[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
                             
                                 [all]