[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
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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
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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
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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
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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).
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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.
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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.
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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\
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\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.
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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\
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\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.
---------------------------------------------------------------------------
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\
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\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
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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\
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\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
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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.
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\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.
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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.
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\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\
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\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\
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\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.
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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\
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\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\
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\18\ Bitwise Asset Management, Presentation to the U.S. Securities
and Exchange Commission, March 19, 2019.
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------
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]