    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                           THE PROMISES AND PERILS OF
                        CENTRAL BANK DIGITAL CURRENCIES

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

                                 HYBRID HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON NATIONAL SECURITY,

                           INTERNATIONAL DEVELOPMENT

                              AND MONETARY POLICY

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 27, 2021

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 117-43

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    45-510 PDF                 WASHINGTON : 2021

    -----------------------------------------------------------------------------------

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
    GREGORY W. MEEKS, New York           BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            ANN WAGNER, Missouri
    ED PERLMUTTER, Colorado              ANDY BARR, Kentucky
    JIM A. HIMES, Connecticut            ROGER WILLIAMS, Texas
    BILL FOSTER, Illinois                FRENCH HILL, Arkansas
    JOYCE BEATTY, Ohio                   TOM EMMER, Minnesota
    JUAN VARGAS, California              LEE M. ZELDIN, New York
    JOSH GOTTHEIMER, New Jersey          BARRY LOUDERMILK, Georgia
    VICENTE GONZALEZ, Texas              ALEXANDER X. MOONEY, West Virginia
    AL LAWSON, Florida                   WARREN DAVIDSON, Ohio
    MICHAEL SAN NICOLAS, Guam            TED BUDD, North Carolina
    CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
    SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
    AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
    RITCHIE TORRES, New York             JOHN ROSE, Tennessee
    STEPHEN F. LYNCH, Massachusetts      BRYAN STEIL, Wisconsin
    ALMA ADAMS, North Carolina           LANCE GOODEN, Texas
    RASHIDA TLAIB, Michigan              WILLIAM TIMMONS, South Carolina
    MADELEINE DEAN, Pennsylvania         VAN TAYLOR, Texas
    ALEXANDRIA OCASIO-CORTEZ, New York   PETE SESSIONS, Texas
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    NIKEMA WILLIAMS, Georgia
    JAKE AUCHINCLOSS, Massachusetts

                       Charla Ouertatani, Staff Director
               Subcommittee on National Security, International
                        Development and Monetary Policy

                      JIM A. HIMES, Connecticut, Chairman

    JOSH GOTTHEIMER, New Jersey          ANDY BARR, Kentucky, Ranking
    MICHAEL SAN NICOLAS, Guam                Member
    RITCHIE TORRES, New York             PETE SESSIONS, Texas
    STEPHEN F. LYNCH, Massachusetts      ROGER WILLIAMS, Texas
    MADELEINE DEAN, Pennsylvania         FRENCH HILL, Arkansas
    ALEXANDRIA OCASIO-CORTEZ, New York   LEE M. ZELDIN, New York
    JESUS ``CHUY'' GARCIA, Illinois      WARREN DAVIDSON, Ohio
    JAKE AUCHINCLOSS, Massachusetts      ANTHONY GONZALEZ, Ohio

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 27, 2021................................................     1
    Appendix:
        July 27, 2021................................................    43

                                   WITNESSES
                             Tuesday, July 27, 2021

    Baldwin, Robert M., Head of Policy, Association for Digital Asset
      Markets (ADAM).................................................    13
    Coronado, Julia, President and Founder, MacroPolicy Perspectives.    11
    Fanusie, Yaya J., Adjunct Senior Fellow, Energy, Economics and
      Security Program, Center for a New American Security...........     7
    Friedlander, Julia, C. Boyden Gray Senior Fellow and Deputy
      Director, GeoEconomics Center, Atlantic Council................     5
    Levin, Andrew, Professor of Economics, Dartmouth College.........     9

                                    APPENDIX

    Prepared statements:
        Baldwin, Robert M............................................    44
        Coronado, Julia..............................................    53
        Fanusie, Yaya J..............................................    58
        Friedlander, Julia...........................................    64
        Levin, Andrew................................................    76

                  Additional Material Submitted for the Record

    Himes, Hon. Jim A.:
        Written statement of the American Bankers Association........    81
        Written statement of the National Association of Convenience
          Stores.....................................................    95
        Written statement of Public Citizen..........................    99

                           THE PROMISES AND PERILS OF
                        CENTRAL BANK DIGITAL CURRENCIES

                                  ----------

                             Tuesday, July 27, 2021

                 U.S. House of Representatives,
                     Subcommittee on National Security,
                              International Development
                                   and Monetary Policy,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jim A. Himes
    [chairman of the subcommittee] presiding.
        Members present: Representatives Himes, Gottheimer, Torres,
    Lynch, Dean, Ocasio-Cortez, Auchincloss; Barr, Sessions,
    Williams of Texas, Hill, Zeldin, Davidson, and Gonzalez of
    Ohio.
        Ex officio present: Representatives Waters and McHenry.
        Also present: Representatives Foster and Emmer.
        Chairman Himes. The Subcommittee on National Security,
    International Development and Monetary Policy will come to
    order. Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time. Also, without
    objection, members of the full Financial Services Committee who
    are not members of this subcommittee are authorized to
    participate in today's hearing.
        Today's hearing is entitled, ``The Promises and Perils of
    Central Bank Digital Currencies.'' Before I recognize myself
    for an opening statement, I will just note for the witnesses
    and anybody watching at home on TV that this is a hybrid
    hearing, so there are actually people participating who are
    tuning in virtually. That should be managed. We have done it
    before. It should be managed well, but there will be moments
    when questions do come in from people who are participating
    remotely, just so the panel is aware of that fact.
        With that, I now recognize myself for 4 minutes to give an
    opening statement, and to welcome the witnesses to this
    important hearing.
        Money and payment systems have been around for thousands of
    years, but what we think of as money and paying for goods today
    would have been unimaginable even to our grandparents, who
    carried cash and sometimes wrote checks. Technological
    innovation in the last 2 decades has transformed money, payment
    systems, and banking. The rapid growth of crypto assets,
    digital currencies, and peer-to-peer networks facilitate
    business transactions and quicker international payments,
    amongst other things. However, as is true with all innovation,
    there are potential downsides. Those of us charged with
    oversight and policymaking must grapple with user anonymity,
    cybersecurity, investor protection, and market safety, among
    other challenges posed by this innovation.
        Today, in a very timely fashion, we grapple with the
    potential benefits and drawbacks of creating government-backed
    digital currencies. The decisions that emerge in legislation
    and regulation will significant shape the world of finance.
        Some 81 nations, including our own, are now exploring a
    central bank digital currency (CBDC). While some countries are
    moving faster than others, each central bank has its own policy
    objectives and expectations.
        The Federal Reserve's forthcoming White Paper on digital
    payment systems will likely provide insight into how the Fed
    believes the U.S. should approach and monitor these issues in
    the years ahead. Vice Chairman Quarles, in a speech notably
    entitled, ``Parachute Pants and Central Bank Money,'' suggested
    that all of this activity might be a bit of a fad.
        No single policy change or set of regulations will solve
    all of the challenges in this arena. The choices we make
    regarding a central bank digital currency will have both
    positive aspects and drawbacks. A U.S. central bank digital
    currency could potentially draw unbanked Americans into a
    formal and lower-cost banking system, it could provide the
    Federal Reserve with greatly enhanced policy tools, and it
    could be a prudent response or alternative to the Wild West of
    privately sponsored cryptocurrencies.
        However, a central bank digital currency could cause
    significant disruptions in the existing banking sector.
    Particularly since the Federal Reserve is looking to the
    Congress for direction and authority, legislative inaction,
    which sadly has become something of a default setting in this
    institution, will be a choice, and not necessarily a good one.
    Widespread global adoption of other central bank digital
    currencies, particularly the Chinese digital currency, could
    erode the highly advantageous role of the dollar
    internationally.
        Since World War II, the U.S. dollar has been the primary
    global reserve currency. The strength and stability of our
    currency has helped secure our position as the world leader in
    finance, and been a reliable mechanism to facilitate trade and
    our borrowing needs. The extensive use of the dollar in foreign
    markets also provides us, and U.S. officials, with important
    tools to crack down on criminal groups, monitor illicit
    activity, and tighten the screws on those who would threaten
    America or its allies.
        Much has been said about the Chinese digital yuan and the
    possibility that the Chinese government will attempt to usurp
    the dollar as the reserve currency, but we must also be mindful
    of the actions by our allies. If the U.S. moves too slowly, we
    risk being overtaken. Today, in my opinion, we are behind.
    Following the rest of the world in innovation is not a
    traditional American experience.
        These are all difficult decisions, and we must approach
    them with an open mind. We need to work together to foresee the
    unintended consequences, understand the expected tradeoffs, and
    stay a step ahead of potential challenges.
        With that, I would like to again welcome this terrific
    panel of esteemed witnesses, and to recognize the ranking
    member of the subcommittee, Mr. Barr, for 4 minutes for an
    opening statement.
        Mr. Barr. Thank you, Mr. Chairman, for holding this very
    important hearing. And thank you to our witnesses for joining
    us today. I look forward to an engaging discussion.
        The development of new technologies and changing consumer
    behavior have resulted in drastic changes to our payments
    systems. Frictions previously associated with the transfer of
    funds from person to person or business to business have eased
    significantly. As the landscape continues to shift, central
    banks are exploring the digitization of their currencies.
        There are many potential benefits associated with the
    development of central bank digital currencies, including
    easing transactions and reaching previously underserved
    populations. However, we must also be mindful of the potential
    negative national security implications, including CBDC's use
    in financing illicit activities of evading sanctions, and the
    long-term consequences if we lose our competitive edge to
    countries like the People's Republic of China.
        According to recent data published by the Atlantic Council,
    since 2014, dozens of central banks have begun exploring CBDCs.
    Thirty-two countries are in the research stage and 35 have
    either launched a CBDC, conducted a pilot, or are in
    development. In the United States, as the chairman noted,
    Federal Reserve Chair Powell has indicated that the Fed is
    closely examining the concept of a digital dollar and plans to
    release a White Paper on the subject in the coming months.
        One area of potential promise of a U.S. digital dollar is
    expanding financial access and inclusion for unbanked
    individuals. A recent FDIC survey found that roughly 14 million
    American adults did not have a bank account. It is possible
    that lower system costs and digital wallets tied to CBDCs may
    provide access to underserved populations.
        Meanwhile, China is pressing ahead in its development of a
    CBDC, and has already launched pilot programs of its digital
    renminbi with major retailers in select metropolitan areas. In
    2016, then-People's Bank of China Governor Zhou Xiaochuan
    stated that his ambition was to eventually replace cash in
    China with its digital renminbi. Beneficial to the Chinese
    Communist Party (CCP) is the fact that a widespread adoption of
    a digital currency would allow them to track every purchase,
    expand domestic surveillance initiatives, and exert greater
    control over private transactions. The CCP may even use its
    new-found visibility into transactions as a tool to enforce
    party discipline.
        China has made clear their motives to challenge the United
    States as the preeminent global economic power. The development
    and implementation of a digital currency is one of several
    steps in their quest as they seek to usurp the dollar as the
    world's reserve currency. As policymakers focus on national
    security implications of financial services, we must closely
    monitor China's actions and appropriately react to these
    developments.
        While it is imperative that the United States not cede its
    competitive advantage, we must not rush the process for the
    sake of simply keeping up. With a development of this
    importance, magnitude, and potential long-term impact, we must
    realize that getting it right is more important than getting it
    done fast. In this regard, I agree with Chairman Powell, who
    last year stated, ``It is more important to get it right than
    to be first, and getting it right means that we not only look
    at the potential benefits of CBDC but also the potential
    risks.''
        We must also carefully deliberate the appropriate role of
    the Fed in issuing a CBDC. Should it approach the program
    alone, going directly to consumers and taking on the roles and
    responsibilities traditionally held by private institutions,
    such as customer service, transaction verification, and Anti-
    Money Laundering (AML) and Know Your Customer (KYC) compliance,
    or should the Fed approach the issue in coordination and
    partnership with the private sector? I hope our hearing today
    will help inform our thinking as we weigh the benefits and
    potential costs of CBDCs, specifically in the context of U.S.
    national security and the appropriate role of the Fed.
        I yield back.
        Chairman Himes. The Chair thanks the ranking member, and
    now recognizes the Chair of the full Financial Services
    Committee, the gentlewoman from California, Chairwoman Waters,
    for 1 minute.
        Chairwoman Waters. Thank you, Chairman Himes, for hosting
    this hearing, part of a series that this committee has been
    holding on the policy, law, and regulations surrounding digital
    assets. The Federal Reserve is at the center of our response
    whenever the economy enters a recession, and thus it is vital
    that our central bank has powerful tools to achieve its
    mandate. A central bank digital currency, or CBDC, is one
    potential tool.
        In addition to economic matters, as the Fed considers CBDC
    adoption, Congress must also be mindful of how proposed models
    will affect the global influence of the U.S. dollar, advance
    efforts to fight financial crime, impact communities of color,
    enhance financial inclusion, and balance privacy with the
    transparency needed to defend the financial system from abuse.
        I look forward to the witnesses' comments, and I yield back
    the balance of my time.
        Chairman Himes. The Chair thanks the Chair of the Full
    Committee, and now recognizes the ranking member of the Full
    Committee, the gentleman from North Carolina, Ranking Member
    McHenry, for 1 minute.
        Mr. McHenry. I thank the Chair for holding this great
    hearing today. This is a subject with which Congress must
    wrestle.
        As Fed Chair Powell says, it is better for the U.S. to get
    a central bank digital currency right than to be first. We are
    certainly not going to be first, but we have to wrestle with
    privacy rights and civil liberties, something that the Chinese
    do not care a whit about. And I agree with my colleagues that a
    digital yuan has national security implications for the United
    States. However, a central bank digital currency is not the
    only tool to compete with China. We should be looking at how we
    are better than China, how do we improve ourselves, how do we
    ensure that private sector innovation continues, how we see
    competition, and competition bringing the best products to
    market and letting that competition encourage the U.S. dollar
    in making cross-border payments faster and cheaper.
        There is a lot of work to be done, but I am glad we are
    jumping into the fray. Congress must wrestle with this, and it
    is on us to legislate this into existence if that is the right
    thing to do.
        And with that, thank you, Mr. Chairman.
        Chairman Himes. The gentleman yields back.
        Today, we welcome the testimony of our distinguished
    witnesses: Ms. Julia Friedlander, the C. Boyden Gray Senior
    Fellow and Deputy Director of the Atlantic Council; Mr. Yaya
    Fanusie, an Adjunct Senior Fellow for Energy with the Economics
    and Security Program at the Center for a New American Security;
    Dr. Andrew Levin, a Professor of Economics at Dartmouth
    College; Dr. Julia Coronado, the President and Founder of
    MacroPolicy Perspectives; and Mr. Robert M. Baldwin, the Head
    of Policy at the Association for Digital Asset Markets.
        Witnesses are reminded that their oral testimony will be
    limited to 5 minutes. You should be able to see a timer on the
    desk in front of you that will indicate how much time you have
    left. When you have 1 minute remaining, a yellow light will
    appear. I would ask that you be mindful of the timer, and when
    the red light appears, to quickly wrap up your testimony, so
    that we can be respectful of the other witnesses' and the
    committee members' time.
        And without objection, your written statements will be made
    a part of the record.
        Ms. Friedlander, you are now recognized for 5 minutes to
    give an oral presentation of your testimony.

     STATEMENT OF JULIA FRIEDLANDER, C. BOYDEN GRAY SENIOR FELLOW
       AND DEPUTY DIRECTOR, GEOECONOMICS CENTER, ATLANTIC COUNCIL

        Ms. Friedlander. Good morning, and thank you, Chairman
    Himes, Ranking Member Barr, and esteemed members of the
    subcommittee for the opportunity to speak to you today about
    central bank digital currencies and their role in global
    finance.
        My name is Julia Friedlander. I am the C. Boyden Gray
    Senior Fellow and Deputy Director of the GeoEconomics Center at
    the Atlantic Council. I lead our work on economic statecraft,
    that is, the use of financial, economic, and regulatory tools
    in foreign policy. I have served as an economist at the CIA, as
    a Senior Advisor at the Treasury Department's Office of
    Terrorism and Financial Intelligence, and 3 years on the
    National Security Council staff. This decade of Federal service
    gave me an acute sense of how financial regulation intersects
    with national security and the role of the United States in
    global standard-setting based on entrepreneurialism, rule of
    law, and respect for the rights of the individual.
        Last week, the GeoEconomics Center launched the newest
    version of its CBDC tracker, which follows the progress of
    research, design, development, and piloting around the world.
    You can explore it at AtlanticCouncil.org. The database
    features 81 countries, more than double the number we
    identified one year ago. Five countries have fully launched a
    digital currency, while 14 others are in the pilot stage, like
    South Korea and Sweden. However, of the four most influential
    central banks in the world--the U.S. Federal Reserve, the
    European Central Bank (ECB), the Bank of Japan, and the Bank of
    England--the United States is the furthest behind.
        Countries are pursuing CBDCs for a variety of reasons.
    COVID-19 obviously played an outsized role. The need to deliver
    unprecedented fiscal and monetary stimulus called for
    innovation in payment systems. Another is the rise of
    cryptocurrencies and stablecoins. Some central bankers fear
    losing control of monetary sovereignty while others see
    stablecoins as a potent complement to the existing financial
    system.
        And, of course, there is Beijing. As of June 2021, the
    People's Republic of China announced corporate and personal
    wallets valued at over $5 billion, and has begun groundwork for
    cross-border transactions with Thailand, the United Arab
    Emirates, and Hong Kong. These tests are limited to bank-to-
    bank transactions, not retail.
        I would like to emphasize, however, that this is not only a
    story about how we manage China. Around the world, central
    bankers recognize that they cannot ignore the advent of new
    forms of digital money. I will touch on three national security
    considerations from our research.
        First, countries researching or testing CBDC use KYC
    procedures similar to the traditional banking sector, but are
    developing different thresholds to balance KYC with financial
    inclusion and lowering barriers to instant payments. This could
    lead to a patchwork quilt of regulations and operating
    platforms, making KYC ineffective.
        Second, what one country calls, ``due diligence,'' may be a
    data privacy violation and illegal state-led surveillance in
    another, complicating cross-border transactions or risking
    personal safety and industrial espionage. Nation states and
    hackers linked to organized crime could target CBDCs to attain
    sensitive data and funds or destabilize the global financial
    system.
        Third, the role of the U.S. dollar. The dollar continues to
    dominate international commerce, reflecting the attractiveness
    of the U.S. economy as a safe haven for investment. We see no
    immediate threat to its role in financial settlements and debt
    markets or in global reserves. Most CBDC programs are focused
    on domestic use cases, not international transactions.
    Compatibility and widespread standardization are a prerequisite
    for a CBDC to challenge the financial system as it currently
    is.
        However, in the medium to long term, if CBDCs demonstrate
    superior effectiveness in the speed and cost of transaction,
    they could begin to undermine the dollar's status. If countries
    are able to build wholesale, cross-border CBDC mechanisms at
    scale, these payment systems could begin to replace SWIFT and
    other messaging systems. This could, over time, reduce the
    share of international trade and capital flows denominated in
    dollars.
        How might this happen? Over time, countries may develop
    cross-border interoperability that settle transactions
    instantaneously. The dollar would become a technological
    laggard. In the private session we convene at the Atlantic
    Council, we have heard from other nations that are eager to
    hear from the U.S., and without our guidance, may look to China
    on how to build a CBDC.
        Chair Powell has emphasized that as the issuer of the
    world's reserve currency, it is more important to be right than
    to be first. This is prudent, but the Fed risks allowing a
    fractured digital currency ecosystem to evolve in a way that
    does not protect privacy and security. The U.S. must innovate
    through a position of strength. This does not necessarily mean
    issuing a digital dollar. Instead, the U.S. can galvanize
    international coordination and ensure that countries create
    digital currencies that are both safe from attack and safeguard
    citizens' data.
        Currently, there is a patchwork of regulatory bodies that
    claim some jurisdiction over development, but the U.S. has been
    able to bring solutions to the table.
        Chair Powell has been clear that he does not believe the
    current language in the Federal Reserve Act allows him to
    create a digital dollar. If Congress believes in the digital
    dollar, it should consider authorizing a pilot program,
    ensuring a role for Treasury and varying bodies in the
    oversight and coordination process, or amend the Federal
    Reserve Act. In countries with a pilot program, other than in
    China, the legislature has been a key player in the process.
        U.S. legislation would have a positive ripple effect around
    the world. It would show that we are at the forefront of
    innovation and compel other countries to coordinate with us.
    Countries exploring cross-border testing with China might worry
    that partnership with the digital yuan would preclude a
    partnership with the digital dollar.
        The U.S. need not roll out a large-scale CBDC, but we need
    to start a new, serious conversation. For the world's largest
    economy, the global financial leader, and the creator of the
    Bretton Woods system, the risk would be to do nothing. In
    finance, the first mover has an advantage in setting the
    international operating environment, and the U.S. is a force
    multiplier. We can and should lead the world in the development
    of a safe and secure CBDC.
        Thank you for the opportunity to appear before this
    subcommittee, and thank you for focusing on this very important
    issue.
        [The prepared statement of Ms. Friedlander can be found on
    page 64 of the appendix.]
        Chairman Himes. Thank you, Ms. Friedlander.
        Mr. Fanusie, you are now recognized for 5 minutes for an
    oral presentation of your testimony.

     STATEMENT OF YAYA J. FANUSIE, ADJUNCT SENIOR FELLOW, ENERGY,
       ECONOMICS AND SECURITY PROGRAM, CENTER FOR A NEW AMERICAN
                                SECURITY

        Mr. Fanusie. Thank you. Chairman Himes, Ranking Member
    Barr, distinguished members of the subcommittee, and my fellow
    panelists, it is an honor to participate in today's hearing.
        CBDCs inevitably, I believe, will become some part of our
    global economic landscape. In my testimony, I will offer
    framing to understand the rise of CBDCs, outline some of the
    geopolitical positioning currently underway around the
    technology, and explain the policy posture needed to navigate
    the opportunities and threats that a CBDC environment may bring
    to U.S. national security.
        First, it is best to frame CBDCs not just as a monetary
    development but as a data development. For example, China's
    motivation for its digital fiat currency is rooted in the
    Chinese Communist Party's push for national financial
    technology development, which is focused on building a data-
    driven digital economy.
        Online retail bank accounts, mobile payments, distributed
    ledger technology, and smart contract programmability are part
    of a range of software innovations that currently are unlinked
    to central bank money. CBDCs are an attempt to integrate the
    world of central bank money directly with both conventional and
    emerging data technology.
        Whether or not CBDCs hold either more promise or more peril
    for U.S. national security will depend on how well the United
    States crafts policy to partake in and influence the march of
    Fintech innovation emerging globally.
        Here are some important strategic points or considerations
    that I think policymakers must address for a sound national
    security-informed approach to the rise of CBDCs.
        One, correspondent banking, the high chance that
    correspondent banking will be disintermediated on some level
    when CBDCs proliferate. Now, private banks will not become
    obsolete, but banks will need to augment their services to
    maintain relevance in a world where users digitally possess
    direct liabilities with their central bank and can transact
    more seamlessly with foreign counterparties online. So, private
    banks will need to find revenue models revolving around data
    and software-related services to remain profitable in a CBDC
    world, although they will also have to be informed by data for
    their manual due diligence commitments.
        Also, whomever governs or influences the international
    CBDC-to-CBDC architecture is likely to gain considerable
    geopolitical power. Earlier this year, China's central bank
    proposed rules for CBDC interoperability across jurisdictions
    at a Bank for International Settlements seminar. The BIS also
    could become an environment where CBDC software is recommended
    or authorized for all central banks. China currently has the
    most progress in CBDC piloting among major economies. The U.S.
    will need to increase its CBDC expertise and assert greater
    influence in the BIS and other international fora that guide
    CBDC development.
        Also, CBDCs could be weaponized in some way to retaliate
    against the United States. Depending on how a global CBDC
    system is governed, it could be possible for a bloc of
    countries to restrict the United States from an international
    CBDC apparatus that operates outside the SWIFT messaging
    system. Also, a foreign government's control over its CBDC
    infrastructure may make it easier for that government to block
    local CBDC accounts or wallets used by U.S. companies operating
    in that country.
        U.S. economic policymakers are going to need more
    collaboration with computer scientists. Economists at the Fed
    are going to have to increasingly wrestle with complex computer
    science problems as they assess the possibilities. The Boston
    Fed's current partnership with MIT is an important step in CBDC
    research, but given the global pace of CBDC development,
    multiple Fed branches probably should collaborate with
    university computer science departments around the country for
    more extensive research.
        Also, fine-tuned rules around data privacy will be needed
    if the U.S. launches a digital dollar. CBDC transactions, even
    if anonymized, will comprise a new data stream that could help
    the government and private firms improve financial services,
    but more specific guidelines on data access must be mapped out.
    Will law enforcement have real-time access to the raw,
    anonymized data feed? Policymakers and technologists must
    create parameters, not only around what entities can directly
    acquire CBDC data, but precisely how much of it, and for how
    long.
        The growing exploration of CBDCs does not mean that all
    nations will develop one in the near future. But with all of
    the CBDC research and piloting occurring, it seems highly
    likely that the world will not return to the status quo of a
    decade ago when there was no foreseeable technological shift in
    central bank money governance. Instead of asking if CBDCs will
    proliferate, the U.S. inquiry should be, how will they develop
    and what should their governance be across the borders?
        Despite some of the accompanying risk from CBDCs that I
    have outlined, the sound policy posture is not to seek to stop
    the development of this technology. The U.S. position should be
    to promote, harness, and shape Fintech innovation so that it
    aligns with American interests and values. This may manifest in
    the U.S. deploying a digital dollar, but either way, the United
    States must prepare for a world where CBDCs operate in the
    global economic landscape.
        Thank you, and I look forward to your questions.
        [The prepared statement of Mr. Fanusie can be found on page
    58 of the appendix.]
        Chairman Himes. Thank you, Mr. Fanusie.
        Dr. Levin, you are now recognized for 5 minutes for an oral
    presentation of your testimony.

     STATEMENT OF ANDREW LEVIN, PROFESSOR OF ECONOMICS, DARTMOUTH
                                COLLEGE

        Mr. Levin. Chairman Himes, Ranking Member Barr, and members
    of the subcommittee, thank you for inviting me to testify at
    this important hearing. I will highlight how the establishment
    of a digital dollar provides a crucial opportunity to improve
    the payment system for small businesses and ordinary families,
    and I will underscore the urgency of moving forward promptly on
    this initiative.
        My written testimony highlights the views of small business
    owners in my region, and actually, there are some slides that
    are a handout for you to look at, too.
        For example, Sean Taylor recently achieved his dream of
    starting his own barber shop, called The People's Barbershop,
    in Hanover, New Hampshire. His business has been thriving, and
    he has now hired his first apprentice, Charlie Foster. On
    average, about 3 percent of the price that Sean receives for
    every haircut is being transferred to huge, multinational
    payment providers--3 percent.
        I have heard similar concerns from many other small
    business owners, such as the founders of the Norwich Farm
    Creamery. Again, you can see their photograph in the slides.
        And I gained numerous insights from Becky Dayton, who has
    been running The Vermont Book Shop for the past 16 years. Becky
    says, ``I am working extra hard to keep this little bookstore
    alive in my community.''
        The same issues are faced by small businesses across the
    country, including online retailers as well as brick-and-mortar
    firms. It is not surprising that small businesses are uniformly
    enthusiastic about the prospect of establishing a digital
    dollar. It would be secure, convenient, and costless for both
    the payer and the payee. Cutting payment transaction costs will
    help foster more business startups and entrepreneurs, and
    create more jobs.
        In joint work with my colleague, Michael Bordo, we have
    concluded that a digital dollar is technologically feasible and
    eminently practical, and we have formulated the following set
    of basic design principles. Again, these are listed on your
    handout.
        1. The Federal Reserve will be responsible for managing the
    centralized ledger. Supervised financial institutions provide
    digital dollar wallets for their customers. We call this a
    public-private partnership. It is standard in infrastructure
    and many other types of public-private operations. This
    approach will foster competition and protect personal privacy.
        2. With a centralized ledger, every payment transaction can
    be transmitted instantaneously and securely, at practically
    zero cost, and the risk of fraud can be mitigated by standard
    methods such as two-step verification.
        3. The digital dollar should be usable for all public and
    private payment transactions, as legal tender. But consumers
    should be free to use other forms of payment, including paper
    cash, and this is, again, a very dramatic difference from the
    design that the People's Bank of China (PBOC) is developing.
        4. Digital dollar accounts should bear essentially the same
    rate of return as U.S. Treasury's. Now, that might seem like a
    dramatic development, but in fact, the Federal Reserve has
    already implemented similar measures, mostly for the benefit of
    high-net-worth individuals and institutions. With the
    establishment of a digital dollar, consumers and small
    businesses will be able to receive a competitive interest rate
    on their everyday payment accounts.
        5. Given that funds held in digital dollar wallets will be
    fully secure, safeguards will be needed to disincentivize high-
    net-worth individuals and institutions from making huge
    transfers into digital dollars at times when the financial
    system is under stress.
        6. The interest rate on digital dollars should become the
    Fed's primary monetary policy tool, and that will strengthen
    the Fed's ability to carry out its dual mandate.
        Now, I want to just highlight some factors that call for
    moving ahead promptly and establishing a digital dollar.
        One, the dollar is the key pillar of the global economy, as
    evidenced by trade invoices and debt securities. And I think it
    is absolutely critical for the Federal Reserve to move quickly
    in creating a digital dollar. The European Central Bank (ECB),
    the Bank of England, and other major central banks are moving
    forward promptly. The Fed needs to do the same.
        Two, as others have said, the Federal Reserve needs to play
    a key role in the design of the cross-border currency exchange
    platform. It is just inexcusable for the Fed to stand back and
    let other major central banks take that role.
        Three, Facebook and other big tech firms are moving ahead
    quickly in launching their own digital currencies, called
    stablecoins. If that happens, and those stablecoins dominate
    the U.S. payment system, the banks will be dramatically
    affected too. But it will also be a regulatory nightmare for
    regulating consumer privacy and equitable treatment of small
    businesses. So again, it is not just that China is the threat;
    the whole digital landscape is changing, and the Fed needs to
    catch up.
        Finally, the Federal Reserve Act does not require Federal
    Reserve notes to be issued as paper bills. Congressional
    legislation is not a prerequisite for the establishment of a
    digital dollar. But the U.S. Congress is the Fed's boss. You
    are the boss, and hearings like this are crucial for overseeing
    the Fed's role in ensuring that the payment system works
    effectively for small businesses and ordinary families across
    the country.
        Thank you for your consideration. I will be glad to answer
    your questions.
        [The prepared statement of Dr. Levin can be found on page
    76 of the appendix.]
        Chairman Himes. Thank you, Dr. Levin.
        Dr. Coronado, you are now recognized for 5 minutes for an
    oral presentation of your testimony.

    STATEMENT OF JULIA CORONADO, PRESIDENT AND FOUNDER, MACROPOLICY
                              PERSPECTIVES

        Ms. Coronado. Thank you very much. Thank you for the
    opportunity to testify. I also have a set of exhibits at the
    back of my testimony.
        My name is Julia Coronado. I am the founder of MacroPolicy
    Perspectives. I have spent my entire adult life in the
    financial services industry, from being a bank teller, to a
    staff economist at the Federal Reserve Board, to chief
    economist at one of the largest global investment banks. I also
    teach macroeconomics to business school students at UT Austin.
    I stress to my students that the U.S. dollar did not become the
    global reserve currency overnight. It is a story of evolution,
    and the job is never done.
        Digital currencies present a challenge to the U.S. and
    other countries, and we must rise to that challenge. If we do
    it well, we can improve the safety and soundness of our
    financial system and enhance the equity and efficiency of
    monetary policy.
        My remarks will draw on a proposal I put forth with Simon
    Potter. We propose the creation of a new system of regulated
    financial institutions called Digital Payment Providers to
    facilitate fast and expensive retail payments for consumers
    through the use of a digital currency backed by reserves at the
    Fed. Much like the current banking system, a two-tiered system
    would promote competition and continued innovation, while Fed
    oversight would promote safety and soundness. Our proposal
    would limit account size to preserve the role of the fractional
    reserve commercial banking system.
        The proposed system would help the Fed ensure that the
    valuable public good of a stable currency survives the
    transition to a digital age, while using lower costs to reach
    the underbanked who have not benefitted from the payment
    convenience and security offered by the current banking system.
        Relying on the private sector alone to offer the benefits
    of new technology, as the U.S. is currently doing, introduces
    significant and growing sources of systemic risk. The Fed would
    need to invest in a new infrastructure that establishes and
    monitors a rigorous standard for cybersecurity, consumer
    privacy, and system resiliency. The Fed would not have access
    to individual data but could establish and monitor standards
    for consumer privacy. Our current lack of digital
    infrastructure has left our economy vulnerable to increasing
    attacks. An important byproduct of a CBDC will be a public-
    private partnership that confronts the most significant risk to
    the functioning of our market economy.
        Some Fed officials have urged the need for caution, given
    the dollar's role as the global reserve currency. I cite that
    as a need to move forward with urgency. Private
    cryptocurrencies are proliferating that pose risks to financial
    stability. Other countries are advancing the ball on CBDCs. The
    U.S. should not just be engaged, but be playing a leadership
    role.
        Digital currencies also present an opportunity to make
    monetary policy more equitable and efficient. Why does the Fed
    need a new tool for monetary policy? Interest rates have fallen
    around the world in recent decades, leaving the Fed and other
    central banks increasingly reliant on balance sheet policy to
    achieve their goals. Bond purchases work by lowering long-term
    rates and boosting asset prices. The Fed has faced the critique
    that its policies exacerbate inequality, and boosting asset
    prices does make the rich richer. However, the alternative is
    to allow unemployment to increase, disproportionately harming
    lower-wage and Black and Brown workers. Doing nothing is not an
    option, but the Fed lacks the tools to boost the economy in a
    more equitable fashion.
        Digital accounts can add a more equitable tool. We propose
    the creation of recession insurance bonds--zero-coupon bonds
    authorized by Congress, calibrated as a percentage of GDP
    sufficient to provide meaningful support in a downturn. The
    Treasury would hold these securities on behalf of the public.
    The Fed would purchase them in a downturn and credit household
    digital accounts.
        Cash transfer may sound like the domain of fiscal policy,
    yet it precisely mirrors the permanent expansion of the money
    supply Milton Friedman described as, ``helicopter money.'' The
    COVID recession confirmed that interest rates and balance sheet
    policy remain powerful tools, yet we have also seen that
    providing cash to households in a crisis is more powerful in
    sustaining demand when the economy is hit with a shock that
    leads to rising unemployment.
        Digital payments could also reduce risks to financial
    stability. The Fed's increasing reliance on bond purchases may
    be contributing to asset price inflation becoming higher and
    more cyclical. Lower interest rates and higher asset prices
    spur business investment and consumer spending, which leads to
    job creation. Asset prices usually decline in a recession,
    which can amplify and deepen job losses. Direct payments to
    consumers can stabilize demand in a recession more effectively,
    and knowing the Fed possesses such a tool could calm investors
    and reduce the need for the Fed to engage in medium-term asset
    purchases.
        Disruption from technology is an inevitable part of every
    industry. It also creates opportunity. Developed together, a
    Fed-backed digital dollar, low-cost accounts and payment
    processing, and a framework for the Fed to make digital
    deposits to consumers could make U.S. institutions able to meet
    the challenges of the current global environment. Thank you.
        [The prepared statement of Dr. Coronado can be found on
    page 53 of the appendix.]
        Chairman Himes. Thank you, Dr. Coronado.
        Mr. Baldwin, you are now recognized for 5 minutes to give
    an oral presentation of your testimony.

    STATEMENT OF ROBERT M. BALDWIN, HEAD OF POLICY, ASSOCIATION FOR
                      DIGITAL ASSET MARKETS (ADAM)

        Mr. Baldwin. Chairman Himes, Ranking Member Barr,
    distinguished members of the subcommittee, thank you for the
    opportunity to testify today. My name is Robert Baldwin, and I
    am the head of policy at the Association for Digital Asset
    Markets, or ADAM. In this capacity, I oversee the policy and
    standards-setting process for the self-governing association,
    and work to develop industry best practices that facilitate
    fair and orderly digital asset markets. Prior to ADAM, I served
    at the U.S. Department of the Treasury and the Central
    Intelligence Agency.
        My testimony today seeks to advance a conversation on the
    future of U.S. payments. I will focus on the current status of
    payments in the U.S., and goals for an advanced payments
    system, and I will discuss two leading solutions, including the
    development of a central bank digital currency, or CBDC, and
    the use of a responsibly managed private sector stablecoin.
        Domestic and international payment settlement mechanisms
    have not kept up with the recent advances in telecommunications
    technology. These complex, decades-old networks are costly,
    slow, and susceptible to cyberattacks. However, the
    international correspondent banking system has served the
    United States very well. The U.S. economy's deep and liquid
    capital markets, strong rule of law, and dynamism have enabled
    the dollar to become the preeminent global reserve and
    transaction currency, accounting for over 60 percent of global
    transactions, despite the U.S. making up about a fifth of
    global GDP. This has provided the U.S. significant fiscal
    space, allowed it to maintain a robust sanctions program, and
    has created many American jobs in financial services.
        However, the system of payments is facing pressures on two
    fronts: first, from international competition, such as China;
    and second, from innovations stemming from the development of
    blockchain technologies, which allows users to make both large
    and small payments in a fast, affordable, and secure manner. It
    is imperative that the U.S. looks to the future at this
    critical juncture and that the future is likely related to the
    use of blockchain technology.
        When modernizing our payment system, the U.S. should seek
    to establish a consumer-friendly system that benefits domestic
    consumers while also making itself attractive for use in
    international business. Such a system prioritizes low-cost and
    fast payments, individual privacy, transaction transparency and
    data control, and ultimately ensures that the U.S. dollar
    maintains its prominence in international markets.
        One such way to accomplish this is through the
    establishment of a central bank digital currency. A CBDC system
    offers the potential for speed and cost benefits and offers
    promise in areas such as financial inclusion and improved
    cross-border transactions. However, a well-designed CBDC is a
    considerable undertaking and it will require many intentional
    design choices.
        Another option is a regulated, private-sector led
    stablecoin approach, endorsed by and coordinated with the
    Federal Government. This could answer many of the stated goals
    and serve in lieu of or in advance of a CBDC. The Federal
    approval process for fully reserved, or nearly fully reserved
    stablecoins would be audited and would be akin to a one-to-one
    stablecoin. This is similar to how the New York Department of
    Financial Services provides oversight of its stablecoins. This
    system would be built on top of current financial
    infrastructure to provide a faster payment layer, and would be
    purely opt-in for businesses or consumers seeking to leverage
    the benefits of stablecoins.
        A stablecoin system would accomplish the core mission of
    making payments cheaper and faster, and could likely be
    developed and implemented quickly. Some questions on the
    functioning of this system remain, but ultimately, it is a very
    promising approach.
        The U.S.'s strength in the international payments and
    financial services space is an American treasure that has
    tremendously benefitted the country. The U.S. must continue to
    innovate in this space so that it does not fall behind the
    pressures from international competition and digitization. The
    payment system is a very complex process which must be handled
    and studied with great care. New developments in this space
    take time to develop, because of the intricacies involved and
    the necessity that there are no issues. The U.S. must start to
    operationalize testing and design of various approaches to
    payment efficiency improvements so when it is time to act,
    policymakers have a full suite of options.
        Thank you for your time, and I look forward to answering
    any questions you may have.
        [The prepared statement of Mr. Baldwin can be found on page
    44 of the appendix.]
        Chairman Himes. Thank you, Mr. Baldwin. We will move now to
    questions from the membership of the subcommittee. As a
    reminder, we will observe the 5-minute rule. I will ask Members
    to wind up their questions within the 5-minute timeframe. I
    will allow witnesses to finish answers to questions, within
    reason, beyond the 5 minutes, but any questions that extend
    past the 5-minute limit will have to be answered in writing for
    the record.
        With that, I recognize myself for 5 minutes.
        I would like to spend a couple of minutes talking about the
    risk of inaction. There are a lot of issues at stake here,
    including possible threats to the traditional banking system.
    The word, ``China,'' gets the Congress these days to sit up
    quickly, but it also strikes me that decisions about which
    currency one might use have everything to do with baskets of
    trade and all sorts of other factors that don't relate to the
    nature of the currency, and, of course, the digital yuan is
    going to raise all sorts of issues around privacy and control
    by the Chinese regime.
        I will start with you, Ms. Friedlander, and if I have time,
    I will move on to the other witnesses. What is the timeframe,
    and what are the indicators, the signals that the United
    States, if it were, in fact, behind, as it appears to be, in
    the creation of a central bank digital currency, that we would,
    in fact, lose the ability to lead and innovate in this area?
    Are we talking about 3 months? Three years? Ten years? What
    does that look like?
        Ms. Friedlander. Thank you. I think it would be difficult
    to put an exact timeframe on it, because the current landscape
    is so disaggregated. Different countries, as we note in our
    tracker, are at different stages of research and development,
    all of which are primarily based on domestic use cases.
        So, what I would look for as a sign that the U.S. has
    missed the mark or missed the train leaving the station would
    be widescale adoption of a central bank digital currency and
    cross-border use.
        Currently, there are only two pilot cases of this, one
    which is between China and UAE, and I believe one other
    country--Thailand, excuse me--and another between UAE and Saudi
    Arabia. Those are really only bank-to-bank transactions. They
    are not for large-scale wholesale use.
        So, I would look for indications that the model was
    internationalizing by another country. And that means that we
    really haven't--as we have all noted here, it is time to move,
    but we certainly haven't missed the ball by any stretch of the
    imagination. This is the time for Congress, and for the Federal
    Reserve, in collaboration with BIS, and we argue the G-20, to
    really develop consensus on all of these criteria for
    adaptation globally that reflect our values, based on privacy
    and industrial espionage, and all of the things that we have
    noted elsewhere.
        Chairman Himes. Thank you.
        Dr. Levin, your testimony had a whiff of urgency to it. Do
    you agree with that? Do you think we are at risk of losing out
    here, and in what timeframe?
        Mr. Levin. You have to imagine central banks tend to be
    sort of conservative, and the association of central banks,
    that is called the BIS, the Bank for International Settlements,
    is traditionally very conservative. The general manager of the
    BIS has said that it is a wake-up call for central banks. He
    has said very clearly that central banks need to introduce
    their own sovereign digital currencies. The European Central
    Bank has already indicated that they are going to do it. The
    Bank of England has come pretty close to saying that now.
        The problem here with delay is that even if these
    currencies are initially introduced for domestic purposes,
    there will be a cross-border platform. That is part of what the
    BIS is working on now, so that these currencies can be easily
    interchanged with each other. And if there is no U.S. digital
    dollar on that platform, then you better believe that all of
    the international trade invoices that have been conducted in
    U.S. currencies, even by countries that are not directly
    trading with the U.S., they are invoiced in U.S. dollars, they
    will all migrate to other digital currencies.
        It's the same with sovereign bonds. Many countries issue
    sovereign debts that are denominated in U.S. dollars today.
    Many corporations in Korea and other countries issue their
    debts in U.S. dollars. If there is no U.S. digital dollar on
    the cross-border platform, then all of that will change, and it
    is probably not 10 years away. It is probably not even 5 years
    away. We are probably talking, I would guess, 2 years.
        But that means that the Federal Reserve has to catch up. I
    think several of you said this earlier. It is not just that the
    Fed is kind of right at the cutting edge. The Fed is behind the
    curve right now, and it needs to catch up urgently, and it does
    not have much time left to do that.
        Chairman Himes. Okay, Dr. Levin.
        Dr. Coronado, I am almost out of time, so a quick question,
    for a quick answer. Addressing the issue of the possible flight
    from banking into CBDC in moments of stress, are there other
    mechanisms to alleviate that other than caps on the amount of
    accounts?
        Ms. Coronado. There are potential structures that you can
    put in place, but the caps on the accounts is the easiest way
    to achieve that. I think it is definitely a solvable problem.
        Chairman Himes. Okay. I am out of time. I apologize for
    that, but I would like to follow up, perhaps for an answer in
    writing for the record on that issue.
        With that, I will recognize the distinguished ranking
    member of the subcommittee, Mr. Barr, for 5 minutes of
    questions.
        Mr. Barr. Thank you again, Mr. Chairman, for holding this
    important hearing.
        Mr. Baldwin, given that China is years into its pilot
    program and has expanded its digital currency's availability in
    more major markets, is there a risk presently that the U.S.
    will cede a global economic competitive advantage to China if
    we do not follow suit, and quickly, with a digital dollar?
        Mr. Baldwin. China has many structural issues associated
    with its central bank digital currency, first of all, a lack of
    rule of law, concerns about privacy, as well as capital
    controls. Those make it an unappealing option in the
    international global sphere if there are no other options. The
    U.S. needs to catch up to the Chinese development, but when the
    U.S. presents its own alternative, there is an obvious
    incentive for the current system to utilize an American-based
    system.
        Mr. Barr. Okay. Given that, let me drill down on a couple
    of follow-ups. If the United States does not proceed with its
    own digital dollar, a CBDC, or some kind of private-sector led
    stablecoin regulated by the government, what impacts would that
    have on the effectiveness of U.S. sanctions, should the
    influence of the dollar wane?
        Mr. Baldwin. Sanctions authorities and abilities that we
    are provided are results of the international correspondent
    banking systems. So, the United States' sanctions abilities
    would be undermined if alternative systems that do not cross
    through traditional U.S. correspondent banking systems are
    undermined.
        Mr. Barr. And I think Ms. Friedlander also made that case
    pretty persuasively.
        Final question to you: Describe the digital dollar CBDC
    approach versus the regulated, private-sector-led stablecoin
    approach. What are the pros and cons?
        Mr. Baldwin. Yes. A CBDC approach could take two forms. It
    could be in a tokenized form, so essentially a digital dollar
    that is transferrable around from different wallets, or it
    could take an account-based approach. There are a number of
    privacy considerations that need to be taken into account for a
    CBDC approach.
        A private-sector stablecoin approach would build on top of
    existing financial infrastructure, so that would enable faster
    payments on a back-end basis and would be primarily opt-in. So,
    banks that are seeking to have faster payment settlements could
    implement a stablecoin approach to have faster payment
    settlement times, and then there could be obvious abilities for
    the private sector to innovate at a consumer level, so
    providing options for consumers holding stablecoins.
        Mr. Barr. Well, for any of our witnesses, does anyone have
    an opinion in terms of the competition with China, and other
    international competitors? Is there a preferred approach to the
    authentic CBDC approach or the regulated stablecoin? Dr. Levin?
        Mr. Levin. Yes. I really appreciate Mr. Baldwin's
    perspective, but I think that the truth here is that it depends
    on how the stablecoin is designed. If you have a stablecoin
    where there is 100 percent backing by reserves held at the
    Federal Reserve--which is essentially what Dr. Coronado was
    describing, and it is essentially what Michael Bordo and I have
    been advocating for quite a few years now--okay, it is actually
    a narrow bank. And I know that Chairman Himes is familiar with
    this issue. A narrow bank means that the deposits that a
    customer makes are held 100 percent in reserves at the Federal
    Reserve, so it is perfectly safe and secure. And in the kind of
    payment system we are describing, it can be instantaneously
    transferred.
        The point is, if you have a privately issued stablecoin
    that does not have 100 percent reserve backing, it is backed by
    something else, people are going to have questions about it,
    and this is not the first time in history. There have been
    other times in the past where there were kind of privately
    issued currencies, and they had different values, trading or
    exchange rates of the different stablecoins. We cannot have
    that kind of thing at the center of our--
        Mr. Barr. Thank you for that insight.
        Mr. Levin. The bottom line here is that we have to move
    forward with a central bank-issued currency.
        Mr. Barr. Thank you for that insight. On monetary policy,
    Dr. Levin and Dr. Coronado had some views on this. I will have
    to say, Dr. Coronado, I was a little alarmed about some of the
    concepts that you are putting out there, moving the role of the
    Fed into a much more powerful role more nonconventional role.
        So with respect to monetary policy, this idea of
    strengthening the Fed's ability to foster dual-mandated,
    maximum employment and price stability, is there a risk of
    giving this kind of power to the Federal Reserve of undermining
    price stability and contributing to, for example, inflation?
        Mr. Baldwin, do you have a view on that?
        Ms. Coronado. I do.
        Mr. Barr. Dr. Coronado has a view on that. I have run out
    of time. Nobody has answered that question, but perhaps you all
    could answer that question in the next round of questioning.
    And I am intrigued, Mr. Chairman, by the argument that we need
    legislation, and I would like to know also from the witnesses
    in the conversation today what that should look like?
        With that, I yield back.
        Chairman Himes. The gentleman yields back. The gentleman
    from New Jersey, Mr. Gottheimer, is now recognized for 5
    minutes.
        Mr. Gottheimer. Thank you, Chairman Himes and Ranking
    Member Barr, and thank you to our witnesses for being here
    today.
        I am very concerned about the increasing attractiveness of
    cryptocurrency and blockchain technologies for illicit actors,
    such as foreign terrorist organizations, including Hamas,
    Hezbollah, and ISIS, and others, and those who wish to avoid
    American sanctions, such as Iran and Venezuela, and domestic
    White supremacists, including the Proud Boys and other violent
    extremist groups, which were involved in the January 6th attack
    on the Capitol.
        Mr. Fanusie, if Russia, China, or Iran creates central bank
    digital currencies, either individually or in coordination, to
    operate outside of the dollar and the technology underpinnings
    international money transfers, how would that, do you believe,
    impact America's ability to effectively target economic
    sanctions on those who wish to do us harm?
        Mr. Fanusie. Thank you. That's a very good question. It is
    going to depend on exactly how those digital currencies are
    governed and what their sort of uptake is. One model is that
    accounts are going to be held by banks, that banks are going to
    still have to hold these digital currencies, or these CBDCs. So
    the question would be, does the U.S. still have leverage to
    influence those financial institutions which are disbursing,
    which are interfacing with users?
        I don't think, in the short term, because Russia or any
    U.S. adversary creates a CBDC, that means that then those
    institutions within the country, even if it is China, it
    doesn't mean that that country is not going to still need
    access to the U.S. dollar, to the global financial system. This
    is not something that just a technological deployment is going
    to give them that much leverage.
        I think you have to look at it as a short-term issue versus
    a long-term issue. I think the long-term risk is not in, are
    these CBDCs proliferating, but the question is, what does the
    international CBDC exchange system look like, how many other
    parties are actually invested in it, and does that system rival
    the conventional systems that we have?
        Mr. Gottheimer. Thank you for that. Are there structural
    aspects to CBDCs that may be of benefit to America's sanctions
    program and our fight against illicit actors in the financial
    system?
        Mr. Fanusie. That is why that idea of promise or peril is
    really good, because on one side, yes, there is this issue of a
    long-term lack of sanctions pressure or vulnerability on these
    actors. But if you also think about a bigger ecosystem, where
    there may be some plusses--for example, if because of the
    technology, if we have a system where, whether it is, let's
    say, a U.S. CBDC, where now it is easier to do sanction
    screening, because of the programmability, right, these are
    solutions that even the private sector is trying to do, working
    sanction screening into digital currencies.
        So, you could imagine that there could be a tradeoff. Now,
    I can't say whether it is going to be all this or all that,
    because we don't know how this is going to play out. But we
    shouldn't underestimate that there will be some positive
    factors as well.
        Mr. Gottheimer. Thank you so much. Ms. Friedlander, in your
    testimony you said, ``Of the four historically most influential
    central banks in the world, the United States is the furthest
    behind in the work on digital currencies. Furthermore, absent
    leadership, the U.S. could miss out on an opportunity to foster
    financial inclusion, increase cybersecurity, and maintain
    dollar dominance.'''
        However, you also said that, ``There are upcoming
    opportunities for the U.S. to play catch-up.'' Would you
    elaborate on those opportunities and what steps does the United
    States need to take to become a leader in digital currency
    infrastructure, please?
        Ms. Friedlander. Sure. Thank you. I think the first step
    would be to openly acknowledge that the United States is
    exploring and actively considering a central bank digital
    currency. As I noted in my testimony, that doesn't mean that we
    actually have to deploy one, but putting our imprint--again, as
    the U.S., as the sort of global financial actor of choice, and
    countries are coming to us and saying, ``Can you help us design
    this?'', using the power of our private sector for design
    elements but also our regulatory capacity in multilateral fora
    to put together a framework among allied countries that then,
    quite frankly, gives China a bifurcated choice, or close to
    one. Do you join the international community and multi-
    lateralize or do you use this as a force of internal control?
        Mr. Gottheimer. Do you think there is a tipping point where
    we have waited too long or are too far behind the Chinese or
    others to lead in this space, or do you think we have time
    here?
        Ms. Friedlander. I think we have a limited amount of time,
    and I think, as I answered the chairman's question, look for
    cross-border use cases of digital yuan. And this is one
    benchmark, I think, that was noted in the briefing memo ahead
    of the hearing, is BRI, using digital yuan as a method of debt
    replaying for individual countries.
        So if those are starting to become effective, if countries
    are saying, okay, we are turning to China as a model for how we
    build this, and not to the United States or not to partner
    countries like the U.K.--
        Mr. Gottheimer. Thank you. I yield back.
        Chairman Himes. The gentleman yields back. The ranking
    member of the Full Committee, the gentleman from North
    Carolina, Ranking Member McHenry, is now recognized for 5
    minutes.
        Mr. McHenry. Thank you, Chairman Himes. Mr. Baldwin, the
    theme of today's hearing, the promises and perils of a central
    bank digital currency, leads me to a fundamental question. When
    we look at what they have done in the Bahamas, on the Sand
    Dollar, they were trying to solve the movement of hard cash, a
    physical asset, among 700 islands. So, that is what they were
    trying to solve. What are we trying to solve with the U.S.
    central bank digital currency, in your view, Mr. Baldwin?
        Mr. Baldwin. At its core, we are looking to solve the issue
    of faster and cheaper payments.
        Mr. McHenry. Okay. Faster and cheaper payments. So, is the
    Federal Reserve the place to do that?
        Mr. Baldwin. The Federal Reserve has the ability to do
    that, through a CBDC approach. There are also private sector
    approaches that could also work, such as the stablecoin.
        Mr. McHenry. Okay. Mr. Fanusie, in one of your papers on
    China's digital currency, you explain that the eCNY will enable
    the CCP to yield punitive control power over Chinese citizens,
    in tandem with a social credit system. So, explain that to us.
        Mr. Fanusie. Well, it is because the eCNY, the digital
    yuan, is just one small part of a broader data strategy that
    the CCP has. It is really about integrating all aspects of
    data, everything that the government can have its data and can
    gain data from, and to utilize it. And whether it is the social
    credit system, whether it is anti-money laundering, political
    corruption and graft, they are trying to develop a system where
    the government is able to use that. And the key thing is to use
    financial infrastructure in a way that right now is a little
    bit--it is not as streamlined. So, if China now wants to--
        Mr. McHenry. But you said, ``punitive.'' What do you mean
    by, ``punitive?'' This isn't just data flows and we want to
    analyze it and understand our economy. Could this potentially
    be to disappear someone, to freeze their assets?
        Mr. Fanusie. It is possible if that is what the state, the
    Chinese government wants to do, yes, it is very possible.
        Mr. McHenry. Okay. We know the story of H&M disappearing
    from all digital aspects in China overnight, out of criticism.
    Now, we see what happened to Jack Ma. We have seen what
    happened with DiDi. These are very public things that we know
    about, as Americans.
        So, Mr. Baldwin, Mr. Fanusie outlines how the eCNY will
    give this heightened level of information about citizens. In
    our system, our civil liberties protections are broadly
    different, and our assumptions, as Americans, are broadly
    different. So, how do we protect that, if it is an entity of
    government having those data flows, account-level data flows?
        Mr. Baldwin. Personal level information needs to be
    anonymized on the system.
        Mr. McHenry. Okay. Could stablecoins address this, a
    variety of different stablecoins in a regulated environment?
        Mr. Baldwin. Yes. The approach I outlined--
        Mr. McHenry. Okay. A number of the attributes of a central
    bank digital currency.
        Mr. Baldwin. The approach I outlined in my written
    testimony describes several competing stablecoins. This
    information is going to be spread across multiple private
    sector entities, and from on-chain blockchain perspective, the
    consumer data would be anonymized. So, you would be seeing
    wallet transfers between the different wallets, that would
    completely anonymize consumer information.
        Mr. McHenry. Okay. Right now, we have a painted system
    domestically. We are talking about the Fed and the clearing
    house having redundancy, having two payment systems, right?
    This raises a question: Could a variety of stablecoins create a
    competitive force, market force, domestically, that could get
    to the question that Mr. Levin raises about really the payments
    for the barber shop? Are there attributes of a stablecoin that
    could better do that than a central bank digital currency?
        Mr. Baldwin. A stablecoin could be implemented on top of
    current infrastructure, so it could speed up, on the back end,
    settlement processes. So, if you are looking at a retail
    provider who is using a Square app, and has a 3-percent fee, a
    stablecoin provides the ability to accelerate the transactions
    and lower the cost on the system, so it benefits the consumer.
        Mr. McHenry. Okay. This is a fantastic panel. Mr. Chairman,
    thank you for this balanced panel, because Mr. Fanusie is
    talking about the international implications. If we don't move,
    as Americans, international settlements, remittances could go
    to a regime that we would not like. But domestically, Mr. Levin
    raises this question of payments and the cost of payments.
        So what I am hearing from this--and tell me if any of you
    disagree--is that we have two separate issues we have to
    wrestle with, a domestic question and an international
    question. Does anyone disagree with that? And, therefore, we
    could take two separate approaches on international and
    domestic. Does anyone disagree with that?
        Okay. I would love to hear your comments in written form,
    if you would, about the nuances of what I have missed. But my
    time has expired. Ms. Friedlander, I would love to hear your
    comments in written form.
        Thank you, Mr. Chairman.
        Chairman Himes. The gentleman's time has expired. The
    witnesses are invited to respond to the ranking member's
    question in written form.
        With that, the gentlewoman from Pennsylvania, Ms. Dean, is
    now recognized for 5 minutes.
        Ms. Dean. Thank you, Chairman Himes, and thank you to our
    witnesses for sharing your expertise with us today.
        Ms. Friedlander, I am thinking in terms of my own
    constituents in the Pennsylvania 4th, so suburban Philadelphia.
    This might all sound like gobbledygook to them. Could you help
    me out and describe, more specifically, how a central bank
    digital currency can help expand financial access to them, to
    some who are underbanked, unbanked, to some who are poor, to
    minority communities who are struggling with access to
    financial institutions?
        Ms. Friedlander. Thank you, and I will try to get at the
    Congresswoman's question in the course of this.
        Central bank digital currency, or a fiat-backed stablecoin,
    both have the ability to accelerate the pace of payments. Think
    about if you are trying to move money from Bank of America to
    Chase, or whatever. It takes days. Or, never mind
    internationally. This has turnover costs and dead-weight loss
    for the broader economy.
        What you are saying to an underserved individual is that
    you are going to have negligible or no cost of transaction, and
    you will be paid either from a financial services provider, or
    if you are receiving government benefits, instantaneously
    overnight.
        Ms. Dean. Thank you very much. What lessons, Ms.
    Friedlander, could we learn from the design of other CBDCs like
    the Sand Dollar in the Bahamas?
        Ms. Friedlander. I think it is important to understand that
    each country is designing and implementing a CBDC for a
    different purpose. So in the case of the Bahamas, as you note,
    it is a financial inclusion issue, after natural disasters
    getting payments to individual islands at rapid speed. If you
    are talking about a country like Sweden, for example, which
    monitors an autonomous currency that is pegged to the euro, it
    is more of a question of, what role is a cryptocurrency or
    stablecoin going to play in monetary policy, monetary
    sovereignty?
        For the United States, it really is that question of
    speeding up the speed of transactions between financial
    services providers. We have a very complicated financial system
    in this country. It is regulated on the Federal level, on the
    State level, and on the local level, and providing some
    clarification on that and streamlining will be very valuable to
    the consumer. And I am sure that some of my colleagues here
    might agree and elaborate more.
        Ms. Dean. Okay. Terrific. Dr. Coronado, in your testimony
    you touch on the idea--and this is something that I had
    introduced during the COVID pandemic and the economic
    collapse--of automatically triggered quarterly economic impact
    payments in times of financial downturn. Others on this
    committee have been working through some other types of
    automatic payments. You touch on this in your testimony as
    well.
        With your concept of recession insurance bonds, could you
    describe what design features of a CBDC currency could increase
    the ease, the ability for the Federal Government to supply
    payments to the American people, to the point that Ms.
    Friedlander was just making?
        Ms. Coronado. Thank you. Yes. We have seen that cash
    payments can be very effective in stabilizing demand in the
    economy. Having a CBDC and a system of digital accounts that is
    more inclusive would meant that it is almost instantaneous,
    that you could get cash to households, and that you would have
    certain--Congress could provide the structure in terms of
    limiting it as a percentage of GDP, or requiring certain
    triggers, like first, the Fed must cut rates to zero, or some
    kind of recessionary indicators. But then you could get those
    cash payments out.
        And I think one of the things we also believe is that it
    might also reduce the need for the Fed to engage in market
    interventions like buying corporate bonds, or some of the
    extraordinary Facilities that were developed during the COVID
    crisis. If investors know that cash is going to households and
    that demand will be stabilized, then one of the benefits is
    that that will calm markets as well. So, it will both benefit
    consumers and probably limit the need for both the Fed and
    Congress to act in other ways.
        Ms. Dean. And an important reminder of the important
    stimulus that we did send out through the CARES Act and other
    measures, and then, of course, with the American Rescue Plan,
    and how that cash is helping stimulate the economy.
        Dr. Levin, I will end with you. Sorry, I have very little
    time. Could this system of CBDCs be useful in small businesses,
    at times of economic downturn? You were talking about these
    very traditional, entrepreneurial small businesses. So for
    households, and small businesses, during an economic downturn,
    how do CBDCs play into that?
        Mr. Levin. I think that it was tragic last year when the
    pandemic hit, and Congress acted very quickly and appropriately
    to try to help people who were thrown out of work, and families
    who were hit really hard. And yet, because many of those people
    were unbanked, there were weeks that went by for those checks,
    paper checks, to be sent out by Treasury in the mail, and for
    people to receive that check and then have to find somewhere to
    cash it. That was very sad. We have to make sure that doesn't
    happen again the next time around.
        So I think, again, part of this urgency here of creating a
    digital dollar is to help make sure that when there is that
    kind of economic or financial emergency, or public health
    emergency, that we can get assistance quickly to small
    businesses, too, of course, because--
        Chairman Himes. The gentlewoman's time has expired.
        Mr. Levin. I'm sorry.
        Ms. Dean. Thank you, Mr. Chairman. And I thank the
    witnesses very much for your testimony.
        Chairman Himes. The gentlewoman yields back. The gentleman
    from Texas, Mr. Williams, is now recognized for 5 minutes.
        Mr. Williams of Texas. Thank you, Mr. Chairman. And I want
    to thank all of our witnesses for coming before us today to
    answer some of our questions about digital currency and to give
    us a better understanding of the costs and benefits of creating
    a new form of the U.S. dollar.
        I am in the car business, so I need to know this. It seems
    like if we move forward with creating a digital currency, it
    would need a lot of additional background support. The Bureau
    of Engraving and Printing alone has 1,500 employees, from
    support staff to the energy and computing power, to the
    cybersecurity necessary to keep all of the infrastructure
    secure. This does not appear to be a simple endeavor. And I
    want to try to get an estimate of the costs of making this a
    reality.
        So, Mr. Baldwin, how big of an expansion of government
    would it take to create a functional digital currency?
        Mr. Baldwin. It would require a large stand-up at the
    Federal Reserve, or an operational office, such as Treasury's
    Fiscal Service.
        Mr. Williams of Texas. Bigger government.
        Mr. Baldwin. Larger government.
        Mr. Williams of Texas. Okay. The private sector already has
    a few different stablecoins that mimic what the Federal Reserve
    is considering creating. Whenever I hear the government is
    going to come in and create a competition or product or provide
    a similar service to the private sector, it really makes me
    wonder if it is necessary for the government to get involved at
    all, because sometimes that really messes things up.
        Ms. Friedlander, can you talk about what is necessary for
    the Federal Reserve to create a digital currency when there are
    already alternatives in the private sector?
        Ms. Friedlander. I would argue that there is a bit of a
    false dichotomy, perhaps, an either/or scenario, between the
    CBDC and the stablecoin. There are feasible uses for each that
    would fulfill different roles in the U.S. economy. If you are
    talking about retail sales, maybe you want to use a stablecoin.
    You are paying for something. But I find it hard to imagine
    that receiving government benefits would be effectuated by a
    private entity like that and would be much better served by the
    central bank, by the Fed. That is not to say that the private
    sector wouldn't be key in the design and consumer framework for
    implementing and deploying the CBDC.
        So, what we are really looking at is a complementary
    ecosystem here where both can serve efficient purposes.
        Mr. Williams of Texas. Okay. I have met with some companies
    and organizations in my district back in Texas that have
    described how cryptocurrencies are already transforming the
    payment space. I spoke with one individual who was about to
    transfer some of his wages into digital dollars and send some
    of his earnings back to his family in Honduras. This cross-
    border transfer was able to happen quickly and without any high
    fees.
        All of this innovation is happening in the payment space
    without the government having their own digital dollars. So,
    Mr. Baldwin, do we risk stifling some of this progress if we
    create our own digital currency?
        Mr. Baldwin. I could see the two processes working
    together, but ultimately, private sector innovation has led to
    the core technology that is enabling the discussion that we are
    having today. It is the coins, the blockchain technology which
    has allowed the potential for CBDC and a stablecoin approach.
    So, it is private sector innovation that has developed these
    new technologies that we are leveraging for more noble
    purposes.
        Mr. Williams of Texas. Private sector is still the best,
    isn't it?
        Mr. Baldwin. Yes, sir.
        Mr. Williams of Texas. Thank you. Mr. Chairman, I yield
    back.
        Chairman Himes. The gentleman yields back. The gentleman
    from Massachusetts, Mr. Auchincloss, is now recognized for 5
    minutes.
        Mr. Auchincloss. Thank you, Mr. Chairman, and to our
    assembled witnesses. As I was reading the material for this
    hearing, I found the case for CBDCs for geoeconomics and
    strategic purposes very compelling, and I understand why the
    United States needs to catch up, both to retain its economic
    leverage, and to maintain the U.S. dollar as the reserve
    currency. This makes a lot of sense to me.
        I do have some significant concerns about domestic use
    cases for CBDCs, and I think as a starting point, Ms.
    Friedlander, I am wondering if we can have a two-tiered
    approach here, if we could move ahead with a federally
    controlled digital currency for use internationally, while
    holding back on any domestic use cases until we can do more
    interrogation of that? Is that even a possible path forward?
        Ms. Friedlander. Potentially, but I would say that looking
    at the countries that are further along than we are, this is a
    revolutionary technology in the financial world, that working
    it out domestically is much more sort of biting things off as
    you can chew, on a regulatory front, especially when you want
    to then proliferate U.S.-based standards internationally. So,
    especially if the U.S. dollar maintains its role as the global
    reserve currency, you are going to want to define those
    standards at home before you deploy them abroad.
        I would not necessarily advise that approach, even if it
    were technically feasible.
        Mr. Auchincloss. Do any of the other witnesses disagree
    with that assertion, or does anybody have anything further to
    add? Dr. Levin, in the next 20 seconds?
        Mr. Levin. I will try to be brief, but I wanted to connect
    this to what Congressman Williams said. Ordinary families
    actually like using U.S. dollars. And just an example of this,
    the Norwich Farm Creamery, all of their products--ice cream,
    milk--
        Mr. Auchincloss. Dr. Levin, I apologize, but I want to get
    directly to the question I asked, whether it would be possible
    to proceed internationally without a domestic use case?
        Mr. Levin. It does make sense to start domestically,
    introduce a currency that is held in wallets, that a lot of
    people start using, and that is instant and free. And then, it
    would develop cross-border transactions to facilitate
    internationally.
        Mr. Auchincloss. Mr. Fanusie?
        Mr. Fanusie. Yes. I will just add that I think it is a
    practical question. If we are going to go to international
    discussions, what do we bring to the table? Other countries,
    China, what do they have? You think about all of the pilots
    that they have. With those pilots, there is a massive amount of
    data and analysis. They are learning. They are iterating.
        So, if we are in the forum, and it is a bunch of countries
    across the table's central banks and China puts all this data,
    all these examples of how its trials have worked domestically,
    well, what do we have? Just theoretically how should things
    work?
        Mr. Auchincloss. Wouldn't we have that we are currently the
    reserve currency, and thereby, there is a tremendous benefit of
    adoption to the digital dollar?
        Mr. Fanusie. Yes, you are right. There was always going to
    be a place at the table for the United States. The Fed is going
    to have a place at the table. We will have a place at the
    table. But I say as a practical matter, these are computer
    science and data issues. We would really have to be able to get
    into the weeds about models, about proposals, and there a are
    whole bunch of policy questions that you have to answer,
    because you start doing the technical research.
        Mr. Auchincloss. Taking that as a jumping-off point in this
    final minute, Dr. Coronado, my principal concern with the
    domestic use case really is the blurring of the line between
    monetary and fiscal policy. I think this builds on what Mr.
    Barr was alluding to before he ran out of time. As I was
    reading some of these memos, with these direct monetary
    transfers, for example, from the Fed to individuals, this
    strikes me as fiscal policy, not monetary policy. And I just
    have real concerns about an organization as insulated--and it
    is designed as such--but as politically insulated as the Fed
    taking over fiscal policy from Congress.
        Ms. Coronado. Let me clarify. I don't think it is fiscal
    policy. I think it is a better form of monetary policy. That
    line was already blurred during the COVID crisis when the Fed
    extended direct lending to a number of sectors in the economy,
    and crossed a number of lines because the economy required it.
    And what this would do is just give them a better tool to get
    at the root of the problem, which is consumers themselves. Why
    do you need to stabilize markets from going into tailspins
    because markets are fearful of consumers, of the economy
    collapsing? So if you can provide that backstop--and again,
    Congress can write the rules here. You can put guardrails on
    this. But it is classic monetary policy. It is Milton
    Friedman's helicopter drops.
        So, I don't agree that that is the critique here. It is
    just money creation in a far more efficient way, and I will bet
    that we will not have to expand the balance sheet nearly as
    much if you give the Fed a tool like this. Four trillion
    dollars we have expanded it over the last 18 months.
        Mr. Auchincloss. I am out of time. Mr. Chairman, so I yield
    back.
        Chairman Himes. The gentleman's time has expired. The
    gentleman from Arkansas, Mr. Hill, is now recognized for 5
    minutes.
        Mr. Hill. I thank the chairman. And thank you to the
    witnesses. It has been a very good, diverse, and interesting
    panel, and we appreciate everybody's participation. I have
    certainly been talking about this concept of a central bank
    digital currency for over 2 years now, and trying to ask the
    best people around the world to think about it.
        In 2019, my friend on the other side of the aisle, Bill
    Foster, and I wrote the Fed and the IMF about what their
    initial views were on a central bank digital currency and what
    their efforts were to move it forward. And I think Mr. Foster
    and I, in the summer of 2019, found that they were not
    interested. I think now, in the summer of 2021, you see
    significant work, and as a result, we introduced legislation
    together, H.R. 2211, the Central Bank Digital Currency Study
    Act, earlier this year, which would require a study and report
    by the Fed and other U.S. financial institutions about the
    impact a digital currency might have on our financial system
    and the economy. And we certainly look forward to that bill
    moving forward.
        Likewise, I have introduced legislation with our chairman,
    Mr. Himes, H.R. 3506, the 21st Century Dollar Act, to make sure
    that the U.S. Government has a strategy to ensure that the
    dollar remains the primary global reserve currency. And
    clearly, the topic we are discussing today indicates how this
    will play some future role in that.
        The international standing of the dollar should always be
    at the forefront of our minds in the development of a digital
    currency, whether it is a CBDC or some other kind of stablecoin
    option.
        I would like to ask my friend, Mr. Himes, if he thinks our
    bill, H.R. 3506, and Mr. Foster's bill, H.R. 2211, might be
    eligible for markup in the House Financial Services Committee.
        Chairman Himes. I thank Mr. Hill, and I think both bills
    are important, they are bipartisan, and forward-looking, so I
    will push the chairwoman of the committee to bring them
    forward.
        Mr. Hill. I thank my friend from Connecticut for that, and
    for his leadership of this subcommittee.
        Personally, I am concerned about this direct account issue.
    I am not there yet. I like the idea that there is a blockchain
    pay rail out there and that it is a dollar-based digital
    currency that America's Congress and Treasury have authorized.
    But I am still thinking--I am open to what those intermediaries
    on that blockchain rail look like, but I am not yet sold on the
    idea of direct accounts, personally. But this conversation is a
    big part of that thinking, and as I said, I am grateful for
    your contributions.
        Mr. Baldwin, do you think it is important, as we think
    through the central bank digital currency idea, that we make
    sure that the dollar, that is a strategic part of the
    discussion, that the dollar we work to make sure it remains the
    reserve currency for the world?
        Mr. Baldwin. Absolutely. The dollar is the reserve currency
    of the world. It provides us so many benefits, ranging from the
    ability to conduct fiscal policy on an expanded basis, in
    addition to our sanctions authorities.
        Mr. Hill. And with your experience at Treasury, I know you
    have studied uses of blockchain from a national security point
    of view as well, and in the past, blockchain analytic tools
    have been successfully employed by cryptocurrency businesses
    and financial institutions to mitigate risks related to
    traditional cryptocurrencies and to enable them to meet their
    AML currency reporting transactions. Can you talk a little bit
    about that?
        Mr. Baldwin. Yes. It is an example of private sector
    innovation. The blockchain space has been around for
    approximately 10 years, and when it first came out, there were
    a number of questions surrounding how we will be able to trace
    these things. But the thing is, they are all in a public
    ledger, and as a result there have been a number of firms that
    have stepped up to the plate and have developed the capacity to
    go and analyze blockchain transactions, and they are able to
    follow the on-chain transactions and find flows to elicit bad
    actors. In the case of the Colonial Pipeline incident and
    hacking, the FBI was ultimately able to track down the funds
    and recover them.
        Mr. Hill. And likewise on sanctions circumvention, this has
    been a good topic today. We have talked about that. The same is
    true there, where blockchain analysis can be used to not allow
    sanctions to be violated.
        Mr. Baldwin. Yes. Analysis of host wallets that are in
    foreign countries, such as Iran or North Korea, could track
    payments and prevent payments from going to certain places.
        Mr. Hill. I thank the chairman, and I yield back.
        Chairman Himes. The gentleman yields back. The gentleman
    from Massachusetts, Mr. Lynch, is now recognized for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. This is a great
    hearing. Thank you to all of our witnesses. This has been very,
    very helpful.
        Dr. Coronado, you mentioned in your opening statement that
    the way that the U.S. dollar became the global reserve currency
    is a long story, and it really involves a lot of factors. I
    would guess that one of those factors is [inaudible].
        Mr. Chairman, I am getting a lot of interference. Is
    something wrong with the technology?
        Chairman Himes. We will just suspend the clock for a
    moment. Let's see if we can improve the audio quality, or at
    least the volume. Mr. Lynch, we will give you back 15 seconds.
        Could the witnesses hear Mr. Lynch?
        Ms. Coronado. Barely.
        Chairman Himes. Okay.
        Mr. Lynch. Dr. Coronado, one of the reasons that we have
    the global reserve currency in the U.S. dollar is because of
    the rule of law that we have here in the United States,
    independent judiciary. There are a lot of reasons that people
    trust the dollar, including the reliability of our elections
    and the fact that we have a peaceful transfer of power every 4
    years.
        So when we talk about a digital yuan versus a digital
    dollar, and we recognize that China probably has more data on
    their individual citizens than any nation on earth--facial
    recognition is widely used for oppressive reasons--this digital
    yuan would give China a more granular level of surveillance of
    financial activity in the country, would it not?
        Ms. Coronado. Yes.
        Mr. Lynch. So, Mr. Baldwin, how do you think we post up
    when we compare a potential U.S. digital dollar versus a
    Chinese yuan, digital yuan?
        Mr. Baldwin. The U.S. system overall is much more
    attractive to international partners. We have rule of law, as
    you mentioned, we have settlements in courts, and we also have
    a history of responsible monetary policy. The Chinese Communist
    Party has a lot of structural issues with its potential digital
    yuan. That includes concerns about monitoring, concerns about
    overstep and controlling payments going to certain individuals,
    and even structural issues such as capital controls.
        Mr. Lynch. Very good. Right now, we have about 200
    stablecoins that are available, the most popular anyway. All of
    those are pegged in some way to a more stable fiat currency.
    And the recommendations of the OCC and the SEC were that there
    should be a one-to-one digital stablecoin to a stable fiat
    currency, such as the U.S. dollar.
        But recently we discovered that Tether, which is one of the
    most popular so-called stablecoins--their reserves are being
    held in commercial paper, which we have seen repeatedly, the
    liquidity of which disappears in times of stress.
        So, Mr. Baldwin or, perhaps Dr. Coronado, is the way we
    design this important? And I know it is taking more time than
    any of us would like, but is it important that we try to, I
    guess, include that stability that the dollar enjoys in the
    design of our digital dollar?
        Mr. Baldwin. Yes. The design of a stablecoin is extremely
    important, and the reserves backing it, and the auditing
    standards of those reserves are extremely important. The
    company you mentioned operates as a money service business.
    That is a State-by-State regulatory authority that does not
    have as much scrutiny as a traditional financial regulator
    would.
        In the State of New York, the New York Department of
    Financial Services oversees stablecoin regulations, and you see
    much more responsibly reserved firms providing stablecoins in
    that State.
        Ms. Coronado. I will add that I don't see any benefit from
    not having full reserve backing from a Federal Reserve digital
    currency. If what we are looking for here is the advantages of
    technology combined with stability, why would we not have 100
    percent reserve-based digital currency, and then what the
    providers, the stablecoins provide is the innovation on the
    technology front?
        Mr. Lynch. Thank you very much. Mr. Chairman, my time has
    expired. I yield back. Thank you.
        Chairman Himes. The gentleman yields back. The gentleman
    from Ohio, Mr. Davidson, is now recognized for 5 minutes.
        Mr. Davidson. Thank you, Mr. Chairman. Thanks for holding
    this hearing. I appreciate our witnesses.
        Where Mr. Lynch left off, the architecture and design is
    very important. We all recognize the importance, and frankly,
    the power that it gives the United States to have the world's
    global reserve currency.
        As I listen to people put emphasis on that, though, I
    wonder whether each of our witnesses thinks it is more
    important that the U.S. dollar is the global reserve currency
    or that the United States has sound money. Sound money or
    global reserve, Mr. Baldwin?
        Mr. Baldwin. I think they operate in accordance, together.
        Mr. Davidson. Dr. Coronado?
        Ms. Coronado. Yes, they go hand in hand.
        Mr. Davidson. That is why we became the global reserve
    currency. Dr. Levin?
        Mr. Levin. I agree. In fact, just to elaborate on what Dr.
    Coronado said earlier, we need to--
        Mr. Davidson. Sound money or global reserve?
        Mr. Levin. Again, they go hand in hand.
        Mr. Davidson. One and both. Mr. Fanusie?
        Mr. Fanusie. I agree. Both.
        Ms. Friedlander. Yes.
        Mr. Davidson. Okay. We want them both.
        We could really debate whether we actually have sound money
    or not, but I think we are doing a nice sample pack of modern
    monetary theory. There is no lender for this helicopter money
    that Dr. Coronado referred to. We are actually destroying the
    dollar, which is why there has been an interest in things that
    aren't U.S. dollars. It has created asset price inflation in
    our stock markets. People have fled cash reserves for anything
    but cash. Wise folks have recognized--Ray Dalio said well
    before the coronavirus that, ``cash is trash.'' Not because the
    U.S. dollar is bad, but because the monetary policy is bad. We
    are destroying the dollar with our fiscal policy, and Dr.
    Coronado, integrating fiscal policy with it is horrific.
        So the real question is, when you look at what is happening
    with the central bank digital currency, some of the aficionados
    for this, when I hear Mr. Fanusie laud the Chinese, it almost
    seems like there is a coveting of the power that China would
    have by being able to create this really creepy surveillance
    tool, by being able to know everything about every person,
    including every transaction, and frankly, the ability to filter
    those transactions, for the power of the state. I guess if you
    are a statist, you would actually love that tool.
        And if you look at the things that Dr. Coronado is talking
    about, and Dr. Levin referenced to perfect the monetary policy,
    you could give the Fed more power than they already have, as
    the most powerful central planner that we have, to distort the
    economy. And frankly, if you want to perfect negative interest
    rates, you make sure that people can only hold digital
    currencies, because you can destroy the holdings. You can put
    expiration dates on people's dollars.
        So, these are tools that people are proposing. They are not
    said here in public, but they have been mentioned at the Bank
    of International Settlements. This is not something that I
    think we should seek to do, to empower the central bank to do
    these things, but I think about, how did we come to have this
    conversation? We largely had it because someone under the
    pseudonym, or some people under the pseudonym, Satoshi
    Nakamoto, created bitcoin. They made the blockchain secure
    architecture, widely known and widely used and very attractive
    for its features.
        So, when I talk about the features, it is a true
    distributed ledger technology. It allows some level of privacy.
    And as we have talked about, the challenges for the payment
    system, all of these things are already happening, Dr. Levin.
    They are already happening. They are happening without a
    central bank digital currency. That is part of the beautiful
    nature of crypto. Stablecoins, like Paxos Gold, for example,
    are stable, and we don't have to have Federal Reserve accounts
    to track the value of gold.
        So if you look at this--let me just go down the line
    quickly--is the permissionless nature of bitcoin a feature or a
    flaw? Mr. Baldwin?
        Mr. Baldwin. A feature.
        Mr. Davidson. Dr. Coronado. Don't know. Dr. Levin?
        Mr. Fanusie. Bitcoin is expensive to use and it is slow.
        Mr. Davidson. Okay. So you see it as a flaw. Mr. Fanusie?
        Mr. Fanusie. It is a feature and a flaw. It can be a flaw,
    yes.
        Mr. Davidson. Okay.
        Ms. Friedlander. Same. Feature and flaw.
        Mr. Davidson. Okay. So, it is not a perfect tool. I don't
    think that the Fed is going to perfect it unless they find a
    way to keep it permissionless.
        I yield back.
        Chairman Himes. The gentleman yields back. The gentleman
    from New York, Mr. Torres, is now recognized for 5 minutes.
        Mr. Torres. Thank you, Mr. Chairman. COVID-19 has shown us
    the fragility of the American social safety net, a fragility
    that stems from a lack of automatic stabilizers. A CBDC, it
    would seem to me, would fill a critical void. It would
    radically reduce the length and depth of future recessions. It
    would bring instantaneous stability to hundreds of millions of
    Americans in times of economic instability.
        I know there are concerns, but it seems to me the
    systemwide stability that it would bring outweighs all of the
    cost. Mr. Levin, do you have any thoughts?
        Mr. Levin. I just want to say again here that for decades,
    normal people in small businesses used U.S. dollars. We have
    stable money, not all the time. We had a Great Depression that
    was horrible and prices dropped 30 percent. It is critical for
    the Federal Reserve to be able to make sure that never happens
    again. But people like being able to use dollars. I think the
    Federal Reserve can create a digital dollar that people who
    want to can hold it and use it. We believe in civil liberties--
        Mr. Torres. But my question is, would it make the economy
    more resilient?
        Mr. Levin. Yes, it would, of course. We talked about this
    before. And it would help make sure that emergency assistance
    to families and small businesses--
        Mr. Torres. And I just want to interject for a moment. What
    are the benefits and costs of a one-tier CBDC model versus a
    two-tier model?
        Mr. Levin. Okay. I think--
        Mr. Torres. As succinctly as you can.
        Mr. Levin. Okay. I will try. I think it is critical to have
    a public-private partnership, which is what maybe you are
    referring to as a two-tiered system. The Fed creates reserves
    that the wallet providers can hold, 100 percent reserves. But
    the wallet providers are competing with each other, and in that
    sense, it is not so far from what Mr. Baldwin described as the
    stablecoin kind of competition, except every stablecoin has 100
    percent reserve backing. They are all called digital dollars.
    They don't have to be called Stablecoin 1 and Stablecoin 2. But
    that is tier two, and that is the best system, a public-private
    partnership with competition among providers.
        Mr. Torres. One of the pillars of America's prosperity is
    the primacy of the dollar. What implications would the rise of
    CBDCs have for the dominance of the dollar, and what does that
    mean for the American economy in the long term? Mr. Fanusie, do
    you have any thoughts?
        Mr. Fanusie. Short term, long term, and it depends on how
    we navigate the CBDC environment. I think most of us actually
    agree--especially the economists--that CBDCs, in the short
    term, are not going to displace the U.S. dollar, for all of the
    reasons that we have been discussing. And I think the broader
    issue is, what will be the role of the dollar in an environment
    where there are CBDCs, that they proliferate, and that they are
    more popular for cross-border use? You could think that maybe
    the Sputnik moment would be, if we are going to look for one,
    the Sputnik moment might be when we see those first retail
    CBDC-to-CBDC transactions happen successfully, not just, ``in
    the lab.''
        Mr. Torres. I want to interject. Cybersecurity. In the
    first half of 2021, we have seen an explosion of cybercrimes in
    general, and ransomware, in particular--the Colonial Pipeline,
    JBS, even the New York City Law Department. Cybersecurity
    Ventures projects that the cost of cybercrime could reach as
    much as $10.5 trillion by 2025.
        What impact would CBDCs have on what appears to be the
    exponential trajectory of cybercrime and ransomware? It seems
    to me the use of centralized ledgers, in particular, by
    authoritarian regimes, would be a dream come true for cyber
    criminals. So what does this mean for cybersecurity? Mr.
    Fanusie, do you want to--
        Mr. Fanusie. It absolutely raises the risk. This is
    probably one of the features that hasn't been studied, because
    we are at such an early stage of discussing CBDC design. But
    this would absolutely be one of the most critical risk areas.
        Ms. Coronado. Can I add, though, that it is also an
    important benefit, because right now what we have seen, both
    through the cyberattacks and the lack of payments in the
    crisis, is that we don't have a digital infrastructure. And
    allowing the Fed, or mandating that the Fed move forward with a
    digital currency would require an investment in that
    infrastructure that would bring huge benefits. We don't have
    best practices. We don't have resiliency. We don't have
    agencies that are tasked with this. And that leaves us more
    vulnerable, and this sort of multiple agencies, and the FBI
    getting involved. If the Fed is backing a digital currency, you
    can be sure they are going to have a lot of investment in the
    resiliency and the technology.
        Mr. Torres. My time has expired. Thank you.
        Chairman Himes. The gentleman yields back. The gentleman
    from Texas, Mr. Sessions, is recognized for 5 minutes.
        Mr. Sessions. Mr. Chairman, thank you very much, and to our
    panel, thank you for taking the time to be with us today.
        Mr. Davidson led us through what tried to be a lightning
    round, so perhaps I want to continue that.
        Dr. Coronado, is this about the underserved, the new
    generation, or an international race?
        Ms. Coronado. All of the above.
        Mr. Sessions. Today we have, by and large, through the
    central bank and through the free enterprise system, something
    that we have a system that is safety and soundness. It sounds
    like, to me, as we aggregate all this, that someone would have
    an account through a transaction. Does that extend credit to
    them also?
        Ms. Coronado. In our proposed system, it would not. It
    would be limited to retail payments only. There would not be
    credit extended. It would not be a fractional reserve system.
        Mr. Sessions. In other words, what you are suggesting is
    that the cash that exists in the account or on a card would be
    what they would be extending.
        Ms. Coronado. Yes.
        Mr. Sessions. It sounds to me that the risk to the central
    bank is low.
        Ms. Coronado. The risk to the central bank from--
        Mr. Sessions. Well, you can only have an account with money
    in it, and you can only exchange the money that you have.
        Ms. Coronado. Right.
        Mr. Sessions. So this really is, in my opinion, as you
    suggest it is, for a new generation.
        Ms. Coronado. Right.
        Mr. Sessions. It is for the underserved, and it is to make
    sure that the American system would be one that is resilient
    but that would be based on day-to-day opportunity, not long
    term, of spending.
        Ms. Coronado. Correct. I do definitely see it as an
    enhancement to safety and soundness, that we don't really have
    a choice. We are losing it, as we speak.
        Mr. Sessions. So in other words, really what this is about
    is to make sure that--we hear these stories, or I have in my
    past, about Africa, that you have a good number of people who
    may be out in a rural area, and they still need to be able to
    have transactions. That is really what this is about.
        You had spoken about what is the biggest challenge. What is
    the biggest challenge?
        Ms. Coronado. To implementation?
        Mr. Sessions. You are the one who said we have--earlier in
    your testimony, you referred to a big challenge.
        Ms. Coronado. I think the big challenge right now is the
    lack of digital infrastructure, and that the world is moving
    ahead while we are standing still. So both in terms of the
    cybersecurity issues and the payment innovation issues and the
    global transaction issues are all moving ahead and we are not
    moving with it. That creates a great challenge to safety and
    soundness, both domestically and the reserve currency status
    that we enjoy. So I don't think it is an option to stand still.
    I think we need to be engaged, and not only be engaged but play
    a leadership role in this.
        Mr. Sessions. Would you see that as the maturity of this
    takes place, that a person who is in an underserved area or who
    does not have an account would walk into a bank or a credit
    union or some financial institution and just use it like a gift
    card, as a one-time use? Is that the way you see this?
        Ms. Coronado. There are different ways. There is the
    account-based, in which would be a transactional account, where
    you are moving the money around different accounts. And then,
    there is sort of a token system. I think the Sand Dollar has
    both, and you could do a system of both.
        I think that primarily, the U.S. would be an account-based
    system, just because you are going to need those digital
    payment providers to provide some of the know-your-customer and
    anti-money laundering oversight for these accounts, I think.
    But there could be an additional sort of tokenized card feature
    to it as well.
        Mr. Sessions. Good. I think this clarity has been very good
    for me to understand, actually, that it would be something
    where someone would have an account. It would be offered with
    the bank, but it would be an account that we would not be
    extending credit but it gives them an opportunity to use it in
    the marketplace.
        Mr. Chairman, thank you for the time. I yield back.
        Chairman Himes. The gentleman yields back. The gentlewoman
    from New York, Ms. Ocasio-Cortez, is now recognized for 5
    minutes.
        Ms. Ocasio-Cortez. Thank you so much, Mr. Chairman, for
    convening this hearing, and thank you to our witness panel for
    being with us today.
        I want to take the time today to explore some of the
    implications of central bank digital currencies for folks kind
    of following at home. A digital dollar would resemble, in
    certain ways, cryptocurrency, such as bitcoin or Ethereum, in
    certain limited respects, but in different, very important ways
    as well.
        Dr. Levin, rather than a tradable asset with wildly
    fluctuating prices that we see in certain crypto markets, and
    limited real-life use as a currency, a central bank digital
    currency would function more like dollars and have more
    widespread acceptance, presumably. Correct?
        Mr. Levin. Right. The point is that the central ledger, in
    an electronic world, you can have instant, free, secure
    transactions. That is why, coming back to this other thing,
    when I think about the digital world, like cellphones, we don't
    say, ``Well, is this for work or is it for home?'' It is for
    everything. And so, it is all of the above.
        And so absolutely, having a free, safe, secure, instant
    transaction platform that every American can use is what we
    should have had already, and we need it now.
        Ms. Ocasio-Cortez. Great. Thank you. And just to clarify,
    it would also be fully regulated under a central authority,
    right?
        Mr. Levin. I think there has been some agreement among a
    number of us at this table that the issue would be 100 percent
    backed by reserves held at the Fed. So, there is no concern
    that the stablecoin provider might go bankrupt, and then there
    is a panic--
        Ms. Ocasio-Cortez. Thank you. I'm sorry. I just have
    limited time.
        Economists like Claudia Sahm have--and as we have heard
    throughout the hearing--agreed that direct stimulus payments
    like the checks that Americans received during the pandemic can
    shorten recessions. And although stimulus payments helped
    stabilize the economy during the pandemic, delivery was
    sometimes slow. And even the IRS and the Treasury just
    announced last week that 2.2 million stimulus payments were
    made in late July. These were the stimulus payments that people
    got months ago, after the original passing of the American
    Rescue Plan.
        This is not because of technical payments getting lost in
    technology or bureaucracy; it is because the most vulnerable
    people in our society are the hardest to reach, people who
    don't have consistent mailing addresses, people who are
    unbanked, a lot of times because it is too expensive to be
    banked, people who don't file taxes because they make too
    little money. And these are real issues.
        And so my question is with the CBDC; it is all about the
    design. It is not just the idea. It is the execution, design,
    and implementation. My question is, in that similar vein, what
    would make a well-designed CBDC system that helps overcome some
    of these existing issues that we have seen with banks and with
    just the delivery of stimulus checks? Ms. Coronado?
        Ms. Coronado. One of the key pieces of the design is that
    the lower-income households should have no fees whatsoever to
    engage, and that some of the technology access questions would
    be part of the infrastructure that is built. And whether that
    is a digital card that they are provided, or kiosks, some sort
    of access to their accounts that is free and built and
    available to them to engage in the transaction space.
        Ms. Ocasio-Cortez. Got it. And there has been some
    discussion, even most recently, and we heard in the last few
    minutes, about two-tier system. And Dr. Coronado, in your
    testimony you state that, ``Preserving a two-tier system of
    private providers would promote competition and end continued
    innovation, while Fed oversight would promote that safety and
    soundness.''
        Now, by two-tier systems, you are referring to how certain
    banks, like Wells Fargo, Bank of America, or JPMorgan, can bank
    with the Federal Reserve but regular Americans cannot. Right?
    That is what you are alluding to? Okay.
        I just want to be clear here, just for clarification. There
    is no legal, technical, or operational requirement as to why
    banks or private payment companies need to be involved.
    Correct? In other words, the Federal Government could provide
    public digital currency services directly to the public if it
    wanted to, like the Postal Service?
        Ms. Coronado. Sure. Yes.
        Ms. Ocasio-Cortez. Okay. Thank you.
        I think one of the things that we are seeing here is that
    we are facing a choice. Congress is facing a choice of whether
    we want to give Wall Street another tool of being in charge of
    the public's money and payments, or whether we can potentially
    establish a public option here as well.
        One concern that we hear in CBDC conversations--my time is
    up. I am sorry that I can't get to the last question. I will
    submit it for the record. Thank you.
        Chairman Himes. The gentlelady yields back. The gentleman
    from Minnesota, Mr. Emmer, is now recognized for 5 minutes.
        Mr. Emmer. Thank you, Chairman Himes and Ranking Member
    Barr, for hosting this hearing to discuss national security,
    privacy, and competitive implications of a potential United
    States digital dollar.
        As we carry on these discussions, on and off the committee,
    we must not forget that the benefit of having a digital dollar
    would only come to fruition if it were open, permissionless,
    and private. Any attempt to craft a central bank digital
    currency that enables the Fed to provide retail bank accounts
    and mobilizes the CBDC rails into a surveillance tool, able to
    collect all sorts of information on Americans, would do nothing
    other than put the United States on par with China's digital
    authoritarianism.
        Our banks and Fintechs--that is okay; you can laugh, but it
    is real, and it is happening. You talk to the Chinese, what
    their government is doing to them. Our banks and Fintechs are
    doing a great job serving their customers and expanding access
    to financial services. It is the competitive marketplace of the
    private sector that facilitates that achievement. For this
    reason, I am deeply concerned by Chair Powell's recent comment
    before the Full Committee that the strongest argument in favor
    of central bank digital currencies is that, ``You wouldn't need
    stablecoins. You wouldn't need cryptocurrencies if you had a
    digital U.S. currency.''
        Our government should never be in the business of designing
    a tool that would wipe out an entire innovative private market,
    a market that creates far more capital and provides far more
    high-tech jobs than the government will ever be able to do.
    More than anything, cryptocurrencies, stablecoins, and other
    private-market blockchain innovations open doors to immense
    opportunities for Americans. These decentralized projects have
    an underlying code that is open source, meaning anyone can find
    it, study it, verify it, and build projects on top of it. It is
    in this way that crypto and blockchain expand opportunity for
    everyone, whether that is financial inclusion or capital
    formation or tech innovation. With cryptocurrencies, no one has
    to ask a bank or a corporation, or perhaps most importantly,
    their government, for permission to start a project or launch a
    business or get a loan. That is the way it should be.
        And, by the way, it is interesting how cryptocurrencies
    have grown as government seeks to grow ever bigger and try to
    make decisions for the public. The size and scope of government
    versus the right of an individual to self-determine is exactly
    what is pushing the development in this area. And it is great
    to have all of you here to talk about this wonderful topic, but
    I will tell you, if we don't start to figure this out and get
    ahead of it, this market is going to happen with or without us,
    and it is going to happen here or somewhere else.
        Mr. Baldwin, in your testimony, you mentioned that
    international competition is decreasing in the United States'
    role in international finance and that our lack of a CBDC plays
    into that. It is my belief that decentralized technology like
    cryptocurrencies and the blockchain technology that they sit on
    maintain a fundamental American principle, that is, individual
    privacy, a free marketplace, and competition with innovation.
    Why should the Fed focus on uplifting private crypto markets
    and blockchain innovation rather than crafting a CBDC that
    wipes out this great industry, or has the potential, according
    to Chair Powell, to wipe out the industry? Specifically, can
    you touch on how a thriving crypto and blockchain industry in
    the United States could make the United States of America more
    competitive with respect to international finance?
        Mr. Baldwin. I think the goal of this hearing is to promote
    faster, cheaper, and easier-to-use payment mechanisms. A
    private sector-led approach opens a lot of opportunities in
    areas such as micropayments. That is engineering jobs. That is
    jobs for salespeople. Creating innovations such as real-time
    payments. So if you are an hourly worker, getting paid for the
    hours you work in real time. Or if you are a music producer,
    getting paid for your streams. These previous transactions that
    are low cost were unfeasible in our current system.
        So, a private sector approach really promotes opportunities
    to innovate in different areas and have private developers see
    a need for it in the market and then go and develop the tool.
        Mr. Emmer. Mr. Baldwin, in the few seconds I have left, is
    there any reason in the world why a free market constitutional
    republic with free citizens, able to self-determine, should
    want to emulate a communist party-driven, authoritarian-type
    digital currency program?
        Mr. Baldwin. The Chinese central bank digital currency
    approach has a lot of negatives in areas such as consumer
    privacy. Any approach the U.S. takes should make sure to steer
    clear and respect the privacy of American citizens.
        Mr. Emmer. Thank you. I see my time has expired.
        Chairman Himes. The gentleman yields back. The gentleman
    from Illinois, Mr. Foster, is recognized for 5 minutes.
        Mr. Foster. Thank you, Mr. Chairman. If you are going to
    prevent digital dollars from being used for ransomware, money
    laundering, child trafficking, terrorism, you name it, is there
    any alternative to having a secure and legally traceable
    digital identity for all participants?
        Ms. Coronado. Not for the bulk of the transactions, no.
        Mr. Foster. Does any one of you believe that a digital
    dollar that can't be abused in this way can be implemented
    without having every transaction tied to a legally traceable
    participant?
        [No response.]
        Mr. Foster. So, that is pretty much a precondition for a
    central bank digital currency, having a digital identity.
        Mr. Levin. A question that I think the Federal Reserve
    should look at, and other central banks are looking at is,
    could you have a $5 prepaid card that you could take up into
    the mountains--
        Mr. Foster. So, you would have de minimis threshold--
        Mr. Levin. Yes, de minimis, okay, but I think for sure,
    once we are talking about--
        Mr. Foster. Significant amounts crossing borders
    especially.
        Mr. Levin. Absolutely.
        Mr. Foster. Okay. So it seems like the starting point for
    this is to get a digital identity ecosystem working in our
    country, and then interoperable. Because if we wish to have an
    effective means of preventing this, we have to identify people
    and say, ``You cannot use digital dollars because you are an
    identified terrorist.'' Okay? Is that pretty much going to have
    to be a feature of any system, whether it is stablecoins or
    anything else that cannot be abused?
        Mr. Levin. I think in civil liberty, no one should be
    required to have a digital identity, but if they don't have it,
    then they can't use that system.
        Mr. Foster. Okay. I agree. Does anyone disagree? Mr.
    Baldwin? So, your members are on board with having every one of
    the transactions associated with a unique, legally traceable
    digital identity for the participants?
        Mr. Baldwin. Any system needs to be in compliance with the
    Bank Secrecy Act.
        Mr. Foster. No, that is obviously not enough to prevent a
    lot of the bad things that happen. I am talking about having a
    legally traceable identity associated with each transaction.
        Mr. Baldwin. Legally associated as long as it meets with
    the rules set forward with the Financial Crimes Enforcement
    Network (FinCEN) in association with--
        Mr. Foster. But FinCEN would like the rules strengthened,
    frankly, because there are a lot of holes in the current
    system, and a lot of terrorism and child trafficking, you name
    it, ransomware. So it seems if you just look at ransomware
    alone, when your screen locks up and it says, transfer X amount
    of your digital assets into this account, you have to be able
    to go to a court system you trust, find out who is behind that
    account, unmask them, and, if necessary, get your money back.
    Is that a necessary feature of a system, the digital dollars
    that can't be abused?
        Mr. Baldwin. Responsiveness to court of law is an important
    feature.
        Mr. Foster. Well, we will get back to that. It seems to me
    that it is, and I think the rest--yes, Ms. Friedlander?
        Ms. Friedlander. Yes, and I would say an ideal system seeks
    to replicate the current KYC orchestration and system that we
    have with commercial banking now. And as you rightly
    acknowledged, there are holes in the system and there are
    things that should be strengthened, but there is a possibility
    to design this so that you would have the same access to
    information balanced by the same privacy protections as you do
    under the current system.
        What I would acknowledge, though, is that illicit financial
    actors, as you say, are very good at eluding the system as it
    currently is. So through complex legal structures, through
    high-risk jurisdictions, that is the bread and butter of money
    laundering. So, I think I would caveat when we say that a
    digital dollar, whether it be central bank-based or stablecoin,
    doesn't necessarily say that this is an instrument designed
    with the knowledge that it will increase our exposure to
    illicit--
        Mr. Foster. Okay. But we are going to need a mechanism to
    tell someone, ``I'm sorry, you cannot transact in digital
    dollars because we have identified you as an international
    gangster,'' or you name it, or a terrorist. And so really,
    operationally, we will set different standards, but it is not
    different than what the Chinese are doing. The only difference
    is we are going to designate terrorists. We are not going to
    designate Hong Kong democracy protesters as terrorists, and
    they are, and that is really the only difference. We have to be
    able to exclude participants, and we have to uniquely identify
    them as well, so that you can't be operating multiple
    identities in multiple jurisdictions.
        So really, it seems to me that is kind of non-negotiable in
    this.
        Mr. Levin. I strongly disagree. I think that a key reason
    for the two-tier system we have been talking about is to
    protect privacy so that you need a court order, a search
    warrant--
        Mr. Foster. Oh absolutely.
        Ms. Coronado. --which is very different from China. In
    China, the government wants direct control of the data.
        Mr. Foster. Correct.
        Ms. Coronado. We are creating a--
        Mr. Foster. There has to be a mechanism to unmask
    participants when malfeasance is suspected, and there has to be
    a way to de-dupe participants so you can't be using multiple
    identities in different jurisdictions. And that is not a
    feature of a lot of the stablecoins and other crypto assets,
    and I think it is going to end up having to be.
        Anyway, my time is up, and I yield back.
        Chairman Himes. The gentleman yields back. We are going to
    implement a very brief second round for the chairman and the
    ranking member to just clean up some questions.
        Mr. Foster, if you would like, I will kick off my 5
    minutes, before recognizing the ranking member for 5 minutes,
    by yielding 2 minutes to you.
        Mr. Foster. That would be wonderful.
        Chairman Himes. I yield 2 minutes to the gentleman from
    Illinois.
        Mr. Foster. Yes. Thank you. This also becomes an issue for
    when we had to dispense stimulus checks. The issue we had is we
    did not have a unique, legally traceable identity for all
    qualifying citizens in the United States. There is a product
    called a Mobile ID or a digital driver's license, that is being
    dispensed by a lot of States--5 or 10 States are actually
    already using them. This thing, it is not a new database or
    anything. What it is, it just sits on top of the REAL ID
    system, which pretty much is a unique, legally traceable
    identity for all citizens, and then transfers that information
    to your cellphone. And that allows you to use your cellphone,
    your REAL ID, to authenticate yourself online as a single,
    legally traceable citizen of the United States.
        Is that an appropriate starting point as the identity
    credential that you will need to operate a central bank digital
    currency?
        Ms. Coronado. It is an intriguing starting point, sure. To
    the extent that you can use existing infrastructure for that,
    then it could create a lot of efficiency.
        Mr. Foster. Yes. NIST has actually negotiated iso-standards
    for these, for interoperability, for multiple vendors. Google
    and Apple have announced that they will support these digital
    driver's licenses. So, I would be interested in your comments
    for the record as to whether those are appropriate. If that was
    the de facto way that you authenticated yourself for using
    digital dollars, what would be missing in such a system, in
    terms of preventing fraud and so on, and how useful would that
    be for dispensing things like stimulus checks or other Federal
    benefits?
        Anyway, I am now pretty much out of time. One last comment
    and--
        Mr. Levin. Another big advantage of a two-tiered system is
    you can have nonprofit organizations that start to help
    ordinary people and small businesses use these digital dollars.
    So, imagine that the AARP starts helping retired people, and
    they might have an app, or it is a card or whatever, a prepaid
    card that is big, that has braille on it, that is really great
    for people with visual or audio disabilities. Okay, there is an
    urban organization that is helping lower-income people and
    disadvantaged people in communities that we can have different
    designs. The fundamental concept here of digital doesn't
    require all one paper identical bill, there could be lots of
    competition and lots of diversity, and helping a lot more
    people than the current payment system.
        Mr. Foster. I am going to reclaim my time because I do have
    one question for Dr. Coronado. We were cut off. I am very
    interested in something that we haven't talked a lot about,
    which is the potential adverse effect on the traditional
    banking system in moments of stress and crisis. And again, we
    talked a little bit about how you could cap the size of an
    account. But could I give you a minute or two to talk about
    what other mechanisms might be in place to make sure that we
    don't see a flight to safety, and therefore an exacerbation of
    problems inside the traditional banking sector?
        Ms. Coronado. The limitation and the integration between
    the systems would be part of the design, I think. So, the
    limitation on the account size would mean that the system
    wouldn't get too big or wouldn't usurp the existing banking
    system, which is where most of the money is in wholesale
    banking anyway. The retail banking system would be necessarily
    limited in size. That is the first pillar of preventing that
    kind of cyclicality. And then, you could have sort of the
    ability to speak between the banking accounts. The banking
    account would be integrated with your digital account, and that
    could also mean that the money flow back and forth wouldn't be
    as destabilizing.
        I don't know. Do you have any--
        Mr. Levin. Michael Bordo and I have thought a lot about
    this. Our recommendation is, during emergenciesc, to think
    about these digital dollars like a safe deposit box. And the
    right solution would be to, in an emergency, for large amounts
    of digital dollars, to impose a safe deposit box fee, which
    could be 1 percent or 2 percent, enough to discourage huge
    institutions from moving all of their money out of the
    commercial paper market into digital dollars.
        So, I think this is a totally solvable problem. There might
    be some--
        Ms. Coronado. The limitation is that you couldn't move that
    size of money. It couldn't destabilize the commercial paper
    market in our design. It just wouldn't be--the scope would not
    be available for that.
        Chairman Himes. Okay. Great. I appreciate those answers. I
    will yield back the balance of my time and recognize the
    ranking member, Mr. Barr, for 5 minutes of additional
    questions.
        Mr. Barr. Again, Mr. Chairman, thank you very much for your
    leadership on this issue and for holding this hearing on what
    is clearly a pressing issue, urgent, and important for national
    security, for the unbanked, for personal privacy and civil
    liberties. A lot of issues were covered today. So, I have one
    final comment and then a question.
        The comment is, I think what we learned today was that
    Chairman Powell was absolutely right about getting this right
    as opposed to getting there first. I think there is urgency,
    and so I think we do need to move forward with urgency, but
    getting it right is so critically important.
        And I think we learned that there are some dangers
    associated with privacy, with manipulation of monetary policy.
    I appreciate my colleague from Massachusetts recognizing that
    this is blurring the lines, Dr. Coronado, between fiscal policy
    and monetary policy.
        Ms. Coronado. They have already been blurred.
        Mr. Barr. And let me also just say--well, that is true. And
    I think we need to restore the Fed to be monetary policy only,
    and accountable. Yes, independent, but accountable to Congress,
    and Congress and the elected officials of this country should
    be the fiscal policymakers in this country.
        The other concern is the concern that the chairman just
    raised, and the possibility that this could get out of control
    to the point where a central bank digital currency is making an
    end run around the private commercial banking system.
        So, what I have concluded is that direct Fed accounts is
    probably not the way to go, that two-tier is a--if we are going
    to go in this direction for purposes of sanctions and
    effectiveness, sanctions enforcement for purposes of dealing
    with the competitiveness challenge from China, and preserving
    the dollar as the world's reserve currency, if this is the
    direction we need to go to pursue and protect those ends, then
    we have to be careful about making an end run around the
    private banking system, compromising privacy, and manipulating
    monetary policy in a way that irretrievably blurs the
    distinction between monetary policy and fiscal policy.
        I will conclude with a question that I have for Mr.
    Baldwin. What is, in your view, the danger of the Fed holding
    so much consumer information, if we move in this direction of
    using accounts at the Fed as opposed to a two-tier system where
    you would have, to the extent that we move in the direction of
    a central bank digital currency, private sector control of
    wallets?
        Mr. Baldwin. Across all financial services, I think the key
    thing that keeps everybody up at night is a wide-scale
    cyberattack. Any time you are dealing with an account-based
    system that has everything in one centralized place, that is a
    prime target for nation states, cyber warfare. Just
    intermediating and having different troves of information,
    potentially facilitated by the private sector, makes it more
    difficult to go after one strategic source that would take down
    an entire system.
        Mr. Barr. And you believe that it is possible to do this,
    to set up a central bank digital currency that is sophisticated
    enough to guard against that kind of a threat?
        Mr. Barr. An account-based approach would be similar to
    traditional banking, so that there would be widescale cyber
    implementations that need to occur. Something occurring on a
    ledger system, so a tokenized system, would have different
    security considerations. But blockchain technology, time and
    time again, has shown to be a very secure method and means of
    transfers of value.
        Mr. Barr. Thank you all for your testimony. We clearly have
    more work to do on this, and that is why I endorse the
    legislation that Mr. Hill and our chairman have authored, and I
    do echo Mr. Hill's comments to encourage our chairman here to
    see if we can get some of these bills in a markup.
        With that, thank you to all of the witnesses for your
    important and illuminating testimony today, and I yield back.
        Chairman Himes. I thank the ranking member, and I really
    would like to thank our witnesses for their testimony today in
    what was a fascinating conversation.
        The Chair notes that some Members may have additional
    questions for these witnesses, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        And, without objection, I would like to enter into the
    record statements from the American Bankers Association, Public
    Citizen, and the National Association of Convenience Stores.
        Without objection, it is so ordered.
        With that, I thank the witnesses again, and this hearing is
    adjourned.
        [Whereupon, at 12:13 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 27, 2021

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