    The first point is the patchwork of cryptocurrency 
regulations emerging around the world. Cryptocurrencies are 
international in nature, but they are regulated by Governments 
at the national level. There are more than 190 countries in the 
world, and they are taking different approaches to the 
regulatory issues presented by cryptocurrencies. For example, 
cryptocurrency regulations have focused on permitted uses, 
consumer protections, securities regulations, licensing and 
reporting requirements, anti- money-laundering regulations, and 
tax treatment.
    Broadly speaking, Government approaches fall across the 
spectrum. At one end of the spectrum, some countries, such as 
Malta, Singapore, and Switzerland, are striving to become 
cryptocurrency hubs. They view cryptocurrencies as a potential 
source of growth, and they actively attract cryptocurrencies 
with favorable regulation and tax regimes.
    At the other end of the spectrum, some countries, including 
China, India, Egypt, and Taiwan, have banned or strongly 
restricted cryptocurrencies. Their concerns focus on Government 
control of the financial sector, financial stability, and 
consumer protection.
    In the middle of the spectrum, some Governments are 
allowing the development of cryptocurrencies while developing 
regulations to minimize risk. Most major developed economies, 
including the United States and the United Kingdom, have 
adopted this approach.
    Differences in financial regulations across countries can 
lead to instability, especially if cryptocurrencies are adopted 
on a larger scale.
    The second point is that some central banks are exploring 
the creation of their own cryptocurrencies. Some countries plan 
to develop cryptocurrencies as a second legal tender. For 
example, the Marshall Islands is planning to create a 
cryptocurrency called the ``sovereign'' to raise Government 
revenue. Venezuela launched the petro, a cryptocurrency backed 
by oil, as a way to raise money and evade sanctions. Iran and 
Russia are also reportedly considering cryptocurrencies, at 
least in part to avoid sanctions.
    Other Governments are considering making digital versions 
of their existing fiat currencies directly available to 
individuals. For example, Sweden's e-krona project strives to 
reduce its reliance on private payment processing companies.
    The policy implications of such initiatives for the United 
States would largely depend on which countries are involved and 
how the new currencies are structured. The central banks of 
most major developed countries are refraining from such 
initiatives at this time.
    The third point is that Facebook has the potential to be a 
game changer for cryptocurrencies. In June, Facebook announced 
its proposal for a new global cryptocurrency, the libra, to be 
used by billions of people. The libra would be backed by a 
reserve fund of safe assets denominated in a basket of 
currencies. The Libra Association, the nonprofit to oversee the 
currency, is headquartered in Switzerland. Many of the details 
about how the libra would operate remain uncertain.
    The libra has raised a number of questions due to 
Facebook's lack of experience in the banking sector, the size 
of Facebook's network, and concerns about Facebook's handling 
of user data. There are also questions about who would regulate 
it and how.
    Earlier this month, the G7 finance ministers and central 
bank Governors agreed that the libra raises regulatory and 
systemic concerns as well as wider policy issues that would 
need to be addressed before the project is implemented.
    Mr. Chairman, this concludes my brief remarks. Thank you 
again for the opportunity to testify, and I look forward to the 
Committee's questions.
    Chairman Crapo. Thank you, Dr. Nelson.
    Professor Baradaran.

STATEMENT OF MEHRSA BARADARAN, PROFESSOR OF LAW, UNIVERSITY OF 
                CALIFORNIA IRVINE SCHOOL OF LAW

    Ms. Baradaran. Thank you. Chairman Crapo, Ranking Member 
Brown, and Members of the Committee, thank you for the 
opportunity to testify today.
    In the aftermath of the 2008 financial crisis, many 
Americans were frustrated with our banking industry that had 
engaged in reckless risk-taking and predatory practices that 
harmed their customers. They were frustrated again by 
Government bailouts that seemed to save just the perpetrators 
of the crisis. Is it any wonder that, as so many people lost 
trust in the system, they enthusiastically embraced bitcoin, a 
new alternative, nonsovereign currency introduced on the heels 
of the crisis to respond to the very problems of the financial 
sector, which, as Mr. Allaire wrote, is rigged against average 
people.
    I wholeheartedly agree with these concerns. I have spent my 
career trying to bring attention to issues of inequality and 
exclusion in banking. While I am glad the cryptocurrency 
industry aspires to help the unbanked, I do not believe that in 
the United States this is the best solution to the problem. The 
blockchain ledger is a big technological leap forward, but 
problems of exclusion and financial marginalization in our 
financial system are not a result of faulty technology but 
faulty policy.
    One stated goal of bitcoin and digital currencies is to 
establish an efficient and public payments system available to 
all. In fact, Congress already established a public payments 
system: the Federal Reserve. The Fed's exclusive charter is to 
serve the public interest and to increase the integrity, 
efficiency, and equity of U.S. payments. The Federal Reserve 
can and should seek to open its payments system to all 
Americans. Currently, the payments system is only open to 
banks. Even mobile apps and FinTech providers have to go 
through a bank. But for a host of reasons, banks are not 
serving low-income and low-profit customers and communities. As 
a result, a quarter, 25 percent, of Americans are unbanked or 
underbanked. These low-income families spend billions of 
dollars and valuable time paying for checks to be cashed, 
refilling prepaid debit cards, and paying bills in person. 
Practically speaking, the most direct path to financial 
inclusion is by opening the doors to our already established 
payments system. It can and must be updated, but the system is 
secure, handles millions of transactions a day, is accepted by 
all merchants, and is widely understood.
    The alternative path to financial inclusion through 
cryptocurrency relies on waiting for entirely new currencies to 
be developed on new and untested technological platforms, 
waiting for wholesale adoption and use, and then waiting for 
technological advances to penetrate banking deserts, all while 
unbanked populations continue to spend hard-earned wages in 
fees.
    And even if technological solutions are right around the 
corner and we decide that this is the answer to financial 
inclusion, we would be reserving the highly subsidized and 
public Federal banking system for those with enough means to be 
banked and relegating the unbanked to the private 
cryptocurrency markets. This is undemocratic and unfair. The 
Federal Reserve and this Congress are in the best position to 
make this possible by offering real-time payments and retail 
point-of-contact operations, such as a post office checking 
account.
    As far as regulating these cryptocurrencies, I ask that 
Congress and regulators approach these financial products with 
a healthy bit of caution. It is the innovator's job to imagine 
a bright and better new world of disruption and change that 
will benefit everyone. It is a regulator's role to imagine what 
could go wrong to create systemwide crisis that could hurt 
everyone. When it comes to regulating finance, an ounce of 
prevention is much better than a $1 trillion bailout.
    As innovators look forward, regulators and Congress must 
make sure that we have learned the lessons of recent history. 
Though no one wants to stifle innovation or to see the U.S. 
lose its competitive edge, we should remember that much of the 
deregulation that led to the financial crisis was justified on 
these very same worries. Just two examples.
    The derivatives market was deregulated because industry 
experts promised that innovative and complicated new products 
hedged risks. Investment banks and regulators relied on very 
sophisticated mathematical risk models for risk management 
instead of old and outdated rules. Not wanting to stifle 
innovation, derivatives were deregulated in 2002, which led to 
a $600 trillion market that no one was watching too closely. As 
financial regulators discovered in 2008, the complex risk model 
had not hedged its risks at all but had merely placed many of 
them on books of their counterparties. The entire sector was 
exposed. The innovation, the math, and the technology was not 
the problem. The problem was the humans.
    Similar promises and assumptions were made about the new 
and innovative money markets in the 1980s that were also 
similarly deregulated. Money markets were pegged to the dollar 
one to one, just as libra and digital fiat currencies are. They 
promised to be stable and liquid and not susceptible to runs. 
And they were fine until they broke the buck and threatened a 
potentially catastrophic run. The Treasury had to step in the 
guarantee these markets.
    Cryptocurrencies create new money-like instruments that are 
tradable and have inherent value. This is not significantly 
different from derivatives markets, commercial paper markets, 
repo markets, even historic markets and private bank notes. 
These shadow banking markets were unregulated for too long and 
created big problems. So far, none of the cryptocurrencies have 
reached the level of scale where they would present a systemic 
threat. But if their ambitions are believed, they will. And we 
have regulators for that that should look to the safety and 
soundness of the financial sector.
    Technology has and will continue to fundamentally transform 
finance, but there has yet to be an innovative technology that 
has eliminated the risks and frauds and crimes that financial 
regulation is meant to combat, despite many promises to the 
contrary. Cryptocurrencies are either a store of value, 
tradable currencies, investments, commodities, or a payments 
system, or as some have promised, they are all of these things. 
There is nothing about all of these things being put on the 
blockchain that makes it any less likely that it could lead to 
systemic risk, fraud, insider trading, criminal activity, 
panics, bubbles, et cetera.
    If our securities or commodities or banking laws have 
become outdated or unnecessary, or if Congress believes that 
they are too cumbersome, then they should be repealed or 
changed for all applicable parties, not just newcomers. 
Technology and innovation cannot undermine public policy.
    Thank you.
    Chairman Crapo. Thank you, professor.
    I may use my first section of time to talk to you, Mr. 
Allaire. It has been 10 years now since bitcoin was first 
issued, and the digital currency marketplace has evolved and 
grown, I think one of you said, to 2,200 currencies right now, 
cryptocurrencies right now.
    Given this innovation and their complexity, it can be 
difficult to understand the differences between products and 
their benefits and the challenges that are raised for a 
regulatory climate. Mr. Allaire, how can the U.S. develop a 
more comprehensive approach to digital currency and blockchain 
regulation while still acknowledging the unique aspects of 
different projects?
    Mr. Allaire. Thank you, Senator. I think your comment is 
very accurate in that we have seen tremendous development over 
that period of time. As noted in my testimony, there are over 
2,300 different digital assets that are available publicly in 
some form.
    In my testimony I do outline in great detail the kind of 
different categories of digital assets. It is very easy when 
one hears about bitcoin or libra to sort of assume this is all 
the same stuff. And so I think one of the very first things for 
regulators and policymakers is to really distinguish between 
the different types of digital assets that are emerging. We see 
obviously these kind of nonsovereign digital monies like 
bitcoin. There are dozens of others like that that have a focus 
on kind of privacy--preserving, you know, transmission of 
value. They implicitly have a kind of monetary policy 
associated with them, and these kind of new commodity monies 
need to be regulated as we have regulated other commodity 
monies, with appropriate types of financial crimes controls, as 
we have seen put forward with FinCEN and FATF guidance.
    But, also, there are, I think, new things that happen in 
this space. The firms that store these assets, these are 
effectively digital bearer instruments, so not unlike diamonds 
or gold or some other bearer instrument, but they are digital, 
which makes them very, very attractive to people who might want 
to steal them; hence, there has been so much activity around 
theft on these kinds of cryptographically secured assets. And 
so regulations around the custody of digital assets is a really 
critical need and is something that a number of jurisdictions 
have actually put forward and built very specific rules around 
how do we custody these types of digital assets.
    I think as I have also talked about, you know, some of the 
most innovative technology in this field are what I call 
blockchain platforms, and these are really general purpose 
infrastructures for recordkeeping, transaction processing, 
writing code that executes different types of contracts, and 
this is, I think, one of the most important breakthroughs that 
we have seen, frankly, in the history of modern computing and 
ultimately can lead to things like secure voting, new forms of 
governance mechanisms within firms, as well as innovations in 
financial assets.
    These types of assets I think have the broadest 
applicability and should be encouraged in their development, I 
think in the same way that we encourage the rapid development 
of technical standards that made the commercial internet 
flourish.
    Chairman Crapo. Let me interrupt and ask a further 
question. As I understand it, it has been recently that 
Poloniex, the subsidiary of Circle, transferred its 
registration to Bermuda, and in that process it was cited that 
there was regulatory uncertainty in the United States, which 
was a primary motivating factor. Could you explain that a 
little better?
    Mr. Allaire. Yes, absolutely. I think the really critical 
issue is that many of these digital assets do not easily fit 
classifications that we have had in our financial system. We 
would like to say, oh, this is like a currency or this is like 
a commodity that you would use or utilize in some way, or this 
has some feature that maybe makes it look like an investment 
contract.
    Many digital assets have features of all three. It is what 
makes digital assets, I think, very innovative, is that you can 
construct an asset that simultaneously incentives capital, 
incentivizes customer behavior, provides value in terms of 
access to goods or services and payments. And that is a 
breakthrough in how we can develop corporate forms. It is a 
breakthrough in how we can incentivize and develop businesses 
and technologies.
    Unfortunately, in the United States, the guidance that the 
SEC has given is extremely, let us just say, narrow in terms of 
what they would deem to not be a security. The vast majority of 
digital assets, if they were, in fact, treated as securities, 
as the Howey test application and the most recent staff 
guidance provides, effectively would mean that those are not 
accessible to U.S. persons because the utility value of the 
asset would not be possible to function if it is treated as a 
security.
    So there is a fundamental mismatch between the regulatory 
structure and guidance that we have here and the nature of 
these digital assets, and so markets around the world are 
adopting these in not just Bermuda but Singapore, Switzerland, 
even jurisdictions like France introducing tailor-purposed 
definitions of digital assets so that issuers can feel 
comfortable with their obligations, there are investor 
protections associated with those, and security and the like, 
but which do not try and jam these into the respective 
classifications we have today.
    Chairman Crapo. So my time has expired, but to be sure I 
understand your point here, as a part of our policy approach, 
you are suggesting we should not regulate this set of 
innovations as securities?
    Mr. Allaire. To the contrary.
    Chairman Crapo. Or you should?
    Mr. Allaire. So I am sorry. I misunderstood the question. 
Yes, we should regulate these. I believe we need new 
definitions of digital assets as a new asset class, and that 
there are circumstances where there are investment protection 
considerations. There are trading and market considerations. 
There are also circumstances that have to do with utility, 
commodity, and end-user usage, and you have to be able to 
define these in a way where that can work.
    Chairman Crapo. All right. Thank you.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Professor Baradaran, welcome, and congratulations on your 
move to Irvine.
    Ms. Baradaran. Thank you very much.
    Senator Brown. You seem like you might be skeptical of 
Facebook claims of 2 weeks ago in this Committee like the one 
that it is barging ahead with an innovation that will serve the 
unbanked and underbanked. If you can kind of cite some history 
when innovators, financial service companies, others said that 
they wanted to bank the unbanked and the underbanked, and what 
actually happened with those kind of innovative financial 
services products.
    Ms. Baradaran. Yeah, this is not the first time we have 
heard that the main--as Calibra says, their fundamental mission 
is to serve the unbanked and underbanked, and I have heard this 
a lot from the cryptoindustry over the past decade. We heard 
access to credit being offered earlier. And one of the ways 
that that was offered was in the subprime crisis. So the idea 
was we are going to lower underwriting standards, and we are 
going to do the subprime market, the mortgage-backed securities 
market, and the CDO market. And one of the main justifications 
was to provide access to credit, to increase financial 
inclusion. With the tech companies, some of the FinTech 
companies, as well, they usually list that as a prime issue.
    Senator Brown. Thank you.
    Mr. Allaire, to address this, I would like you to--is there 
any reason to treat cryptocurrencies and other financial 
services offered on blockchain, to treat them differently than 
the products that have existed? I want you to answer, Professor 
Baradaran--you spoke to it a bit--and hear your thoughts on 
treating them differently from what we have done over the 
years.
    Ms. Baradaran. I mean, blockchain is new technology, 
absolutely. It is amazing. And maybe we will all be on it soon. 
That is all fine. But what we are talking about is the digital 
assets. I mean, this hearing is about the value created, the 
assets on the blockchain. And so it is sort of a red herring to 
just talk about the blockchain technology. We need to be 
talking about what actually is going on in these markets.
    And so I do not think there is any reason to put--whatever 
we are going to call it, whether it is an investment, a 
currency, some product of value, it does not matter what 
technology undergirds it. What matters is the risks presented 
by this, and there is nothing about the blockchain that 
diminishes these risks like any of the other sort of models 
that we had previously. That is not something that 
fundamentally changes the things that regulations are meant to 
combat.
    Senator Brown. Discuss your skepticism that technology 
alone, like Facebook, libra, or cryptocurrencies, can address 
unequal access.
    Ms. Baradaran. I mean, the problems of the unbanked, like I 
said, are not technological problems. They are policy problems. 
We have the technology to provide an ATM and a debit card to 
people. The most popular product for unbanked communities is a 
debit card. What they need to do is to take their cash--their 
paychecks, to cash it someplace, right? So they need a safe and 
secure place to store their money, and usually people want 
something old and dusty, like a bank, as opposed to some new 
startup to invest all their life savings in.
    So they need somewhere to save their money. They need a way 
to engage in digital commerce. So we have all of these banking 
deserts, especially in rural places, and all we need to do is 
allow some bank, some access for that point of contact cash 
digital, and none of these cryptocurrencies can do that until 
there is wide-scale adoption, and this currency would be 
acceptable by every single point, node, that these people are 
using these payments. And that is just--it may happen, but 
there are many easier ways to do it.
    Senator Brown. You compare cryptocurrencies in some ways 
with going back to the gold standard. Some at the Fed have 
commented on that. Why is that a problem?
    Ms. Baradaran. Well, you know, like Mr. Allaire said, his 
company is a minority in this field. Most of it wants to 
rewrite monetary policy and go back to relitigate those debates 
about whether fiat currency is a good idea. Our Federal Reserve 
has a charter to create elastic currency. That is a debate that 
we have litigated in this Congress, and if we want to 
relitigate the merits of gold versus fiat, this would be the 
place to do it, not at some startup.
    So what is happening in the bitcoin and the cryptocurrency 
market is a lot of these companies just want to create an 
alternative to the U.S. currency, to the U.S. dollar. And I 
understand their frustrations. I cannot imagine this body would 
want to delegate that money-making authority to the private 
market.
    Senator Brown. Thank you. Mr. Chairman, I will just close. 
Your comments about the Federal Reserve I think rang true, that 
they have the authority and the ability to modernize our 
payments system, and I am worried that if they do not move 
quickly, Facebook or Wall Street or some tech company will use 
it to squeeze more profits from hardworking families and 
community banks and will break that critical public 
infrastructure. So thanks for your comments.
    Ms. Baradaran. Thank you.
    Chairman Crapo. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I want to say I 
really appreciate the fact that you and Ranking Member Brown 
have had this second hearing on this issue. I think it is 
really important.
    I do think, you know, blockchain, distributed ledger 
technology, as the professor indicated and Mr. Allaire 
indicated, has great potential. I am a little intrigued that we 
are basically almost 10 years into this, and even in countries 
that have not had the kind of regulatory oversight we have had, 
we have not really seen a full breakout. You know, I would like 
to get to that at some point.
    I want to start, though, with the professor. One of the 
things that Mr. Marcus from Facebook said at the previous 
hearing is that if we are going to go with libra, there was 
going to in a sense be a one-to-one relationship. To me that 
does sound a little bit like gold standard. And, you know, what 
would be the effect if this were to become an extraordinarily 
popular currency? How could this association, the Libra 
Association, acquire and hold onto enough assets to be able to 
allow that one-to-one? I would love to have a brief comment 
from everybody on this.
    Ms. Baradaran. It does seem like the gold standard or like 
the money markets, but one of the things that differentiates us 
is every time we in the United States have had a gold standard, 
it was still backed to money created by the Government. So we 
have never had a pure gold standard, and this is what Libra 
would advise. And so you would have this bucket of currencies 
that would be worldwide. So what happens if everyone in Greece 
all of a sudden invests in libra? That would sort of 
destabilize the U.S. dollar. So if we are going to have a 
basket of currencies and no sort of central issuer, there are 
potential problems. I am not saying they cannot be solved, 
but----
    Senator Warner. But wouldn't you also have to have, you 
know, in a sense, enough basket of currencies that would be 
available on almost an as-needed basis----
    Ms. Baradaran. Yes.
    Senator Warner. And, again, if you are talking not millions 
or billions but hundreds of billions or trillions potentially, 
Mr. Allaire, do you think that really is what Marcus meant, 
that there would be a literal one-to-one?
    Mr. Allaire. Yes, thank you, Senator. My understanding is 
that, yes, it is a one-to-one based on a mixture of reserve 
currencies that they would ultimately specify.
    I would like to comment on this particular topic. I think 
it is critical, which is, you know, the first wave of these 
private monies, like bitcoin, decentralized private monies, 
were very much focused on establishing a global digital 
currency with a very specific monetary policy ideology. And 
those will continue to grow and very likely flourish to the 
degree that people are interested in pursuing that form of 
store of value.
    However, the critical mainstream use cases for the 
financial services sector built on blockchains has really 
required the development of what we refer to and the industry 
refers to as these ``stable value token'' or ``stable coins,'' 
libra being an example of that. But these have been around for 
a number of years, and 2 years ago, with one of the other 
leading companies in the industry, Coinbase, we created a 
consortium to develop an open standard for stable value 
currencies to work on blockchains, and we launched in Q4 of 
last year the U.S. dollar coin, which is not a basket. It is 
U.S. dollar coin, and it is a one-for-one backing model as 
well.
    Senator Warner. I still do not understand how you fully 
aggregate that one-to-one backing, but I want to get to a 
couple more questions quickly.
    One is, you know, if you have got--if the libra approach 
has got a basket of currencies, don't you have currency risk 
there? And if you have got currency risks, shouldn't there be, 
again, some additional at least information in terms of 
consumer protections?
    Ms. Baradaran. Absolutely. There is currency risk, and 
there is also the same risk of the shadow banking market 
created, right? So the commercial paper markets and the repo 
markets and the money markets, these were all dollar-
denominated currencies. They were not new currencies. But there 
is new money and value creation in a different format, and this 
is exactly what we have here. And not to say that, you know, 
they would not have 100 percent reserves, just to say what is 
the point, right? We have U.S. dollars. If we want more of 
them, the Fed could do that.
    Senator Warner. It also seemed to me a little bit--if you 
have 100 percent reserves, where is Libra going to make money 
on this if you have got that maintenance of that backstop all 
the time?
    Mr. Allaire, I have got only a few seconds left. I am open 
on this question around, you know, tokens vis-a-vis securities. 
You have said there ought to be a new framework, a new 
structure. Where would you put the regulatory authority in the 
United States if you were to be able to wave that magic wand?
    Mr. Allaire. Sure. My recommendation would be the 
development of a national policy on digital assets, definitions 
of digital assets, specific rules and exemptions around those, 
and have a single supervisor over the firms that are regulated.
    Senator Warner. That is easy to say that, but you did not 
answer my question. Would you create a whole new regulatory 
system for digital assets? Or are you going to pick--and I have 
run out of time. The Chairman is giving me a second. Where 
would you place this within our existing regulatory structure, 
or would you create something brand new?
    Mr. Allaire. It is a very good question, Senator. I am 
certainly not an expert on the efficacies of the different 
regulatory agencies, financial regulatory agencies and how to 
best organize those.
    Senator Warner. Thank you. I do think the question about 
why there has not been a breakout beyond digital currency is 
something I would love to get an answer to as well. Thank you.
    Chairman Crapo. Thank you.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thank you to the 
testifiers.
    Professor Baradaran, I want to ask you about the Federal 
law that says that only the Government can mint a coin. And, of 
course, the reason it was written that way is because that was 
the only way that it could be conceived that an entity could 
create a currency. And so the basic question is: Knowing that, 
OK, only the Government can mint a coin, but these people are 
trying to do something that sort of rhymes with that, although 
it seems to comply with the statutory language, which is old, 
what do we do now?
    Ms. Baradaran. Yeah, so I do want to differentiate that, 
like Mr. Allaire said, not all cryptocurrencies want to 
establish new alternative currencies, but certainly the 
majority of the market, which is bitcoin, does. And we do have 
laws against this. And I want to be clear that we created these 
laws because we had problems. We have had problems of private 
issuance of coins. The U.K. had the Stamp Act before that. So 
we have experienced what it is like to have alternative 
currencies, and we have purposefully put that power in the 
Federal Government.
    Senator Schatz. Mr. Allaire, I want to see if I can find an 
area of agreement between you and the professor, but I do not 
have a lot of time. So here is the thing: It sounds like you 
think this will democratize the use of financial products. But 
I am sort of stuck on what she said and tend to agree with what 
she said, which is to say that there is a much more 
straightforward way to do that. There are public policy 
proposals all the time. There are things that our regulators 
could do under existing statute to democratize the process and 
to decentralize the process.
    And so what I am trying to get at is: Do you really think 
that in a society in which only 81 percent of the public 
currently has a smartphone, we are anywhere close to 
democratizing the use of these products? I mean, what it sounds 
like to me is tech people wanting to wave a wand and skip a 
bunch of steps and avoid the tough politics of doing things for 
people and saying we have got a new tech that will solve all 
this stuff.
    So I am just wondering whether you want to speak to the 
limitations societally of what you are doing. I do not doubt 
the importance of the technology or that we will probably all 
be using it in two decades. But I think that that is a 
different assertion than, oh, and by the way, it is going to 
solve all these other societal ills. Go ahead.
    Mr. Allaire. Well, first, you know, I think the motivations 
for founding this company in particular, Circle, and I think a 
lot of the entrepreneurs, computer scientists, economists, 
cryptographers, and others that work in this field is not 
focused on financial wizardry and how to, you know, get rich 
quick. There is certainly a fair share of that. It is focused 
on how do we build a new global infrastructure for economic 
activity.
    Senator Schatz. OK, but what do you do about like--just as 
a start, 19 percent of the American public does not have access 
to the device that you would use to execute a transaction. And 
what do you do about the fact that adoption is nowhere near 
universal? Are we just sort of supposed to place our bet on 
this tech as solving a bunch of problems and leaping over all 
the existing ones?
    Mr. Allaire. No, I do not think so at all. I think, you 
know, first of all, these technologies develop over time. In 
1998, well, the internet existed but no one had broadband 
access. You know, personal computers were relatively new in 
terms of their adoption. Should we not have focused on 
innovating and building the cloud infrastructure, higher-speed 
internet connections, come up with policies that encourage 
broadband adoption? Should we not have made those investments 
and policy choices?
    Senator Schatz. No, but since you are asking the question, 
let me answer the question. The important thing here is to 
understand what this tech does and what it does not do, because 
if we are going to establish a regulatory framework for this 
tech, we need to not be so triumphant about all the problems 
that it is going to solve. But we also have to be clear-eyed 
about the problems it may create, but also the potential for 
it.
    And so when tech executives and their funders talk as 
though all of societal ills will be solved by a new code, you 
will forgive us if we are little bit skeptical about all of 
that. I do not doubt the potential for this tech. I just do not 
think it is actually going to bank low-income communities. And 
I do not think you have persuaded anybody here that it is going 
to do so.
    Mr. Allaire. So there is no silver bullet from technology, 
very clearly. These are human issues, and there are real 
policies issues. I think the risks that we have to address in 
the financial system, whether it is access, criminal abuse, 
data security, privacy, those exist significantly. This 
technology actually, you know, does provide an avenue to 
improve upon those. But there is no silver bullet here. This is 
people who have to build and innovate and collaborate with 
policymakers.
    Senator Schatz. And I will take the professor's answer for 
the record, if you do not mind.
    Thank you.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Thank you, Chairman Crapo 
and Ranking Member Brown, for this important discussion. And 
thank you all for being here.
    Let me follow up on that, and let me start with you, Mr. 
Allaire. I do think that blockchain technology, there is 
potential for it. It is the future. It is a platform that has 
the ability to transform so many sectors of this country from 
what we are right now, the financial sector, to the energy 
sector, to health care records, to everything. I think there is 
potential here, and it is not going to go away. It is something 
we have to address, because if we as a country do not lead in 
this technology, China or some other country is going to do so.
    So, Mr. Allaire, let me talk to you about this, because you 
talked about defining digital assets. When you are talking 
about that, are you only talking about it as it pertains to the 
financial sector? Or are you looking at other potential areas 
where blockchain can be used in our economy?
    Mr. Allaire. Thank you, Senator. You know, in my written 
testimony, I talk about this category of digital assets which 
are often called, you know, ``tokens'' or ``tokenized digital 
assets''.
    Senator Cortez Masto. So that is just as it refers to 
cryptocurrency, some sort of currency?
    Mr. Allaire. It is not necessarily. So you may have a token 
that represents boats. You may have tokens that are, you know, 
associated with health care records, as you said. You know, the 
breakthrough here is that we have a public, secure, tamper-
proof infrastructure that is evolving and emerging for 
recordkeeping and processing of data that is more resilient and 
ultimately more private than some of the infrastructures that 
we have today, and that can be applied in many industries in 
many significant ways.
    A lot of the innovations that are happening with these 
digital assets that are built on blockchains may have some 
fundamental utility within an industry, a business, a product, 
a service. But that digital asset also may be associated with 
some financial characteristic, and the coupled of the utility 
and financial characteristics is part of what makes these 
innovative, and it is the definitions there that I think really 
need to be more clearly defined in the United States in 
particular in order for businesses who want to build on this to 
be able to innovate and issue new types of digital tokens that 
can be applied very, very broadly in many, many industries.
    Senator Cortez Masto. Thank you. And so, Professor, would 
you disagree with that? And is your concern more on the 
financial sector piece of it?
    Ms. Baradaran. Yes, my concern is on the digital asset 
side. The blockchain is neutral. Technology can be used, like 
Mr. Allaire said, in voting and all these other things.
    I do want to point out, though, that the blockchain has 
potential to be more secure and reliable. So far it has not 
been, and it has been hackable. There have been security 
issues. I think, again, there is a lot of potential, and it has 
been 10 years and billions of dollars of, you know, venture 
capital, and I still do not think it is better than some of the 
payments systems that we currently have, though it could be.
    Senator Cortez Masto. OK. So when you talk about--let us go 
back to the unbanked, because in Nevada we have the highest 
rate of underbanked adults in our State as opposed to the rest 
of the country. But can you do me a favor and can you expand on 
why you think new digital currencies will not meet the banking 
needs of rural and low-income residents that are not well 
served by our current banking system?
    Ms. Baradaran. Yeah, I mean, the problems of low-income and 
underbanked customers is not that they are unsatisfied with the 
current technology being offered to them. The problem is that 
they live in banking deserts where there is no place for them 
to take their cash. Nevada is a huge cash-based economy. Where 
do you take your cash to put it into a savings account that 
would then give you are debit card that you can use in e-
commerce? There is no place to do that because of a variety of 
reasons, but mainly because banks no longer are interested in 
serving those customers.
    And so how does any technology, any digital-based currency 
help when people are operating in cash? Now, do we need to get 
people off cash? Absolutely. How do we do that? I mean, this 
blockchain conversation is, you know, four or five steps ahead 
of where we need to start, which is how do we get ATMs that do 
not charge $8 per person?
    Senator Cortez Masto. I was just going to say, so the 
answer might be looking at why there is a charge of a fee for 
an ATM or why you have to have a minimum balance of $1,500 or 
more in a bank account before you can even open a bank account.
    Ms. Baradaran. Yeah, and this is where I truly am grateful 
for this industry for bringing attention to these things 
because, really, there are problems with our payments system. I 
am not trying to defend them to say that they are perfect and 
we should use them. There are huge problems, accessibility 
issues, they are slow, they are inefficient, et cetera. But 
they have a public mission, and we can fix them, and we should 
fix them as opposed to sort of outsourcing it to the tech 
sector.
    Senator Cortez Masto. Thank you. I appreciate that.
    Chairman Crapo. Senator Van Hollen.
    Senator Van Hollen. All right. Thank you, Mr. Chairman and 
Ranking Member Brown, and I thank all of you for your 
testimony. I have been trying to listen from the TV monitors. 
And I want to thank all of you for your testimony, and I 
appreciate the series of hearings we have had on the subject of 
cryptocurrencies and new technologies. But I was listening to 
you, Ms. Baradaran, talk about the importance of planning for 
these technologies, but also the need right now to move to a 
real-time payment system, because our failure to move forward 
with this technology, as so many other countries have already 
done, is costing millions of Americans billions of dollars 
every day, right?
    Ms. Baradaran. Absolutely.
    Senator Van Hollen. And, you know, Mr. Chairman, I hate to 
sound like a broken record on this. Whenever the Fed Chairman 
or other Members are here, I urge them to move forward right 
away on building out that faster payment system. I hope that 
they will make a decision soon.
    Let me just, if I could, Mr. Chairman, put in the record an 
article, and the headline--this is a Post article from a little 
while ago, headline: ``A Former Bank CEO Named His Boat 
`Overdraft'. Now That Bank Is in Hot Water Over the Fees''.
    The point is that for people who are living paycheck to 
paycheck, the inability to access their funds in real time is 
costing them a huge amount of money in fees and overdraft.
    Could you, Professor, just again elaborate on what it is 
costing the public right now and how we have it within our 
power right away to move forward on its front?
    Ms. Baradaran. Yes, and if we are worried about the U.S. 
lagging behind, this is a huge area where we are lagging behind 
other countries. In the bill that you introduced, real-time 
processing is essential. So if you do not have a buffer of 
wealth, if you do not have a big bank account, you need to 
spend your paycheck as soon as you get it. And this is why 
people go to check cashers. They would rather pay 10 percent of 
their paycheck just to be able to use it to pay the rent and 
buy their groceries. Instead, they go to a bank, they put their 
paycheck in, and 3 to 5 days later, 3 to 5 business days later, 
they would have to go back to the bank to be able to get that. 
That is a main reason a lot of people do not use bank accounts.
    And so what does it cost them? Well, not just the check-
cashing fees, but the money is sucked out of their accounts, 
and with these fees, it also makes them rely on payday loans. 
And they, of course, have got 300 percent APR and just more 
wealth being sucked out. These are really simple problems, and 
I think part of being poor is that there are a lot of problems 
that other people do not realize that you have, and I think we 
need to have a little bit more compassion about what it is like 
to not have that much money and how we can make their lives 
better.
    Senator Van Hollen. Well, thank you. As you mentioned, 
Senator Warren and I and others have introduced legislation to 
move forward in this area, but really the Fed has it within its 
power and authority to do this right away. Can you just talk a 
little bit about how they have that authority or your view that 
they should move forward immediately to catch up with many of 
our global competitors?
    Ms. Baradaran. Yes, they have the authority. They say that 
they are studying it. I do not know how high on the priority 
list it is, but I think it should be. You know, as the 
Brookings Institution pointed out, the low-income people are 
spending billions of dollars in overdraft fees. We could 
actually just put that money back in their pockets through 
adopting this very simple technology. And, yes, I think the Fed 
should definitely do it.
    Senator Van Hollen. I appreciate that.
    Mr. Chairman, I would also like to put in the record 
another article from FinTech entitled ``Go Slow on Libra. Speed 
up on Faster Payments''.
    Chairman Crapo. Without objection.
    Senator Van Hollen. Thank you. It makes the point that some 
of us have been trying to make, which is that the Fed, again, 
could do this now and really provide relief and put billions of 
dollars back into the pockets of working people. And I hope 
they will move forward quickly. In the meantime, we will 
continue to push for our legislation.
    Thank you.
    Chairman Crapo. Thank you, Senator.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. Thank you, Ranking 
Member Brown. Thank you to the folks who are testifying.
    Dr. Nelson, I guess the first question for you is: Do you 
agree that cryptocurrencies are leaving the U.S.?
    Ms. Nelson. Sure. It is certain that other jurisdictions 
are out ahead of the United States in trying to become 
cryptocurrency hubs.
    Senator Tester. And so do you think that they are leaving 
because they are looking for a safe haven to avoid regulation? 
Or is there another reason?
    Ms. Nelson. Some of the cryptocurrency hubs are actually 
using regulation as a way to attract cryptocurrencies to their 
borders. It is not a----
    Senator Tester. So increased regulation.
    Ms. Nelson. Well, not necessarily increased regulation, but 
perhaps clarity over regulation, that by giving regulatory 
certainty to consumers and businesses in the cryptocurrency 
market, they are getting out in front on that and attracting 
cryptocurrencies to their jurisdictions.
    Senator Tester. So one of the things that was brought up--
and it has been referenced several times in the hearing with 
Facebook, but one of the things that is of concern, I think, 
with you and others is how do you prevent bad actors from 
laundering money that is financing terrorist activities or 
whatever. Any ideas in that vein?
    Ms. Nelson. Money laundering is a huge concern for 
cryptocurrencies. Countries around the world are looking at 
their money-laundering regulations and how to address 
cryptocurrencies. Even the cryptocurrency hubs like Switzerland 
have money-laundering regulations. They are working to make 
those more robust. The Financial Action Task Force and 
international law----
    Senator Tester. Do you believe those regulations could 
apply to cryptocurrency and have them work?
    Ms. Nelson. And have them work? Well, I think money 
laundering continues to be an issue. The Financial Action Task 
Force is trying to update its regulations to get in front of 
the technology. I think it is a continuing concern.
    Senator Tester. So the question is: Is there a way to put a 
regulatory design in place that will discourage money 
laundering with cryptocurrencies?
    Ms. Nelson. I think some of the licensing and reporting 
requirements, transparency requirements, can help address some 
of these concerns.
    Senator Tester. OK. The Facebook fellow who was here talked 
about--I asked him a question about what happens if the 
accounts get breached, the same way my credit card has happened 
on occasion, and it has not cost me any money. The banks have 
taken care of it, thank God. And I think it may have happened--
it happens to everybody at some point in time--through no fault 
of their own, I might add. So the same thing could be applied 
here. And his response to that was that they have a one-to-one 
backup on the dollars.
    I do not know if you watched that hearing or not--you did? 
And any of you can respond to that. That seems to me to be--I 
mean, that is incredible to have a one-to-one leverage. Do you 
think that is real?
    Ms. Nelson. I think one of the concerns about the libra is 
how the reserve assets would function. They pledge to have safe 
assets today, but what is a safe asset today may be less safe 
tomorrow. So even if it is backed on a one-to-one ratio, will 
that always be true in a safe asset? And then what happens if 
there is a run on libra, if it is being used as a global 
currency, used by billions of people.
    Senator Tester. And you can answer this, too, Professor, if 
you would like. Go ahead.
    Ms. Baradaran. Yeah, I mean, there is what Facebook 
sometimes states it is going to do and then what they end up 
doing, and then, oops, sorry, we were going to do that thing, 
and we accidentally did not.
    Senator Tester. So would it kill cryptocurrency in the laws 
that we are probably going to be passing because I do not think 
we are going to leave it entirely up to the regulators, since 
they brought it up, if we stipulated that there had to be a 
one-to-one.
    Ms. Baradaran. Cryptocurrencies, like we said before, there 
is a variety. I mean, if you are just talking about 
cryptocurrencies, they actually are trying to be alternative 
currencies. So they are not worried about one-to-one.
    Senator Tester. OK. Let us talk about the libra 
specifically, because that--and, look, I am not an expert in 
this field at all, but it appears to me that they are trying to 
take the dollar, because you can buy them with the dollar, and 
then make a transaction across country lines.
    In that kind of a scenario, which is what I interpret them 
to be offering up, would a one-to-one be something that we 
could require without putting them out of business? Or would 
that be good, prudent fiscal responsibility?
    Ms. Baradaran. I think we still are unsure. One-to-one to 
what? It is not just dollars. It is a basket of currencies. So 
what is that other one?
    Senator Tester. So in libra's case, one-to-one to every 
libra, they have got the equivalent dollar amount behind it. I 
take it what you are saying is there are ways to game the 
system if they want to game it, regardless of what we say.
    Ms. Baradaran. As we say in law, definitions are tricky. 
You know, you can define something as a one-to-one, but what 
does that mean? One-to-one to what, right?
    Senator Tester. Yeah, I got you.
    Well, I appreciate you all being here. I would just say 
that I think this is coming, and we have to be ready for it. 
And I think that all three of you can be an incredible resource 
to us as we figure out how we are going to deal with it.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    I will go to another round of questioning, and I want to 
start my questions this time with you, Dr. Nelson. In your 
report, you described the different approaches that different 
Governments have had to cryptocurrency. What are some of the 
key attributes of countries whose regulatory frameworks are 
considered more accommodative? And how do they approach issues 
relating to money laundering and the other types of issues that 
we are talking about here?
    Ms. Nelson. Some of the countries that are trying to build 
themselves as cryptocurrency hubs are really trying to adopt 
clear regulations at the outset on how cryptocurrencies are 
going to operate. This is to give regulatory certainty to 
consumers and businesses who want to use cryptocurrency 
regulations.
    That said, some of their regulations have been described as 
more favorable to cryptocurrency industries. For example, in 
Switzerland, they have regulations for money laundering 
addressing cryptocurrency. They have provided guidance on how 
ICOs should be treated in regards to securities regulations. 
They provide guidance on what kind of licenses cryptocurrency 
industries need to operate within Switzerland. So it is not 
that these countries are trying to shirk regulations. They are 
trying to provide certainty while also balancing innovation to 
encourage the adoption of cryptocurrencies.
    Chairman Crapo. So it is not so much that they are trying 
to create the Wild West, so to speak, and invite folks to come 
there because there is not really significant regulation. It is 
that they are providing clarity and--well, maybe, Mr. Allaire, 
you could address that.
    Mr. Allaire. Sure. As we looked at the ongoing expansion in 
our international business and operations, you know, it was 
very clear to us that for our non-U.S. business--you know, the 
U.S. regulations are the U.S. regulations, and what we do here 
is exactly what the law stipulates. But outside the U.S., you 
know, there are opportunities for digital assets and 
blockchains that are larger. And so we spent time to look at 
all the different jurisdictions, and the things that we were 
focused on as a firm were we wanted there to be an actual high 
bar from a regulatory perspective, meaning that there needed to 
be, you know, significant, serious firms where fundamental 
risks were being supervised, enterprise risk, cybersecurity 
risk, financial crime risk, anti- money-laundering risk, and, 
most critically in the case of digital assets, custody risk--
the protection of these assets from theft, having the 
appropriate insurance around them--but also clear definitions. 
And I think this gets to what one of the other panelists has 
said and I have said as well, which is very clear definitions 
about what constitutes a token or a digital asset to provide 
that kind of clarity to businesses that want to operate there; 
whereas, I think in some other jurisdictions, including the 
United States, there is an incredible gray area. It makes it 
very difficult for businesses to know where they stand and 
where to operate.
    So those are some of the things that we considered and have 
found in other jurisdictions.
    Chairman Crapo. So I want to get into data privacy, and I 
may have to do that after Senator Brown takes another round. 
But in the last couple of minutes that I have here, help me 
understand. If a digital currency is to become global, like 
Libra seeks to do, how does it do that? How does it get global 
acceptance if it faces 190 different countries with different 
jurisdictional issues and different regulatory systems? And 
maybe another way to ask my question is: If the United States 
were to decide--and I am not saying that it should, but if the 
United States were to decide we did not want cryptocurrency to 
happen in the United States and tried to ban it, I am pretty 
confident we could not succeed in doing that because this is a 
global innovation. But how would a company that wants to create 
a cryptocurrency that has global reach get into the United 
States? Or how would that impact the United States? Do you see 
the question I am asking?
    Mr. Allaire. I am happy to take part of that, Senator. You 
know, I think the challenge that we all face with this is, you 
know, some of these cryptocurrencies, they are literally just a 
piece of open-source software. There is nothing else. It exists 
on the internet. It is open-source software. Anyone can 
implement it. It runs anywhere the internet runs. And these 
have a monetary policy where these assets are algorithmically 
generated, and they exist everywhere the internet exists. They 
will soon exist, you know, interstellar. They will exist, 
again, anywhere the internet exists.
    That is a challenge that every Government in the world now 
faces, that money, digital money, will move frictionlessly 
everywhere in the world at the speed of the internet, hopefully 
with a high level of security and data protection around it.
    One of the promises of this technology very specifically is 
a higher standard around privacy, a higher standard around 
confidential transactions and data protection. That is one of 
the core infrastructure focuses of these blockchains, and so I 
think those needs can be met. There is the flip side, which is 
how does law enforcement get its job done and how do 190 
countries get an agreement about that. You know, FATF 
guideline, for example, that are specific to virtual assets 
have come into place, which I think could be a road map to that 
as well.
    Chairman Crapo. I will have to ask Professor Baradaran and 
Dr. Nelson to either answer--if I can get to another round, and 
maybe I will, we can answer that question then.
    Senator Brown.
    Senator Brown. Thanks.
    Professor Baradaran, I have a series of questions for you. 
Mr. Allaire said that he did not really know who should 
regulate digital assets, and Facebook essentially said that 2 
weeks ago. Let me ask you a series of mostly yes-and-no 
questions.
    Do we already have rules and regulations for currency?
    Ms. Baradaran. Yes.
    Senator Brown. Do we have rules and regulations for 
securities?
    Ms. Baradaran. Yes.
    Senator Brown. And do we have rules and regulations for 
payday loans?
    Ms. Baradaran. Yes.
    Senator Brown. Sort of.
    Ms. Baradaran. Sort of.
    Senator Brown. Do we have rules and regulations for 
exchange-traded funds?
    Ms. Baradaran. Yes.
    Senator Brown. Are there any new financial products that 
have been invented that we have never seen before, or are we 
talking about financial products that already existed but now 
run on blockchain?
    Ms. Baradaran. Yes, I think--these are my----
    Senator Brown. If you would expand on that.
    Ms. Baradaran. The technology is new, but the sort of 
essence of the product is something that we have seen before.
    Senator Brown. So if there are not really new products, why 
would we need new rules and new regulations?
    Ms. Baradaran. I think it is important to have clarity. It 
is very important for people to understand what it is. I do not 
think we have to reinvent the wheel on any of this stuff. I 
think we have clarity in each of the jurisdictions. So the 
extent a digital asset hits the currency model or the 
securities model, we have already sort of debated those models, 
and we can enforce those rules.
    Senator Brown. Are you concerned that tech companies seem 
to be pretty strongly resistant to rules and regulations?
    Ms. Baradaran. I think there is a lot of faith that some of 
the problems that we are a society face are solved by tech, and 
I think sometimes there is a naivete on the part of some of 
these tech founders in what tech can accomplish and what is 
better for public institutions. And so I think sometimes tech 
is great and can solve a lot of problems, use the internet 
before, and I think nobody wants to ban--no one is saying ban 
blockchain. No one is saying ban these digital currencies. All 
we are saying is let us just protect people in the ways that 
regulations are meant to protect them. So if we had said in the 
early days of the internet, look, the internet is going to take 
over education soon, so let us just not worry about fixing 
public schools and the internet will educate the young, right? 
So I think it is essentially that. We still have these public 
institutions that are doing it, and we do not go around them 
just because we have a new potentially revolutionary 
technology.
    Senator Brown. Does the resistance of--big tech companies' 
resistance to regulation, does it remind you of resistance by 
big banks to regulation? Are there similarities there?
    Ms. Baradaran. There are similarities there, yes.
    Senator Brown. What does that tell you?
    Ms. Baradaran. I mean, I just think we need to be cautious. 
I think we need to be--again, innovators dream big, and 
regulators just need to also imagine bad scenarios. I think we 
as regulators and Congress people do not need to just swallow 
it wholesale. It is good that we have innovators and 
entrepreneurs that have really beautiful visions of the future, 
and I hope that they are right. But it is also good to have a 
counterpoint to that where regulators say, hey, what could go 
wrong here and try to imagine those scenarios, too.
    Senator Brown. I have said a number of times in this 
Committee that many of my colleagues seem to have--maybe we all 
do to a degree--a collective amnesia about what happened to our 
financial system 10 years ago. What lessons do we learn from 
weakening regulations in the banking sector a decade-plus ago? 
What lessons do we apply to tech companies here?
    Ms. Baradaran. I think one of the things that keeps being 
said is, you know, we are going to lose--the U.S. is going to 
lose its, you know, leadership worldwide if we do not let these 
companies do whatever they want. And I think that is not--we 
cannot compare the U.S. economic system to Malta or Bermuda or 
to Venezuela or even China. We have the strongest currency 
worldwide for a reason. We have great technology companies for 
a reason. We have got a very, very strong and healthy sector--
not to say that it is perfect, just to say that, you know, oh, 
we are all going to leave to Malta, I do not think that should 
make regulators think that, OK, well----
    Senator Brown. I know skeptics of your view say that the 
reason we have such strong innovation is because Government 
gets out of the way and lets big tech or lets Wall Street 
invent new products and do what they want.
    Ms. Baradaran. I think we said that until the financial 
crisis, and then with a $1 trillion bailout, and the Fed is 
left holding the bag. And so I think we just--you know, we say 
that on the front end, let them do it, but let us remember what 
happens when we sort of do not regulate those things that 
matter. And it is not just all technology. Not all technology 
is similarly risk-inducing. Again, the internet and email, all 
of these things, we keep comparing blockchain to these things, 
but it is very different in a lot of ways, specifically digital 
assets on the blockchain. We are talking about trading and 
markets and finance. We are not talking about just neutral tech 
here.
    Senator Brown. Thanks. Thank you, Mike.
    Chairman Crapo. Thank you, Senator Brown.
    I have a few more questions. As I indicated, I would like 
to get into the data privacy issue a little bit here. As I am 
sure you know, Senator Brown and I together have jointly 
expressed serious concerns over the collection of data on 
individuals and the phenomenal explosive growth of that 
collection and then use of data. That happens without 
individuals usually knowing that it is happening or when it is 
happening or knowing what has been collected on them or how it 
is being used.
    And each of you could respond to this if you would like to. 
Will this new technological innovation that we are seeing into 
digital currencies and blockchain technologies give us an 
ability to meaningfully enhance individuals' privacy rights and 
protections? And if so, kind of explain how so?
    Mr. Allaire. I would be happy to start. Thank you, Senator. 
I have addressed this somewhat in my written testimony as well. 
You know, if you step back for a moment and you look at these 
public blockchain infrastructures that are being built, they 
are designed in a way to provide a global, open recordkeeping 
system that is highly secure, that is very tamper resistant, 
and which can work in a kind of interoperable way all around 
the world.
    One of the killer apps, if you will, that is being explored 
to build on top of these--and there are many, many projects, 
startups, companies, Governments even that are working on 
this--is the development of essentially new standards for what 
is often referred to as self-sovereign digital identity, the 
ability to have a digital identity where you as an individual 
have self-sovereignty over who can access attributes of your 
digital identity, how they can access it, the ability to 
provably demonstrate something to someone, say someone needs to 
know your age in order to conduct a transaction, without having 
to disclose to them your address or other information, so the 
ability to have much more fine-grained, selective ways to 
attest, through attestation methods, to attest to who you are 
or what you do without actually having to transmit all of that 
sensitive personal information.
    The data breaches that we have today, the massive privacy 
violations that happen continually on centralized internet 
services, those are the core, core issues that blockchain 
infrastructure is being designed to try and address.
    So it is one of the areas I am most hopeful, and when you 
couple that kind of digital identity model with global digital 
currencies, you actually can imagine a financial system that 
both preserves privacy, provides mechanisms that are still 
highly useful to law enforcement to pursue the bad guys, but, 
you know, keeps people in control. And so I think those things 
are, you know, very much becoming possible and in front of us.
    There are still needed policies around that, around who can 
add elements to these digital identities and how they are 
accessed and reporting and other things. So there is absolutely 
the need for very clear laws and policies. But it is a 
technical breakthrough that is emerging that could solve some 
of these issues.
    Chairman Crapo. So before I go to Dr. Nelson and Professor 
Baradaran, going beyond financial transactions, could this 
innovation or technology that you are talking about, could that 
be used outside financial transactions, for example, somebody 
surfing on the web or looking to buy a washing machine on the 
web, and having their identity grabbed or having their search 
identified and then utilized in artificial intelligence to 
manipulate them?
    Mr. Allaire. It could be applied. It could be applied in 
putting people in more control over who is accessing their data 
and how, when they are interacting with any digital service, 
not just financial services. It is applicable very broadly.
    Chairman Crapo. All right. Dr. Nelson or Professor, would 
either of you like to----
    Ms. Nelson. I would just add that Facebook has totally 
changed the debate about privacy and cryptocurrencies. We used 
to focus on whether cryptocurrencies gave users too much 
privacy and that it allowed bad actors to engage in nefarious 
activities. Now with Facebook's libra, the concern is about 
whether users of cryptocurrencies will have enough privacy and 
the potential for economic transaction data to be merged with 
other data about users on the internet, including other 
Facebook platforms. And this issue then ties into the 
differences in regulatory approaches taken by countries around 
the world. Countries regulate privacy differently, and so if 
you have a global currency with different regulatory approaches 
relating to privacy, that is maybe something that regulators 
really want to address and get in front of.
    Chairman Crapo. Thank you. Professor.
    Ms. Baradaran. Yes, I was going to say there are two 
different kinds of privacy. Do we want to privately buy drugs, 
child porn, or send money to terrorists? No, and we have laws 
for that, right? So we do not want that kind of privacy. But we 
also want the privacy of, you know, Facebook not using 
algorithms and data to target me knowing, you know, oh, she is 
sad and does not have enough money in her bank account, so I am 
going to give her a payday loan when I know that she is going 
to take it up. That is the kind of privacy where it is not 
individually--maybe they do not know me personally, but they 
know the type of person I am and what kind of mistake I would 
make.
    And so those are the kinds of things--they are two very 
different types of things, and like she said, Facebook presents 
kind of a different problem than bitcoin, which, you know, is 
popular for people who want to buy illicit and extralegal 
drugs. And this is why you see Venezuela, Iran, and other 
countries with sanctions, you know, wanting to evade them using 
these platforms.
    Chairman Crapo. Anybody want to add anything else to that?
    [No response.]
    Chairman Crapo. Well, there are obviously tons of questions 
here. I have a lot more myself, and as we move forward, I am 
sure that we will be communicating with you to get your advice. 
We appreciate you all coming today and sharing your information 
and expertise with us. This is obviously a very critical issue. 
As I said at the outset, I want the United States to stay at 
the forefront of essentially engaging in and hosting and 
managing and regulating this new creative technology and the 
innovation that will flow from it. I do believe that it has 
some incredible potential that can be utilized for good, and it 
does have incredible risk that can be utilized for bad. And we 
just need to get a handle on that. I appreciate your coming 
here today to help us out on that.
    With that, this hearing is adjourned.
    [Whereupon, at 11:23 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Last Congress, this Committee held two hearings examining the 
digital currency ecosystem.
    In those hearings, we heard about some of the developments that 
have occurred within the digital currency marketplace since the 
creation of bitcoin in 2008; the potential benefits of digital 
currencies; and concerns about value stability, fraud and illicit uses, 
market manipulation, and privacy.
    Since then, Facebook announced its intention to launch a 
blockchain-based payment system and digital currency, libra, that will 
be governed by an association that will include up to 100 financial and 
nonfinancial members, including Facebook's digital wallet service, 
Calibra.
    Facebook's Libra project has generated renewed interest in digital 
currencies and blockchain, generally, including how they interact with 
U.S. and international regulatory frameworks, the potential benefits 
and challenges they pose, and concerns around issues like anti- money 
laundering and counterterrorism efforts, data privacy, consumer 
protections, commerce and monetary policy.
    A few weeks ago, the Head of Calibra, David Marcus, joined the 
Committee to provide an update on Facebook's proposed digital currency.
    During that hearing, Mr. Marcus emphasized some important points 
and commitments, including that: there are a number of regulators 
globally that are currently engaged on Facebook's project, including 
the Federal Reserve, FSOC, FinCEN, Financial Conduct Authority, the G7 
and more; Calibra and the Libra Association will have the highest 
standards when it comes to data privacy, and no financial data or 
account data that is actually collected in Calibra will be shared with 
Facebook; and the Libra Association will be headquartered in Geneva, 
Switzerland, but will still register with FinCEN and have oversight 
from U.S. regulators.
    It seems to me that digital technology innovations are inevitable, 
could be beneficial, and I believe that the U.S. should lead in 
developing these innovations and what the rules of the road should be.
    The digital currency and blockchain ecosystem is diverse, and care 
must be taken in determining what gaps may be present in the existing 
framework and developing a more comprehensive approach.
    In mid-July, Treasury Secretary Mnuchin said, ``To be clear, the 
U.S. welcomes responsible innovation, including new technologies that 
may improve the efficiency of the financial system and expand access to 
financial services. That being said, with respect to Facebook's Libra 
and other developments in cryptocurrencies, our overriding goal is to 
maintain the integrity of our financial system and protect it from 
abuse.''
    He also noted that Treasury has serious concerns regarding the 
growing misuse of digital currencies by money launderers, terrorist 
financiers, and other bad players.
    As Facebook's and other's digital currency efforts move forward, I 
am particularly interested in better understanding how these 
technologies may impact individuals' ability to exercise control over 
their data, including the right to receive information about and access 
their data, correct inaccuracies, and delete their data.
    During this hearing, I look forward to learning more about: the 
encryption and networking features behind blockchain technology and how 
that technology enables digital currency transactions; ways that the 
market for digital currencies has grown and evolved over the last 
decade; different types of digital currencies in the marketplace, 
including their key differences with Facebook's proposed digital 
currency; how other countries are approaching the regulation of digital 
currencies and blockchain technology, and what we might learn from 
their successes and failures; potential gaps in existing regulatory 
frameworks; whether distributive ledger technology can help to 
facilitate meaningful privacy for individuals' data; and approaches 
Congress should consider in developing a comprehensive regulatory 
regime for digital currencies, including ensuring individuals have real 
control over their data.
    With the appropriate balance of regulation, digital currencies and 
their innovative underlying technology could provide meaningful 
benefits and I look forward to learning more about the ecosystem during 
this hearing.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you Chairman Crapo, and welcome to our witnesses.
    At this Committee's hearing earlier this month, many of us of both 
parties voiced serious concerns about Facebook's plan to run its own 
currency out of a Swiss bank account.
    And by and large, we mostly heard deflections and dodging. It's 
exactly what we mean when we say Facebook doesn't understand 
accountability.
    Facebook has proven over and over, through scandal after scandal, 
that it can't be trusted.
    But they don't care.
    They move fast and break things--things like our political 
discourse, journalism, relationships, privacy. Now they want to break 
our currency and payment systems, hiding behind the phrase 
``innovation.''
    They want to ``innovate'' Americans right out of their hard-earned 
paychecks.
    Look around at what happens with big corporations say they want to 
``innovate.''
    Before they blew up the economy in 2008, bankers were pitching an 
``innovative'' new product called subprime mortgages.
    Just like Facebook--which claims its new currency will help the 
unbanked and underbanked--these mortgages were supposed to help people 
who never had access to credit achieve the American dream of home 
ownership.
    In reality, those mortgages ripped off millions of families who 
ended up losing their homes, they wrecked the economy, and they made 
the staggering inequality in this country even worse.
    The only innovative thing about the financial crisis was how the 
banks managed to stick everyone else with the bill--not exactly the 
kind of innovation we were hoping for.
    So I am all for innovation--especially if that innovation delivers 
on its promises of improving people's lives. But big tech companies and 
Wall Street banks are hiding behind innovation as an excuse to take 
over important public services that we all benefit from, and should all 
have a say in.
    There are some things--like our currency, our payments system, and 
the protection of our savings accounts--that everyone in the country 
has a stake in. We should not be handing those kinds of public 
resources over to wealthy special interests, so they can squeeze more 
profits out of ordinary Americans.
    Think about how hard it is to get quality service from Comcast, or 
about how much of your personal data was leaked by Equifax, or how your 
privacy was invaded by Facebook
    So we should be a little suspicious when someone tells us that only 
big corporations can be trusted to provide critical public services.
    I recently moved into a new office--it was John Glenn's office when 
he served Ohio in the Senate. John Glenn was an innovator--he was the 
first American to orbit the Earth as part of the Mercury Project, which 
would be followed by the Gemini and Apollo Missions that would 
eventually put Americans on the moon. Many of us joined in the 
celebrations of the 50th anniversary of Apollo 11 just this month.
    None of the astronauts did it alone--it took the hard work of 
thousands of innovating scientists and engineers, people like famed 
mathematician Katherine Johnson or immigrants like engineer Miguel 
Hernandez. These Americans didn't do it for the profits. They did it to 
serve their country, and their successes were shared by every American 
who saw ``U-S-A'' emblazoned on the side of Apollo 11.
    It's a reminder that some infrastructure works better as a public 
good, and we shouldn't let Big Banks or Big Tech get their hands on it.
    The Federal Reserve and other watchdogs need to continue to be 
leaders in banking innovation.
    And if we don't move quickly to improve important infrastructure--
not just roads and bridges, but our payments system--we'll end up with 
big corporations that have broken our trust over and over doing it--and 
frankly I don't think that makes any sense.
    I look forward to hearing from our witnesses today about which of 
these technologies might actually help regular Americans, and what we 
can do to make sure everyone benefits from them.
    Thank you, Mr. Chairman.
                                 ______
                                 
                  PREPARED STATEMENT OF JEREMY ALLAIRE
   Cofounder, Chief Executive Officer, and Chairman, Circle Internet 
       Financial Limited, on behalf of the Blockchain Association
                             July 30, 2019
    Thank you Chairman Crapo, Ranking Member Brown, and the Members of 
the Committee. It is my pleasure to appear before you today to testify 
about the promise of digital assets and blockchain technology and their 
potential to fundamentally improve and democratize financial services 
globally--improving access to capital, eliminating and reducing costs 
and risks, more effectively fighting financial crime, and ultimately 
improving opportunities for creating value in our economy.
    I have spent the past 25 years helping to build internet technology 
platforms and companies in the United States, including multiple 
global, publicly traded technology companies with products and services 
that have been adopted by millions of businesses and hundreds of 
millions of consumers. Throughout my career as an internet 
entrepreneur, I have consistently focused on how the open, global, and 
decentralized internet could empower people and businesses to better 
connect, communicate, and transact through innovations in software.
    It is these experiences that brought me to the possibilities of 
cryptocurrencies and blockchain technology, and led me to cofound 
Circle in 2013. Our vision was that digital currency and related 
technologies could transform the global financial system in ways that 
made it much easier for people and businesses everywhere to create and 
exchange value with the same ease that we create and share information 
and content on the internet, while eliminating the gatekeepers, toll 
takers, and middlemen that extract value from the real economy and 
limit access for all.
    Today, Circle is one of the leading cryptocompanies in the world, 
providing regulated products and services to millions of people who use 
our products to exchange value, trade, invest, and store digital 
assets. In the next several years, the adoption of digital currency 
technologies and blockchains will accelerate, begin to help hundreds of 
millions if not billions of people, and transform the economies of the 
countries that participate in the innovation.
    Today, I will share my perspective on several things. First, I will 
discuss the challenges faced by the existing financial system and a 
vision for what is becoming possible in the next 5 to 10 years because 
of the innovation of digital assets and blockchains.
    Second, I will discuss the fundamental innovation of digital assets 
and blockchains, including an overview of the different forms that 
these technologies take and what they can enable for society and the 
economy. This will include a discussion around ``stable value'' digital 
currencies, or stablecoins, which are critical building blocks for the 
future digital economy.
    Third, I will discuss major international and United States-
specific policy issues. As one of the earliest cryptocompanies to 
embrace licensing and regulation virtually everywhere licensing is 
available, we have well informed views on the gaps, limitations, and 
opportunities around national cryptopolicy and regulation, and believe 
this is becoming a major issue. Jobs, investments, and technical 
innovations are leaving the United States or becoming inaccessible to 
U.S. citizens and businesses because projects and companies, including 
Circle, are relocating to other jurisdictions and blocking U.S. persons 
from even accessing the technology and services.
    Finally, I will offer perspective on major issues surrounding 
identity, privacy, and data security, which I know are important topics 
for the Committee. Public blockchain technologies have enormous 
potential for simultaneously increasing our security and privacy while 
also enabling law enforcement to more effectively execute their mandate 
for public safety and national security.
Challenges in the Existing Global Financial System and a Vision of the 
        Future
    Today's global financial system, including our own domestic 
financial system, faces significant challenges. Billions of people lack 
basic access to financial services. Those who do have access face a 
system with exorbitant fees and excessive time delays--limiting 
economic opportunity and removing real value from the economy.
    Our existing financial system is also riddled with crime and money 
laundering. According to the U.N. Office of Drugs and Crime, annual 
illicit proceeds laundered through our financial system exceed $2 
trillion, with greater than $300B laundered in the United States alone. 
Rob Wainwright, the former director of Europol, reports that 99 percent 
of money laundering goes undetected in the existing banking system. 
Only detecting 1 percent of financial crimes is clearly not good 
enough.
    Access to capital for small businesses, both here in the United 
States and globally, is extremely limited with capital markets reserved 
for only the largest companies. Investment into small and growing 
private businesses are only accessible to the wealthy and connected, 
limiting investment opportunities for people everywhere. Venture 
capital investment remains extremely geographically concentrated. A 
new, more open and accessible system of capital formation must be 
possible.
    Finally, our existing financial system, built on legacy technology, 
is riddled with privacy violations and data breaches. Our identities 
are no longer secure. Banks, credit card companies, and credit 
reporting agencies have failed to adequately plug the holes in the dike 
as cybercriminals and hostile Nation States take aim at our financial 
infrastructure. According to Juniper Research, the annual cost of data 
breaches could reach over $2 trillion.
    Our existing financial system is in desperate need of 
transformation. We currently have a global system with limited access 
and exorbitant fees that impose a tax on real economic activity; a 
system rife with money launderers and financial crime that is failing 
99 percent of the time to stop bad actors and leads to trillions in 
losses because our existing data and financial infrastructure are not 
secure enough; a system where entrepreneurs and small businesses don't 
have access to capital to build and innovate, while Main Street 
investors are left on the sidelines, blocked from investing in the most 
promising young companies and technologies.
    There is absolutely a better future ahead of us, one that is built 
on a technological transformation ushered in by digital assets and 
blockchains.
    I am often asked what the world will look like in the next 5 to 10 
years, based on the trajectory of this innovative new technology. If 
policymakers, regulators, and industry can successfully work together, 
we can transform the financial system to address the deep problems 
outlined here. With a coordinated effort, in the next 10 years we will 
see a series of profound changes that will benefit individuals and 
businesses in the U.S. and around the world:

    Sovereign and nonsovereign global digital currency models 
        will proliferate and become usable by billions of people 
        through their mobile devices. We will become comfortable with 
        the adoption of a mix of private and public monies being 
        available to everyone, everywhere, and will see the rapid 
        development of global basket currencies that become preferred 
        for settlements and storing value.

    Payments and value exchange will be commoditized and become 
        free services on the internet, in the same way that sharing 
        content or data and communicating online are free today. This 
        will ultimately return hundreds of billions of dollars of value 
        to the real economy, as the fees that people and businesses pay 
        to intermediaries to move value drops to zero. This will also 
        lead to greater economic activity between people around the 
        world.

    A new set of internet-based global capital markets built on 
        digital assets will emerge. We imagine capital markets that 
        more closely resemble the multisided internet marketplaces we 
        have in commerce, content, advertising, and transportation. 
        Internet-based markets can support an incredibly diverse and 
        global base of suppliers and buyers, scaling from the 
        individual to the largest enterprise, with incredible choice 
        and access. Our capital markets will resemble the Amazon and 
        Alibaba commerce marketplaces or the Google advertising 
        marketplace more than the NYSE or NASDAQ. This will open up 
        capital formation for businesses globally, while creating new 
        ways for individuals everywhere to save and invest into value-
        producing enterprises.

    Economic and commercial relationships will increasingly be 
        mediated by smart contracts running on public blockchains, as 
        businesses, labor market participants, and consumers seek to 
        operate in a digital commerce environment with greater 
        security, efficiency, transparency, certainty, and 
        enforceability across borders.

    Decentralized, self-sovereign forms of secure identity and 
        privacy built on public blockchains will become available. 
        These new identity protocols will allow for much safer use of 
        digital services globally, ensure compliance with KYC/AML 
        rules, and radically improve privacy and reduce data leakage 
        while more effectively thwarting financial crimes than our 
        legacy financial system.

    All of these things can come to pass within a decade, driving us 
towards a 21st century architecture for commerce and finance that can 
deliver greater economic opportunity for all, while enhancing our 
collective ability to cope with the challenges and risks of the digital 
age.
Understanding Blockchains and Digital Assets
    To understand how we can realize this vision, I would like to give 
an overview of the fundamental technical innovation of blockchains and 
a review of the different types of digital assets in the marketplace 
today, including their use cases and potential for society.
    First, in terms of nomenclature, I will be referring primarily to 
the innovations offered by public blockchains, which are built as 
freely available, open source software that anyone can connect to and 
run using an internet-connected device. This differs from private 
blockchains or permissioned chains, which do not offer the same level 
of openness, security, privacy, and global reach. Also, the terms 
cryptoassets, cryptocurrencies, and digital assets are often used 
interchangeably. I will be using digital assets as the term to talk 
about these new, innovative forms of financial assets.
    The introduction of bitcoin in 2009 was a momentous occasion, 
releasing a proverbial genie from the bottle that we will never put 
back. That genie was the invention of a new form of decentralized, 
global, and public record-keeping system that is tamper-proof, 
irreversible, highly secure, and private. This specific blockchain had 
a relatively narrow focus--to create a new kind of nonsovereign digital 
money inspired by the implicit monetary policy of gold. The technical 
breakthrough of bitcoin was not missed by leading technologists, 
computer scientists, cryptographers, economists, and many others, and 
has spawned a rapidly growing global ecosystem of competing 
blockchains, as well as new forms of financial assets built upon these 
blockchains.
    Why are such inventions so important and valuable right now for our 
country and the broader global community?
    The rapid growth of the internet has led to a hyperconnected world, 
but one where our major institutions--financial, Government, and 
communications platforms--are built on legacy technology platforms that 
are centralized and therefore inherently more fragile and at risk of 
cyberattacks, data breaches, and privacy violations.
    Public blockchains, for the first time in human history, are 
creating new record-keeping and transaction processing systems that are 
designed to be inherently decentralized, tamper-proof, highly secure, 
and private. In fact, the most popular blockchains, such as bitcoin and 
Ethereum, use Nation State attacks as the security threshold that they 
must defend against. During the past 10 years, they have maintained 
that level of security, while the rest of the internet has become more 
porous and vulnerable to hostile Nation States and criminals.
    Digital assets and blockchains are also a technical and economic 
response to what is broadly felt to be a financial system that is 
rigged against the everyday person, one that is not fully serving the 
needs of people and businesses to participate in global economic 
activity, and which places an inordinate burden on the economy through 
bailouts and excessive fees, while limiting access.
    Finally, digital assets are part of a broader societal focus on 
digital services. People everywhere have felt the benefits of an open 
internet that connects people, information, and commerce globally. 
However, expectations have shifted among generations who have grown up 
with the internet. People already expect that online communication 
should be instant, global, free, and frictionless. Soon, everyone will 
have these expectations about money and finance.
Types of Digital Assets and Blockchains
    While people and businesses are already using and trading more than 
2,300 distinct, publicly available digital assets, I want to broadly 
talk about three major types of public blockchains and associated 
digital assets: (i) nonsovereign digital currencies, (ii) blockchain 
platforms, and (iii) tokenized digital assets. Although the lines and 
distinctions between these sometimes blur, this categorization is still 
helpful. I will also provide specific thoughts on a major and important 
subcategory, stablecoins.
Nonsovereign Digital Currencies
    Dozens of distinct blockchains with native digital assets aim to 
provide a decentralized, private, and secure form of digital money. 
This digital money is issued algorithmically and secured using an open 
network of participating computers which are incentivized to honestly 
verify transactions and shared ledger entries. The most notable and 
popular of these blockchains is the Bitcoin Network and the associated 
bitcoin native digital asset.
    In addition to bitcoin, there are many other popular blockchains 
that aim to compete with bitcoin based on improved speed, scalability, 
security, and privacy features. Some notable examples are Ripple, 
LiteCoin, ZCash, Bitcoin Cash, Bitcoin SV, Monero, and newer assets 
such as Grin.
    The developers of nearly all of these projects and assets share a 
common belief in the need for nonsovereign, secure, and private forms 
of value storage and exchange. The projects also typically create a 
fixed or highly predictable monetary supply. These attributes make 
digital assets attractive to those who believe that a predictable 
supply of money is preferable to fiat currency. Similar to gold and 
other ``commodity monies,'' these digital assets have grown in 
popularity in the face of global economic uncertainty, rising 
nationalism, currency manipulation, and trade war risk.
    Given their privacy-preserving characteristics, digital assets pose 
unique but solvable risks for abuse in financial crimes. Recent FinCEN 
guidance and the new FATF guidelines for the AML requirements for 
``Virtual Asset Service Providers'' provide an international roadmap 
for regulating businesses that act as intermediaries in the transfer of 
digital assets. However, as I will discuss in more detail later, the 
proposed global AML rules also create an unintended consequence of 
privacy risk for people everywhere because they require personal 
information to be shared, and potentially exposed, between digital 
intermediaries all around the world.
Blockchain Platforms
    Another rapidly growing category of public blockchain and 
associated digital assets are blockchain platforms. The most well-known 
and popular blockchain platform is the Ethereum blockchain and its 
associated digital asset, Ether. Other notable examples include EOS, 
Tezos, Tron, NEO, Cardano, and Algorand, but there are many more 
competing in this space. The proposed design of the libra blockchain 
could also very much be characterized as a blockchain platform.
    These blockchains have a broader scope than pure digital 
currencies. As their name suggests, they seek to provide a platform for 
building apps and financial assets on top of them. In many respects, 
these platforms represent one of the most important new infrastructure 
layers of the internet, providing a means for storing and exchanging 
data, facilitating transactions, and executing contracts in a 
decentralized, tamper-proof, and private manner.
    These innovations have a collateral benefit: they address the 
surging privacy and security risks that people, businesses, and society 
confront in the internet age. Earlier versions of the internet created 
larger and larger risks for data breaches and privacy violations 
through the centralization of massive amounts of personal, financial, 
and other sensitive data in a few large internet services. Blockchain 
platforms seek to increase internet decentralization and better secure 
private data.
    Most of these platforms are purpose-built; some are focused on the 
introduction and automation of financial assets and financial 
contracts, others on more diverse applications in content, games, 
entertainment, or social media, and still others as general purpose 
computing platforms aiming to compete with centralized cloud services 
offered by companies such as Amazon.
    The native digital assets of these platforms operate as digital 
commodities, often referred to as ``fuel,'' which is used to pay for 
the use of the infrastructure services the platform's provide. Just as 
oil and gas became the fundamental commodities that powered the 
industrial economy, these blockchain digital commodities may become the 
fuel for digital commerce in the 21st century.
    We are seeing significant competition and innovation in the 
development of blockchain platforms, with many of the most innovative 
projects being designed to accommodate mass market adoption of digital 
assets and applications. While most current blockchain platforms can 
support tens of millions of users, we expect to see next-generation 
platforms that will support applications that can reach hundreds of 
millions and eventually billions of people. This is likely to happen in 
the next 2-3 years.
    One of the most important functions of these platforms is to 
provide a means for developers to create custom digital assets, often 
dubbed ``tokens,'' which are attached to code, called ``smart 
contracts,'' that enable and enforce features, behaviors or economic 
incentives associated with the tokens. The ability to create tokenized 
digital assets is one of the most profound innovations in the modern 
history of finance, economics, and internet commerce, and a significant 
category in and of itself in the topology of digital assets.
Tokenized Digital Assets
    Of the greater than 2,300 digital assets available to the public, a 
significant percentage of them are tokens issued on top of popular 
blockchain platforms such as Ethereum.
    Tokens allow businesses and technology projects to create digital 
assets that can incentivize and provide utility to customers, be sold 
and used in novel ways to raise capital, and serve as a means of 
payment. Some examples of tokenized digital assets include:

    New decentralized infrastructure services for storing data 
        and content, sharing files, or streaming and encoding video.

    New identity infrastructure that provides a means for 
        people to control their own data and private identity 
        information.

    Tokens that reward and incentivize content creators, 
        publishers, and end-users of internet content services and 
        games.

    The development of purely digital financial contracts that 
        are implemented in code, including tokenized forms of debt and 
        lending, tokens that provide voting and governance features, 
        and tokens that provide access to underlying royalties or 
        revenue streams.

    Tokens that digitize existing financial contracts such as 
        equities and bonds, enabling more efficient access to capital 
        for business and new investment opportunities for investors 
        globally.

    Tokenization of physical property including real estate, 
        property, and fine art, opening up historically illiquid and 
        inaccessible asset classes for global investors.

    The benefit of tokens is that they can be easily stored, 
transferred, traded, and exchanged, while providing utility to users 
and benefits to businesses, all within a public infrastructure that is 
highly secure, tamper-proof, open, and interoperable.
    These digital assets often defy easy classification as securities, 
commodities or currencies. In fact, one of the greatest benefits of 
digital assets is that they can simultaneously have investment 
contract, utility, and payment currency characteristics. While this 
introduces new complexity for financial regulators, it also creates 
incredible opportunities for businesses and projects that seek to 
employ digital assets to innovate. Indeed, as I will discuss shortly, 
this is one of the largest and most important policy and regulatory 
issues the industry faces.
Stablecoins
    A very specific form of tokenized digital asset is the emerging 
category of stable value tokens, or stablecoins. While the recent 
announcement of the libra cryptocurrency was the first time many people 
heard about the concept of a stablecoin, they have been around for 
years and are growing steadily. Stablecoins represent one of the most 
important areas of innovation in our global financial system.
    There are several flavors of stablecoins. The first are tokens 
where the stablecoin is backed by a single fiat currency and the 
backing is held in M1- or M2-style bank deposits. There are other types 
which are backed by fiat, including the proposed libra digital 
currency, but which are held in a basket of currencies and potentially 
other bonds and securities. There are also a number of nonfiat backed 
stablecoins, such as DAI, which are backed by cryptocurrency collateral 
with incentives to peg the token to $1.
    I will focus today on the fiat currency or asset-backed stablecoin 
variety, sometimes referred to as fiat tokens. Beyond the attention 
garnered by libra, fiat tokens are also noteworthy because of the rapid 
growth in new digital assets such as U.S. Dollar Coin, as well as 
proposals around the world for central bank-issued or regulated digital 
currencies.
    In their recent history, these fiat tokens have largely been used 
in the digital asset trading and exchange markets to support trading 
strategies, including hedging and arbitrage. In the cryptoexchange 
market, traders need to be able to easily hedge in and out of volatile 
currency positions, and stablecoins created a tool to achieve this. 
Stablecoins' advantage over dollars in traditional bank accounts is 
that they move at the speed of the internet and with the same security 
and transaction permanence as other digital currencies, helping to 
reduce or altogether eliminate counterparty risk.
    When we founded Circle 6 years ago, we believed that a digital 
currency based on existing fiat currency would emerge and that new open 
standards and technologies would allow fiat currency to gain all of the 
benefits of cryptocurrency. Fiat-backed digital currency would offer 
speed, security, privacy, global reach and nearly free transmission. 
Moreover, we were confident this kind of digital fiat money would 
become programmable using smart contracts, creating the possibility of 
a broad transformation of the global financial system.
    Just over 2 years ago, technology emerged to make these new 
standards possible, and we embarked on the creation of the CENTRE 
Consortium and its first stablecoin, the U.S. Dollar Coin (USDC).
    The CENTRE Consortium is a new membership-based network that 
provides an open source and open standard protocol for using fiat 
currencies on blockchains. CENTRE's self-governance scheme requires 
consortium members to ensure compliance with financial regulations and 
the demanding security, custody, audit, and accounting methods needed 
to operate such an enterprise. CENTRE was cofounded by industry leaders 
Circle and Coinbase and recently opened up for new member applications. 
Conceptually, CENTRE is a mix between an open source software project 
and a self-governed payment network such as Visa or Mastercard.
    The first stablecoin issued on the CENTRE Network is the U.S. 
Dollar Coin, a digital currency that is 1:1 dollar backed with reserves 
held in high-quality U.S. banks, with public monthly reserve 
attestations provided by a leading global public accounting firm. 
Issuers, which today include Circle and Coinbase, are regulated money 
service businesses under FinCEN rules and are licensed and regulated 
under money transmission and State banking statues around the United 
States.
    Over $1 billion has been tokenized, and over $500 million redeemed, 
through our services. U.S. Dollar Coin is now the largest and fastest 
growing financially transparent stablecoin issued by regulated 
financial institutions.
How Does CENTRE and U.S. Dollar Coin Compare to Libra?
    USDC has been available to customers since Q4 of 2018. We published 
our white paper nearly 2 years ago, launched the protocol and 
associated services, and recently opened up the consortium to new 
members. USDC is already supported by dozens of digital wallets, 
exchanges, and custodial services, and is being used daily by leading 
digital asset market makers and liquidity providers.
    While USDC was initially launched with a focus on trading and 
markets use-cases, similar to libra, it has been designed to expand 
into payments and settlement for both consumers and businesses. Because 
it is built on the most popular smart contract platform, Ethereum, we 
also expect USDC to be used for financial contracts and other tokenized 
digital assets.
    Unlike Libra, which is attempting to establish a new global 
currency and unit of account, the CENTRE protocols provide a path for 
major reserve currencies to work as digital currencies. Over the next 
several years, the most important payments and financial contracts use-
cases that use digital currency will be denominated in popular global 
reserve currencies.
    Also, unlike Libra, which has tied its stable-value token to its 
own blockchain, CENTRE is becoming blockchain agnostic, as we are 
moving to enable the CENTRE protocols and stablecoins to work on all 
major public blockchain infrastructures. Major public blockchain 
platforms are still in the early stages of development and adoption. 
Moving forward, people and businesses will want to use fiat digital 
currencies across these different platforms, in the same way that we 
want our content and websites to be accessible by any operating system, 
web browser, or device. We believe in openness, interoperability, and 
cross-platform standards.
The Regulatory Environment for Digital Assets
    I am both deeply familiar with and actively involved in regulatory 
and policy issues surrounding cryptocurrencies, digital assets, and 
blockchain technology. Circle itself has embraced a regulated approach 
to crypto, with money transmission licenses from 48 States, the first 
New York BitLicense, the first Electronic Money Issuer (EMI) license 
for a cryptocompany in the U.K. and EU, and one of the first FINRA-
regulated broker dealers operated by a cryptocompany. We have devoted 
significant time over the past 6 years to engaging constructively with 
financial regulators and policymakers all around the world.
    It is incorrect to think that U.S. cryptocompanies are unregulated. 
We focus every day on our obligations under Federal and State law, as 
well as the supervisory agreements of the licenses we carry. But being 
a law-abiding U.S. citizen should not put U.S. companies, or U.S. 
industry, at a disadvantage in the development of this global 
technology. To harness its promise, the industry needs consistent and 
globally coordinated national policies on digital assets. Because 
digital assets present a new kind of custody and security risk, the 
appropriate response of Governments should be to ensure that there is 
supervision and compliance around the fundamental protections needed 
for financial services--enterprise risk, cybersecurity risk, fraud and 
financial crime risk, and the risk of theft.
    At the same time, there is a tremendous amount of technical and 
business model innovation emerging in this field, with new developments 
moving at an accelerated pace. To support this innovation and 
experimentation, it is crucial that Governments approach this new asset 
class with a relatively light touch.
    A number of Governments around the world have started to pass laws 
that take just this approach, including smaller jurisdictions such as 
Singapore, Bermuda, Switzerland, and Malta. Recently, larger countries 
such as France and Japan have put forward and are contemplating 
cohesive national policy frameworks for the digital asset industry.
    Governments and regulators globally are taking very different 
approaches, creating a significant impact on the industry. In the 
United States, regulatory uncertainty and the application of laws that 
do not contemplate digital assets has led to the loss of significant 
opportunity for U.S. cryptocompanies, and ultimately for consumers, 
businesses, and the national economy as a whole. The Securities and 
Exchange Commission, for example, is forced to apply Federal laws 
written in the 20th century to technologies created in the 21st. In the 
U.S., one of the main factors that determines whether or not a 
cryptoasset should be regulated as a security is the Howey test, 
formulated by the Supreme Court in 1946. \1\ If an asset is deemed a 
security, it must be registered with the SEC and the team behind it 
must abide by a wide range of regulatory obligations. The consequences 
of a mistake can be serious financial and legal consequences for an 
organization as well as its officers and employees. This has had a 
material impact on the competitiveness of U.S. cryptocompanies, and is 
a backward- rather than forward-looking approach. Congress should 
consider new laws that protect consumers while not causing companies to 
fixate on nearly century-old definitions rather than innovation. While 
the U.S. has been working through these issues, foreign, mostly Asian-
based, cryptocompanies have begun to dominate, while U.S. companies 
have lost considerable market share.
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     \1\ Securities and Exchange Comm'n v. W.J. Howey Co. , 328 U.S. 
293 (1946).
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    The result of the uncertain and restrictive regulatory environment 
has led many digital asset projects and companies to domicile outside 
of the United States and to block U.S. persons and businesses from 
accessing products and technologies. In Circle's case, we have begun 
the process of moving our international-facing products and services 
into a licensed Bermuda entity. Bermuda's forward looking Digital Asset 
Business Act provides a comprehensive regulatory framework for 
companies offering this new type of financial service. We believe that 
the approach the Bermuda Government has taken can and should be 
emulated by other countries. Some of the positive aspects of their 
regulatory framework include:

    They have established a comprehensive national policy for 
        digital assets businesses.

    Rather than try and fit digital assets into banking and 
        payments or securities and investments laws, they established a 
        new set of laws specific to digital assets, including a new set 
        of definitions of what constitutes digital assets, reflecting 
        the dynamic and multifaceted nature of this new asset class.

    The licensing and supervisory framework is broad, spanning 
        digital asset activities including storage and custody, 
        payments, dealing and trading, and operating exchanges.

    Compared to a patchwork of regulators here in the United 
        States, across the Federal Government and the States, there is 
        a single regulator to supervise firms.

    There is an acknowledgement from both policymakers and 
        regulators that this is a dynamic and fast moving field with 
        constant technology and business model innovation, and they 
        have committed to proactively working with industry to evolve 
        the laws and supervisory requirements as the market grows and 
        matures.

    The core of the risks they are focused on regulating are in 
        our view the most important risks--enterprise risk, financial 
        crimes risk, cybersecurity risk, and custody risk.

    As the largest economy in the world, and the home of the largest 
financial markets infrastructure, the United States has built robust 
regulatory and supervisory frameworks for financial institutions that 
have served as a model for other countries. This is a huge asset for 
the U.S. and the global economy, and the legal frameworks that have 
been adopted and amended over the past 80 years are without a doubt 
foundational to market stability and risk management.
    However, just as the joint-stock corporation and private banking 
emerged and transformed how economic activity could be organized during 
the late industrial revolution, the development of the global digital 
economy and a new financial system built on digital assets will lead to 
massive changes in the nature of finance and economic organization.
    It is vital that we allow innovators and digital assets projects 
room to grow and develop here in the United States. Congress should 
adopt national policies that define and establish digital assets as a 
new asset class and develop appropriate rules and exemptions for 
digital assets. This will require legislation that likely changes our 
existing commodities, securities, and banking laws, among others. Such 
policies should have the effect of enabling rapid technological 
progress within the context of sound risk management.
    Without a sound, pragmatic, and agile national policy framework for 
digital assets, I am concerned that the United States will not be the 
world's leader in this critical new technology, that it will continue 
to fall behind, and that it will not fully reap the benefits of the 
economic transformation that digital assets will bring.
    Thank you for your increased interest and attention to this area of 
significant transformation. I look forward to continued dialogue as we 
work to ensure that the United States remains a center of technological 
advancement of the financial system.
                                 ______
                                 
                PREPARED STATEMENT OF REBECCA M. NELSON
 Specialist in International Trade and Finance, Congressional Research 
                                Service
                             July 30, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the opportunity to appear before you today on behalf of 
the Congressional Research Service to discuss ``Examining Regulatory 
Frameworks for Digital Currencies and Blockchain''.
    As requested, my testimony focuses on the international landscape 
of digital currencies and emerging policy issues. \1\ In particular, I 
discuss the cryptocurrency market, the approaches adopted by 
Governments to regulate cryptocurrency, and the potential need for 
harmonization of regulations across countries. I also analyze the 
potential implications of proposals made by some Governments and large 
multinational corporations (MNCs) to create new digital currencies to 
be used on a large scale.
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     \1\ This testimony draws on CRS Report R45440, ``International 
Approaches to Digital Currencies'', by Rebecca M. Nelson. Relevant CRS 
products also include CRS Report R45427, ``Cryptocurrency: The 
Economics of Money and Selected Policy Issues'', by David W. Perkins; 
CRS Report R45116, ``Blockchain: Background and Policy Issues'', by 
Chris Jaikaran; CRS In Focus IF10825, ``Digital Currencies: Sanctions 
Evasion Risks'', by Rebecca M. Nelson and Liana W. Rosen; CRS Report 
R45301, ``Securities Regulation and Initial Coin Offerings: A Legal 
Primer'', by Jay B. Sykes; and CRS In Focus IF10810, ``Blockchain and 
International Trade'', by Rachel F. Fefer.
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Cryptocurrencies: Terminology and Market Developments
    Cryptocurrencies are digital representations of value that 
typically are administered using distributed ledger technology and have 
no status as legal tender. Distributed ledgers use independent 
computers to record, share, and synchronize transactions in their 
respective electronic ledgers, rather than relying on a centralized 
ledger. \2\ As a result, cryptocurrencies do not rely on Government 
agencies (such as central banks) or financial institutions (such as 
private banks), both of which are involved in the creation and transfer 
of fiat money (money that has no intrinsic value, but serves as money 
by Government decree). Most cryptocurrencies usually use a particular 
type of distributed ledger technology, blockchain, to both secure the 
ledger using cryptographic protocols and give users some level of 
anonymity.
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     \2\ ``Blockchain and Distributed Ledger Technology (DLT)'', World 
Bank Brief, April 12, 2018.
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    The first cryptocurrency, bitcoin, was launched in 2009, partly in 
response to concerns about traditional banks and fiat money following 
the global financial crisis of 2008--2009. \3\ Over the following 
decade, thousands more cryptocurrencies were created. As of today, more 
than 2,200 cryptocurrencies are in circulation. \4\ As the market has 
developed, different types of cryptocurrencies have emerged that vary 
on a number of dimensions. \5\
---------------------------------------------------------------------------
     \3\ ``An Abridged History of Bitcoin'', New York Times, November 
19, 2013.
     \4\ ``Cryptocurrency Market Capitalizations'' CoinMarketCap, with 
values as accessed on July 19, 2019. Market capitalization data is not 
available for about 400 cryptocurrencies.
     \5\ Rebecca Campbell, ``The Ultimate Cryptocurrency Explainer: 
Bitcoin, Utility Tokens, and Stablecoins'', Next Web, February 13, 
2019.
---------------------------------------------------------------------------
Types of Cryptocurrencies and Related Terminology
    Payment tokens are the most well-known type of cryptocurrencies, 
and are designed to function as a medium of exchange or payment for 
goods and services. Bitcoin is a payment token, as are Ethereum and 
Litecoin among others. \6\ Utility tokens are digital assets designed 
to be spent within a certain blockchain system. For example, the Golem 
platform is a marketplace for computing power; users can earn Golem 
Network Tokens by renting out unused computational resources. \7\ 
Another example is Dentacoins: dental patients can earn the coins by 
giving dentist reviews and other activities and use Dentacoins to pay 
for dental services at participating dentists. \8\
---------------------------------------------------------------------------
     \6\ ``Payment Tokens'', Medium, November 14, 2018.
     \7\ Maaren Zuidhoorn, ``The Technology Behind Ethereum Tokens'', 
Medium, May 9, 2019.
     \8\ Izabella Kaminska, ``From Max to Minimum Optimality With 
Dentacoin'', Financial Times, August 4, 2017.
---------------------------------------------------------------------------
    More recently, a new type of cryptocurrency has been created to 
address the large value fluctuations of the more prominent payment 
tokens. \9\ ``Stablecoins'' are cryptocurrencies pegged to or backed by 
fiat currencies, other cryptocurrencies, or precious metals. As their 
name indicates, these cryptocurrencies are designed to be more stable 
in value than the earlier payment tokens. Tether and Gemini Dollar, 
which were designed to be backed by the dollar on a 1:1 ratio, are 
examples of stablecoins, as are Digix Gold Tokens, which were designed 
to be backed by gold. \10\ Facebook's proposed new cryptocurrency, the 
libra, would also be a stablecoin; Facebook is planning to back the 
libra with a basket of ``low-volatility'' assets (bank deposits and 
short-term Government securities) from ``stable and reputable central 
banks.'' \11\
---------------------------------------------------------------------------
     \9\ Tatiana Koffman, ``Stablecoins: The Next Generation of Digital 
Money'', Forbes, March 8, 2018.
     \10\ Hannah Murphy, ``Stablecoins Are Crypto Sector's Next Big 
Bet'', Financial Times, November 15, 2018; Frances Coppola, ``Tether's 
U.S. Dollar Peg Is No Longer Credible'', Forbes, May 14, 2019.
     \11\ Even though libra is a ``stablecoin,'' its value would 
fluctuate against the dollar as currencies in the basket fluctuate. 
``The Libra Currency and Reserve'', White paper, June 2018.
---------------------------------------------------------------------------
    Cryptocurrencies are also occasionally referred to as cryptoassets, 
to emphasize that these products are in practice closer to financial 
assets or investments than a functional medium of exchange. \12\ The 
term ``cryptoassets'' is also used to refer more broadly to the 
expanding universe of financial products underpinned by distributed 
ledger technology. In addition to digital money, entrepreneurs are 
increasingly exploring the distributed ledger technology's application 
to securities. Security tokens are a subset of cryptoassets and are 
used to represent legal ownership of a financial asset, such as equity 
or debt interests in an enterprise managed principally by others and 
are often transacted using distributed ledger technology. \13\ One 
example of a security token is tZero, a subsidiary of e-commerce 
retailer Overstock. The tZero security token provides its holders with 
a preferred equity security in Overstock, and features a dividend based 
on the firm's revenue. \14\
---------------------------------------------------------------------------
     \12\ For example, see Hyun Song Shin, ``Cryptocurrencies and the 
Economics of Money'', Bank for International Settlements, June 24, 
2018.
     \13\ Olga Kharif, ``Security Tokens Are the New Crypto--But You 
Probably Can't Afford Them'', Washington Post, February 11, 2019.
     \14\ Rebecca Campbell, ``The Ultimate Cryptocurrency Explainer: 
Bitcoin, Utility Tokens, and Stablecoins'', Next Web, February 13, 
2019.
---------------------------------------------------------------------------
    Companies that facilitate the use of cryptocurrencies have also 
flourished over the past decade. For example, exchanges are digital 
platforms that allow customers to trade cryptocurrencies for other 
cryptocurrencies and/or fiat currencies. Top exchanges by trading 
volume are OKEx, Binance, and HitBTC. \15\ Wallets are applications or 
interfaces that can be downloaded onto a device to facilitate 
transacting in cryptocurrencies. Popular wallet apps include Exodus and 
Copay, among others. \16\
---------------------------------------------------------------------------
     \15\ ``Top 100 Cryptocurrency Exchanges by Trade Volume'', 
CoinMarketCap, with values as accessed on July 23 2019.
     \16\ Oliver Rist, ``The Best Cryptocurrency Wallets From 2019'', 
PC Magazine, September 18, 2018.
---------------------------------------------------------------------------
Market Trends
    The cryptocurrency market is concentrated and volatile. In terms of 
market concentration, bitcoin remains the most well-known and widely 
used cryptocurrency, accounting for 65 percent of the market. \17\ The 
five largest cryptocurrencies (Bitcoin, Ethereum, Ripple, Litecoin, and 
Bitcoin Cash) account for over 80 percent of the market (Figure 1). In 
terms of market fluctuations, the cryptocurrency market (driven largely 
by bitcoin) boomed in 2017, increasing from a market value of about $18 
billion in January 2017 to over $800 billion in January 2018. The 
market crashed in 2018, with cryptocurrencies losing about 85 percent 
of their value by the end of the year. It has somewhat rebounded in 
2019, to about $274 billion in July, comparable in market value to 
large corporations such as Nestle, Samsung, or Proctor and Gamble. \18\ 
Compared to other global financial markets, however, the cryptocurrency 
market is small: global stock markets are valued around $80 trillion 
and global bond markets are valued around $246 trillion globally. \19\
---------------------------------------------------------------------------
     \17\ Data on cryptocurrency market valuations in this written 
statement are from ``Cryptocurrency Market Capitalizations'', 
CoinMarketCap, with values as accessed on July 23, 2019.
     \18\ IMF, World Economic Outlook, April 2019; ``The World's 
Largest Public Companies'', Forbes, accessed July 25, 2019.
     \19\ Global Financial Data, Inc. and Institute of International 
Finance, ``Global Debt Monitor--July 2019''.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Potential Benefits and Risks
    In general, observers debate whether cryptocurrencies will in time 
achieve their purported potential, or whether they are another 
speculative bubble, similar to tulip bulbs in 17th century Holland. 
\20\ Proponents argue that cryptocurrencies have the potential to 
revolutionize the financial and banking industries. Cryptocurrencies 
could increase payment efficiency, reduce transaction costs of payments 
and fund transfers, increase participation in the financial system, and 
facilitate transactions.
---------------------------------------------------------------------------
     \20\ Nathaniel Popper, ``After the Bust, Are Bitcoins More Like 
Tulip Mania or the Internet?'' New York Times, April 23, 2019.
---------------------------------------------------------------------------
    Others are more skeptical. Many cryptocurrencies are considered to 
be volatile, create a host of consumer protection and illicit finance 
concerns, face an uneven global regulatory environment, and require 
sizeable energy resources for the associated computations. Some 
skeptics allege that many cryptocurrencies are effectively a Ponzi 
scheme and primarily finance illicit activities. \21\
---------------------------------------------------------------------------
     \21\ For example, see Paul Krugman, ``Bitcoin Is Basically a Ponzi 
Scheme'', Seattle Times, January 30, 2018; Nouriel Roubini, ``The Great 
Crypto Heist'', Project Syndicate, July 16, 2019.
---------------------------------------------------------------------------
Patchwork of National Regulations
    Cryptocurrencies span national borders and are designed for 
international use, but they are regulated by Governments at the 
national level. Governments around the world are taking different 
approaches to cryptocurrencies, applying different nomenclatures and 
definitions, and tackling different legal and policy questions. With 
more than 190 sovereign States in the world and arguably little 
harmonization of cryptocurrency regulations across countries to date, a 
complex patchwork of Government regulations is emerging. Broadly 
speaking, Government approaches fall across a spectrum from actively 
encouraging cryptocurrencies to banning them outright.
Actively Fostering Cryptocurrencies
    At one end of the spectrum, some Governments are actively seeking 
to become cryptocurrency hubs by attracting and developing 
cryptocurrency industries in their countries. These Governments view 
cryptocurrency as an important financial innovation that can create 
jobs and generate economic activity. They have created regulatory 
frameworks tailored to, and designed to attract, a range of businesses 
and activities in the cryptocurrency industry, including cryptocurrency 
exchanges and initial coin offerings (ICOs).
    For example, Switzerland is seeking to create a cryptocurrency 
industry, or ``Crypto Valley,'' a cluster of companies associated with 
cryptocurrency akin to the cluster of technology companies in Silicon 
Valley. ``Crypto Valley'' is located in the canton of Zug. The 
jurisdiction has tried to attract cryptocurrency companies and 
exchanges through the early adoption of regulations designed to provide 
regulatory certainty; these regulations are also generally viewed as 
favorable to attracting cryptocurrency activities. Multinationals are 
attracted to Zug's low tax rates. Companies that created and promote 
Ethereum, the second largest cryptocurrency by value, are located in 
Zug, and as many as 200-300 cryptocurrency entities have opened there 
in recent years. \22\ The nonprofit that is to oversee Facebook's 
proposed new cryptocurrency, the libra, is registered in Geneva, where 
it received a ``warm welcome'' from officials. \23\ By contrast, 
officials in many other jurisdictions have raised a number of concerns 
regarding the libra. In 2018, the Swiss finance minister talked about 
expanding ``Crypto Valley'' to ``Crypto Nation.'' \24\
---------------------------------------------------------------------------
     \22\ Anna Irrera and Brenna Hughes Neghaisi, ``Switzerland Seeks 
To Regain Cryptocurrency Crown'', Reuters, July 19, 2018.
     \23\ Hugo Miller and Leonard Kehnscherper, ``Facebook's 
Cryptocurrecy Gets a Warm Welcome in Geneva'', Bloomberg , June 25, 
2019.
     \24\ Matthew Allen, ``Swiss Blockchain Industry Sees Meteoric 
Growth'', SWI, October 10, 2018.
---------------------------------------------------------------------------
    Similarly, Malta is promoting itself as ``Blockchain Island.'' Its 
development of ``cryptofriendly'' frameworks and a blockchain strategy 
taskforce to advise the Government, as well as a favorable tax rate for 
international companies, has attracted cryptocurrency industries, 
including two prominent cryptoexchanges (Binance and OKEx). \25\ 
Singapore has also strived to become a cryptocurrency hub in Asia, with 
analysts describing its regulators as well-informed and transparent 
about blockchain and cryptocurrency, compared to regulatory 
uncertainties in other jurisdictions. \26\ Singapore has embraced 
cryptofriendly regulations and is a major location for ICOs. \27\ 
Singapore has also explored ways to integrate distributed ledger 
technology into its financial system. \28\
---------------------------------------------------------------------------
     \25\ For example, see Viren Vaghela and Andrea Tan, ``How Malta 
Became a Hub of the Cryptocurrency World'', Bloomberg Businessweek, 
April 23, 2018; ``Regulation of Cryptocurrency Around the World'', 
Global Legal Research Center, Law Library of Congress, June 2018
     \26\ Joyce Yang, ``Singapore Is the Crypto Sandbox That Asia 
Needs'', TechCrunch, September 22, 2018.
     \27\ ``Singapore Continues To Be a Hotbed for Crypto Companies in 
2019'', Asean Today, July 29, 2018.
     \28\ Ibid.
---------------------------------------------------------------------------
Banning or Restricting Cryptocurrencies
    At the other end of the spectrum, Governments have banned the use 
of cryptocurrencies or specific activities associated with 
cryptocurrencies. These Governments generally view the risks of 
cryptocurrencies, such as undermining financial stability, lack of 
investor and consumer protections, and the potential for illicit 
transactions, as more significant than the possible benefits.
    For example, China has restricted its banks from using 
cryptocurrencies as currency, banned ICOs, and restricted 
cryptocurrency exchanges. \29\ South Korea has also banned ICOs. \30\ 
Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam ban all 
cryptocurrency activities; Qatar and Bahrain bar domestic 
cryptocurrency activities; and Bangladesh, Colombia, Iran, Lithuania, 
Lesotho, and Thailand ban financial institutions from facilitating 
transactions involving cryptocurrencies. \31\ Egypt has banned the use 
of cryptocurrencies to conduct commerce, Taiwan has prohibited its 
banks from accepting or transacting cryptocurrencies, Indonesia has 
prohibited the use of cryptocurrencies for payment, and Vietnam does 
not allow cryptocurrencies to be used as a legal means of payment. \32\ 
In India, a Government panel has recommended banning cryptocurrencies. 
\33\
---------------------------------------------------------------------------
     \29\ Gerry Mullany, ``China Restricts Banks' Use of Bitcoin'', New 
York Times, December 5, 2013; Chao Deng, ``China Bans Fundraising Via 
Cryptocurrencies, Known as ICOs'', Wall Street Journal, September 4, 
2017; Kenneth Rapoza, ``Cryptocurrency Exchanges Officially Dead in 
China'', Forbes, November 2, 2017.
     \30\ Oscar Williams-Grut, ``South Korea Banks ICOs'', Business 
Insider, September 29, 2017.
     \31\ ``Regulation of Cryptocurrency Around the World'', Global 
Legal Research Center, Law Library of Congress, June 2018.
     \32\ Ibid.
     \33\ Rahul Shrivastava, ``Govt Committee Recommends Ban on 
Cryptocurrency in India'', India Today, July 23, 2019.
---------------------------------------------------------------------------
Balanced Regulation of Cryptocurrencies
    In the middle of the spectrum, some Governments are seeking to 
balance encouraging financial innovation and managing the risks posed 
by cryptocurrencies, while providing greater clarity surrounding the 
emergency of cryptocurrencies. These Governments stop short of banning 
cryptocurrencies but are not actively seeking to become cryptocurrency 
hubs. Most major advanced economies, including the United States, 
Eurozone countries, and the United Kingdom, have adopted this type of 
approach.
    Regulatory frameworks in many countries are still evolving, and 
countries are taking different approaches. Countries often have 
differing working or legal definitions of cryptocurrencies and are 
developing differing regulations across a range of issues. Some 
countries are applying or adapting existing regulations to 
cryptocurrencies and others are developing new regulations specifically 
focused on cryptocurrencies. One study finds that even within 
countries, consensus may be elusive, as different agencies in the same 
Government may adopt conflicting approaches to cryptocurrencies. \34\
---------------------------------------------------------------------------
     \34\ Claire Groden, Edorado Saravalle, and Julia Solomon-Strauss, 
``Uncharted Waters: A Primer on Virtual Currency Regulation Around the 
World'', Center for a New American Security and The Center on Law and 
Security at the NYU School of Law, September 2018.
---------------------------------------------------------------------------
    Countries have focused, to varying degrees, on regulations 
pertaining to cryptocurrencies' permitted usage, tax treatment, 
application to securities regulations, anti- money laundering/
countering the financing of terrorism (AML/CFT) implications, 
registration and reporting requirements, cybersecurity requirements, 
and regulations pertaining to financial institutions dealing with 
cryptocurrencies.
    For example, regulators focus on cryptocurrency exchanges, because 
they provide a nexus between the cryptocurrency market and the 
traditional financial sector. Exchanges present a number of issues for 
regulators, particularly related to consumer protections and money 
laundering. According to one study, nearly 95 percent of all reported 
trading in bitcoin is suspected to be artificially created by 
unregulated exchanges. \35\ There are also concerns that exchanges are 
exploited for money laundering. \36\ Regulators striving to protect 
consumers and address illicit financing consider what licensing, 
reporting, cybersecurity, systems integrity, and AML/CFT regulations to 
apply to exchanges, among other requirements. \37\ Part of their 
calculation may center on whether to apply existing regulations, such 
as those pertaining to banks, securities exchanges, or other components 
of the payments or financial system, or whether to develop a new 
regulatory structure altogether. The different types of 
cryptocurrencies (for example, payment tokens vs. stablecoins) and the 
opaque nature of the exchanges may complicate regulators' calculations. 
\38\ Different countries have taken various approaches in their 
licensing, transparency, and AML/CFT requirements.
---------------------------------------------------------------------------
     \35\ Paul Vigna, ``Most Bitcoin Trading Faked by Unregulated 
Exchanges, Study Finds'', Wall Street Journal, March 22, 2019.
     \36\ Nouriel Roubini, ``The Great Crypto Heist'', Project 
Syndicate, July 16, 2019.
     \37\ Daniel A. Leslie, ``Cryptocurrency Exchanges and Custody 
Providers: International Regulatory Development'', Norton Rose 
Fulbright, October 2018.
     \38\ Leslie Ankney, ``Who Should You Trust? Understanding Crypto 
Exchanges and Regulation'', Forbes, January 30, 2019.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Governments also vary in their regulatory treatment of ICOs. ICOs 
are a process by which new cryptocurrency coins or tokens are issued, 
and a way to raise capital. In 2018, 2,284 ICOs were concluded, raising 
almost $11.4 billion. \40\ Consumer protections are a key concern of 
ICO regulations: according to one study, nearly 80 percent of ICOs in 
2017 were identified as scams, and only about 8 percent reached the 
trading stage on cryptocurrency exchanges. \41\ Regulators have focused 
on when ICOs should be regulated as securities. The issuance of 
securities is highly regulated in many countries. For example, 
countries may require registration with a regulating agency and the 
disclosure of information about the seller and the security. Some 
countries have developed guidance on the application of securities 
regulations to ICOs based on different types of tokens; others are 
applying existing securities regulations to ICOs on a case-by-case 
basis.
---------------------------------------------------------------------------
     \39\ Claire Groden, Edorado Saravalle, and Julia Solomon-Strauss, 
``Uncharted Waters: A Primer on Virtual Currency Regulation Around the 
World'', Center for a New American Security and The Center on Law and 
Security at the NYU School of Law, September 2018.
     \40\ Daniele Pozzi, ``ICO Market 2018 vs 2017: Trends, 
Capitalization, Localization, Industries, Success Rate'', Coin 
Telegraph, January 5, 2019.
     \41\ Sherwin Dowlat, ``Cryptoasset Market Coverage Initiation: 
Network Creation'', Stais Group, July 11, 2018.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    National regulators have also considered the tax treatment of 
cryptocurrencies, and again have arrived at different approaches. For 
tax purposes, a cryptocurrency could be considered a form of cash, 
foreign currency, investment, income, commodity, or service. 
Classification has implications for the tax treatment of transactions 
and holdings of cryptocurrencies. For example, classification may 
determine whether cryptocurrency proceeds are subject to income tax, 
capital gains tax, sales tax, and so forth. Some jurisdictions also 
differentiate between individual use of cryptocurrency on a small scale 
and larger-scale cryptocurrency investments and transactions. Likewise, 
some jurisdictions differentiate between cryptocurrency transactions by 
corporations and individuals. Another complicating factor is the 
growing types of cryptocurrencies. As cryptocurrencies proliferate and 
start to serve different functions, policymakers are faced with whether 
they should all be taxed the same way.
---------------------------------------------------------------------------
     \42\ Claire Groden, Edorado Saravalle, and Julia Solomon-Strauss, 
``Uncharted Waters: A Primer on Virtual Currency Regulation Around the 
World'', Center for a New American Security and The Center on Law and 
Security at the NYU School of Law, September 2018.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Despite the differences in regulatory approaches, one global survey 
of cryptocurrency regulations finds that issuing warnings about the 
pitfalls of investing in cryptocurrencies is exceedingly common. \44\ 
Such warnings are usually issued by central banks, and are largely 
designed to educate citizens about the difference between fiat 
currencies and cryptocurrencies. The warnings caution that citizens who 
invest in cryptocurrencies do so at their own personal risk and that 
consumers have no legal recourse available in the event of loss.
---------------------------------------------------------------------------
     \43\ Ibid.
     \44\ ``Regulation of Cryptocurrency Around the World'', Global 
Legal Research Center, Law Library of Congress, June 2018.
---------------------------------------------------------------------------
The Need for International Regulatory Harmonization?
    The patchwork of national-level cryptocurrency regulations around 
the world raises the question of whether international regulatory 
harmonization is needed. In general, major financial regulatory 
differences among countries can create instability. Regulatory 
differences can lead to an accumulation of under-regulated activities, 
financial institutions may engage in regulatory arbitrage, countries 
may engage in a regulatory race-to-the-bottom, and lax regulation in 
one country can cause contagious crises around the world. \45\ 
Countries have worked together in the past to harmonize various 
financial regulations, including capital standards (the Basel Accords) 
and shadow-banking activities (G20 regulatory reforms following the 
global financial crisis in 2008-2009).
---------------------------------------------------------------------------
     \45\ Jeffry Frieden, ``The Governance of International Finance'', 
Annual Review of Political Science, vol. 19, no. 33-48 (December 2015).
---------------------------------------------------------------------------
    Several policymakers have argued for greater harmonization of 
cryptocurrency regulations across countries. The G7 finance ministers 
and central bank governors agreed in 2018 that international 
coordination on cryptocurrencies is needed to ensure that regulations 
are effective in a globally interconnected financial system. \46\ The 
G20 finance ministers and central bank governors pledged to work with 
international bodies to monitor the risks associated with 
cryptocurrencies and to assess multilateral responses as needed. \47\ 
Then-Managing Director of the International Monetary Fund (IMF) 
Christine Lagarde argued that international regulation and supervision 
of cryptocurrencies is ``inevitable.'' Additionally, the editorial 
board of the Financial Times argues that a coordinated international 
regulatory framework for the ``wild west'' of cryptocurrencies is long 
overdue. \48\
---------------------------------------------------------------------------
     \46\ ``Chair's Summary: G7 Finance Ministers and Central Bank 
Governors' Meeting'', Whistler, British Columbia, Canada, June 2, 2018.
     \47\ G20 Finance Ministers and Central Bank Governors Communique, 
Buenos Aires, Argentina, July 23, 2018.
     \48\ Zahraa Alkhalisi, ``IMF Chief: Cryptocurrency Regulation Is 
`Inevitable' '', CNN, February 11, 2018; Editorial Board, 
``Cryptocurrency Wild West Is Crying Out for a Principled Sheriff'', 
Financial Times, September 25, 2018.
---------------------------------------------------------------------------
    Some initial international efforts at harmonization of 
cryptocurrency regulations are proceeding (see textbox below), although 
more systematic coordination remains elusive. A more aggressive 
adoption of a one-size-fits all international regulatory structure for 
cryptocurrencies could have costs, however. It could create 
distortions, have unintended consequences, and impede innovation, a 
particular concern in the fast-changing cryptocurrency market. 
Additionally, the macroeconomic risks associated with cryptocurrencies 
have been relatively limited to date; in 2018, the Financial Stability 
Board (FSB), which promotes international financial stability by 
coordinating national financial authorities and international standard-
setting bodies found that cryptocurrency markets do not currently pose 
a material risk to global financial stability. \49\
---------------------------------------------------------------------------
     \49\ ``FSB Sets Out Potential Financial Stability Implications 
From Crypto-Assets'', Financial Stability Board, October 10, 2018.
     \50\ ``FATF Reporting to the G20 Leaders' Summit'', Financial 
Action Task Force, June 2019; John O'Donnell and Tom Wilson, ``Global 
Money-Laundering Watchdog Launches Crackdown on Cryptocurrencies'', 
Reuters, June 21, 2019
     \51\ ``Statement on Crypto-Assets'', Basel Committee on Banking 
Supervision, March 13, 2019.
     \52\ ``IOSCO Board Communication on Concerns Related to Initial 
Coin Offerings (ICOs)'', International Organization of Securities 
Commissions (IOSCO), January 18, 2018; ``Issues, Risks, and Regulatory 
Considerations Relating to Crypto-Asset Trading Platforms'', 
International Organization of Securities Commissions, May 2019.

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Could Digital Currencies Go Mainstream?
    To date, cryptocurrencies have been a relatively small, niche 
market, dominated by specialized entities and firms and used among a 
small set consumers. \53\ The proliferation of cryptocurrencies has 
generated interest among some Governments and large multinational 
corporations (MNCs). If Governments and MNCs move into the digital 
currency market, the usage of digital currencies could dramatically 
increase, which would have policy implications for the United States.
---------------------------------------------------------------------------
     \53\ A poll conducted in 2018 found that 92 percent of Americans 
do not own any cryptocurrencies, primarily citing lack of interest or 
practical need. Peter Terlato, ``Here's Why Americans Aren't Buying 
Cryptocurrencies'', Finder.com, March 20, 2018.
---------------------------------------------------------------------------
Digital Fiat Currencies
    Interest is growing among some Governments in creating digital 
versions of their fiat currencies. Digital fiat currencies would be 
exchanged electronically but, unlike cryptocurrencies, would serve as 
legal tender. There are a wide range of proposals and forms that 
digital fiat currencies could take. To date, countries are primarily 
exploring digital fiat currencies as a way to raise money, avoid 
sanctions, or ensure a safe and efficient payment system.
    Sovereign Cryptocurrencies
    Some Governments have launched or are considering a blockchain-
based legal currency to run in parallel with their traditional fiat 
currency. The most prominent example to date is Venezuela. In December 
2017, President Maduro of Venezuela announced plans to launch a new 
digital fiat currency, the ``petro,'' which would use blockchain 
technology and be backed by oil reserves and oil commodities. \54\ 
Maduro hoped that creating and selling a new digital currency could 
provide the cash-strapped Government with a fresh infusion of funds. 
Maduro also stressed that the petro would help Venezuela ``advance in 
issues of monetary sovereignty, to make financial transactions and 
overcome the financial blockade,'' an apparent reference to U.S. 
sanctions that restrict Venezuela's access to U.S. financial markets. 
There were, and continue to be, a number of questions about the 
currency, including how the oil guarantee works.
---------------------------------------------------------------------------
     \54\ Alexandra Ulmer and Deisy Buirago, ``Enter to `Petro': 
Venezuela To Launch Oil-Backed Cryptocurrency'', Reuters, December 3, 
2017.
---------------------------------------------------------------------------
    The Venezuelan Government launched the petro in February 2018 
through a private presale that went through mid-March. The Government 
claims it raised $3.3 billion, \55\ but the amount raised has not been 
confirmed by an independent audit. \56\ Amidst historically high 
inflation of its fiat currency, the bolivar, the Venezuelan Government 
in August 2018 devalued the bolivar by about 95 percent, renamed it the 
``sovereign bolivar,'' and pegged it to the petro. \57\ Nevertheless, 
the petro is not being circulated within Venezuela or sold on any major 
cryptocurrency exchange, and some analysts have called the petro a 
scam. \58\ Iran and Russia have also considered issuing their own 
cryptocurrencies to evade sanctions, although the details and status of 
such plans are unclear. \59\
---------------------------------------------------------------------------
     \55\ Eric Lam, ``Here's What Maduro Has Said of Venezuela's Petro 
Cryptocurrency'', Bloomberg, August 20, 2018.
     \56\ Aaron Mak, ``What Does It Mean for Venezuela To Peg Its New 
Currency to a Cryptocurrency?'', Slate, August 22, 2018.
     \57\ Sam Jacobs, ``Venezuela Just Devalued the Bolivar by 95% and 
Pegged It to a Cryptocurrency'', Business Insider, August 20, 2018.
     \58\ Brian Ellsworth, ``Special Report: In Venezuela, New 
Cryptocurrency Is Nowhere To Be Found'', Reuters, August 30, 2018; 
Katia Moskvitch, ``Inside the Bluster and Lies of Petro, Venezuela's 
Cryptocurrency Scam'', Wired, August 22, 2018.
     \59\ Yaya Fanusie, ``Blockchain Authoritarianism: The Regime in 
Iran Goes Crypto'', Forbes, August 15, 2018; Max Seddon and Martin 
Arnold, ``Putin Considers `Cryptorouble' as Moscow Seeks To Evade 
Sanctions'', Financial Times, January 1, 2018. For more on the use of 
digital currencies to evade sanctions, see CRS ``In Focus IF10825, 
Digital Currencies: Sanctions Evasion Risks'', by Rebecca M. Nelson and 
Liana W. Rosen.
---------------------------------------------------------------------------
    The Marshall Islands is also pursuing the launch of a 
cryptocurrency, the ``Sovereign'' (SOV). The SOV would become the 
Marshall Islands' second legal currency and run parallel to the U.S. 
dollar. By international agreement with the United States (the Compact 
of Free Association), the U.S. dollar is legal tender in the Marshall 
Islands. \60\ The primary motivation for the cryptocurrency is to raise 
revenue for the Government; the Marshall Islands is a small country at 
risk for natural disasters and reliant on the United States for foreign 
aid. In February 2018, the Marshall Island's parliament passed 
legislation to lay the groundwork for the digital decentralized 
currency. In June 2019, the Government established a nonprofit 
organization to develop, implement, and maintain the infrastructure for 
the SOV. \61\
---------------------------------------------------------------------------
     \60\ ``Republic of the Marshall Islands: Selected Issues'', 
International Monetary Fund, August 10, 2018.
     \61\ ``Marshall Islands Sets up Non-Profit To Oversee National 
Digital Currency'', Coindesk, June 6, 2019.
---------------------------------------------------------------------------
    The IMF has raised a number of concerns about the SOV, such as:

    the likelihood that the SOV could to become an effective 
        means of exchange;

    the SOV poses serious AML/CFT risks; fluctuations in the 
        SOV's value could create financial risks for the Government;

    the SOV requires heavy reliance on a third-party to develop 
        and manage the currency;

    the SOV could be a target for cyberattacks;

    and the legal implications of the SOV are complicated by 
        the international agreement with the United States establishing 
        the U.S. dollar as legal tender in the Marshall Islands. \62\
---------------------------------------------------------------------------
     \62\ ``Republic of the Marshall Islands: Selected Issues'', 
International Monetary Fund, August 10, 2018.

    Central Bank Digital Currencies
    Some Governments are also exploring streamlining the electronic 
payment system for fiat currencies, to provide a more robust and legal 
alternative to cryptocurrencies. In particular, some Governments are 
considering whether and, if so how, central banks could make digital 
fiat currencies directly available to the public, obviating the need 
for the intermediaries to complete transactions (as is the case 
currently). \63\ Transactions involving such ``central bank digital 
currencies'' could be recorded using distributed ledger technology, but 
alternative ledgers (including centralized ledgers) would also be 
possible.
---------------------------------------------------------------------------
     \63\ Tommaso Mancini-Griffoli, Maria Soledad Martinez Peria, Itai 
Agur, et. al, ``Casting Light on Central Bank Digital Currency'', IMF 
Staff Discussion Note, November 2018; ``Central Bank Digital 
Currencies'', Bank for International Settlements, March 2018; Claire 
Jones, ``Central Bank Plans To Create Digital Currencies Receive 
Backing'', Financial Times, June 30, 2019.
---------------------------------------------------------------------------
    For example, Sweden's central bank, the Riksbank, is considering 
the adoption of an ``e-krona.'' \64\ The e-krona is motivated by the 
decline in the use of cash in Sweden and the increasing reliance on 
private payment processors. The Riksbank has argued that the e-krona is 
necessary to maintain sovereign control over the payment system, and to 
ensure stability and trust in Sweden's monetary system, particularly 
during crises. The e-krona would be issued by the Riksbank and 
represent a claim on the Swedish State. The e-krona would be 
denominated in Swedish krona (it would not have a different value 
system from its traditional fiat currency, the krona) and the Riksbank 
would have responsibility for the e-krona's underlying infrastructure. 
The Riksbank is currently considering a pilot e-krona project to assess 
its viability. Other central banks including Canada, China, and Uruguay 
are also considering similar initiatives, and the Eastern Caribbean 
Central Bank (ECCB), the monetary authority for eight island economies, 
launched a pilot in July 2019. \65\
---------------------------------------------------------------------------
     \64\ Gabriel Soderberg, ``Are Bitcoin and Other Crypto-Assets 
Money?'' Economic Commentaries No. 5, Riksbank, March 14, 2018; and 
``The E-Krona Project, Report 2'', Riksbank, October 26, 2018.
     \65\ Christine Lagarde, ``Winds of Change: The Case for New 
Digital Currency'', Speech at Singapore FinTech Festival, November 14, 
2018; ``ECCB Launches a Digital Currency Pilot'', Dominican News 
Online, July 22, 2019.
---------------------------------------------------------------------------
    In contrast, many central banks in advanced economies, including 
the U.S. Federal Reserve, \66\ the European Central Bank (ECB), \67\ 
the Bank of England, \68\ the Reserve Bank of Australia, \69\ the Bank 
of Israel, \70\ and the Reserve Bank of New Zealand, \71\ have argued 
against the benefits of digital fiat currencies or announced that they 
do not intend to adopt a digital fiat currency at this time. To varying 
degrees, they have questioned the need for digital fiat currencies and 
cautioned that digital fiat currencies could be prone to hacking and 
undermine financial stability.
---------------------------------------------------------------------------
     \66\ Remarks by Federal Reserve Chair Jerome Powell at U.S. 
Congress, House Financial Services Committee, Monetary Policy and the 
Economy, 115th Cong., 2nd sess., July 18, 2018.
     \67\ Francesco Canepa, ``ECB Has No Plan To Issue Digital 
Currency: Draghi'', Reuters, September 14, 2018.
     \68\ ``Digital Currencies'', Bank of England, August 22, 2018.
     \69\ Tony Richards (Head of Payments Policy Department at the 
Reserve Bank of Australia), ``Cryptocurrencies and Distributed Ledger 
Technology'', Speech at Austrian Business Economists Briefing, Sydney, 
June 26, 2018, https://www.rba.gov.au/speeches/2018/sp-so-2018-06-
26.html.
     \70\ ``The Bank of Israel Published a Summary of the Work of the 
Team To Examine Central Bank Digital Currency'', June 11, 2018, https:/
/www.boi.org.il/en/NewsAndPublications/PressReleases/Pages/6-11-
18.aspx.
     \71\ Geoff Bascand (Governor of the Reserve Bank of New Zealand), 
``In Search of Gold: Exploring Central Bank Digital Currency'', Speech, 
June 26, 2018, Auckland, https://www.rbnz.govt.nz/research-and-
publications/speeches/2018/speech2018-06-25.
---------------------------------------------------------------------------
    Implications for the United States
    If other Governments create and adopt digital fiat currencies, the 
policy implications for the United States would largely depend on which 
countries are involved and how their digital fiat currencies are 
structured. For example, one of the more nefarious motivations for a 
digital fiat currency--sanctions evasion--would raise issues pertaining 
to the enforcement of U.S. sanctions. The adoption of digital fiat 
currencies by many other major economies could raise concerns about 
maintaining the role of the U.S. dollar as a reserve currency in the 
global economy, although the central banks of major advanced economies 
have largely indicated their intent to refrain from doing so at this 
time. New digital fiat currencies could also raise concerns about the 
potential for new vulnerabilities in the international economy and the 
protection of U.S. consumers purchasing, holding, and transacting in 
these currencies.
Cryptocurrencies Associated With Large Multinational Corporations
    Some large financial and nonfinancial MNCs are also creating or 
planning to create their own cryptocurrencies. In February 2019, 
JPMorgan, which has a presence in over 100 markets worldwide, became 
the first U.S. bank to create and successfully test a digital coin 
representing a fiat currency: the JPM Coin. \72\ Goldman Sachs, a major 
U.S. multinational investment bank and financial services company, is 
conducting extensive research on ``tokenization,'' the process for 
transforming currencies or assets into tradeable digital contracts 
transacted through distributed ledger technology. \73\
---------------------------------------------------------------------------
     \72\ ``J.P. Morgan Creates Digital Coin for Payments'', JPMorgan, 
February 14, 2019.
     \73\ Alastair Marsh, ``Goldman Sachs Explores Creating a Digital 
Coin Like JPMorgan's'', Bloomberg, June 28, 2019.
---------------------------------------------------------------------------
    In June 2019, Facebook, with approximately 2.4 billion active 
users, announced its plans for the libra, a new cryptocurrency to be 
backed by assets and supported by more than two dozen companies 
including Uber, Spotify, Mastercard, and Visa, among others. Libra 
would be classified as a stablecoin, because its value would be backed 
by a reserve of assets with a stable value. In contrast, the value of 
bitcoin, for example, fluctuates depending on users' beliefs about its 
worth. Relative to the U.S. dollar however, the value of the libra 
would fluctuate, because the reserve assets would be denominated in a 
basket of currencies. The Libra Association, the nonprofit established 
by Facebook in Switzerland to oversee the currency, is targeting a 
launch date for the libra in the first half of 2020.
    Following Facebook's announcement, China's central bank is 
reportedly reconsidering an officially sanctioned cryptocurrency after 
previously banning them; there is speculation they could develop a 
cryptocurrency associated with WeChat. \74\ WeChat is a popular 
messaging app in China with 1.1 billion active users and has an 
affiliated payment system (WeChat Pay) that transacts money in Chinese 
yuan and through Chinese banks.
---------------------------------------------------------------------------
     \74\ Kenneth Rapoza, ``Beijing Begins Imaging a WeChat 
Cryptocurrency'', Forbes, July 8, 2019.
---------------------------------------------------------------------------
    By tapping their large customer bases and networks, these or other 
major institutions aspire to take cryptocurrencies mainstream. 
Upscaling the size of the cryptocurrency market could magnify 
cryptocurrency's benefits, including cheaper and easier transactions 
and broader financial inclusion. Their proposals also magnify existing 
concerns about cryptocurrency, including consumer protections and money 
laundering, as well as introduce new concerns about sovereign control 
of money, global stability, and privacy.
    Debating the Merits of the Proposed Libra Cryptocurrency
    Facebook has garnered far more interest and backlash against its 
cryptocurrency plans than other traditional financial MNCs, due to 
questions about Facebook's alleged lack of expertise in the banking 
sector, the size of its network, and concerns about its handling of 
user data. \75\ In July 2019, the G7 finance ministers and central bank 
governors agreed that the libra raises ``serious regulatory and 
systemic concerns, as well as wider policy issues, which both need to 
be addressed before such projects can be implemented.'' \76\
---------------------------------------------------------------------------
     \75\ Matt Levine, ``Facebook's Crypto Annoys Everyone'', 
Bloomberg, July 17, 2019.
     \76\ ``Chair's Summary: G7 Finance Ministers and Central Bank 
Governors' Meeting'', Chantily, France, July 18, 2019.
---------------------------------------------------------------------------
    If the project moves forward, the libra may have the most appeal 
for consumers in developing countries who do not have access to 
traditional banking systems (the ``unbanked''). The World Bank 
estimates that 1.7 billion adults are unbanked, yet two-thirds of them 
own a mobile phone that could help them access financial services. \77\ 
The libra would provide these consumers with the ability to store and 
transact money digitally from mobile phones. The libra could also 
potentially benefit the senders and receivers of remittances by 
dramatically reducing fees, potentially to zero. Even among these 
potential users, however, there are questions about whether the libra 
could effectively replace cash in developing countries, currently the 
dominant method of payment. \78\
---------------------------------------------------------------------------
     \77\ ``Financial Inclusion on the Rise, but Gaps Remain, Global 
Findex Database Shows'', World Bank Press Release, April 19, 2018.
     \78\ Annie Lowrey, ``What Facebook Can Do for the Global Poor'', 
The Atlantic, June 27, 2019.
---------------------------------------------------------------------------
    The libra may have less appeal to consumers in developed countries 
with access to traditional banking systems. Unlike fiat money held in a 
traditional bank account, libra holdings would not earn interest or be 
backed by deposit insurance. Libra users would assume foreign exchange 
risk by holding libra and maintaining payment obligations, such as 
taxes, denominated in the traditional fiat currency. Users would also 
need to accept the risk that the value of their libra holdings could 
change relative to the domestic fiat currency if the Libra Association 
changed the currency composition of the reserve basket.
    The libra's reserve assets are critical to its operation, but raise 
a host of policy questions. Examples include the following.

    If the libra scales to the size envisioned, it is unclear 
        how this will affect markets of ``safe'' assets, as the libra 
        reserve becomes a huge buyer and holder of them.

    It is also unclear what the implications of concentrating 
        safe assets into one private institution would be; some 
        policymakers are already concerned about the large size of some 
        technology and financial firms.

    There are also concerns about what would happen if the 
        assets in the libra's reserve deteriorate; what is a safe asset 
        one day may not be safe the next. For example, if one of the 
        currencies in the libra's basket collapses, it could trigger a 
        run on the libra, necessitating a broad selloff of the libra's 
        reserve assets. \79\ Depending on the size, such a selloff 
        could trigger a significant financial crisis.
---------------------------------------------------------------------------
     \79\ David Z. Morris, ``Facebook's Libra Currency Could Threaten 
the Global Financial System. Here's How'', Fortune, July 18, 2019.

    Strong regulations could address some concerns about the libra's 
reserve assets, but there are questions about who and how the libra 
would be regulated. \80\ The regulatory framework is complicated by the 
number of jurisdictions in which Facebook is proposing to operate, and 
the different aspects of the libra project that could require 
regulation: the libra itself, the Libra Association, and Facebook's 
proposed libra wallet app, Calibra. In response to backlash from some 
regulators, the Libra Association appears to be shifting its approach. 
The libra's white paper asserts that it would operate as an open and 
largely decentralized network after 5 years. Subsequently in public 
statements, the Libra Association appears to be stressing that it would 
shoulder significant responsibility for ensuring compliance with 
various regulations. \81\
---------------------------------------------------------------------------
     \80\ Gregory Barber, ``Everyone Wants Facebook's Libra To Be 
Regulated. But How?'' Wired, July 18, 2019.
     \81\ Timothy B. Lee, ``Facebook is Backpedaling From Its Ambitious 
Vision for Libra'', Ars Technica, July 18, 2019.
---------------------------------------------------------------------------
    The libra also upends the debate about privacy and cryptocurrency. 
Previously, concerns about privacy in cryptocurrency markets focused on 
whether users had too much privacy: that by partially shielding user 
identities, cryptocurrencies allowed bad actors to engage in nefarious 
and illegal activities. The libra inverts the policy discussion to 
focus on protecting user data. In particular, concerns focus on how 
users' data on financial transactions would be protected, and not 
merged with user data from other Facebook platforms. Although the head 
of Calibra has pledged that ensuring privacy is a top priority, many 
analysts are more skeptical given previous scandals involving 
Facebook's use of user data and the dependence of Facebook's business 
model on collecting and monetizing user data. \82\
---------------------------------------------------------------------------
     \82\ Testimony by David A. Marcus, Head of Calibra, Facebook, U.S. 
Congress, Senate Committee on Banking, Housing, and Urban Affairs, 
Examining Facebook's Proposed Digital Currency and Data Privacy 
Considerations, 116th Cong., 1st sess., July 16, 2019; Frances Coppola, 
``The Real Threat From Facebook's Libra Coin'', Forbes, June 30, 2019.
---------------------------------------------------------------------------
Conclusion
    Cryptocurrencies are a relatively new market that is still rapidly 
evolving. Bitcoin was introduced in 2009, and initially existed in 
obscurity. Now thousands of different cryptocurrencies are in 
circulation with a value of about $270 billion. Governments have 
responded differently to the rise of cryptocurrencies, and a patchwork 
of national regulations has been developed. Given the mismatch between 
the international nature of cryptocurrencies, and their regulation at 
the national level, there is increasing discussion about whether 
cryptocurrency regulations need to be harmonized across countries.
    Today's cryptocurrency market is much smaller than other global 
financial markets. However, digital currencies may have the potential 
to be adopted more widely, as central banks and large MNCs look to 
create their own digital currencies. Large-scale adoption of digital 
currencies could have a range of policy implications for the United 
States, including financial stability, consumer protections, AML/CFT, 
privacy considerations, and sanctions policy, among others.
                                 ______
                                 
                 PREPARED STATEMENT OF MEHRSA BARADARAN
    Professor of Law, University of California Irvine School of Law
                             July 30, 2019
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the opportunity to testify today on the topic of 
Examining Regulatory Frameworks for Digital Currencies and Blockchain. 
As a banking law scholar, I hope to provide some perspective on the 
cryptocurrency industry's ambitions with regard to financial inclusion 
for low income Americas as well as its place in the banking regulatory 
landscape.
    Bitcoin, cryptocurrency, and the blockchain technology on which 
they are based began in 2008 in the aftermath of the financial crisis. 
The promise and appeal of bitcoin and the cryptocurrencies that 
followed it is to offer a stateless alternative currency to the U.S. 
monetary system. The cryptocurrency industry aspires to offer a more 
efficient, confidential, and accessible payments system than the bank-
operated payments system, which they claim is slow, outdated, 
inefficient and exclusionary. They claim that the banking sector has 
created inequalities, that it has perpetuated fraud and harmed people 
by their reckless risk-taking. They are frustrated by a banking sector 
that seems not to have their customers best interests at heart. They 
are absolutely right and I am grateful to them for drawing attention to 
the problems in the payments and finance sector. I have spent my 
academic career trying to illuminate and remedy these problems as well. 
I am especially concerned with financial inclusion and equity in 
banking. While I share many of the cryptocurrency industry's concerns 
with respect to failures of the banking industry, I do not believe 
cryptocurrency is the best solution to the problems of financial 
inclusion and equity in banking.
    Specifically, one stated goal of cryptocurrencies is to establish a 
``public'' payments system available to all. \1\ In fact, such a public 
payments system already exists: that is the exact mission of the 
Federal Reserve. Congress established the Federal Reserve in 1913 to 
increase the integrity, efficiency and equity of U.S. payments. It was 
a public institution by design. According to its own charter, ``the 
Federal Reserve was established to serve the public interest.'' \2\ To 
the extent that this system is exclusionary, it is up to our 
democratically elected representatives to update this mission and 
mandate that the Fed promote efficiency and financial inclusion to the 
benefit of more Americans. Money itself is a public good and its 
creation, supply, and stability is a function of the U.S. Treasury in 
coordination with the Federal Reserve. \3\ If there are any problems 
with U.S. Currency, the Constitution of the United States has 
authorized only this institution, Congress, to change the laws and 
institutions related to currency. \4\ The problems of inequality and 
inefficiency that bitcoin and the cryptocurrency industry has set out 
to solve are not problems of technology, they are problems of policy. 
And it is in this chamber, and not in a tech startup office or 
anonymous white paper, that these problems must be addressed. Access to 
the Federal Reserve payments system is essential to full participation 
in commerce. Every American not only deserves the right to participate 
in the economy, but also to participate democratically in the monetary 
policy decision making that affects their lives. We do not need to 
replace the Federal Reserve or fiat currency to achieve that. In fact, 
our Congress must do just the opposite and ensure that our public 
institutions are achieving their mission.
---------------------------------------------------------------------------
     \1\ ``Bitcoin is open-source; its design is public, nobody owns or 
controls Bitcoin and everyone can take part.'' https://bitcoin.org/en/
     \2\ https://www.federalreserve.gov/faqs/about_14986.htm
     \3\ Ricks, Morgan, and Crawford, John, and Menand, Lev, ``A Public 
Option for Bank Accounts (Or Central Banking for All)'' (December 2, 
2018). Vanderbilt Law Research Paper 18-33; UC Hastings Research Paper 
No. 287. Available at SSRN: https://ssrn.com/abstract=3192162 or http:/
/dx.doi.org/10.2139/ssrn.3192162. James Tobin, ``The Case for 
Preserving Regulatory Distinctions'', in Restructuring the Financial 
System 167, 172 (1987) (``I think the Government should make available 
to the public a medium with the convenience of deposits and the safety 
of currency, essentially currency on deposit, transferable in any 
amount by check or other order. . . . The Federal Reserve Banks 
themselves could offer such deposits.''). See also Kenneth J. Arrow, 
``The Organization of Economic Activity: Issues Pertinent to the Choice 
of Market Versus Non-Market Allocations'', in Analysis and Evaluation 
of Public Expenditures: The PPP System 48 (J. Econ. Comm. of Cong. 
1969) (``The creation of money is in many respects an example of a 
public good.''); Charles P. Kindleberger and Robert Z. Aliber, 
``Manias, Panics, and Crashes: A History of Financial Crises'' 19 (6th 
ed. 2011) (``Money is a public good.''); John Cochrane, Remarks at the 
Federal Reserve Bank of Minneapolis, May 16, 2016 (``There's a few 
things that Government has a natural monopoly in: national defense, 
courts, property rights, and I would say money.'').
     \4\ See Legal Tender Cases, 110 U.S. 421 (1884) (``Congress has 
the constitutional power to make the Treasury notes of the United 
States a legal tender in payment of private debts, in time of peace as 
well as in time of war.''). See also, 18 U.S.C.  486--Uttering Coins 
of Gold, Silver or Other Metal: ``Whoever, except as authorized by law, 
makes or utters or passes, or attempts to utter or pass, any coins of 
gold or silver or other metal, or alloys of metals, intended for use as 
current money, whether in the resemblance of coins of the United States 
or of foreign countries, or of original design, shall be fined under 
this title or imprisoned not more than 5 years, or both.''
---------------------------------------------------------------------------
The Payments System Is a Public Good and It Should Be Available to All 
        Americans
    The largest and most secure payments system in the U.S. is operated 
by the Federal Reserve as per its mandate. \5\ The Federal Reserve's 
own policy mandate on payments is ``to bring to payments markets an 
overall concern for safety and soundness, promotion of operating 
efficiency, and equitable access.'' The Fed promises that these 
``considerations relating to integrity, efficiency, and access to the 
payments system will remain at the core of the Federal Reserve's role 
and responsibilities regarding the operation of the payments system.'' 
As the Fed itself recognizes, ``given the size, speed, and 
interdependencies of payments, this mission is, and will likely 
continue to be, even more important than it was when the Federal 
Reserve was established in 1913.'' \6\
---------------------------------------------------------------------------
     \5\ Federal Reserve System, Payment Systems: https://
www.federalreserve.gov/paymentsystems.htm; Carol Coye Bensin and Scott 
Loftesness; ``Payments Systems in the U.S.'' 3rd ed. (Glenbrook 
Partners 2010).
     \6\ https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm
---------------------------------------------------------------------------
    Indeed, achieving this mission today is essential. The Federal 
Reserve payments system is accessed by most Americans through their 
banks, and yet a quarter (25 percent) of Americans are unbanked or 
underbanked. \7\ These low-income families spend about 10 percent of 
their total income in fees to alternative financial service providers 
just to use their money. \8\ Being underbanked is expensive and time-
consuming as each financial transaction involves fees and hurdles. \9\ 
The unbanked must pay fees to send and receive money, cash checks, use 
debit cards, and otherwise engage in commercial activities that are 
routine and nearly free for most Americans. In the United States, we 
have decided that only chartered banks and their customers can access 
the payments systems built, maintained, and overseen by the Federal 
Reserve. \10\ Yet banks are not mandated to offer these services to all 
people. Banks can choose their customers and the communities in which 
they will operate physical branches.
---------------------------------------------------------------------------
     \7\ 2017 FDIC National Survey of Unbanked and Underbanked 
Households: https://www.fdic.gov/householdsurvey/2017/2017report.pdf; 
https://www.cnbc.com/2019/03/08/25percent-of-us-households-are-either-
unbanked-or-underbanked.html.
     \8\ U.S. Postal Service, ``Providing Non-Bank Financial Services 
for the Underserved'' (2014), available at http://www.uspsoig.gov/
sites/default/files/document-library-files/2014/rarc-wp-14-007.pdf.
     \9\ See Mehrsa Baradaran, ``How the Other Half Banks: Exclusion, 
Exploitation, and the Threat to Democracy'', Harvard University Press 
(Oct. 2015)
     \10\ Structure of the Federal Reserve System: https://
www.federalreserve.gov/aboutthefed/structure-federal-reservesystem.htm.
---------------------------------------------------------------------------
    Banks have abandoned certain low-profit communities and customers. 
Over the last several decades, deregulation, heightened market 
competition, and the subprime crises has led to wave after wave of bank 
mergers and a conglomerated banking industry. Industry consolidation 
has meant that many communities, especially in rural regions across the 
country are banking deserts where communities do not have a bank. \11\ 
In these banking deserts, it is not uncommon that the only ATM in the 
entire area is at a gas station with fees up to $7.50 per transaction. 
\12\ But even where banks are physically available, there remain many 
barriers for low-income Americans. Banks charge excessive and onerous 
overdraft fees and excess activity fees--fees that are lucrative for 
banks and disastrous for low-income consumers. \13\ Small accounts are 
not profitable for banks so they avoid them--either by leaving low 
income areas or repelling low income customers through fees. \14\ Faced 
with seemingly random and punitive fees, low-income customers have 
taken their business to the fringe banking sector. \15\
---------------------------------------------------------------------------
     \11\ Bank closures are not spread out evenly--93 percent of bank 
closings are in LMI communities. NCRC Research, ``Banking Deserts in 
America'', National Community Reinvestment Coalition (June 2017) http:/
/maps.ncrc.org/bankdeserts/index.html;. Frank Bass and Dakin Campbell, 
``Study Finds Latest Bank Branch Closing Strike Hardest in Poor 
Neighborhoods'', Bloomberg News (May 2, 2013) https://www.stltoday.com/
business/local/studyfinds-latest-bank-branch-closings-strike-hardest-
in-poor/article_b33a4103-280f-5b3c-9754-3086de4b0070.html. Rural 
America has lost over half of its banks in the last few decades and 1 
in 8 communities is a banking desert. Housing Assistance Council, ``The 
Community Reinvestment Act and Mortgage Lending in Rural America'' 22 
(Jan. 2015) http://www.ruralhome.org/storage/documents/publications/
rrreports/rrr-cra-in-rural-america.pdf.
     \12\ ``A Town With No Bank'', NBC News, 2019. https://
www.nbcnews.com/news/nbcblk/how-itta-bena-mississippi-became-banking-
desert-n1017686
     \13\ ``Overdraft Fees: Compare What Banks Charge'': https://
www.nerdwallet.com/blog/banking/overdraft-fees-what-banks-charge/; 
``Bank overdraft fees could jump if consumer watchdog eases rule'': 
https://www.cnbc.com/2019/06/25/bank-overdraft-fees-could-jump-if-
consumer-watchdog-eases-rule.html; Center for Responsible Lending, 
``Report: FDIC Data Shows that Banks Collected $11.45 Billion in 
Overdraft Fees in 2017'': https://www.responsiblelending.org/media/
report-fdic-data-shows-banks-collected-1145-billion-overdraft-fees-
2017; Center for Responsible Lending, ``Unfair Market: The State of 
High-Cost Overdraft Practices in 2017'': https://
www.responsiblelending.org/research-publication/unfair-market-state-
high-cost-overdraft-practices-2017.
     \14\ Most banks require balances of $1,500 to avoid fees on their 
basic accounts. Lisa J. Servon, ``The High Cost, for the Poor, of Using 
a Bank'', New Yorker (Oct. 9, 2013), https://www.newyorker.com/
business/currency/the-high-cost-for-the-poor-of-using-a-bank. Abby 
Vesoulis, ``Millions of Americans Can't Afford a Checking Account. The 
Post Office Could Fix That'', Time (Aug. 7, 2018); Government 
Accountability Office, Community Reinvestment Act, Options for Treasury 
to Consider to Encourage Services and Small-Dollar Loans When Reviewing 
Framework (Feb. 2018), https://www.gao.gov/products/GAO-18-244.
     \15\ The rise of fringe banking, check-cashing, and payday lending 
was a direct result of the decline of community banks. See Mehrsa 
Baradaran, ``How the Other Half Banks: Exclusion, Exploitation, and the 
Threat to Democracy'', Harvard University Press (Oct. 2015).
---------------------------------------------------------------------------
    Those who are unbanked need a way to cross the cash/digital divide 
so they can engage in commerce. This problem can be fixed by offering a 
direct checking account to all communities through the post office. 
\16\ The United States Postal Service (USPS) operated a savings bank 
for much of its history and most postal services do so worldwide. \17\ 
The post office need not engage in banking or even lending, but simply 
offer transaction services. Post office branches already take cash from 
customers and offer money orders. My postal banking proposal only 
requires that post offices go one step further and offer a digital 
checking account linked to a central payment system. Once consumers 
have a digital account, they can begin to use mobile banking and other 
FinTech services. Moreover, a low-cost savings account and the 10 
percent of their income saved from payments services could diminish the 
need for payday lending by providing a financial buffer. My colleagues 
Morgan Ricks, John Crawford, and Lev Menand have suggested that the 
Federal Reserve should offer accounts directly to all individuals and 
businesses through a Fed Account, which could be offered through the 
post office. They argue that ``restricting central bank accounts to an 
exclusive clientele (banks) is no longer justifiable on policy grounds 
if indeed it ever was.'' \18\ These accounts would not cost taxpayers 
any additional money, but could in fact create profits for both the 
Federal Reserve and the Post Office. \19\
---------------------------------------------------------------------------
     \16\ Mehrsa Baradaran, ``It's Time for Postal Banking'', 127 Harv. 
L. Rev. F. 165 (2014)
     \17\ See Mehrsa Baradaran, ``How the Other Half Banks: Exclusion, 
Exploitation, and the Threat to Democracy'', Harvard University Press 
(Oct. 2015)
     \18\ Ricks, Morgan, and Crawford, John, and Menand, Lev, ``A 
Public Option for Bank Accounts (Or Central Banking for All)'' 
(December 2, 2018). Vanderbilt Law Research Paper 18-33; UC Hastings 
Research Paper No. 287. Available at SSRN: https://ssrn.com/
abstract=3192162 or http://dx.doi.org/10.2139/ssrn.3192162.
     \19\ For revenue projections for the post office, see: USPS, 
Office of Inspector General, ``Providing Non-Bank Financial Services 
for the Underserved'' (January 27, 2014). White Paper Report No. RARC-
WP-14-007. Available at https://www.uspsoig.gov/sites/default/files/
document-library-files/2014/rarc-wp-14-007.pdf. As for Fed Accounts, as 
Ricks, Crawford, and Menand explain, the FedAccounts would increase 
revenue. ``Central banks' asset portfolio returns typically exceed 
their interest payments and other expenses by a wide margin. These 
earnings are called `seigniorage': fiscal revenue from money creation. 
The amounts are large. The Fed remitted $98 billion, $92 billion, and 
$90 billion in earnings to the U.S. Treasury Department in 2015, 2016, 
and 2017, respectively. FedAccounts would [sic]
---------------------------------------------------------------------------
    Another important way that banks are not meeting the needs of low-
income Americans is the delay in making funds available to customers. 
Payments clearing--the time between when a check is deposited and when 
the funds can be withdrawn as cash--can take 3 to 5 business days. For 
families who do not have a buffer of wealth and need to spend their 
paychecks for food or rent, this delay is costly and onerous. In order 
to avoid this time gap, families often resort to checkcashers or payday 
lenders. Aaron Klein of the Brookings Institute claims that real-time 
payments could help eliminate a share of overdrafts, payday loans, and 
check cashing fees, and restore tens of billions a year to working 
families. \20\ The Federal Reserve must update its processing to real-
time payments clearing so that those who need access to their hard-
earned wages do not have an unnecessary delay. \21\ The Federal Reserve 
has stated that it is studying the issue, but the recently introduced 
Payments Modernization Act seeks to speed the process along and mandate 
a real-time payments system. The technology is readily available and 
the U.S. is playing catch up as many other countries have already 
adopted real-time payments. \22\
---------------------------------------------------------------------------
     \20\ Aaron Klein, ``Real-Time Payments Can Help Combat 
Inequality'', March 6, 2019, https://www.brookings.edu/opinions/real-
time-payments-can-help-combat-inequality/.
     \21\ https://www.americanbanker.com/news/elizabeth-warren-other-
democrats-look-to-force-feds-hand-on-faster-payments; Federal Reserve 
Banks, ``Faster Payments Task Force'', Federal Reserve Banks, 2015 
(Circle, ``About'', 2016. Federal Reserve System, ``Strategies for 
Improving the U.S. Payment System'', January 26, 2016.
     \22\ https://www.ncr.com/company/blogs/financial/real-time-
payments-what-where-and-when
---------------------------------------------------------------------------
    The Federal Reserve payments system has proved secure, private, and 
safe and is among the most reliable in the world--but it is 
exclusionary. And I want to be clear about why it is exclusionary: it 
is not that the Federal Reserve lacks the expertise or the technology 
or that there is anything inherently exclusionary about their payments 
system; rather the Federal Reserve has not prioritized the needs of the 
underbanked for faster processing and retail point of contact 
operations. The Federal Reserve has only offered its payments system to 
banks--who, as profit seeking institutions, avoid the least profitable 
consumers. This is a problem that can and must be fixed through policy 
rather than outsourced to technology or banking corporations to solve. 
The Federal Reserve states that it has ``a public-interest motivation 
in seeking to stimulate improvements in the efficiency of the payments 
system.'' This, according to their own mission, requires it ``to 
provide equitable access and an adequate level of services 
nationwide.'' \23\ In order to achieve this mission, the Federal 
Reserve must open up its payments system to all Americans. If the 
Federal Reserve falters in its mission, it falls in Congress' purview 
to enforce it.
---------------------------------------------------------------------------
     \23\ https://www.federalreserve.gov/paymentsystems/
pfs_frpaysys.htm
---------------------------------------------------------------------------
Cryptocurrency Is Not the Way To Achieve Financial Inclusion
    Since its inception a decade ago, many in the cryptocurrency 
industry have promised that one of the main benefits of the 
distributive ledger technology is to facilitate financial inclusion of 
the unbanked. \24\ In fact, this promise was repeated in every hearing 
that has been held before this Committee on the topic, including the 
Libra hearing a few weeks ago. \25\ FinTech companies have been making 
similar promises for just as long. Thus far, FinTech has only served 
the population who is already banked and blockchain use is limited to 
the technically savvy. \26\ There is no reason to doubt the good 
intention of these technology companies, but I believe there is a 
fundamental mismatch between the problems and barriers that the 
unbanked face and the technological solutions being offered. What 
unbanked customers need are simple and safe places to save their money, 
and then convenient and inexpensive ways to use it. The most popular 
product for low-income consumers has been a very simple, and still very 
expensive, prepaid debit card. \27\ It is accepted for all purchases 
and resembles a no-fee debit card from a bank. While it is possible and 
likely that crypto and FinTech technologies have and will help with 
financial inclusion efforts in countries with an underdeveloped banking 
system, the United States has a nationwide system of digital payments 
already in use.
---------------------------------------------------------------------------
     \24\ ``Unbanked to Big Banks: How Crypto Facilitates Financial 
Inclusion'': https://www.ibm.com/blogs/blockchain/2019/04/unbanked-to-
big-banks-how-crypto-facilitates-financial-inclusion/; ``How Blockchain 
Is Banking the Unbanked'': https://cointelegraph.com/news/how-
blockchain-is-banking-the-unbanked; ``Blockchain and Financial 
Inclusion'' (White Paper, March 2017): https://digitalchamber.org/
assets/blockchain-and-financial-inclusion.pdf.
     \25\ ``Our first goal is to create utility and adoption, enabling 
people around the world--especially the unbanked and underbanked--to 
take part in the financial ecosystem.'' Hearing Before the United 
States Senate Committee on Banking, Housing, and Urban Affairs July 16, 
2019, Testimony of David Marcus Head of Calibra, Facebook. https://
www.banking.senate.gov/imo/media/doc/Marcus%20Testimony%207-16-19.pdf 
July 16, 2019, hearing before Committee on Banking, Housing, and Urban 
Affairs (Senate)--Hearing to examine Facebook proposed digital 
currency, known as libra, and implications for consumers.
     \26\ See, e.g., Morgan Ricks, ``Money as Infrastructure'', supra 
note 110, at Part III.B. Michael S. Barr, Howell E. Jackson, and 
Margaret E. Tahyar, ``Financial Regulation: Law and Policy 796'' 
(2016); Even committed laissez faire economists like Milton Friedman 
and James Buchanan recognized that money creation is inexorably linked 
to the Government. Milton Friedman called money creation and monetary 
policy ``an essential governmental function on a par with the provision 
of a stable legal framework.'' Milton Friedman, ``A Program for 
Monetary Stability'' 8 (1960); James M. Buchanan, ``The 
Constitutionalization of Money'', 30 CATO J. 251, 251 (2010) (``The 
market will not work effectively with monetary anarchy.'')
     \27\ Carol Coye Bensin and Scott Loftesness, ``Payments Systems in 
the U.S.'' 3rd ed. (Glenbrook Partners 2010) https://
www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------
    Cryptocurrencies intend to offer the unbanked an alternative 
payments processing, but this only works if all employers, landlords, 
utilities, restaurants, stores, babysitters, dentists, and every other 
way that people currently spend their cash, transition to using 
cryptocurrencies. In order for cryptocurrencies to be the solution to 
financial inclusion, they must be widely adopted and user-friendly--
even for the least technologically savvy on both ends of a transaction. 
This is the policy equivalent of moving a mountain. Some might argue 
that total adoption of cryptocurrency is unnecessary to provide some 
measure of benefit to the underbanked, but then we are left with 
debating how much financial inclusion is good enough, who should be 
included, and still what to do about those who are left out.
    Achieving a cashless commercial system is possible and I believe it 
to be an important policy goal. But practically speaking, it is much 
easier to expand the current Federal Reserve payments system to include 
the unbanked rather than create an entire new currency on a new 
technological platform, wait for wholesale adoption, and then double 
check to make sure the unbanked are using it.
    Expanding access to already established payments systems would 
allow frictionless and immediate inclusion into efficient traditional 
financial services like the direct deposit of paychecks or writing a 
check, as well as newer financial services like autopay and the host of 
products offered by FinTech providers. In the United States, all app-
based mobile banking and FinTech providers use traditional banks to 
access the Federal Reserve payments system. As a matter of policy, the 
most simple and direct path to financial inclusion is by upgrading the 
technology and opening the doors to our already established payments 
processing system. We do not need to wait for technological advances to 
reach banking deserts as unbanked populations continue to pay billions 
of dollars of their hard-earned wages to a fringe banking sector. And 
even if the problems with cryptocurrencies I have outlined can be 
addressed with technological solutions that are just around the corner, 
reserving the highly subsidized and public Federal banking system for 
the wealthy and relegating the unbanked to the private cryptocurrency 
markets is undemocratic. The payments problem is a policy problem not a 
technological problem.
New Technologies Do Not Change the Fundamental Risks of Finance and 
        Must Not Be Exempt From Regulation
    Technology has and will continue to fundamentally transform 
finance, but it has not and should not alter safety and soundness, 
privacy, or consumer protection regulations. There has yet to be an 
innovative new technology that has eliminated the risks and frauds and 
problems that financial regulation is meant to combat despite promises 
and hopes to the contrary. From the ATM to internet banking, FinTech, 
mobile banking, high frequency trading, and digital payments 
processing--the banking sector is constantly in a state of flux and 
upheaval. But the core risks that regulations are designed to address 
have not fundamentally changed. Cryptocurrencies are either a store of 
value, tradable currencies, investments, and a payments system or as 
some have promised, they are all of these things. There is nothing 
about all these things being put on the blockchain that makes it any 
less likely that it could lead to systemic risk, fraud, insider 
information, criminal activity, panics, bubbles, etc.
    Before the 2008 crisis, the derivatives market was deregulated 
because industry experts promised that the new and innovative 
derivatives markets offered a perfect hedge. The counterparties, 
regulators were promised, would absorb all the risk. The investment 
banks and derivatives traders warned that outdated and unnecessary 
regulations were ``stifling innovation.'' In 2000, U.S. regulators 
passed the ``Commodity Futures Modernization Act'', which quickly led 
to a practically unregulated $600 trillion derivatives market. \28\ As 
financial regulators discovered in 2008, the innovative market had not 
hedged its risks at all, but had merely placed many of them on the 
books of their counterparties, like AIG. When the risks materialized, 
the entire banking sector was exposed. Similar promises and assumptions 
were made about the new and innovative money markets in the 1980s, 
which also led to their deregulation. \29\ Money markets were 
essentially pegged to the dollar 1:1 (similar to Libra's strategy) and 
promised to be stable and liquid. It was said that they did not need to 
be insured by the FDIC because they were not susceptible to a run. And 
they were safe, until they broke the buck by three cents, threatening a 
potentially catastrophic run. \30\ Only a Government guarantee and 
heavy Federal Reserve involvement calmed the markets. \31\ The same 
risks were inherent in the repo and commercial paper markets in 2008, 
which also all suffered runs. \32\ So far, none of these 
cryptocurrencies have reached the level of scale where they would 
present a systemic threat, but if their ambitions are to be believed 
they will. Safety and soundness regulators and systemic risk regulators 
such as FSOC must make sure these markets do not present a systemic 
risk thread. This is especially true in the case of Libra, which is 
linked already with a powerful corporate monopoly.
---------------------------------------------------------------------------
     \28\ https://corpgov.law.harvard.edu/2009/07/21/how-deregulating-
derivatives-led-to-disaster/
     \29\ For a history of financial markets deregulation, See Simon 
Johnson and James Kwak, ``13 Bankers'', Chapter 5 (pp. 120-152). The 
money markets were specifically deregulated in the Depository 
Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980, 
Pub. L. No. 96-221, 94 Stat. 132 (codified as amended in scattered 
sections of 12 U.S.C.).
     \30\ https://dealbook.nytimes.com/2008/09/17/money-market-fund-
says-customers-could-lose-money/
     \31\ James Stewart, ``Eight Days: The Battle To Save the American 
Financial System'', The New Yorker, Sept. 21, 2009; Niel Willardson and 
LuAnne Pederson, ``Federal Reserve Liquidity Programs: An Update'' 
(June 2010), available at http://www.minneapolisfed.org/research/
pub_display.cfm?id=4451 ; Alexander Mehra, ``Legal Authority in Unusual 
and Exigent Circumstances: The Federal Reserve and the Financial 
Crisis'' (U. Pa. J. Bus. L. 2011 update), at https://www.law.upenn.edu/
journals/jbl/articles/volume13/issue1/
Mehra13U.Pa.J.Bus.L.221(2010).pdf.
     \32\ Gary Gorton, ``Slapped in the Face by the Invisible Hand: 
Banking and the Panic of 2007'' May 9, 2009, Federal Reserve Bank of 
Atlanta's 2009 Financial Markets Conference: Financial Innovation and 
Crisis, May 11-13, 2009. Available at http://www.frbatlanta.org/news/
conferences/09-financial_markets_agenda.cfm. See also, Mehrling, Peter: 
``The New Lombard Street: How the Fed Became the Dealer of Last 
Resort'' (Princeton Press, 2010).
---------------------------------------------------------------------------
    Whether trade and investments are in tulips or South Sea stocks, 
CDOs, or bitcoin, asset price bubbles will create crashes and crises. 
\33\ And with each crisis, the risks, the frauds, and the bubble is 
only apparent in the rearview mirror. There is no reason to believe 
that a new and impressive blockchain-based investment market should be 
exempt from bubbles, speculations, manias, panics, and other individual 
or systemic risks that our monetary policy and regulatory bodies have 
worked hard to mitigate. Many bitcoin enthusiasts are philosophically 
opposed to any State intervention in markets or in people's lives and 
see State supervision of financial transactions and regulation of 
markets as a major problem of our current system. \34\ While I 
understand why that philosophy might appeals to many, I struggle to 
imagine why this Congress--the very body distrusted by many 
cryptoenthusiasts--would agree with them and willingly cede its and 
regulatory authority.
---------------------------------------------------------------------------
     \33\ Charles P. Kindleberger and Robert Z. Aliber, ``Manias, 
Panics, and Crashes: A History of Financial Crises'' (6th ed. 2011).
     \34\ David Golumbia, ``The Politics of Bitcoin: Software as Right-
Wing Extremism'' (2016).
---------------------------------------------------------------------------
    Most of the laws that regulate banks and financial firms were 
created in response to a crisis or repeated crises that have harmed 
people. They were passed with care and thought, through democratic 
means, to deal with specific recurring problems. FDIC supervision of 
banks and Federal deposit insurance, for example, was created because 
of the disastrous effects of constant banking runs and panics, 
culminating in the Great Depression. \35\ Anti- Money Laundering, Bank 
Secrecy Act, Anti-terrorism, and Know Your Customer laws were created 
to prevent organized crime and terrorism. The Consumer Financial 
Protection Bureau was created because other laws had failed to protect 
consumers. Securities and commodities laws were designed to protect 
investors from fraud. There are inefficiencies and overlaps and perhaps 
too much regulation in parts and not enough in others. While not all of 
these laws are applicable to cryptocurrencies, if the cryptoindustry 
intends to compete in markets regulated by these laws, the industry 
should be regulated by them. These laws were not passed haphazardly. As 
this chamber certainly understands, our bicameral legislature makes 
laws difficult to pass. These laws and regulations were seen as 
necessary, were debated, and written and revised, and compromises were 
made through the democratic process. If these laws have become outdated 
or unnecessary, or if Congress believes that they are too cumbersome, 
then they should be repealed or changed for all applicable parties, not 
just newcomers. Technology and innovation cannot undermine public 
policy.
---------------------------------------------------------------------------
     \35\ Piergiorgio Alessandri and Andrew G. Haldane, ``Banking on 
the State'', November 6, 2009, based on presentation at Federal Reserve 
Bank of Chicago 12th Annual International Banking Conference on ``The 
International Financial Crisis: Have the Rules of Finance Changed?'' 
September 25, 2009, 1; Richard S. Grossman, ``Unsettled Account: The 
Evolution of Banking in the Industrialized World Since 1800'' 
(Princeton: Princeton University Press, 2010), 29.
---------------------------------------------------------------------------
Bitcoin as Monetary Theory
    While Congress and regulators should allow blockchain-based tech 
companies to experiment with and profit from novel uses and markets for 
blockchain, they must also recognize the ways in which a large portion 
of the ambitions of the cryptocurrency is an ideologically motivated 
endeavor that exists apart from the blockchain technology on which it 
is based. Specifically, bitcoin and bitcoin-like cryptocurrencies are 
based on assumptions and theories about money that are at odds with 
history and modern markets. The goal of many cryptoenthusiasts is to 
completely replace the current fiat currency system for a State-less 
and decentralized monetary system. It is understandable that many 
people would yearn for a different system of currency and banking after 
the 2008 crisis and the repeated failures of the banking industry to 
secure the public's trust, but our banking system and the fiat currency 
on which it is based is worth defending. Money has been inexorably 
linked with the State for as long as there has been modern markets. 
\36\
---------------------------------------------------------------------------
     \36\ See, Christine Desan, ``Making Money: Coin, Currency, and the 
Coming of Capitalism'', (2014); Ricks, Morgan, ``Money as 
Infrastructure'' (March 11, 2018), Columbia Business Law Review (2018). 
Available at SSRN: https://ssrn.com/abstract=3070270 or http://
dx.doi.org/10.2139/ssrn.3070270. According to economists, the gold 
standard was the principle threat to financial stability before the 
United States finally availed itself of the gold standard. Golden 
Fetters: ``The Gold Standard and the Great Depression, 1919-1939'', 
https://ideas.repec.org/b/oxp/obooks/9780195101133.html.
---------------------------------------------------------------------------
    Since Satoshi Nakamoto's white paper, the central premise and 
promise of cryptocurrency has been to develop a currency that is better 
than fiat currency and untethered from a central bank. \37\ The premise 
is that the Government's ability to print fiat money is a threat to 
economic stability, that it is inflationary, and deprives individuals 
of their liberties. This extreme libertarian theory envisions the 
eradication of all State intervention in commerce. This is a political 
theory and it is based on a fundamental set of assumptions about the 
dangers of the Federal Reserve and its role in money creation. Though 
many have compared the innovation of cryptocurrencies to earlier 
technologies like the internet, social media, or email, this analogy is 
not quite accurate. \38\ Though the blockchain is neutral technology 
and it could potentially lead to major societal and market change, the 
theory of cryptocurrencies that operate using the distributive ledger 
is premised in opposition to State-created fiat currency. One popular 
book on bitcoin shows off that bitcoin is the ``enemy of the State.'' 
\39\
---------------------------------------------------------------------------
     \37\ Satoshi Nakamoto, ``Bitcoin: A Peer-to-Peer Electronic Cash 
System'': https://bitcoin.org/bitcoin.pdf; Alex Tapscott and Don 
Tapscott, ``Blockchain Revolution: How the Technology Behind Bitcoin Is 
Changing Money, Business, and the World'' (2016); Michael Casey and 
Paul Vigna, ``The Age of Cryptocurrency: How Bitcoin and Digital Money 
Are Challenging the Global Economic Order'' (2015).
     \38\ Andreas M. Antonopoulos, ``The Internet of Money'', 2016.
     \39\ Dominic Fisby, ``Bitcoin: the Future of Money?'' https://
www.amazon.com/Bitcoin-future-money-Dominic-Frisby/dp/1783521023; 
https://thenextweb.com/hardfork/2019/01/02/blockchain-cryptocurrency-
books-2019/
---------------------------------------------------------------------------
    The Federal Reserve was created by Congress to deal with the costly 
turbulence inherent to financial markets during panics. After decades 
of repeated banking crises, unstable credit markets, and recessions, 
the United States built a public payments and monetary system through 
democratic means with a mission to serve the public. Inspired by Walter 
Bagehot's analysis of sound central banking, the Federal Reserve was 
authorized to ``avert panic'' by ``lend[ing] early and freely (i.e., 
without limit), to solvent firms, against good collateral, and at `high 
rates.' '' \40\ And yet bitcoin-like cryptocurrencies promise to 
``remedy'' the inflationary monetary policies of the Federal Reserve. 
\41\ Many cryptoenthusiasts lament the loss of a fixed gold standard 
and decry the Federal Reserve's ability to ``print money.'' \42\ Fiat 
currency was created, however, because gold created inequalities, 
constrained credit markets, and created instability in markets. \43\ 
The gold standard not only lead to repeated crises, but it was a boon 
for the wealthy who held gold and a curse for everyone else who relied 
on credit and wages. \44\
---------------------------------------------------------------------------
     \40\ Walter Bagehot ([1873] 1897), ``Lombard Street: A Description 
of the Money Market'' (New York: Charles Scribner's Sons). See, Federal 
Reserve: ``Bagehot's Dictum in Practice: Formulating and Implementing 
Policies To Combat the Financial Crisis'' (2009) https://
www.federalreserve.gov/newsevents/speech/madigan20090821a.htm.
     \41\ https://beincrypto.com/bitcoin-federal-reserve-
centralization-inflation/
     \42\ https://www.msn.com/en-us/news/us/winklevoss-twins-bitcoin-
is-gold-20/vp-AAE84IX; See also Nathaniel Popper, ``Digital Gold: 
Bitcoin and the Inside Story of the Misfits and Millionaires Trying To 
Reinvent Money'' (2015); Ben Mezrich, ``Bitcoin Billionaires: A True 
Story of Genius, Betrayal, and Redemption'' (2019). Though the Federal 
Reserve can engage in monetary policy, only the U.S. Treasury can issue 
(print) new currency.
     \43\ https://www.moneyandbanking.com/commentary/2019/7/6/
protecting-the-federal-reserve
     \44\ Poor farmers from the South and West opposed the gold 
standard because the rich Wall Street bankers held the gold and there 
wasn't enough of it to provide credit. William Jennings Bryant 
passionately decried the gold standard on behalf of the poor farmers he 
represented. Bryan, voicing the discontent of many during this era, 
which he framed as a ``struggle between the idle holders of idle 
capital and the struggling masses who produce the wealth and pay the 
taxes of this country.'' ``Official Proceedings of the Democratic 
National Convention Held in Chicago, Illinois, July 7, 8, 9, 10, and 
11, 1896'', in The Annals of America, Vol. 12, 1895-1904: Populism, 
Imperialism, and Reform (Chicago: Encyclopedia Britannica, Inc., 1968), 
100-105.
---------------------------------------------------------------------------
    The Federal Reserve was explicitly mandated by Congress to foster 
an elastic currency. \45\ Our money system is an electronic debt-based 
fiat currency with all monetary policy powers delegated to the 
politically insulated Federal Reserve. The Federal Reserve can expand 
the money supply as needed. The U.S. Dollar's elasticity and the 
Federal Reserve's ability to expand its supply is a feature--not a 
bug--of the U.S. currency regime and a result of purposeful 
institutional design. This is one reason the U.S. Dollar is the world's 
most valued and stable currency. \46\ The Federal Reserve was able to 
be the lender of last resort worldwide and Quantitative Easing restored 
the world's economy to health (with the caveat that the recovery was 
not spread equally). \47\ The Federal Reserve enables credit to course 
through economic channels through its reserve balances and monetary 
policy. \48\ To the extent that inflation is a current threat--and all 
evidence leads in the opposite direction--Congress has authorized the 
Federal Open Market Committee (FOMC) to take the appropriate actions 
necessary. \49\
---------------------------------------------------------------------------
     \45\ ``An Act to provide for the establishment of Federal reserve 
banks, to furnish an elastic currency, to afford means of rediscounting 
commercial paper, to establish a more effective supervision of banking 
in the United States, and for other purposes.'' The Federal Reserve Act 
of 1913, https://www.federalreserve.gov/aboutthefed/officialtitle-
preamble.htm.
     \46\ Eswar S. Prasad, ``The Dollar Trap: How the U.S. Dollar 
Tightened Its Grip on Global Finance'' (Princeton: 2014), https://
press.princeton.edu/titles/10182.html.
     \47\ Adam Tooze; ``Crashed: How a Decade of Financial Crisis 
Changed the World'' (2018); J. Lawrence Broz, P, ``The Federal Reserve 
as Global Lender of Last Resort, 2007-2010'', London School of 
Economics, http://eprints.lse.ac.uk/60951/1/dp-30.pdf.
     \48\ James Tobin, ``Commercial Banks as Creators of `Money' '' 
(1963). Cowles Foundation for Research in Economics, Yale University. 
No. 159, 6-7. McLeay, Radla, and Thomas, ``Money Creation'', 16.
     \49\ https://www.bankofengland.co.uk/-/media/boe/files/quarterly-
bulletin/2014/money-creation-in-the-modern-economy
---------------------------------------------------------------------------
    Cryptocurrencies promise to remove trust from money. They say that 
the ledger and the decentralized network will replace the need for a 
trusted intermediary, like a Government, by verifying each transaction. 
\50\ But verifying transactions is only a small part of the role played 
by the FDIC, the Federal Reserve, and U.S. Treasury in lending 
credibility to the U.S. currency and enabling its wide use and 
acceptance. Trust in money requires a strong and reliable Government 
infrastructure--as failed historical experiments with private notes 
issued by banks and private deposit insurance schemes have made clear. 
\51\ Successful money creation has always been tied to Governments. 
\52\ A healthy financial system relies on broad trust and to date, only 
the full faith and credit of the Federal Government backing its 
currency has been able to provide the level of stability, 
responsiveness and flexibility that has yielded a worldwide trust in 
the dollar. Our evolved combination of Federal deposit insurance backed 
by U.S. Treasury guarantee has been able to provide the trust and 
stability necessary to support modern markets. \53\
---------------------------------------------------------------------------
     \50\ In fact, some cryptocompanies have already recognized the 
need for a trusted intermediary and have created a central authority. 
121 See, e.g., Brian Fung, ``Move Deliberately, Fix Things: How 
Coinbase Is Building a Cryptocurrency Empire'', Wash. Post, May 17, 
2018 (describing Coinbase's role as a major cryptocurrency 
intermediary).
     \51\ See James A. Kahn, ``Another Look at Free Banking in the 
United States'', American Economic Review 75 (1985), 881. Available at 
http://www.jstor.org/discover/
1821369?sid=21105644997413&uid=2&uid=2134&uid=70&uid=3739256&uid=3739616
&uid=4; Richard S. Grossman, ``Unsettled Account: The Evolution of 
Banking in the Industrialized World Since 1800'' (Princeton: Princeton 
University Press, 2010); Bray Hammond, ``Banks and Politics in America: 
From the Revolution to the Civil War'' (Princeton: Princeton University 
Press, 1991).
     \52\ See, Christine Desan, ``Making Money: Coin, Currency, and the 
Coming of Capitalism'', (2014); Ricks, Morgan, ``Money as 
Infrastructure'' (March 11, 2018), Columbia Business Law Review (2018). 
Available at SSRN: https://ssrn.com/abstract=3070270 or http://
dx.doi.org/10.2139/ssrn.3070270. Michael McLeay, Amar Radla, and Ryland 
Thomas, ``Money Creation in the Modern Economy'', Quarterly Bulletin 54 
(Bank of England, 2014): 16. Available at http://
www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/
qb14q1.aspx (last accessed Nov. 9, 2014). James Tobin, ``Commercial 
Banks as Creators of `Money' '' (1963). Cowles Foundation for Research 
in Economics, Yale University. No. 159, 6-7. McLeay, Radla, and Thomas, 
``Money Creation'', 16.
     \53\ Alessandri and Haldane ``Banking on the State'', 7. When the 
FDIC fund dipped into the red during the financial crisis, only a 
promise from the U.S. Treasury that they would guarantee all deposits 
could calm markets. ``Crisis and Response: An FDIC History, 2008-
2013'', https://www.fdic.gov/bank/historical/crisis/overview.pdf.
---------------------------------------------------------------------------
Conclusion
    There are inequalities and problems in the U.S. banking system and 
they must be fixed, but they must be fixed through democratic means. 
Cryptocurrencies want to take over where our public institutions have 
failed. We should heed the criticism of this industry, but we should 
not give up on the mission and promise of our public institutions. It 
was Congress that charged the Federal Reserve with its mission to 
provide equitable access. Congress that created fiat currencies. 
Congress that authorized the Securities and Commodities Commissions, 
the FDIC, and other regulatory agencies. If Congress wants to foster 
financial inclusion or a different monetary system, it is the duty of 
Congress as the representatives of the people to authorize and charge 
the Federal Reserve with creating an inclusive and effective payments 
system or with a new monetary regime.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM JEREMY ALLAIRE

Q.1. In your written testimony, you state, ``It is incorrect to 
think that U.S. cryptocompanies are unregulated.'' \1\ The 
United States, however, does not have a comprehensive and 
coordinated framework to oversee digital currencies. Instead, 
the United States currently has a patchwork regulatory 
framework, from bureaus within the Treasury Department, the 
Securities and Exchange Commission, and the Commodity Futures 
Trading Commission.
---------------------------------------------------------------------------
     \1\ Written testimony of Jeremy Allaire to the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, July 30, 2019, 
https://www.banking.senate.gov/imo/media/doc/Allaire%20Testimony%207-
30-19.pdf.
---------------------------------------------------------------------------
    Is the current patchwork of Federal regulations of digital 
currencies adequate to protect consumers? If so, why? If not, 
who should regulate digital currencies?

A.1. Response not received in time for publication.

Q.2. Is the current patchwork of Federal and State data privacy 
and cybersecurity laws, standards, and best practices that 
apply to different products and industries adequate to protect 
consumers? If so, why? If not, who should regulate digital 
currencies?

A.2. Response not received in time for publication.

Q.3. Please describe all cybersecurity measures that your 
company is taking to protect sensitive financial and other data 
of your customers.

A.3. Response not received in time for publication.

Q.4. In your written testimony, you state, ``Billions of people 
lack basic access to financial services. Those who do have 
access face a system with exorbitant fees and excessive time 
delays--limiting economic opportunity and removing real value 
from the economy.'' \2\ A recent FDIC survey, however, found 
that a quarter of Americans are unbanked or underbanked, \3\ 
and Professor Mehrsa Baradaran's written testimony states, 
``Thus far, FinTech has only served the population who is 
already banked and Blockchain use is limited to the technically 
savvy.'' \4\ Additionally, the Federal Reserve announced that 
it will create a real-time payments system to make paychecks 
and money transfers available for use more immediately.
---------------------------------------------------------------------------
     \2\ Id.
     \3\ CNBC, ``25% of U.S. households are either unbanked or 
underbanked," Erin Barry, March 9, 2019, https://www.cnbc.com/2019/03/
08/25percent-of-us-households-are-either-unbanked-or-underbanked.html.
     \4\ Written testimony of Mehrsa Baradaran to the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, July 30, 2019, 
https://www.banking.senate.gov/imo/media/doc/Baradaran%20Testimony%207-
30-l9.pdf.
---------------------------------------------------------------------------
    How will digital currencies reach consumers who do not have 
a bank account or have bank accounts but still rely on the 
fringe banking sector, like the payday loan industry, to make 
ends meet? Please provide specific details.

A.4. Response not received in time for publication.

Q.5. Why have digital currencies thus far failed to reach these 
consumers, and what can the digital currency sector do to 
address this lack of access? Why have these policies not yet 
been implemented?

A.5. Response not received in time for publication.

Q.6. You state, ``The result of the uncertain and restrictive 
regulatory environment has led many digital asset projects and 
companies to domicile outside of the United States and to block 
U.S. persons and businesses from accessing products and 
technologies,'' \5\ including your own. You also suggest that 
Congress adopt legislation that would change existing 
commodities, securities, and banking laws.
---------------------------------------------------------------------------
     \5\ Written testimony of Jeremy Allaire to the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, July 30, 2019, 
https://www.banking.senate.gov/imo/media/doc/Allaire%20Testimony%207-
30-19.pdf.
---------------------------------------------------------------------------
    Many laws that regulate banks and the financial industry 
were created in response to financial crises with the intention 
of protecting consumers and our economy. Please explain in 
detail the laws that you suggest Congress should change and how 
you suggest Congress amend or repeal these laws.

A.6. Response not received in time for publication.

Q.7. Please explain how your suggested changes to existing laws 
would not negatively impact identity, privacy, and data 
security.

A.7. Response not received in time for publication.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
            SENATOR CORTEZ MASTO FROM JEREMY ALLAIRE

Q.1. What are the implications for privacy and widespread 
surveillance with central bank digital currencies like the one 
announced in China?

A.1. Response not received in time for publication.

Q.2. Can you explain the tension between the right to deletion 
and how cryptocurrencies like libra and others work?

A.2. Response not received in time for publication.

Q.3. Should we be worried that, if widely adopted, currencies 
like libra will substantially limit the ability of countries to 
use capital controls in times of financial crisis?

A.3. Response not received in time for publication.

Q.4. Can you explain how so-called ``smart contracts'' work?

A.4. Response not received in time for publication.

Q.5. Certain factors in contract law such as frustration, 
duress, undue influence, or misrepresentation need subjective 
human interpretation of judgement on a case-by-case basis, how 
is this possible under smart contracts?

A.5. Response not received in time for publication.

Q.6. Are there steps Federal regulators can take to protect 
investors from fraudulent ICOs? What are they?

A.6. Response not received in time for publication.

Q.7. Should cryptocurrencies have the same investor 
protections, the same rules against market manipulation and 
market fraud? Should they have adequate disclosures and 
investor protections? The same as bonds and stocks have?

A.7. Response not received in time for publication.

Q.8. Can you describe steps owners of cryptocurrencies should 
do to prevent thefts via mobile phone hacks? What about the 
exchanges themselves? And the phone companies? And Federal and 
State agencies?

A.8. Response not received in time for publication.

Q.9. How can we either avoid mobile phone hacks or tell people 
that doing financial business on a mobile phone could open you 
up to theft?

A.9. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                      FROM JEREMY ALLAIRE

Q.1. Blockchain has been presented as an opportunity to better 
manage digital identities. What are the potential benefits of 
using a decentralized system to verify an individual's 
identity?

Q.1. Response not received in time for publication.

Q.2. Will those benefits attract criminals to take advantage of 
a decentralized system?

A.2. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                     FROM REBECCA M. NELSON

Q.1. In your written testimony, you state, ``Regulatory 
frameworks in many countries are still evolving, and countries 
are taking different approaches. Countries often have differing 
working or legal definitions of cryptocurrencies and are 
developing differing regulations across a range of issues. Some 
countries are applying or adapting existing regulations to 
cryptocurrencies and others are developing new regulations 
specifically focused on cryptocurrencies.'' \1\
---------------------------------------------------------------------------
     \1\ Written testimony of Rebecca M. Nelson to the U.S. Senate 
Committee on Banking, Housing, and Urban Affairs, July 30, 2019, 
https://www.banking.senate.gov/imo/media/doc/Nelson%20Testimony%207-30-
19.pdf.
---------------------------------------------------------------------------
    Please provide details for how cryptocurrencies are 
currently regulated in the United States, including the 
application of securities laws, tax treatments, application of 
anti- money laundering and other regulations.

A.1. In the United States, existing financial regulations have 
been applied to cryptocurrencies. David Perkins, CRS Specialist 
in Macroeconomic Policy, provided this response: \2\
---------------------------------------------------------------------------
     \2\ Also see CRS Report R45427, ``Cryptocurrency: The Economics of 
Money and Selected Policy Issues'', by David W. Perkins and CRS Report 
R45301, ``Securities Regulation and Initial Coin Offerings: A Legal 
Primer'', by Jay B. Sykes.
---------------------------------------------------------------------------
    Securities Regulations: According to the Securities and 
Exchange Commission (SEC), ICOs may qualify as securities 
offerings subject to regulation under the Federal securities 
laws. \3\ Whether an ICO qualifies as a securities offering has 
important legal implications. Under Section 5 of the Securities 
Act, an issuer of securities must either (1) file a 
registration statement with the SEC containing a variety of 
information about the issuer and its business, or (2) conduct 
the offering pursuant to a specific exemption from 
registration. In addition, the Securities Exchange Act imposes 
certain continuous disclosure obligations on securities issuers 
and anti-fraud liability on securities issuers and sellers. \4\ 
Moreover, the platforms on which securities trade must register 
with the SEC as ``securities exchanges'' in certain 
circumstances. \5\
---------------------------------------------------------------------------
     \3\ Initial Coin Offerings, Sec. and Exch. Comm'n, https://
www.sec.gov/ICO; Clayton Statement, supra n. 2.
     \4\ See 15 U.S.C. 78o(d), 78j(b); 17 CFR 240.10b-5.
     \5\ 15 U.S.C. 78f.
---------------------------------------------------------------------------
    Money Laundering: The Department of the Treasury's 
Financial Crimes Enforcement Network (FinCEN) has issued 
guidance explaining how its regulations apply to the use of 
virtual currencies--a term that refers to a broader class of 
electronic money that includes cryptocurrencies. FinCEN's 
guidance clarifies the application of the Bank Secrecy Act and 
associated regulations to three categories of individuals who 
deal in virtual currencies:

    Exchangers: Under FinCEN's guidance, a virtual 
        currency ``exchanger'' is ``a person engaged as a 
        business in the exchange of virtual currency for real 
        currency, funds, or other virtual currency'';

    Administrators: Under FinCEN's guidance, a virtual 
        currency ``administrator'' is ``a person engaged as a 
        business in issuing [putting into circulation] a 
        virtual currency, and who has the authority to redeem 
        [to withdraw from circulation] such virtual currency'';

    Users: Under FinCEN's guidance, a virtual currency 
        ``user'' is ``a person that obtains virtual currency to 
        purchase goods or services.''

    In its guidance FinCEN has explained that virtual currency 
exchangers and administrators qualify as money services 
businesses (MSBs) that must register with FinCEN, report 
suspicious transactions, and maintain anti- money laundering 
compliance programs that meet certain minimum standards. \6\ 
Many State laws also impose registration requirements on 
businesses engaged in money transmission, though regulations of 
such business vary from State to State. \7\ In contrast, FinCEN 
has indicated that virtual currency users do not qualify as 
MSBs.
---------------------------------------------------------------------------
     \6\ 31 CFR Part 1022, Subpart C.
     \7\ Jennifer Moffit, ``The Fifty U.S. States and Cryptocurrency 
Regulations'', Coin ATM Radar, July 27, 2018, at https://
coinatmradar.com/blog/the-fifty-u-s-states-and-cryptocurrency-
regulations/. Hereinafter Moffit, ``The Fifty U.S. States''.
---------------------------------------------------------------------------
    Tax Treatment: The Internal Revenue Service (IRS) has 
issued guidance stating that it will treat virtual currencies 
as property (as opposed to currency), meaning users owe taxes 
on any realized gains whenever they dispose of virtual 
currency, including when they use it to purchase goods and 
services. \8\ The guidance further indicates that if an 
employee is paid in virtual currency, the payment will be taxed 
as wages.
---------------------------------------------------------------------------
     \8\ IRS, ``Virtual Currency Guidance'', https://www.irs.gov/pub/
irs-drop/n-14-21.pdf.
---------------------------------------------------------------------------
    Consumer Protections: The way cryptocurrencies are sold, 
exchanged, or marketed can subject cryptocurrency exchanges or 
other cryptocurrency-related businesses to generally applicable 
consumer protection laws. For example, Section 5(a) of the 
Federal Trade Commission Act (P.L. 63-203) declares ``unfair or 
deceptive acts or practices in or affecting commerce'' unlawful 
and empowers the Federal Trade Commission (FTC) to prevent 
people and most companies from engaging in such acts and 
practices.
    Title X of the Dodd-Frank Act (P.L. 111-203) also grants 
the Consumer Financial Protection Bureau (CFPB) certain 
rulemaking, supervisory, and enforcement authorities to 
implement and enforce certain Federal consumer financial laws 
that protect consumers from ``unfair, deceptive, or abusive 
acts and practices.'' \9\ These authorities apply to a broad 
range of financial industries and products, and they arguably 
could apply to cryptocurrency-based financial products and 
services as well.
---------------------------------------------------------------------------
     \9\ 15 U.S.C. 5511.
---------------------------------------------------------------------------
    In addition, all States have laws against deceptive acts 
and practices, and State regulators have enforcement 
authorities that could be exercised against cryptocurrency-
related businesses. \10\ Additional consumer protections 
generally are applied to cryptocurrency exchanges at the State 
level through money transmission laws and licensing 
requirements. \11\ Money transmitters, including cryptocurrency 
exchanges, must obtain applicable State licenses and are 
subject to State regulatory regimes applicable to the money 
transmitter industry in each State in which they operate. For 
example, money transmitters generally must maintain some amount 
of low-risk investments and surety bonds--which are akin to an 
insurance policy that pays customers who do not receive their 
money--as safeguards for customers in the event they do not 
receive money that was to be sent to them. \12\
---------------------------------------------------------------------------
     \10\ Nicholas Gess and Andrew Ray, ``State Attorneys General to 
FinTech Companies: Eyes on Cryptocurrencies'', in All Things FinReg, a 
blog of Lexology, July 31, 2018, at https://www.lexology.com/library/
detail.aspx?g=baaab9f9-af12-49e6-99d5-b063b0e61533.
     \11\ Matthew E. Kohen and Justin S. Wales, ``State Regulations on 
Virtual Currency and Blockchain Technology'', Carlton Fields Insights, 
June 28, 2018, at https://www.carltonfields.com/insights/publications/
2018/state-regulations-on-virtual-currency-and-blockcha.
     \12\ Conference of State Bank Supervisors and Money Transmitter 
Regulators Association, ``The State of State Money Services Businesses 
Regulation and Supervision'', May 2016, pp. 6-10, at https://
cca.hawaii.gov/dfi/files/2016/06/CSBS-MSB-Regulation-and-
Supervision.pdf.

Q.2. A patchwork of Federal and State data privacy and 
cybersecurity laws, standards, and best practices apply to 
different products and industries. Please describe all relevant 
privacy and security frameworks that will govern 
---------------------------------------------------------------------------
cryptocurrencies.

A.2. [Chris Jaikaran, CRS Analyst in Cybersecurity Policy, 
provided the response for 1(B), including subquestions 1(B)(a) 
and 1(B)(b):]
    Many Federal laws address data privacy. These laws 
generally fall into two categories: (1) laws addressing certain 
populations (e.g., the Children's Online Privacy Protection 
Act, COPPA, governing the protection of children's digital 
information, P.L. 105-277); and (2) laws addressing certain 
industries (e.g., the Gramm-Leach-Bliley Act, GLBA, governing 
data protection in the financial services industry, P.L. 106-
102). \13\ For the financial services industry, many laws are 
applicable for cybersecurity. \14\ There are also many State 
laws addressing data security. \15\
---------------------------------------------------------------------------
     \13\ For a further discussion on Federal data privacy laws, see 
CRS Report R45631, ``Data Protection Law: An Overview'', by Stephen P. 
Mulligan, Wilson C. Freeman, and Chris D. Linebaugh. COPPA is in Title 
15 U.S.C. 6501-6506. The GLBA data protection provisions are in Title 
15 U.S.C. 6801-6809.
     \14\ For further discussion on financial services cybersecurity 
laws, see CRS Report R44429, ``Financial Services and Cybersecurity: 
The Federal Role'', by N. Eric Weiss and M. Maureen Murphy.
     \15\ States have regulations governing financial institutions and 
transactions in their States. A few States also have data protection 
laws, such as the California Consumer Privacy Act (CCPA, see CRS Legal 
Sidebar LSB10213, California Dreamin' of Privacy Regulation: The 
California Consumer Privacy Act and Congress, by Wilson C. Freeman). A 
comprehensive review of all States' laws is beyond CRS's capacity given 
time constraints.
---------------------------------------------------------------------------
    Cryptocurrency platforms contain many elements which may 
affect the applicability of Federal data privacy laws to that 
cryptocurrency. A cryptocurrency itself is a medium of 
exchange, but there may also be a money transfer service (which 
takes a fiat currency or other cryptocurrency and exchanges 
that for the cryptocurrency) and/or a wallet (which stores the 
asset until a user seeks to spend it, similar to a bank 
account) related to the cryptocurrency platform. Each of these 
can be combined within the cryptocurrency platform, or be 
independent and separate from the platform. Depending on the 
implementation of that cryptocurrency platform, different rules 
may be applicable, and it is difficult to describe a relevant 
privacy or security standard without knowing the specific 
implementation of a platform.
    Potentially, the Safeguards Rule may apply to a 
cryptocurrency as the platforms that govern those mediums of 
exchange may be considered financial service institutions. The 
Safeguards Rule, as promulgated by the Federal Trade Commission 
(FTC), states that financial institutions within the FTC's 
jurisdiction must protect nonpublic customer information. \16\
---------------------------------------------------------------------------
     \16\ 16 CFR 314.

Q.3. Please explain if there are industry best practices for 
cybersecurity measures to protect sensitive financial and other 
---------------------------------------------------------------------------
data. If so, please describe them.

A.3. CRS is unable to identify clear and consistent guidance 
from an industry group that would constitute a collection of 
``best practices.'' This is despite observers for many critical 
infrastructure industries lauding the application of best 
practices to protect sensitive data.
    Other groups have provided frameworks and guidance to 
assist financial institutions with protecting data on 
information technology systems. The National Institute of 
Standards and Technology (NIST) developed the Cybersecurity 
Framework to help organizations voluntarily identify 
cybersecurity risks and implement a process to assess and 
manage that risk. \17\ The Cybersecurity Framework does not 
prescribe specific actions for an organization to address 
cybersecurity risks. But, a document map that accompanies the 
framework aligns its functions to categories and subcategories 
of activities, and provides national and international 
standards bodies' reference documents to help organizations use 
those reference documents to implement the framework. \18\
---------------------------------------------------------------------------
     \17\ NIST, ``Framework for Improving Critical Infrastructure 
Cybersecurity'', report, April 16, 2018, at https://nvlpubs.nist.gov/
nistpubs/CSWP/NIST.CSWP.04162018.pdf.
     \18\ NIST, ``Framework Core v1.1'', spreadsheet, April 16, 2018, 
at https://www.nist.gov/document/2018-04-16frameworkv11core1xlsx.
---------------------------------------------------------------------------
    The Federal Financial Institutions Examination Council 
(FFIEC) \19\ has published many guides and other documents for 
examining regulated financial institutions such as banks. \20\ 
While the documents are designed for auditors to use during IT 
security examinations, financial institutions may use them to 
guide their cybersecurity investments and processes.
---------------------------------------------------------------------------
     \19\ The members of the Federal Financial Institutions Examination 
Council include the National Credit Union Administration (NCUA), the 
Office of the Comptroller of the Currency (OCC), the Board of Governors 
of the Federal Reserve System (Fed), and the Federal Deposit Insurance 
Corporation (FDIC).
     \20\ Federal Financial Institutions Examination Council, ``IT 
Booklets'', at https://ithandbook.ffiec.gov/.
---------------------------------------------------------------------------
    Additionally, the Carnegie Endowment for International 
Peace partnered with financial industry organizations to 
develop and publish a series of guides and checklists for 
financial institution board members, chief executive officers 
(CEOs), and chief information security officers (CISOs) to use 
to protect against and respond to a cybersecurity incident. 
\21\ As these documents are meant for senior-level financial 
institution official use, these documents may be considered 
best practices for those officials, but they do not necessarily 
contain best practices for the administrators of technology.
---------------------------------------------------------------------------
     \21\ Carnegie Endowment for International Peace, ``Cyber 
Resilience and Financial Organizations: A Capacity-Building Tool Box'', 
website, 2019, at https://carnegieendowment.org/specialprojects/
fincyber/guides.

Q.4. Please describe how relevant privacy and security 
frameworks can and should apply specifically to Libra and 
---------------------------------------------------------------------------
Calibra.

A.4. As noted earlier, Facebook has proposed the creation of a 
blockchain-based cryptocurrency, the libra, to serve as a 
global digital currency. The libra and its financial 
infrastructure is to be governed by the Libra Association. \22\ 
Calibra is a digital wallet (akin to a bank account) for the 
libra cryptocurrency which will enable users to use the libra 
in financial transactions. Unlike the libra, Calibra is a 
Facebook product which will integrate into other Facebook 
products (e.g., Messenger and WhatsApp).
---------------------------------------------------------------------------
     \22\ Libra Association, ``An Introduction to Libra'', white paper, 
July 23, 2019, at https://libra.org/en-US/wp-content/uploads/sites/23/
2019/07/LibraWhitePaper_en_US-Rev0723.pdf. While Facebook developed 
libra, they do not intend to control the cryptocurrency, instead opting 
for a multiparty association to perform that role.
---------------------------------------------------------------------------
    It is so far unclear how much customer information will 
reside in either Libra or Calibra and which privacy and 
security rules will apply. \23\ The Libra Association states 
that the libra will include a reserve of national fiat 
currencies which will help to stabilize the value of the libra. 
\24\ Depending on which national fiat currencies Libra includes 
in its reserves and where users are located, the Libra 
Association will face the regulations and requirements of those 
Nations. Facebook states that Calibra will comply with anti- 
money-laundering requirements and that it will update the 
documentation for Calibra closer to launch. \25\
---------------------------------------------------------------------------
     \23\ Facebook, ``Calibra: Customer Commitment'', white paper, 
2019, at https://scontent-iad3-1.xx.fbcdn.net/v/t39.2365-6/
65083631_355528488499253_8415273665234468864_n.pdf?_nc-cat=106&-nc-
oc=AQniVTdCK3z7oUvx7Mw3hI7Xs1aYWlorVTS9kavWeNFODjDrtv8rwvpTRND3Q9z0Xes&-
nc-ht=scontent-iad3-
1.xx&oh=404919f1d5f6540510936ca088500c77&oe=5E0ED1C3.
     \24\ Libra Association, ``An Introduction to Libra'', white paper, 
July 23, 2019, at https://libra.org/en-US/wp-content/uploads/sites/23/
2019/07/LibraWhitePaper-en-US-Rev0723.pdf.
     \25\ Facebook, ``Calibra: Customer Commitment'', white paper, 
2019, at https://scontent-iad3-1.xx.fbcdn.net/v/t39.2365-6/65083631-
355528488499253-8415273665234468864-n.pdf?-nc-cat=106&-nc-
oc=AQniVTdCK3z7oUvx7Mw3hI7Xs1aYWlorVTS9kavWeNFODjDrtv8rwvpTRND3Q9z0Xes&-
nc-ht=scontent-iad3-
1.xx&oh=404919f1d5f6540510936ca088500c77&oe=5E0ED1C3.
---------------------------------------------------------------------------
    Regardless of how financial regulators rule on Libra and 
Calibra, and which requirements will apply to these platforms, 
the Libra Association and Facebook can voluntarily choose to 
employ the Cybersecurity Framework, FFIEC, and/or the Carnegie 
Endowment for International Peace documents to improve data 
protection and security.

Q.5. In your written testimony, you state, ``The World Bank 
estimates that 1.7 billion adults are unbanked, yet two-thirds 
of them own a mobile phone that could help them access 
financial services.'' \26\ Nineteen percent of Americans \27\ 
and 55 percent of people in emerging economies, \28\ however, 
do not have smartphones and the numbers are worse for older, 
poorer and less well-educated consumer.
---------------------------------------------------------------------------
     \26\ Conference of State Bank Supervisors and Money Transmitter 
Regulators Association, ``The State of State Money Services Businesses 
Regulation and Supervision'', May 2016, pp. 6-10, at https://
cca.hawaii.gov/dfi/files/2016/06/CSBS-MSB-Regulation-and-
Supervision.pdf.
     \27\ Pew Research Center, ``Mobile Fact Sheet'', June 12, 2019, 
https://www.pewinternet.org/fact-sheet/mobile/.
     \28\ Pew Research Center, ``Smartphone Ownership Is Growing 
Rapidly Around the World, but Not Always Equally'', Kyle Taylor and 
Laura Silver, February 5, 2019, https://www.pewresearch.org/global/
2019/02/05/smartphone-ownership-is-growing-rapidly-around-the-world-
but-not-always-equally/.
---------------------------------------------------------------------------
    How can digital currencies reach consumers who do not have 
a bank account or have bank accounts but still rely on the 
fringe banking sector, like the payday loan industry, to make 
ends meet? Please provide specific details.

A.5. [This response was provided jointly with Cheryl Cooper, 
CRS Analyst in Financial Economics:]
    In general, internet and mobile technology may be able to 
reduce the cost to provide consumer financial products, both in 
the United States and abroad. For example, internet-based 
mobile wallets may have the potential to provide access to 
payment services for unbanked consumers. \29\ Alternatives to a 
banking-based payment system have been proposed or pursued in 
other countries, such as M-pesa, a mobile payment system that 
does not use banks which has achieved high levels of usage in 
parts of Africa. \30\ Yet, although these new financial 
technologies have the potential to help unbanked and 
underbanked consumers, concerns continue to exist for internet-
based products around data privacy and cybersecurity issues. In 
addition, these nonbank products may not always have all of the 
benefits of bank accounts, such as FDIC insurance or other 
consumer protections.
---------------------------------------------------------------------------
     \29\ For more information, see CFPB, ``Mobile Financial Services: 
A Summary of Comments from the Public on Opportunities, Challenges, and 
Risks for the Underserved'', November 2015, p. 7, https://
files.consumerfinance.gov/f/201511_cfpb_mobile-financial-services.pdf.
     \30\ For more information on M-pesa, see https://
www.worldremit.com/en/how-it-works.
---------------------------------------------------------------------------
    Currently, most payment services in the United States are 
generally layered on top of traditional electronic payment 
systems. To use these services, the consumer or businesses 
often must link them to a bank account, debit card, or credit 
card. The payments are still ultimately settled when the money 
from the payer's account is deposited in the recipient's 
account.
    Proponents of cryptocurrencies argue that cryptocurrencies 
can help address the needs of consumers that do not have access 
to traditional bank accounts (the ``unbanked'') or access to 
traditional financial products and services (the 
``underbanked''). In theory, cryptocurrencies, by eliminating 
the need for financial intermediaries, allow any consumer with 
a smart phone or access to the internet more generally to 
complete financial transactions inexpensively and quickly. 
Access to funds more quickly might be very valuable for 
consumers with tight budgets, as many consumers choose 
alternative financial payment products such as cash checkers in 
order to access to their funds quickly. \31\ However, whether 
cryptocurrency payment systems will develop to provide these 
services cheaper and quicker to the underserved than other 
technologies is unclear.
---------------------------------------------------------------------------
     \31\ Aaron Klein, ``The Fastest Way To Address Income Inequality? 
Implement a Real-Time Payment System'', Brookings Institute, January 2, 
2019, at https://www.brookings.edu/research/the-fastest-way-to-address-
income-inequality-implement-a-real-time-payment-system.
---------------------------------------------------------------------------
    At this time, traditional payment systems are also working 
towards real-time payments; as a result, digital currency may 
not be necessary to achieve this value for consumers. Both the 
private sector and the Government are currently working on 
initiatives to make the bank payment system faster. \32\ For 
example, the Federal Reserve plans to introduce a real-time 
payment system called FedNow in 2023 or 2024, which would allow 
consumers access to funds quickly after initiating the 
transfer. \33\ Faster payments may also help some consumers 
avoid overdraft fees on checking accounts, reducing the cost of 
checking accounts for some consumers. \34\ Note, however, that 
some payments that households make would also be cleared 
faster--debiting their accounts more quickly--which could be 
harmful to some of these households compared to the current 
system.
---------------------------------------------------------------------------
     \32\ Several private-sector initiatives are underway to implement 
faster payments. For an overview, see Nacha, ``Faster Payments 101'', 
https://www.nacha.org/system/files/2019-05/FasterPayments101_2019.pdf. 
Notably, the Clearing House introduced its RTP network (with real-time 
settlement) in November 2017; according to the Clearing House, it 
currently ``reaches 50 percent of U.S. transaction accounts, and is on 
track to reach nearly all U.S. accounts in the next several years.'' 
For more information, see The Clearing House, ``The RTP Network: For 
All Financial Institutions'', webpage, https://
www.theclearinghouse.org/payment-systems/rtp/institution.
     \33\ The Fed stated, ``it will likely take longer for any service, 
whether the FedNow Service or a private-sector service, to achieve 
nationwide reach regardless of when the service is initially 
available.'' Fed, ``Federal Reserve Actions To Support Interbank 
Settlement of Faster Payments'', August 5, 2019, Docket No. OP-1670, 
https://www.federalreserve.gov/newsevents/pressreleases/files/
other20190805a1.pdf.
     \34\ CFPB, ``Consumer Voices on Overdraft Programs'', November 
2017, pp. 16-19, https://files.consumerfinance.gov/f/documents/cfpb-
consumer-voices-on-overdraft-programs-report-112017.pdf.

Q.6. Why have digital currencies thus far failed to reach these 
consumers, and what can the digital currency sector do to 
address this lack of access? Why have these policies not yet 
---------------------------------------------------------------------------
been implemented?

A.6. In general, cryptocurrencies have not been widely adopted 
by the population generally, including unbanked or underbanked 
consumers, for a variety of reasons. Cryptocurrencies are not 
widely accepted by businesses or individuals for payments, the 
prices of cryptocurrencies are highly volatile, 
cryptocurrencies are unevenly regulated, and many consumers 
find the market complicated to navigate. \35\ Some regulations 
also make cryptocurrencies cumbersome and expensive to use. For 
example, in the United States, individuals owe capital gains 
tax on every payment made using cryptocurrencies, a tax that is 
not owed on transactions made in U.S. dollars.
---------------------------------------------------------------------------
     \35\ ``Bitcoin and Other Cryptocurrencies Are Useless'', 
Economist, August 30, 2018.
---------------------------------------------------------------------------
    In addition, cryptocurrencies may not help unbanked or 
underbanked consumers overcome the obstacles they face in 
obtaining traditional bank accounts and financial services. 
Unbanked households often say that their household does not 
have a bank account because they do not have enough money, do 
not trust banks, and to avoid high and unpredictable bank fees. 
\36\ It is not clear that cryptocurrencies can address these 
issues. Cryptocurrency exchanges often have minimum transaction 
amounts, and charge fees on cryptocurrency transactions. In 
terms of accessibility, it is not clear that cryptocurrencies 
are significantly easier to access than the online banking 
services already offered through smartphone apps by traditional 
banks and nonbank financial services providers using 
noncryptocurrency technologies (for example, through a prepaid 
card or online wallet). Moreover, cryptocurrency exchanges may 
require documentation to verify user identities in order to 
comply with AML/CFT regulations, similar to the documentation 
required by banks complying with AML/CFT regulations.
---------------------------------------------------------------------------
     \36\ FDIC, ``FDIC National Survey of Unbanked and Underbanked 
Households'', October 2018, p. 4, https://www.fdic.gov/householdsurvey/
2017/2017report.pdf.
---------------------------------------------------------------------------
    Financial institutions and technology companies are 
striving to address some of these challenges to wider adoption 
of cryptocurrencies. For example, entrepreneurs in the 
cryptocurrency markets have developed stablecoins, which strive 
as their name suggests to provide consumers with 
cryptocurrencies that have stable values. Likewise, Facebook is 
working to introduce a new global currency that would be user-
friendly and widely accepted. However, consumers--whether they 
are banked, unbanked, or underbanked--may be reluctant to turn 
to cryptocurrencies on a larger scale as long as 
cryptocurrencies do not provide a reliable means of exchange or 
store of value, key attributes of money.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
          SENATOR CORTEZ MASTO FROM REBECCA M. NELSON

Q.1. How expansive do you believe this problem is and what 
safeguards, if any, are in place to ensure bitcoin or other 
cryptocurrencies, are not used to finance illegal activity?

A.1. By potentially shielding user identities, cryptocurrencies 
can allow bad actors to engage in nefarious activities and 
illegal financial transactions, but it is difficult to 
precisely measure the extent to which cryptocurrencies are used 
to fund or financially facilitate illegal activities. One study 
by a group of academics estimates that around $76 billion of 
illegal activity per year involves bitcoin, nearly half (46 
percent) of all bitcoin transactions. \1\ \2\
---------------------------------------------------------------------------
     \1\ Information in this memorandum may be used by CRS to respond 
to other congressional requests and for other CRS products.
     \2\ Sean Foley, Jonathan R. Karlsen, and Talis J. Putnins, ``Sex, 
Drugs, and Bitcion: How Much Illegal Activity Is Financed Through 
Cryptocurrencies?'' SSRN Working Paper, Forthcoming in Review of 
Financial Studies, Updated December 15, 2018.
---------------------------------------------------------------------------
    Currently, countries take different approaches to anti- 
money laundering and countering the financing of terrorism 
(AML/CFT) regulations with regards to cryptocurrencies. \3\ 
Some countries prohibit cryptocurrencies outright. Other 
countries permit the use of cryptocurrencies by applying 
existing AML/CFT regulations to cryptocurrency businesses and 
transactions. Finally, some countries are in the process of 
implementing cryptocurrency-specific laws or regulations.
---------------------------------------------------------------------------
     \3\ FATF Report to the G20 Finance Ministers and Central Bank 
Governors, July 2018.
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    Some countries have undertaken efforts to coordinate AML/
CFT regulations. The Financial Action Task Force (FATF), an 
intergovernmental organization that promotes international AML/
CFT standards, has adapted its recommendations to clarify their 
application to cryptocurrencies. \4\ However, FATF membership 
is not universal and its recommendations are nonbinding.
---------------------------------------------------------------------------
     \4\ ``Guidance for a Risk-Based Approach to Virtual Assets and 
Virtual Asset Providers'', FATF, June 21, 2019.

Q.2. In your opinion, what is the best way to crack down on the 
use of cryptocurrencies to finance illegal transactions dealing 
---------------------------------------------------------------------------
with drug and sex trafficking?

A.2. Within the focus of my testimony--international approaches 
to cryptocurrencies--one area policymakers may consider is to 
encourage regulatory harmonization across countries. With 
countries adopting different AML/CFT approaches to 
cryptocurrencies, bad actors may be able to exploit cross-
country regulatory differences to engage in illegal activities. 
Closer coordination of AML/CFT among a broad set of countries 
may enhance the ability of national regulators to prevent the 
use of cryptocurrencies to fund illegal activities. However, 
some countries trying to attract cryptocurrencies and 
associated businesses may be concerned that more stringent 
regulations could deter financial innovation and limit the 
adoption of cryptocurrencies.

Q.3. What are the implications for privacy and widespread 
surveillance with central bank digital currencies like the one 
announced in China?

A.3. A number of central banks are examining the possibility of 
issuing digital currencies directly to consumers. \5\ In most 
cases, the specifics of how such currencies will be issued and 
administered were they to be created have not been determined, 
making it is difficult to analyze how they may affect 
individuals' privacy. In cases where a central bank directly 
validates and settles transactions, information related to 
individuals' transaction history and the responsibility to 
monitor for money laundering would likely migrate (at least in 
part) from private financial institutions, such as banks, to 
the Government's central bank.
---------------------------------------------------------------------------
     \5\ Bank for International Settlements, Committee on Payments and 
Market Infrastructures, Central Bank Digital Currency, March 2018.
---------------------------------------------------------------------------
    After 5 years of research, China's central bank, the 
People's Bank of China (PBOC), is reportedly close to issuing 
its own digital currency, which would serve as legal tender. 
\6\ The Government is pursuing this initiative to retain 
greater control over its financial system as nongovernmental 
cryptocurrencies proliferate and to support 
internationalization of the yuan.
---------------------------------------------------------------------------
     \6\ ``China's PBOC Says Its Own Cryptocurrency is `Close' to 
Release'', Bloomberg, August 11, 2019.
---------------------------------------------------------------------------
    Although details about the proposal remain uncertain, the 
PBOC is expected to issue the currency and design the wallets 
for the digital currency. Statements from PBOC officials 
suggest that the digital currency is unlikely to rely on 
distributed ledger technology; instead, the PBOC is expected to 
maintain the centralized ledger that records transactions in 
the new digital currency. It is unlikely that users of the 
Chinese digital currency would have anonymity or pseudonymity 
with the PBOC.
    The new digital currency could allow the Chinese Government 
to expand its surveillance capabilities. The digital currency 
could provide the PBOC with considerably more information about 
user transactions than it has about cash transactions. Roger 
Huang, who writes about crypto and blockchain for Forbes, 
stated his view in an August 2019 article that ``given that the 
PBOC is ultimately accountable to the Chinese State, it is 
exceedingly likely that financial transactions and data will be 
stored for State purposes, perhaps even in the vein of adding 
an additional layer for social credit.'' \7\
---------------------------------------------------------------------------
     \7\ Roger Huang, ``China's Digital Currency Is Unlikely To Be a 
Cryptocurrency'', Forbes, August 14, 2019.

Q.4. Can you explain the tension between the right to deletion 
---------------------------------------------------------------------------
and how cryptocurrencies like libra and others work?

A.4. There are questions about whether the ``right to 
deletion'' is compatible (or even possible given the validation 
processes currently used) with cryptocurrencies, including 
Facebook's proposed new global cryptocurrency, the libra. The 
``right to deletion,'' also called ``right to be forgotten,'' 
generally refers to the ability to erase one's personal data, 
cease further dissemination of the data, and potentially have 
third parties halt processing of data.
    Cryptocurrencies use blockchain technology, which entails 
the permanent storage of data. Cryptocurrency users are given a 
pseudonym, and every transaction involving that address is 
stored on a ledger maintained by the network of independent 
computers. Once a transaction has been recorded on the ledger, 
it cannot be deleted. Every transaction involving a particular 
pseudonym is publicly available, although the true identity of 
a pseudonym may not be publicly known.
    Some analysts have proposed various methods to enhance 
cryptocurrency users' ``right to deletion.'' \8\ One proposal 
is deleting the encryption key that allows access to an 
individual's information. \9\ Another proposal is storing some 
data off the public ledger. Many analysts, however, are 
skeptical that such proposals would fully address ``right to 
deletion'' concerns. \10\
---------------------------------------------------------------------------
     \8\ For example, see James Donaghue, ``Solutions Suggest 
Blockchain Can Conform to GDPR's `Right To Be Forgotten' '', Blockchain 
Land, August 8, 2018.
     \9\ In general, cryptocurrencies use public ledgers that allow 
individuals to establish an account with a pseudonymous name known to 
the entire network--or an address corresponding to a public key--and a 
passcode or private key that is paired to the public key and known only 
to the account holder.
     \10\ ``Is GDPR the End of Blockchain?'' Medium, June 28, 2018.

Q.5. Should we be worried that, if widely adopted, currencies 
like libra will substantially limit the ability of countries to 
---------------------------------------------------------------------------
use capital controls in times of financial crisis?

A.5. The ability of cryptocurrency users to evade capital 
controls has been an ongoing concern for many that is amplified 
by the global scope of Facebook's proposed cryptocurrency. \11\ 
Capital controls are measures taken by a Government, central 
bank, or other regulatory body to limit the flow of foreign 
capital into and out of the domestic economy. There is debate 
about whether capital controls are helpful in smoothing debt 
inflows and outflows, particularly during economic crises, or 
whether capital controls are undesirable policy tools because 
they create economic distortions.
---------------------------------------------------------------------------
     \11\ Ross Buckley, Dirk Zetzsche, and Douglas Arner, ``Regulating 
Libra'', Harvard Law School Forum on Corporate Governance and Financial 
Regulation, July 10, 2019; Kevin Werbach, ``Will Facebook's Libra 
Change the Way the World Banks?'' Foreign Affairs, July 29, 2019.
---------------------------------------------------------------------------
    The Libra proposal is relatively new, and there are many 
questions about how the libra will operate in practice. 
Officials associated with the Libra project have pledged to 
delay implementation of the libra until they have fully 
addressed regulatory concerns and received appropriate 
regulatory approvals. \12\ Regulators could require the Libra 
Association (the governing body for the libra cryptocurrency) 
to enforce Government capital controls in order to operate 
legally within their jurisdiction.
---------------------------------------------------------------------------
     \12\ Testimony of David Marcus, Head of Calibra, Facebook, Hearing 
before the United States Senate Committee on Banking, Housing, and 
Urban Affairs, July 16, 2019.

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Q.6. Can you explain how so-called ``smart contracts'' work?

A.6. [Jay Sykes, CRS Legislative Attorney, provided this 
response:]
    Commentators generally use the term ``smart contract'' to 
refer to an agreement whose execution is automated via computer 
code. For example, a borrower might enter into a ``smart'' loan 
agreement with a lender under which the borrower agrees that 
payments will be automatically transferred from her bank 
account on the first day of each month in an amount that 
adjusts based on a reference interest rate. Commentators have 
suggested that the use of software to execute such a contract 
upon the receipt of certain inputs (e.g., the start of each 
month or changes in the reference interest rate) may allow 
parties to the contract to perform their obligations more 
efficiently. Some smart contracts involve computer code that is 
embedded on a blockchain distributed ledger--that is, a peer-
to-peer database that does not depend on a central authority. 
\13\
---------------------------------------------------------------------------
     \13\ See ``Smart Contracts and Distributed Ledger--A Legal 
Perspective'', Int'l Swaps and Derivatives Ass'n, Linklaters LLP 4-9 
(Aug. 2017), https://www.isda.org/a/6EKDE/smart-contracts-and-
distributed-ledger-a-legal-perspective.pdf.

Q.7. Certain factors in contract law such as frustration, 
duress, undue influence, or misrepresentation need subjective 
human interpretation of judgement on a case-by-case basis, how 
is this possible under smart contracts?
A.7. [Jay Sykes, CRS Legislative Attorney, provided this 
response:]
    Because there is not an extensive body of case law applying 
these doctrines to ``smart contracts,'' it is difficult to 
state with confidence how they affect such agreements. 
Nonetheless, a number of commentators have argued that standard 
defenses to contract formation apply to smart contracts. \14\ 
If a smart contract is embodied in text, courts will likely 
evaluate that text and the circumstances surrounding the 
parties' agreement in adjudicating subsequent legal disputes. 
In contrast, if parties reach an oral understanding that is 
directly reduced to computer code (a ``code-only'' smart 
contract), courts may rely upon the outcomes that the code 
produces and extrinsic documentary evidence (e.g., email 
exchanges between the parties) to resolve such disputes. \15\
---------------------------------------------------------------------------
     \14\ See Jonathan Beckham, Alicia Rosenbaum, and Maria Sendra, 
``Smart Contracts Lead the Way to Blockchain Implementation'', Thomson 
Reuters 3 (Mar. 12, 2018); Max Raskin, ``The Law and Legality of Smart 
Contracts'', 1 Geo. L. Tech. Rev. 305, 325 (2017).
     \15\ See Stuart D. Levi and Alex B. Lipton, ``An Introduction to 
Smart Contracts and Their Potential and Inherent Limitations'', Harv. 
L. Sch. Forum on Corp. Gov. and Fin. Reg. (May 26, 2018), https://
corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-
and-their-potential-and-inherent-limitations/.

Q.8. Are there steps Federal regulators can take to protect 
---------------------------------------------------------------------------
investors from fraudulent ICOs? What are they?

A.8. Regulators around the world have focused on measures to 
protect investors participating in initial coin offerings 
(ICOs), a method of raising capital in exchange for digital 
coins or tokens that entitle their holders to certain rights. 
Some countries, including China, Macau, and Pakistan, ban ICOs. 
In contrast, other countries--including the United States--
regulate ICOs under existing securities laws. Securities 
regulations require that an ICO's promoter register its 
offering with a regulating agency and disclose certain 
information about its business. Some countries have developed 
guidance on the application of securities regulations to 
various categories of tokens issued pursuant to ICOs, while 
other countries are applying existing securities regulations to 
ICOs on a case-by-case basis.
    In the United States, ICOs may qualify as securities 
offerings subject to Federal regulation, depending on their 
specific features. If policymakers in the United States or 
other countries are concerned about increasing investor 
protections, they could consider whether ICOs merit additional 
licensing and transparency requirements, provide greater 
clarity regarding which types of ICOs will qualify as 
securities offerings, and/or focus on increased enforcement 
efforts and public warnings about the risks of fraudulent ICOs. 
Additional regulations come with a tradeoff: broader and 
stronger regulations may deter financial innovation and broader 
adoption in the cryptocurrency market.

Q.9. Should cryptocurrencies have the same investor 
protections, the same rules against market manipulation and 
market fraud? Should they have adequate disclosures and 
investor protections? The same as bonds and stocks have?

A.9. For investment markets to work efficiently, investors must 
trust that they have the relevant information necessary to 
judge the possible risks and rewards of a particular 
investment. Securities and commodities laws and regulations has 
been developed overtime in most countries with the aim of 
ensuring that is the case.
    In the United States, market manipulation is prohibited for 
tradeable securities through the Securities Exchange Act and 
for commodity futures contracts and commodity spot transactions 
through the Commodity Exchange Act. According to the Securities 
and Exchange Commission (SEC), cryptocurrencies offered in an 
``initial coin offering'' (ICO) may, depending on their 
features, qualify as offerings of ``securities'' subject to 
Federal regulation under the Securities Act of 1933 (Securities 
Act) and the Securities Exchange Act of 1934 (Exchange Act). 
\16\ The Commodity Futures Trading Commission (CFTC) has 
defined cryptocurrencies as ``commodities'' which gives them 
enforcement authority regarding fraud and manipulation of 
cryptocurrency exchanges.
---------------------------------------------------------------------------
     \16\ ``Initial Coin Offerings'', U.S. Securities and Exchange 
Commission, https://www.sec.gov/ICO; Jay Clayton, ``Statement on 
Cryptocurrencies and Initial Coin Offerings'', U.S. Securities and 
Exchange Commission, December 11, 2017.
---------------------------------------------------------------------------
    Despite these laws, concerns about market manipulation on 
cryptocurrency exchanges persist. Market manipulation is a 
deliberate attempt to interfere with the free and fair 
operation of the market and create artificial, false, or 
misleading appearances with respect to the price of, or market 
for, a product, security, commodity, or currency. In 
cryptocurrency exchanges, concerns about market manipulation 
include, for example:

    pump-and-dump schemes (artificially inflating the 
        price of an owned cryptocurrency through false and 
        misleading positive statements, in order to sell the 
        cheaply purchased stock at a higher price);

    wash trading (an investor simultaneously sells and 
        buys the cryptocurrencies to create misleading, 
        artificial activity in the marketplace);

    spoofing (a trader places a large order to buy or 
        sell a cryptocurrency, with no intention of executing); 
        and

    front running (a firm either buys cryptocurrency 
        for itself before filling customer buy orders that 
        drive up the price, or sells cryptocurrency itself 
        before filling customer sell orders that drive down the 
        price). \17\
---------------------------------------------------------------------------
     \17\ Nouriel Roubini, ``The Great Crypto Heist'', Project 
Syndicate, July 16, 2019.

    According to one study, up to 95 percent of all 
transactions in bitcoin are fraudulent and/or noneconomic in 
nature. \18\
---------------------------------------------------------------------------
     \18\ Bitwise Asset Management, Presentation to the U.S. Securities 
and Exchange Commission, March 19, 2019.
---------------------------------------------------------------------------
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
           SENATOR CORTEZ MASTO FROM MEHRSA BARADARAN

Q.1. In your paper, you recommend faster payments and an 
expansion of postal banking. What about enforcing and possibly 
expanding the Community Reinvestment Act to ensure that 
residents of rural areas and low-income communities have access 
to bank accounts that don't charge high fees like $7.00/per ATM 
transaction or require a minimum balance of $1,500 to open an 
account or avoid costly fees?

A.1. The CRA must be strengthened, expanded, and enforced. I 
recently testified in response to this question before the 
House Subcommittee on Consumer Protection and Financial 
Institutions about the CRA. The underlying theory of the CRA is 
that banks have public duties because they are essentially 
public institutions. In passing the CRA in 1977, Senator 
William Proxmire, Chairman of the Senate Committee on Banking, 
Housing, and Urban Affairs alluded to the dependent nature of 
the bank-State relationship. He stated that the CRA was based 
on a ``widely shared assumption'' that ``a [bank's] public 
charter conveys numerous economic benefits and in return it is 
legitimate for public policy and regulatory practice to require 
some public purpose . . . .'' The Senator claimed that banks 
are ``a franchise to serve local convenience and needs'' and 
therefore ``it is fair for the public to ask something in 
return.''
    The CRA is the last remaining tool of regulators to require 
banks to extend credit beyond their preferred customer base, 
but banks have resisted engaging in ``inefficient'' or 
``unprofitable'' transactions. And this is the truth that 
cannot be avoided--serving the needs of these communities has 
not be profitable and regulators have not required that they do 
so. The CRA only requires banks to offer services in their 
chosen service area. Thus, many banks have decided to close 
down branches in wide swaths of the country. These areas are 
essentially CRA deserts as well as bank deserts. If banks are 
not providing financial services to the poor, and requiring 
them to do this is ineffective, inefficient, or otherwise 
politically fraught, then any serious discussion of financial 
inclusion must consider a public option.
    In short, the CRA must be strengthened in ways that 
recognize the tremendous task it was created to do and remains 
undone today. Banks are in a unique position to engage in this 
effort and have historically been tasked with playing a 
significant role. But a strong CRA should be only one step in 
an effort to match for the large inequalities in the credit and 
payments systems.
    The full testimony can be found here: https://
financialservices.house.gov/uploadedfiles/hhrg-116-ba15-wstate-
baradaranm-20190409-u2.pdf.

Q.2. What safeguards, if any, are in place to ensure bitcoin or 
other cryptocurrencies, are not used to finance illegal 
activity?

A.2. Cryptocurrency exchanges have voluntarily complied with 
KYC, AML, and CFT regulations--these exchanges are registered 
companies and thus have regulatory compliance duties. While 
many people and companies use these exchanges to purchase and 
sell, there are also decentralized exchanges that operate from 
one person to another--without an exchange. There are currently 
no comprehensive safeguards in place to prevent the financing 
of illegal activities through those transactions. Accordingly, 
bitcoin and other cryptocurrencies are currently being used to 
finance illegal activities.

Q.3. In your opinion, what is the best way to crack down on the 
use of cryptocurrencies to finance illegal transactions dealing 
with drug and sex trafficking?

A.3. Because I am a banking law expert and not an expert on 
criminal enforcement, I will narrow my response to what can be 
done in the banking context. Cryptoexchanges can be regulated 
to prevent illegal exchange so laws can mandate that all 
cryptotransactions must go through a sanctioned private 
exchange. Anyone exchanging cryptocurrencies outside of 
regulated exchanges would have to be prosecuted, which might 
prove to be difficult. Whether and how law enforcement might be 
able to track and prosecute these transactions is outside of my 
scholarly purview.

Q.4. Should cryptocurrencies have the same investor 
protections, the same rules against market manipulation and 
market fraud? Should they have adequate disclosures and 
investor protections? The same as bonds and stocks have?

A.4. Yes. Though compliance can be made less costly, these 
regulations must apply to public investments in order to 
protect investors and consumers from fraud. The test for 
whether an investment is a security, according to the Howey 
case ``is the presence of an investment in a common venture 
premised on a reasonable expectation of profits to be derived 
from the entrepreneurial or managerial efforts of others.'' If 
this applies to an ICO, it should be considered a security. The 
CFTC has likewise determined that some cryptocurrencies like 
bitcoin are a commodity and shall be regulated as such.
    Technology has and will continue to fundamentally transform 
finance, but it has not and should not alter safety and 
soundness, privacy, or consumer protection regulations. 
Cryptocurrencies are either a store of value, tradable 
currencies, investments, and a payments system or as some have 
promised, they are all of these things. There is nothing about 
all these things being put on the blockchain that makes it any 
less likely that their founders will engage in fraud, insider 
trading, or other harms that the SEC and CFTC regimes were 
created to prevent.
              Additional Material Supplied for the Record


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