[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
DIGITAL ASSETS AND THE FUTURE
OF FINANCE: EXAMINING THE BENEFITS
AND RISKS OF A U.S. CENTRAL
BANK DIGITAL CURRENCY
=======================================================================
VIRTUAL HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
MAY 26, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-88
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
47-883 PDF WASHINGTON : 2023
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
C O N T E N T S
----------
Page
Hearing held on:
May 26, 2022................................................. 1
Appendix:
May 26, 2022................................................. 43
WITNESSES
Thursday, May 26, 2022
Brainard, Hon. Lael, Vice Chair, Board of Governors of the
Federal Reserve System......................................... 4
APPENDIX
Prepared statements:
Brainard, Hon. Lael.......................................... 44
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the American Bankers Association........ 50
Written statement of the Independent Community Bankers of
America.................................................... 75
Written statement of the National Association of Convenience
Stores..................................................... 79
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 107
Written statement of the National Community Reinvestment
Coalition.................................................. 110
Written statement of the Retail Industry Leaders Association. 127
McHenry, Hon. Patrick:
Written statement of the Bank Policy Institute............... 130
Written statement of the Electronic Transactions Association. 136
Joint trade association letter............................... 138
Letter to Hon. Jerome Powell, Chair, Board of Governors of
the Federal Reserve System, dated May 18, 2022............. 144
DIGITAL ASSETS AND THE FUTURE
OF FINANCE: EXAMINING THE
BENEFITS AND RISKS OF A U.S.
CENTRAL BANK DIGITAL CURRENCY
----------
Thursday, May 26, 2022
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12:06 p.m., via
Cisco WebEx, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Sherman, Scott,
Cleaver, Perlmutter, Himes, Foster, Beatty, Gottheimer, Axne,
Casten, Pressley, Lynch, Garcia of Illinois, Garcia of Texas,
Williams of Georgia, Auchincloss; McHenry, Posey, Luetkemeyer,
Huizenga, Barr, Hill, Zeldin, Loudermilk, Mooney, Davidson,
Budd, Kustoff, Gonzalez of Ohio, Rose, Steil, and Timmons.
Chairwoman Waters. Thank you very much. The Financial
Services Committee will come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``Digital Assets and the
Future of Finance: Examining the Benefits and Risks of a U.S.
Central Bank Digital Currency.''
I now recognize myself for 5 minutes to give an opening
statement.
While cryptocurrencies have the potential to offer several
efficiencies in the way that we send and receive money, the
early stages of innovation in this round are revealing the
clear risk associated with some cryptocurrencies, including
significant volatility, and even so-called stablecoins, that,
despite their name, have been anything but a stable value.
Earlier this month, we saw the dramatic collapse of Terra,
which, according to one analysis firm, resulted in investors
losing more than $40 billion in a product that was supposed to
always return $1 for each dollar invested.
Central bank digital currencies (CBDCs) have the potential
to harness the efficiency of cryptocurrencies, while providing
the security and stability of the U.S. dollar backed by the
full faith and credit of the Federal Government. As we explore
the possibility of a U.S. CBDC and the future of the global
financial system, we must keep in mind that we may very well be
in the midst of a new digital asset space race, with countries
around the world competing to deploy digital versions of their
own currencies, and America can't be left behind.
The U.S. dollar has long been the global leader and reserve
currency worldwide, and Americans reap enormous benefits from
having their currency widely accepted across the globe. For
example, a reserve currency means that the United States
Government's cost of financing is lower, which translates long
term into lower mortgage and credit card rates than consumers
see in other countries. But it is not hard to imagine how
another major economy's CBDC could chip away at the dollar's
leadership status because of the efficiencies that CBDCs could
offer in making instantaneous and secure payments at lower
cost.
According to estimates, over 90 nations, representing 90
percent of the global GDP, are researching, piloting, and
developing CBDCs, including China, which rolled out its CBDC at
the Winter Olympic Games in Beijing. As the U.S. explores the
potential for our own CBDC, I believe the design of this
digital dollar should balance the need for privacy protections,
while retaining mechanisms to prevent money laundering and
other illicit uses. I also strongly believe that a U.S. CBDC
should be designed to promote financial inclusion. These are
values that I believe that Democrats and Republicans share in
this digital asset race to space share. This is why it is
critical for the U.S. to stay competitive in this field to
ensure that our values prevail as a way that the global
financial system evolves.
First, let me extend my congratulations to Dr. Lael
Brainard on her confirmation as the Vice Chair of the Board of
Governors of the Federal Reserve System. I am so happy you have
joined us in this new capacity to discuss the potential of
central bank digital currencies, or CBDCs, as part of the
future of our financial and monetary system.
Today, we continue the committee's bipartisan series of
hearings on digital assets. This hearing will allow us to
examine and discuss the Fed's ongoing research on CBDCs and to
learn how the Fed is working with other Federal agencies, as
encouraged by the White House in its recent Executive Order on
digital assets, to ensure that the U.S. is properly regulating
the cryptocurrency industry. While cryptocurrencies have the
potential to offer several efficiencies in the way that we send
and receive money, the early stages of innovation in this realm
are revealing the clear risks associated with some
cryptocurrencies, including significant volatility, even so-
called stablecoins, that again, I repeat, despite their name,
have been anything but a stable value. Earlier this month, we
saw, again, the dramatic collapse of Terra, which according to
one analysis firm, resulted in investors losing more than $40
billion in a product that was supposed to always return $1 for
each dollar invested. And I am repeating all of this because I
want it to be clear.
And now, I will recognize the ranking member of the
committee, the gentleman from North Carolina, Mr. McHenry, for
5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman, and Vice Chair
Brainard, thank you for being here today as we seek to
understand what problems a Fed-issued digital currency would
solve. Despite this being our third hearing focused on CBDCs,
and the Fed issuing its report, we still have many unanswered
questions, but we knew that would happen. We all have to get a
better understanding of the consequences of a central bank
digital currency and understand the technical aspects as well.
This is why prior to the reports released from the Fed, my
Republican colleagues and I developed a set of principles to
guide our evaluation of a U.S. central bank digital currency,
or CBDC. For more than a year, we have been exploring the
potential impact of a CBDC on monetary policy. We have been
trying to understand the impact of the Fed's dual mandate and
the implications for our banking system. Most importantly, we
have been reviewing the Federal Reserve's current authority, if
any, to issue a digital currency. Our principles provide a
coherent framework to evaluate the Fed's report. In its report,
the Fed listed a number of potential benefits of a CBDC, most
of which, in my view, could be realized through private-sector
alternatives. There seems to be a disconnect about how
innovation truly happens, which is outside the walls of
government bureaucracies.
We also don't know the impact of a digital currency on the
Fed's ability to effectively perform its monetary and
regulatory functions, and we are trying to explore that and
understand it better, and no one has made a compelling case on
why we should expand the Fed's mandate into retail banking or
how a Fed-issued CBDC won't politicize the Fed.
I understand that this issue is obviously in its
exploratory phase. However, there is the potential for
significant harm to our financial system if we move forward
without sorting through potential consequences. That is why
last week, committee Republicans sent a letter to Chair Powell
outlining exactly where the Federal Reserve should focus its
next steps. Chair Powell has been outspoken in his view,
stating, ``It is more important that we get it right, which
means that we not only look at the potential benefits of a CBDC
but also the potential risks, and recognize the important
tradeoffs that have to be thought through carefully.'' And I
strongly agree with Chair Powell's assessment.
Chair Powell, in the discussion paper, emphasized that,
``The Federal Reserve does not intend to proceed with the
issuance of a central bank digital currency without clear
support from the Executive Branch and from Congress, ideally in
the form of a specific authorizing law.'' Since the job rests
with Congress to make this decision, we should be thorough in
our review. Congress should not rush to issue a digital
currency, nor should the Fed. We both should understand whether
the benefits of a digital currency actually outweigh the risks
before any further congressional action is considered.
Thank you, Madam Chairwoman, and I yield back.
Chairwoman Waters. Thank you very much. I want to welcome
today's distinguished witness, Dr. Lael Brainard, Vice Chair of
the Board of Governors of the Federal Reserve System.
You will have 5 minutes to summarize your testimony. You
should be able to see a timer that will indicate how much time
you have left. I would ask you to be mindful of the timer and
wrap up your testimony before your time has expired.
And without objection, your written statement will be made
a part of the record.
Vice Chair Brainard, you are now recognized for 5 minutes
to present your oral testimony.
STATEMENT OF THE HONORABLE LAEL BRAINARD, VICE CHAIR, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Brainard. Chairwoman Waters, Ranking Member McHenry,
and members of the committee, I am very pleased to join you
today.
There has been explosive growth in the digital financial
system built around new digital assets and facilitated by
crypto asset platforms with stablecoins as settlement assets.
And in recent weeks, two widely-used stablecoins have come
under considerable pressure. The recent turmoil makes it clear
that the actions we take now, whether on regulations or on
explorations surrounding a digital dollar, should be robust to
the future evolution of the financial system. That rapid
ongoing evolution of the digital financial system should lead
us to frame the question not as whether there is a need for a
central bank-issued digital dollar today, but rather whether
there may be conditions in the future that may give rise to
such a need. No decision has been made about whether a U.S.
CBDC will be a part of that future. But it is important to
undertake the necessary work to inform any such decision and to
be ready to move forward, should the need arise. There are
risks on both sides, both risks of acting and of not acting.
The share of U.S. payments made by cash has already
declined by one-third, to 20 percent just over the last 5
years, and of course, the share is even lower for people who
are under the age of 45. While digitalization of the financial
system continues, it is prudent to consider how to preserve
ready public access to safe central bank money. And that is
where questions around the issuance of a digital dollar akin to
the Federal Reserve's issuance of physical currency arise.
In addition to the migration away from cash, we are also
seeing growth in new forms of digital private money, such as
stablecoins. They don't share the same protections that
underpin confidence in commercial bank money, such as deposit
insurance, access to central bank liquidity, and banking
regulation and supervision. They can lose their promised value
relative to fiat currency, harming consumers and creating
broader financial stability risks, and, indeed, we saw in the
19th Century that active competition among issuers of private
paper banknotes led to instability, inefficiency, and fraud
that was so widespread that it led to the need for a uniform
national currency and, ultimately, the protections I just
noted.
In addition to consumer protection and financial stability
risks, if private money such as stablecoins were to become very
widespread, we could see fragmentation of the U.S. payment
system into so-called walled gardens. In those kinds of
circumstances, a central bank digital dollar could improve the
stability and efficiency of the payment system by coexisting
with and complementing stablecoins and commercial bank money,
much like cash currently coexists with commercial bank money.
It could provide a safe central bank liability as the neutral
settlement layer in the digital financial ecosystem that would
actually facilitate and enable private-sector innovation, but
it is very important to consider the risk of bank
intermediation. A vibrant, healthy banking system with banks of
all sizes is very important to the economy and to the Federal
Reserve. And in some circumstances, a widely-available CBDC
could serve as a substitute for deposits, and a CBDC would be
attractive to risk-averse users during times of stress. That is
why we want to make sure that banks are among those
intermediaries, if, in fact, we were to have such a system with
intermediaries, which we have said is very important, and to
develop design features to mitigate those risks.
Finally, in addition to those two reasons, in future states
where one or more major foreign currencies are issued in CBDC
form, it is prudent to think about what the risks are in the
presence or absence of a U.S. central bank digital dollar. And,
of course, China's actions are important, but other central
banks in Europe and elsewhere are also pretty far along in
terms of thinking about issuing their own digital currency. And
of course, we shouldn't take the dollar's global status as the
dominant payment currency for granted.
Thank you very much. I look forward to engaging with you on
this important issue.
[The prepared statement of Vice Chair Brainard can be found
on page 44 of the appendix.]
Chairwoman Waters. Thank you very much. I now recognize
myself for 5 minutes for questions.
Vice Chair Brainard, one potential benefit that the Federal
Reserve highlighted in its January CBDC report was that a CBDC
could support the dominant international standing of the U.S.
dollar, and could help to ensure that our currency is
positioned to remain the world's reserve currency and primary
medium of exchange internationally in this digital age. The
report noted that, ``Today, the dollar is widely used across
the globe because of the depth and liquidity of the U.S.
financial markets, the size and openness of the U.S. economy,
and the international trust in United States institutions and
the rule of law. It is important, however, to consider the
implications of a potential future state in which many foreign
countries and currency unions may have introduced CBDCs.''
Some advocates have noted that if foreign CBDCs become more
widely used than existing forms of the U.S. dollar, the global
power of our currency could decrease. As you look at the CBDC
development in China and elsewhere, do you think that a U.S.
CBDC is essential to preserve the international role of the
dollar?
Ms. Brainard. Thank you, Madam Chairwoman. I think this is
one of the important considerations informing the work to
better understand the design and potential importance of a
digital dollar. We do derive important benefits from being the
dominant payments currency. It does lower our borrowing costs
and our transaction costs, and that does flow through to
businesses and consumers. So, it is very important for us to
retain a dominant position in international payments, and as
you noted, China has already introduced a digital yuan. The ECB
is pretty far along in its thinking. If a number of major
foreign jurisdictions do, in fact, issue digital currencies, it
is important to think how that would look for the dollar if the
U.S. did or did not join that.
Regardless of whether or not the decision is made to move
forward, it is very important for us to be involved in standard
setting in cross-border transactions. And of course, our
ability to shape those standards will be influenced by whether
or not we actually have a digital offering to bring to the
table as well.
Chairwoman Waters. Thank you very much. I just want to ask
you about the President's direction. It seems that he said that
all of these agencies should work together. And we talked with
Mr. Xu just yesterday, and he said there has been no real
discussion on CBDCs. Is that true?
Ms. Brainard. The Executive Order on digital assets does, I
believe, include an important role for Treasury in bringing
together the banking agencies to discuss the issue of a central
bank-issued digital dollar. So, I do think it will be very
important for Treasury to convene those discussions and, of
course, we look forward to fulfilling our role under the
Executive Order.
Chairwoman Waters. But it has not happened yet. Is that
right?
Ms. Brainard. It has not happened yet, to the best of my
knowledge, but we are working with other agencies on the
Executive Order and we do expect to have discussions convened
by Treasury.
Chairwoman Waters. Thank you very much. The gentleman from
North Carolina, Mr. McHenry, who is the ranking member of the
committee, is now recognized for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman. Vice Chair
Brainard, you obviously are very steeped in the details of the
mechanics of a CBDC. We have seen the MIT report. We have seen
the Boston Fed report. We have seen the overall Fed report on
CBDCs. The one thing that the Federal report makes clear is
that legislation is necessary for the Fed to issue a central
bank digital currency. Is that your view?
Ms. Brainard. Ranking Member McHenry, the report is clear
that the Federal Reserve would not move ahead without support
by the Executive Branch and by Congress, and ideally, that
would take the form of authorizing legislation.
Mr. McHenry. Yes, I mentioned that in my opening statement,
and that was my question. I was asking your view.
Ms. Brainard. Of course, I don't have any expertise on what
kind of authorizing legislation would be necessary, but I think
our view as an institution was clearly stated.
Mr. McHenry. You are the Vice Chair for Regulation, and I
just want to ensure that it is your understanding that the Fed
is constrained by statutes, and that is why I am asking. This
is not supposed to be a hard question. It is supposed to be the
easy opener.
Ms. Brainard. Yes. It is clear that the Federal Reserve
does not have the authority, for instance, or is precluded from
individual accounts, so we have taken a very strong position on
that in the report. And, yes, it is important for us to have
strong support from both the Executive Branch and Congress, and
ideally, that would come in the form of authorizing
legislation.
Mr. McHenry. Okay. I think you will hear from me on this,
because it seems like there is some wiggle room you are trying
to show. Let me move on to my question, if I may. What specific
problems, if any, will a central bank digital currency solve?
Ms. Brainard. I think this is a very important question and
set of considerations. And the way that I think about it is
that it is really the future states of the financial system
that we should be thinking about as we think about the costs
and benefits. There are potential risks to creating a CBDC,
depending on the future evolution of the financial system.
There are also potential risks to not having a CBDC, and what
is really important is that it takes a long time. If, for
instance, Congress were to decide that it is very important for
the Federal Reserve to issue a central bank digital currency,
it could take 5 years to put in place the requisite security
features, the design features. And I cited earlier the enormous
changes that have taken place in our financial system just over
the past 5 years, a one-third decrease in the use of cash, a
huge amount of migration to mobile apps for payments in and out
of the banking system, an introduction by several foreign
central banks of their own digital currencies and plans by 90
percent--
Mr. McHenry. Okay. I understand. And my question is, what
problem are we trying to solve for, and I have not gotten a
clear answer on this. For most consumers, payments are digital.
The movement of cash between banks is digital. In the private
sector, we see the payment system working well. We see the
FedNow system is expected to go live in 2023. So, what are the
differences here from all of those alternatives, and why would
the Fed need to have a CBDC?
Ms. Brainard. There are three reasons that I cited earlier,
including the declining use of cash. Potentially, consumers no
longer having direct access to a safe, central bank-issued
digital currency is one significant risk. A second significant
risk is that stablecoins become the dominant form of U.S.
digital dollar. And in that world, you could have fragmentation
of the payment system, instability of those digital currencies,
the kind of instability that Congress chose to move away from
100 years ago.
Mr. McHenry. Thank you, Vice Chair. And, Madam Chairwoman,
thank you for this hearing. I think this is the reason why we
need to have a well-regulated stablecoin regime, or to at least
have a conversation. Thanks so much.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Cleaver, who is also the Chair of our Subcommittee on
Housing, Community Development, and Insurance, is now
recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. And Vice Chair
Brainard, thank you so much for being with us today. I
appreciate it very much. As you well know, the Federal Reserve
Bank of Boston has partnered with MIT to conduct CBDC-related
research through Project Hamilton. Together, they have studied
the technological aspects of a potential CBDC, and it was going
to be hard because I would say, ``CDBG,'' all the time in my
committee, but CBDC, with the first phase of the project
released in February 2022, which looks into cryptography,
distributed systems, and blockchain technology. Some have
argued that existing American digital initiatives for real
payment time, such as Pay It Now, will likely have slower
settlement times when compared to Project Hamilton or the CBDCs
being developed by other nations.
What is your view? Is there a Fed view? What is the Fed
likely to do now? Will your study be laid out to us and to the
Senate? We are, of course, very much interested in any
sensible, well-studied work that will help us deal with this
issue. That is scary, at least to me. It is frightening to me.
So, what will happen with the research?
Ms. Brainard. Thank you. The work that we are doing now on
FedNow is on a real-time payments platform. It is the first
system that we are building that is cloud native. And I think
that we are learning a lot about the cyber security
requirements, potential settlement times, and the execution
requirements, so it is a very important build experience for
us. And it is also, I think, a good example of how long it
takes from the time that the decision is made to build such a
new platform, to the time when it is ready to be connected up
to financial institutions.
There is relevance there for a central bank digital
currency. And as you noted, we have a variety of research
around the system that is potentially relevant both to what it
would take to execute on a digital dollar issued by the Federal
Reserve, but also relevant to simply understanding some of the
private-sector platforms that have stablecoins or are building
stablecoins. It is very helpful to us, for instance, to Project
Hamilton, to experiment with what kind of throughput, what kind
of settlement times, how many transactions per second you might
be able to see when you layer on the kind of cryptography that
is necessary to make these transactions secure and private.
So, I think the work that we are doing helps give us some
background, and it is very important for us to continue with
technological research and experimentation, not only for
purposes of our own payments infrastructure, but more broadly,
to understand the private sector and where some of the risks
may lie and where some of the efficiencies may lie.
Mr. Cleaver. Do you believe that the Fed will likely have
slower settlement times when compared to Project Hamilton or
the CBDCs?
Ms. Brainard. I would be a little hesitant to compare
simply because Project Hamilton is entirely experimental in
nature. And of course, with FedNow, we are building in very
significant operational resilience and security. And so, I
would be a little cautious about thinking about settlement
times comparably between those two.
Mr. Cleaver. Madam Chairwoman, I yield back the balance of
my time.
Chairwoman Waters. Thank you very much. The gentleman from
Florida, Mr. Posey, is now recognized for 5 minutes.
Mr. Posey. Thank you very much, Chairwoman Waters. Dr.
Brainard, if working people got paid in central bank digital
currency, could it threaten the viability of commercial banks
using deposits to fund their lending activities?
Ms. Brainard. One of the things that I have focused most on
in thinking about this debate is how important it is to our
economy, and to the Federal Reserve, to have a vibrant,
resilient banking system with banks of all sizes, and we want
to make sure anything we do continues to support that really
important banking system. As we think about some of those
issues, I think one thing that is important to recognize is
that anything that we would want to do in this space would have
to be consistent with banks remaining really important
intermediaries of any future evolution of the U.S. payments and
financial system. And that is one of the reasons that we
emphasize in our report that it should be an intermediated
system with banks as intermediaries or among intermediaries.
In terms of the deposits, there is certainly a lot of
consideration that we have been doing in terms of thinking
about potential implications for deposits. Banks are very
important in terms of credit provision, in terms of monetary
policy transmission. Of course, we are already seeing massive
changes where payments are made increasingly through mobile
payments apps. We have seen a tenfold increase of the leading
mobile payments app, a sevenfold increase just in the last few
years of the second mobile payments apps. Those already hold
balances largely outside the banking system.
Similarly, we have seen those having some implications for
cash usage. So, I think any future evolution of the financial
system with digitalization is going to lead to some diminished
use of cash and some diminution of bank deposits, but that is
also true for stablecoins. You could see some reduction in bank
intermediation and bank deposits there, so I think we want to
think holistically about it. And it is very important to think
about limits, potential limits on central bank digital currency
holdings, whether to pay interest. That would be another way to
make holdings of central bank digital currency really only for
payments in ways that wouldn't compete with deposits, if for
instance, they didn't pay interest. There are a variety of ways
people have been thinking about designing these so that they
wouldn't diminish deposits in the banking system.
Mr. Posey. Thank you. Do you think the interest rate of a
central bank digital currency could increase the threats to
diminishing the role of the banking system in our economy as we
currently know it?
Ms. Brainard. I think that question about whether or not a
central bank digital currency would be interest bearing is a
really important one. I think there are a variety of reasons to
think it would be probably preferable not to have an interest-
bearing digital currency. And I think the one that you
mentioned is one of the most compelling reasons; it would be
less attractive than deposits if it were not interest bearing.
And of course, consumers are accustomed to making payments on
mobile apps without interest on those balances. In that sense,
it seems like a natural way to go to me, but it is one of the
design questions that our paper raises and that we asked for
feedback on in the comments.
Mr. Posey. Thank you very much. Madam Chairwoman, I see my
time is just about to expire, so I yield back. Thank you.
Chairwoman Waters. Thank you very much. The gentleman from
California, Mr. Sherman, who is also the Chair of our
Subcommittee on Investor Protection, Entrepreneurship, and
Capital Markets, is now recognized for 5 minutes.
Mr. Sherman. Thank you. CBDCs will not meet the primary
need that is aspired to be met by cryptocurrencies. With
cryptocurrencies, the name tells you everything--``crypto''
means hidden, and ``currency'' is money--and it is designed to
meet the needs of those who need hidden money: drug dealers;
sanctions evaders; human traffickers; and especially, tax
evaders. And I don't think that a central bank digital currency
will help those folks because you are going to enforce the Know
Your Customer and Anti-Money Laundering (KYC/AML) rules. There
is a second need that is met by cryptocurrencies and those who
may not care whether they hide their own money, but they want
to heap high-risk investment wagers on whether other people
will want hidden money and bid the price of cryptos up.
Mr. McHenry asked what a CBDC could do, and I would point
out that accounts of over a quarter million dollars are not
insured by the Federal Government. So if you want an account,
rather than in, say, T-bills, you could buy it, then sell it,
then use the money, but you want in the account money, and you
want to take zero risk, and you have more than a quarter
million, CBDCs could do that. But there will be a disadvantage
that I think Mr. Posey identified in his question.
Governor Brainard, given your role at the Fed, it is
logical that you would focus on digital currencies, but I also
want to tap your knowledge about stablecoins. We have seen that
Terra was not, ``terra firma.'' It was, ``terra incognita.'' We
see that Tether is completely untethered. I am concerned
particularly that Tether's investors are being told it is
linked one-to-one with immediately-redeemable cash reserves. We
don't really have reliable financial statements, no, that there
are any reserves at all, but if we take it at face value, the
release is out of Tether. They own commercial paper
cryptocurrencies, which could go up or down on any day, and a
lot of investments in the notes of Chinese real-estate
companies, which are highly impaired.
Earlier this month, the Treasury Secretary testified about
the need for Congress to take action, and laid out a framework
for doing so. Congress is somewhat divided, as you may have
heard, so we may not be able to pass anything. Is there
anything you can do or that the regulatory agencies can do to
protect those who think they are buying something stable and,
in fact, they are buying anything but?
Ms. Brainard. I have certainly been very focused on the
potentially unstable nature of the so-called stablecoins for
some time, and I do think the first best answer would be for
Congress to specifically legislate a regulatory regime for
stablecoins. I do believe we have just seen, in the last few
weeks, exactly the kinds of risks that we have all been talking
about for some time: a run on the platform; a collapse in the
value of a stablecoin; a stablecoin breaking the buck or moving
off of its one-for-one value because of lack of transparency
into the reserve assets and supposedly underlying that
stablecoin. All of those things we have all been talking about,
and that is why I think the President's Working Group
principles for regulating are good, and it would be best to
first see some legislation there. There are consumer protection
risks. There are investor protection risks. There are
financials that involve risks.
Mr. Sherman. I am going to sneak in one more question. I
think Mr. Posey brought this up. We tend to focus on the
financial services system, but the real impact is what impact
financial services then has on the real economy. We want
business loans made. We want home loans made. If we had a CBDC,
would that cause deposits to move out of banks, particularly
community banks and credit unions, and into the Fed in a way
that would provide less money available for the loans we want
banks to make?
Ms. Brainard. I think with the right design features, that
could be avoided. Again, we already have payments apps that
would operate quite similar to central bank digital currencies,
so the financial system is already moving in that direction.
And simply doing things like not having interest on a digital
currency potentially limits how much people could hold. It
would confine their use to payments and not impede those
important functions of a vibrant banking system. And of course,
again, it is really important for banks to be intermediaries in
any such future system.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Luetkemeyer, is now recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Good morning,
Vice Chair Brainard. I just want to kind of get a little bit of
clarity here. You keep saying that the Fed will move forward,
but you are not moving forward without congressional approval,
ideally in the form of legislation. That is kind of a hedge
there that I am concerned about. Do you or do you not believe
that we have to have legislation? And if you don't believe we
have to have legislation, what other forms of a nod toward
approval would you accept--some sort of a letter from the
Administration, from Congress, a Floor speech on the lack of
action, for instance? Would that imply that everything was
okay? Can you give me a little more definitive answer on this,
please?
Ms. Brainard. Let me just repeat what we have said, that
the Federal Reserve discussion paper that was released in
January said that the Federal Reserve would not move forward
without strong support from the Executive Branch and from
Congress, ideally in the form of authorizing legislation. And
of course, I think that was--
Mr. Luetkemeyer. That is what I want to clarify, ideally
here. Is that the only form that you could you go forward with
or are there other things, other ways that you would consider
approval from Congress or the Administration? I want to nail
this down. What do you think it takes to make this happen?
Ms. Brainard. I believe in the Executive Order on digital
assets, the Department of Justice has the responsibility for
opining on this topic. Others who are lawyers probably are
better placed to give you a very precise answer. I can tell you
that we believe that Congress should be very engaged on this
issue. That is why I am so delighted that you are holding this
hearing today. There are a lot of really important questions
that I think you are asking here, and our job is to make sure
that at least the part of this that I think I have some
responsibility for is to make sure any decision that you make
is well-informed. That is why we put out the discussion paper.
That is why we think it is important to have technology
research. I would hate for Congress to decide 5 years from now
that the Federal Reserve needs to catch up. China is out there.
The ECB is out there. And we would be serving you very poorly.
We have done a lot of work.
Mr. Luetkemeyer. Okay. Thank you. Along that same line, you
have opened up another question for me here with regards to
other countries--China, Europe, UAE--that are acting in the
space. And the Fed is thinking about doing something with, I
guess, consent and approval, with direction from the Congress
and from the Executive Branch. My question is, do you think
that you can move fast enough to be able to compete with these
other currencies? And if not, do you think that the private
sector, which I think we have all agreed can innovate and do
this much more quickly, that if you worked in concert with them
or turned them loose with the innovation that they could come
up with, may be able to make us more competitive, more quickly?
Ms. Brainard. In any circumstance, we operate alongside the
private sector. That is true of all of our payment systems that
we operate today. It is true of the coexistence of cash and
central bank money, and that is one of the great strengths of
our system. In any circumstance, I would think of the central
digital dollar as creating a neutral settlement layer that
would actually allow our private sector to innovate more
effectively and more rapidly. And if I think about where other
countries are by doing the kind of technology research and
policy research and soliciting input today, I am hoping that
we, working with the private sector, can be in a good position.
Mr. Luetkemeyer. Can you give me an instance of how you are
working with them? How are you working with the private sector?
Ms. Brainard. In all of the work that we do, we have
private-sector partners. In FedNow, for instance, we have a
group of private-sector partners that have helped inform the
design of our system, and, of course, all of our payment
infrastructure is kind of a neutral infrastructure that allows
interoperability between private-sector solutions. And that is
how I would continue to see the role of the Federal Reserve in
the future.
Mr. Luetkemeyer. Okay. Thank you. I see my time is up, so I
yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from
Connecticut, Mr. Himes, who is also the Chair of our
Subcommittee on National Security, International Development
and Monetary Policy, is now recognized for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman, and thank you very
much, Dr. Brainard, for your presence here.
As the chairman of the subcommittee that has jurisdiction
over the possibility of a CBDC, I am really excited that we are
having this conversation, and I am deeply appreciative of the
work that you have done, and I am appreciative of the
Minority's engagement here. I studied their letter of May 18th,
and I want to make some observations and maybe get your view on
some of this. Just for the record, the Minority is very focused
on the statutory authority. I think it would be very wise,
whatever the legal niceties are, for the Fed to move forward
with statutory authorization because this is a big deal.
But I want to make an observation. The Minority has accused
you of failing to identify the payment system inefficiencies. I
think I am quoting them right in their letter. They write about
identifying the problems in the current payment system. That is
not a hard question to answer, Dr. Brainard, right? There are
still millions of Americans who don't feel comfortable using
commercially-backed payment systems. They tend to be
immigrants. They tend to be lower-income people. That is
correct, isn't it?
Ms. Brainard. Yes.
Mr. Himes. Yes, and I suspect that is always going to be
true, and, look, I think it is important for them to have the
option to do it. But there is something unique about the full
faith and credit of the United States Government, and that is
why, of course, people use physical currency.
I also want to spend a moment--I was a technology banker
back in the 1990s, and I watched the internet develop. And the
truth is that in the mid-1990s, we had no idea what the
internet was going to be. We had no idea in the late 1990s that
someday the internet would enable your refrigerator to text you
at your office to tell you that you needed more milk. We didn't
dream of that. I am not sure that we wouldn't have looked at
travel agents and said, that is a clearly inefficient system,
at the time. My point is that we just don't know, but we would
be making a terrible mistake if we stood in the way of
innovation because the problems of today don't actually
indicate where this may go.
The second issue I want to maybe get your agreement on,
too, and I worry about the Minority, sort of, because I think
the outcome here is one in which the Federal Government, the
Federal Reserve provides a foundation upon which the private
sector innovates in a big way. The government should not
squeeze out the private sector.
But I wave this thing around a lot. This is the iPhone that
I use. We are all enslaved to these things. But this is the
metaphor for what we are doing because this thing is made by a
private company. It has apps, and semiconductors, and all sorts
of things that have created immense wealth in the private
sector. But this thing is cool because decades ago, the Federal
Government invested a huge amount of money in semiconductor
research. It is pretty cool because when the Federal Government
created the Advanced Research Projects Agency Network
(ARPANET), in the Advanced Research Project, they didn't see
that it would lead to the internet. The only reason location
services work on this device is because the United States
Government maintains 31 global positioning satellites above our
heads.
And the reason I tell that story is because this is the
story of innovation. You can call it a partnership. You can
call it a foundation that the government sets up that the
private sector builds on. But it is really important that we
remember that is the nature of innovation because, look, I am a
general cryptocurrency skeptic here, but I don't ever want to
do something, including demanding use cases that are very, very
specific at a time when we could find ourselves at a
competitive disadvantage.
So, Dr. Brainard, I worry about this. If we wake up 6
months from now and the EU has created a digital CBDC
equivalent of the Euro, or if the British have developed a CBDC
sterling and their private sector in Europe is innovating on
top of that foundation, could we find ourselves at a real
innovative disadvantage?
Ms. Brainard. Yes.
Mr. Himes. And you talked about this before, but if that
happens, and the apps that get built on a euro or a sterling,
CBDCs are really attractive, is it possible that around the
world, people would migrate away from the dollar as not just a
reserve currency, but as a used currency?
Ms. Brainard. I think it is, yes.
Mr. Himes. So, there is a very real risk to our traditional
position as an innovator if, by having some ideological split
that doesn't exist between the government and the private
sector, we allow--I don't worry so much about China; who is
going to trust the Chinese digital currency?--Europe, or the
U.K., or someone else to move ahead of us. There are some
really important risks, and you have highlighted them,
associated with a CBDC. We do not want to disintermediate the
banking system. We don't want to create a flight to quality and
panicked moments. But is it possible that an intermediated
system like you called for with wallets that perhaps are held
in the private sector, but which are capped in the amount that
one can hold and that perhaps are not interest bearing, can you
sort of conceive of a structure like that which really creates
no risk for the existing financial services system?
Ms. Brainard. Certainly in the research that we have done
and the paper we put out, it is those caps, the lack of
interest that would help to protect the banking system from any
disintermediation of deposits.
Chairwoman Waters. Thank you.
Mr. Himes. Thank you, Dr. Brainard. My time has expired.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is now recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman, and Vice Chair
Brainard, thank you so much for your insights into this
important topic.
I wanted to follow up on Ranking Member McHenry's and
Congressman Luetkemeyer's questions about the need for
congressional authorization. You reiterated that your January
report states that the Fed would not issue a CBDC without
congressional authorization. In that report, the Fed committed
to moving forward with a CBDC only with clear congressional
support, ``ideally in the form of a specific authorizing law.''
You have reiterated that today.
But I want to get into this Executive Order that you
mentioned in response to Congressman Luetkemeyer. That March
9th Executive Order requires the Attorney General, in
consultation with the Secretary of the Treasury and the Chair
of the Fed, to provide an assessment of whether legislative
changes would, in fact, be necessary to issue a central bank
digital currency should it be deemed appropriate and in, ``the
national interest.'' This, to me, suggests that the
Administration is not yet convinced that Congress has a role
here.
Tell us how the Fed is coordinating with Treasury on this?
And if Treasury and the Attorney General take the position that
congressional authorization is not necessary, will you,
Chairman Powell, and your General Counsel, Mr. Van Der Weide,
commit to pushing back to protect the important role of
Congress?
Ms. Brainard. I appreciate the question. I can certainly
say that you are right, that is what the Executive Order asked
for. No, I have not been engaged in any of those conversations,
but, of course, that is not my expertise, so it would not be
likely. But I believe that there have been some staff-level
discussions between the Federal Reserve, the Department of
Justice, and Treasury, and, of course, I don't know where those
discussions are going to go. So, the kind of hypothetical
circumstance that you mentioned is very hard for me to
speculate on.
Mr. Barr. What I think Congress is expecting, and I hear
some bipartisan support for this from Mr. Himes, is that your
General Counsel, and Chairman Powell, as the Executive Order
requires to coordinate with the Attorney General, take the
position you are taking here today, that congressional
authorization is required, and we will be following up with you
on that.
Let me let me follow up on this deposit substitution
concern about a CBDC. You mentioned that a key objective of a
CBDC is to promote financial inclusion. You are hearing concern
today that this actually might compromise access to credit,
that a CBDC would compromise access to credit, especially in
rural, community bank-dependent areas like my district, that
moving deposits off of bank balance sheets may be harmful to
the very people we are trying to help. Talk about that a little
bit more. And as you do, I will just quote the Fed itself: ``A
widely-available CBDC could serve as a closed substitute for
commercial bank deposits or other low-risk assets, such as
government, money market funds, and Treasury bills. A shift
away from these assets could reduce credit availability or
raise credit costs for households, businesses and
governments.''
Ms. Brainard. Let me just start by saying that I am very
focused on the role of community banks in rural communities,
and the really important and unique role they play in providing
credit, in particular, to small businesses and to communities
there. So, it is a very important link to financial inclusion
for rural communities, and I certainly care a lot about making
sure that our community banks are vibrant.
Mr. Barr. Can I reclaim my time quickly, and get to your
point about intermediation and caps, because I know that is
your solution. But I worry that a CBDC, even an intermediated
CBDC, where the caps are capped at $5,000 per end-user, would
still result in $720 billion in deposits leaving the banking
system. And that would, in fact, impact community banks the
worst because 46 percent of community bank deposit accounts
have less than a $5,000 balance.
Ms. Brainard. I think what you can already see today is
that there is a big migration of consumers, particularly young
consumers, to mobile apps for payments, particularly for peer-
to-peer (P2P) payments. We have just seen a tenfold increase
just over the last few years alone in those balances that are
already not being held in community banks. If you saw
stablecoins being prominent in payments, that would also lead
to migration. So, I think we need to think broadly about the
future of community banks and the vibrancy of deposit holdings
in a world that is rapidly digitizing on payments. And of
course, as you noted, any system, any design considerations
would include a prominent role for banks of all types as
intermediaries. And we certainly have been thinking a lot
about, are there kinds of restrictions, like no interest
payments, restricted caps, that would help guard against risks
in moments of instability?
Mr. Barr. How does the intermediary--
Chairwoman Waters. Excuse me. The gentleman's time has
expired.
Mr. Barr. So many questions. Thank you.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
who is also the Chair of our Task Force on Artificial
Intelligence, is now recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman. There has been
some discussion here about what problem this might be solving.
And if everyone had access to either a Fed account or Fed bank
stablecoins, which were widely used for consumer and commercial
payments at negligible cost, roughly how much would vendors and
consumers save in credit card fees?
Ms. Brainard. I don't have a specific estimate for you, but
certainly, transaction costs are very high currently as we know
from--
Mr. Foster. If you could get back to me with an estimate, I
would appreciate it, because that is a big potential consumer
benefit.
Now, it seems to me the first, safest step here would be
stablecoins issued by a regulated financial institution that
were 100-percent backed by Fed Reserves. That seems like the
safest thing you can imagine. And the main thing that would be
required for this to happen is that the Fed would provide an
Application Programming Interface (API) to verify in real time
the reserve account balances so that any time anyone was going
to mint a stablecoin, the minting process could not complete
until the Fed had verified that the updated account balance
was, in fact, on reserve. It seems like, technically, this
should be a fairly straightforward thing, and I wouldn't be
surprised if the parts were already in place in the regulated
financial system to make that happen. This approach would also
neutralize any monetary effects of changing stablecoin
balances. So it seems, from that point of view, it would be a
pretty safe thing.
What would be the residual dangers in an initial approach
like this, and is this really a project that would take 5
years?
Ms. Brainard. Of course, private stablecoins could and are
growing in usage every day, and so, what would be different?
First, as you say, an entirely reserve-backed stablecoin with
very strong regulations and guardrails around it would mitigate
some of those financial stability risks. It would not mitigate
risks of fragmentation of the payment system or of walled
gardens. And that is another really important aspect, I think,
of thinking about whether you want a neutral settlement layer
that might underpin a variety of stablecoins and other private,
innovative solutions. And fragmentation of the payment system
is costly. As we know from previous periods, when it makes it
difficult to move from platform to platform, it introduces
large inefficiencies.
Similarly, if you think about the cross-border case, and,
in particular, the cross-border wholesale case, where I think
banks are particularly focused as potentially lowering
transaction costs, there, too, you would either have a large
number of stablecoins, in which case you might have some
fragmentation and inefficiencies, or you end up potentially
with one very concentrated stablecoin which would require even
more regulatory oversight. And, of course, any special
stablecoin would lead to the same kind of disintermediation
risk as a central bank digital currency.
Mr. Foster. Okay. In your testimony, you highlighted the
fact that the discussion paper indicated that a Fed-issued CBDC
would best serve the needs of the United States by being
privacy-protected, intermediated, widely transferable, and
identity-verified. You mentioned that you would also need
legislation to proceed with CBDCs. Do you also feel that you
would need legislation on the digital identity front to make
this a realistic possibility? Is that a necessary part of any
CBDC program? Are the standards in place already sufficient for
that?
Ms. Brainard. I would say two things there. One, we talk
about trying to strike that balance between privacy and
identity verification by leaning on the current system that we
have with banks as intermediaries where banks are responsible
for verifying identities, and consumers, as a result, have
privacy. There is no direct visibility into consumer
transactions on the part of the government. But you are asking
a broader question about digital identities, and that is really
outside the purview of what the Federal Reserve is
knowledgeable about or responsible for. And I think it is a
much broader and very important question.
Mr. Foster. Okay. If you could just let us know who is
actually carrying the ball, I would appreciate it.
Chairwoman Waters. Thank you.
Mr. Foster. Okay. Thank you. I yield back.
Chairwoman Waters. The gentleman from Arkansas, Mr. Hill,
is now recognized for 5 minutes.
Mr. Hill. Thank you Chairwoman Waters, and, again, my
congratulations, Dr. Brainard, on your new position as Vice
Chair for Regulation at the Fed.
This committee's work on digital assets has been one of the
bright spots in recent years, and I thank our members for their
hard work. I think our committee is among the best-informed
Members of Congress on the subject of digital assets, and that
is due to the strong bipartisan engagement on that over the
past few years. And I particularly appreciate the work of the
ranking member and of the chairwoman of the committee and for
working on a bipartisan basis here.
I have been urging full consideration of the central bank
digital currency, or CBDC, for about 3 years now. And last
year, I introduced with my friend from Connecticut, Mr. Himes,
the 21st Century Dollar Act to make sure that the U.S.
Government has a strategy to maintain the dollar as the primary
global reserve currency now and well into the future, with or
without a central bank digital currency.
And in 2019, Congressman Foster and I authored H.R. 2211,
the Central Bank Digital Currency Study Act, which directed the
Fed's Board of Governors to study a potential CBDC, and its
impact on consumers, businesses, monetary policy, and the U.S.
financial system. And while that bill hasn't passed, we are
here today talking about precisely that kind of a study, so I
am delighted to see the work by the Fed, both with the private
sector and MIT to conduct this study. And I was also pleased
that I think I heard Dr. Brainard confirm that they would not
issue a central bank digital currency without clear legislation
from Congress, so I thank Mr. Himes and Mr. Foster for working
with me on these issues.
In thinking back, looking at the Fed's report, one quote
stood out to me: ``The Federal Reserve Act does not authorize
direct Federal Reserve accounts for individuals, and such
accounts would represent a significant expansion of the Federal
Reserve's role in the financial system in the economy.'' Dr.
Brainard, just confirming with you, you stand by that and you
don't support direct consumer accounts at the Fed. Is that
correct?
Ms. Brainard. Yes, I think our statute is clear on that.
Mr. Hill. Thank you. And it seems like a clear indication
to me, also, that the Fed understands that if a CBDC were to be
created here in America, it should be intermediated through the
private sector. Whereas companies, not the government would
offer these accounts and digital wallets to facilitate the
management of CBDC holdings and payments and innovations, that
would be also reserved for the private sector. Is that also,
again, your confirmation today?
Ms. Brainard. Yes.
Mr. Hill. Yes. We have been talking a lot about consumer
benefits, about payments being reduced in fees, for example, in
offshore dollar exchanges like MoneyGram and things like that,
which was a big part of our hearing a few years ago with Libra
and Facebook. But I wouldn't call current digital asset
transfers on blockchains cheap. Would you say it is inexpensive
now to do that?
Ms. Brainard. Yes, the numbers I have seen are actually
quite expensive.
Mr. Hill. Yes. And also settlement times are long, are they
not, compared to if I use my debit card at the Longworth
cafeteria and debit my account through Visa Debit, blockchain
settlement times are also not instantaneous. Is that not
correct?
Ms. Brainard. That is correct.
Mr. Hill. Yes. So, there are operational issues that we
have, as you say, a lot of work to do before we just
instantaneously think this is going to be successful. Are you
testifying in a general way that you really prefer a CBDC over
a stablecoin innovation regime? Is it unfair for you to say
that is your view, or is that a fair way to describe it? Do you
actually prefer a U.S. Government-issued CBDC through an
intermediary overseen by the Government versus a number of
stablecoins?
Ms. Brainard. No, I really see the potential for a digital
dollar as being complementary to a more stable, efficient
system that would include stablecoins and commercial bank
money. So, I really see them as potentially enabling private-
sector innovation and being fully complementary. And, of
course, just to your earlier question on blockchain, obviously
blockchain has some real inefficiencies associated with the
proof of work. The way that it verifies any kind of ledger with
a central permissioned authority like a central bank wouldn't
have those kinds of inefficiencies on settlement.
Mr. Hill. Thank you, Dr. Brainard. And, Madam Chairwoman, I
have some additional questions I will submit for the record.
I yield back.
Chairwoman Waters. Thank you. The gentleman from Georgia,
Mr. Scott, who is also the Chair of the House Agriculture
Committee, is now recognized for 5 minutes.
Mr. Scott. Thank you, Madam Chairwoman. Dr. Brainard, I am
also, as the Chairwoman said, the Chair of the House
Agriculture Committee, in addition to being a senior member on
this Financial Services Committee, for 20 years. And it has put
me in the pivot of the two essential things that we cannot
survive without: access to food; and access to money. So, let
me share with you why I am worried, because we have unbanked
and underbanked people who don't have access to the
infrastructure of our financial system. I am also worried and
concerned about the failure of us having financial education to
educate people. We are making drastic moves with this
cryptocurrency and the subject we are addressing today.
Let me ask you this, so you can address my concerns. How
would a Fed-backed digital currency address the various reasons
that our low-income consumers say why they are unbanked? They
say specifically that they have a lack of physical branches in
their communities. What role would that be? They say they have
minimum balance requirements, and then also this general
distrust of our financial system. How do you address that? You
made a statement in your report. You said that a central bank
digital currency could have helped millions of unbanked and
underbanked Americans during the pandemic. You suggested that
if the Federal Government had the option of providing digital
cash, people without a bank account could have received relief
payments faster and more efficiently. How can you back that up,
ma'am?
Ms. Brainard. I think the reasons that you noted are the
reasons that we see in our surveys, in FDIC surveys, why more
than 5 percent of our population doesn't have a bank account,
and that does include cost-related concerns, first and
foremost, such as minimum balance requirements and
unpredictable or high fees, as well as lack of trust, and, as
you also noted, lack of convenience, and potentially, a lack of
branches. Of course there are some products out there, like the
Bank On initiative, where banks are offering low-cost, low-risk
consumer checking accounts. I certainly hope that will improve
financial inclusion, but many consumers are also moving to
payments methods outside the banking system because they are
accessible, they are on apps, and because they don't have those
kinds of minimum balance requirements. So, it is possible that
a digital dollar issued by the central bank could be part of an
ecosystem that lowers transactions costs--
Mr. Scott. I only have a moment here.
Ms. Brainard. Sorry. Yes.
Mr. Scott. With all that you said, answer this for me: How
do we overcome the challenge of having unbanked and underbanked
communities view a central bank digital currency exactly the
same as if they had a bank account?
Ms. Brainard. A central bank digital currency is really
more like a cash analog. It is really in the digital world, the
equivalent of holding on to cash or currency. It is direct
central bank-issued safe money. Consumers hold that right now
in the form of currency, but currency is not always accepted
any longer. It is hard to--
Mr. Scott. Okay. I have 7 seconds, 6 seconds, but please
make a point to address this. We have to bring everybody along
with us, including the unbanked and underbanked. And until we
have that done, we cannot move ahead and be functionable for
all Americans.
Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
Davidson, is now recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman, and Ranking
Member McHenry. And Vice Chairwoman Brainard, thank you and
congratulations for your testimony, and I am glad we are doing
this hearing. I wish we had scheduled it when we were in town.
I think being live and in-person adds a lot of value, but I am
glad we are doing it, nevertheless.
Ms. Brainard, earlier when my colleague, Mr. Barr from
Kentucky, was talking with you about your inquiry from the
Executive Branch, you pointed out that you hadn't personally
been contacted, but you also said that you wouldn't be the
subject matter expert. If that is the case, why are you our
witness? I think I want clarity there. You seem to be handling
the questions well. Who is the subject matter expert that the
Administration would be working with, if not you?
Ms. Brainard. I think our General Counsel's Office would be
the group of people who interpret our statutory language.
Mr. Davidson. Okay. So you mean on statute, not necessarily
on the subject at hand, central bank digital currencies?
Ms. Brainard. No, my apologies. I was really referring to
that specific question about statutory language.
Mr. Davidson. Okay. Wonderful. Thank you for that. And I
appreciate the chance to clarify it. And just recently, with my
colleague, you pointed out that the analog is more to cash. So,
if a person holds $100 of cash in their wallet, is it something
the Fed would consider a vulnerability to public safety that
must be reported or monitored?
Ms. Brainard. No, there is a really important difference, I
think, in terms of the anonymity of cash, the potential
anonymity of cash. And of course, any future stake cash would
continue to be an option for consumers.
Mr. Davidson. Yes. So, is it a vulnerability if a person
holds $1,000, or what about $10,000? Is there a point where
holding cash is some sort of vulnerability to the financial
system?
Ms. Brainard. The financial system and consumer preferences
are moving away from cash, so this is really just an
observation about what is actually happening. We are very
committed to provision of currency. We have a lot of really
important responsibilities in that regard, and we will continue
to be very committed to currency.
Mr. Davidson. I asked the question that way because,
frankly, while cash isn't really illegal yet, there is an
effort to make the digital equivalent of cash illegal. This is
a rulemaking, frankly, first attempted under Secretary Mnuchin
and now contemplated under Secretary Yellen that would ban
self-custody. And self-custody of digital currency is
essentially the same as self-custody of physical currency or
cash. Why do you believe there is scrutiny there?
Ms. Brainard. That really sounds like something that
Treasury would be best placed to address.
Mr. Davidson. Yes. So as you contemplate central bank
digital currencies, what would you consider a permissionless
peer-to-peer transaction, because that is the nature of cash.
If we are trying to preserve that, wouldn't that make it
essential that any future central bank digital currency also
preserve those characteristics?
Ms. Brainard. That is one of the most, I think, profound
questions that we raised in our discussion paper. There is that
tension between potential anonymity and concerns, as were noted
by other members of the committee earlier, about potential
illicit activity and anti-money laundering.
Mr. Davidson. Yes, that is why the government has almost
banned cash, not entirely. And to Mr. Scott's concern, the
unbanked and underbanked community is already distrustful of
banks, and they tend to not have accounts. They want to stay in
cash, and sometimes for good reason, and not illicit activity.
And I know, frankly, in an adjacent point, 40 of my Democratic
colleagues sent a letter to Google because they were concerned
that the geolocation tracking could be used by people to
regulate abortion, and the reality is their concern on abortion
might seem more partisan. But the concern is the surveillance
state, and while geolocation can do that, there is a reason
they say, just follow the money. We have made cash almost
impossible to use, and I think that hurts the unbanked and
underbanked the most. Lastly, I will say if you turn the
central bank digital currency into this creepy surveillance
tool and don't preserve the permissionless characteristics of
it, it is going to hurt. It literally is what China is
developing, and we shouldn't imitate them. We should protect
America's way of life.
Chairwoman Waters. Thank you very much. The gentlewoman
from Ohio, Mrs. Beatty, who is also the Chair of our
Subcommittee on Diversity and Inclusion, is now recognized for
5 minutes.
Mrs. Beatty. Thank you very much, Chairwoman Waters, and I
would also like to thank Vice Chair Brainard for appearing
before our committee today. Much has been touched upon, but it
gives me a great opportunity to segue from Mr. Himes, Mr.
Davidson, and Mr. Scott.
When I think of technology--going back to Mr. Himes--in my
districtc, because of the Intel Project hopefully that will be
here, we are going to have a small microchip that is going to
control just about everything that we are doing. And I put this
in the same alignment when we start talking about whether it is
Sandbox, whether it is Coinbase, and any other form of
cryptocurrency is education and awareness. We know what
happened with the stimulus checks. We had a great idea. We got
the monies out there but because of the lack of education, the
lack of banking for those who had bank accounts with
businesses, but to be in good standing meant you had to have
had that much money.
My question, Madam Vice Chair, is, how do we get the
underbanked and unbanked educated on this? I am hearing well-
educated people on the Financial Services Committee say, ``I am
a skeptic.'' Many would say this is the Wild, Wild West. I
believe it is the new frontier. I am not a skeptic. I just
returned from a CODEL in the Caribbean with Chairwoman Waters,
where I got probably the best education on cryptocurrency there
with many experts in the Bahamas. So, what is our education and
awareness plan? That would be part two, and for everyone, but
especially for the underbanked and unbanked.
And then, I will just give you my next question and you can
roll the response in, and you have touched on it, and it has
been asked in different ways. But when we look at 85 percent of
central banks, that is a good portion that currently are
exploring a digital currency and end up issuing one. And
theoretically, let us just say the United States does not. How
does that affect us in our international landscape?
Ms. Brainard. Let me just quickly respond to the second
question first. I think it is very important for your committee
and for Congress generally to be asking that question. I don't
think we can take the global status of the dollar for granted.
And in a world where other major jurisdictions move to the
issuance of their own digital currencies, it is important to
think about whether the United States would continue to have
the same kind of dominance without also issuing one. It is
possible, but it is a very important question.
Mrs. Beatty. Yes, one other thing. Is broadband important
for us to be engaged in this digital currency world?
Ms. Brainard. Yes, although offline usage is also an area
that will be important to explore for areas that don't have
good coverage.
Mrs. Beatty. And, ``good coverage'' is the operative
phrase, as we weave in other things. Let me remind everybody
who didn't necessarily support the infrastructure bill, that as
we move forward, broadband was a part of it. So as we keep
coming back, we need to think about that in relationship to how
we survive financially. Thank you.
In fact, I am not sure what my time period is, so I yield
back, Madam Chairwoman.
Chairwoman Waters. Thank you, Mrs. Beatty.
The gentleman from Ohio, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and
thank you, Dr. Brainard, for being here and sharing your
thoughts.
You talked with Mr. McHenry about two of the benefits of a
CBDC--avoiding fragmentation and instability--and you cited the
recent instability in the stablecoin market as your example for
that. Just so we have a base level of understanding, would you
agree that, one, the stablecoin that broke and basically went
to zero, that was backed by low-quality assets or at least
volatile assets? Would you agree that was an algorithmic
stablecoin not backed by fiat currency in any way, shape, or
form? You would agree with that, correct?
Ms. Brainard. It appears that way, yes.
Mr. Gonzalez of Ohio. Okay. Would you also agree that the
other one that you cited that broke the peg for a period of
time does not have the same transparency or isn't as
transparent from an asset quality standpoint as maybe we would
like in an ideal world? Would you agree with that?
Ms. Brainard. Yes.
Mr. Gonzalez of Ohio. Okay. Would you also agree that
another prominent stablecoin, which is more transparent and
claims to have higher quality assets, that did not break the
buck, correct?
Ms. Brainard. Yes.
Mr. Gonzalez of Ohio. Okay. Tell me if this leads you to
the conclusion that it leads me to, which is that a well-
regulated stablecoin, where we have high standards for quality
of assets, and liquidity transparency, and where we really
tighten the definitions around what a stablecoin is and what it
can hold, would it solve the instability issue that you cited?
Ms. Brainard. A very robust set of regulation, akin to
bank-like regulations, would solve a bank-run type of
instability, yes.
Mr. Gonzalez of Ohio. Again, quality of reserve. I think we
would probably disagree on sort of the scope of that, but
quality of reserves, liquidity, transparency, redemption
rights, these are the sorts of things we should be talking
about when we are talking about well-regulated stablecoins.
Ms. Brainard. Yes. It won't solve the fragmentation
problem. It won't solve the interoperability problem. It
wouldn't solve the potential--
Mr. Gonzalez of Ohio. I want to get to that fragmentation
point for a second. You also said that you are in favor of a
world where we have coexisting alongside of each other, CBDCs
and stablecoins. When you say what you just said about all of
these other problems that don't get solved, but then you say
that you are for this coexistence, help me understand why that
is not speaking out of both sides. You are not both the--
Ms. Brainard. Let me just say first, one way or the other,
I think the decision about whether to issue a CBDC lies in the
future. So, it is really in that world I would see a CBDC as
potentially complementary.
Mr. Gonzalez of Ohio. Let me just ask you really quickly,
in a world where we have well-regulated stablecoins, and there
are various providers, you have said that leads to
fragmentation. Help me understand why that world, plus a CBDC,
in your view doesn't also lead to fragmentation? How are we
less fragmented if you are in the camp of saying, I am for both
coexisting?
Ms. Brainard. Yes, the currency that is backed by the full
faith and credit of the U.S. Government naturally provides
interoperability between different platforms. And so, in that
kind of a world, you would still have a digital asset that
would have the backing of the U.S. Government and, therefore,
would naturally be that kind of neutral self-settlement asset
layer. And different stablecoins could then have different
attributes and be part of different ecosystems, but you would
have that basic interoperability built in.
Mr. Gonzalez of Ohio. Yes, I guess I am still having
trouble understanding how, in your view, these could coexist
and there not be fragmentation, but I will set that aside for a
second. My final question, with 20 seconds left is, have other
central banks reached out to your team and expressed concern
from a reserve currency status if the U.S. does not have a
CBDC?
Ms. Brainard. Other central banks have certainly asked us
to participate in some of their work in the hopes that the U.S.
would--
Mr. Gonzalez of Ohio. Specific to the reserve currency
status question.
Ms. Brainard. Specific to being one of the most important
central banks that values privacy and transparency and a set of
values around digital currencies that they share.
Mr. Gonzalez of Ohio. Thank you. I yield back.
Chairwoman Waters. The gentleman from Illinois, Mr. Casten,
who is also the Vice Chair of our Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets, is now
recognized for 5 minutes.
Mr. Casten. Thank you, Madam Chairwoman, and I am really
enjoying this conversation. And thank you, Vice Chair Brainard,
for being here today.
I want to start with just some structural issues that I
have. I am still having a hard time getting my head around this
as long as we have had these conversations. For a U.S. CBDC, my
understanding, and correct me if I am wrong, just, ``yes'' or
``no,'' is that for it to work, it always has to be a liability
of the Federal Reserve. Is my understanding correct?
Ms. Brainard. Yes.
Mr. Casten. Okay. So if that is the case, does that not
mean that from a money supply perspective, it is always limited
to M1 money supply? There is no multiplier effect, the banks
can't lend against deposits, it is always limited to just an M1
money supply issue. Is that essentially correct?
Ms. Brainard. It would be akin to cash. It would be the
digital analog of cash, currency.
Mr. Casten. Okay. I asked that because I am getting to a
larger question, so we will get there. But I am hard pressed to
think of how a private bank would ever have a specific
incentive to take CBDC deposits. I can't imagine the interest
rate that gives them the same incentive that they would have if
they can lend against deposits. What is the case for why the
private banking sector would find CBDCs valuable in their
business model?
Ms. Brainard. Banks are very important in payments.
Consumers are moving away from, to some degree, using their
deposit accounts for payments. We have seen that kind of growth
in some of the leading mobile payments apps, and so I certainly
don't know. Again, I think the reason that we are trying to
think in the future about this is because we don't actually
know how the financial system is going to evolve, but I would
imagine that banks would continue to want to be very active in
the payment space, and this is an important service.
Mr. Casten. I am not raising these as criticisms of your
work or our work. It is just that I understand that you know,
as an intermediary of money charging fees, that different types
of currency are fungible but with the opportunity to make money
in a bank. If I deposit $1,000 in the bank and lend out $800, I
just can't see that opportunity existing in a CBDC space. And
that is such a huge engine not only of the bank's incentives,
but our economy's incentive.
Let me shift if I could, and I am still going to get to the
bigger question here if I run out of time. Let's talk about
stablecoins that are not CBDC stablecoins. In a world where we
have satisfied that there is no differential money laundering
advantage or payment time advantage, is there any reason why a
stablecoin doesn't fundamentally present the same liquidity and
risk issues as a money market fund does and shouldn't have the
same sorts of protections around it from a depositor investor
protection perspective?
Ms. Brainard. Yes. You could think about it as a money
market fund or you could think about it as requiring even
higher protections as a kind of tokenized deposit, but yes.
Mr. Casten. Okay. The reason that I asked those questions,
and I don't mean this to sound like a leading question, but I
think I am somewhere between Congressman Himes and Congressman
Sherman. I love the new technology. I think there is sex
appeal. I think we should embrace these things. I also agree
with Mr. Sherman that there is the potential for a lot of grift
on these devices because they are so sexy and they are
attracting a lot of relatively unsophisticated money. Do you
have a view, from where you sit as a Vice Chair on FSOC or
otherwise, that if we have this thing that is very
technologically sexy, lots of people are coming into it. There
are sophisticated players that are taking advantage of it.
Do we have enough visibility into the transactions that are
going on in these markets, whether inside the exchanges or
inside the wallets, to ensure that people are not essentially
running a whole lot of pump and dump schemes, for lack of a
better word or taking advantage of insider information? Do we
have enough regulatory protection to understand what is
happening there, because I have a concern, and I would love
your thoughts on the time we have left?
Ms. Brainard. We certainly don't at the Federal Reserve,
and I am guessing several of the other financial regulators
might share that concern.
Mr. Casten. I would love to follow up offline, because it
scares me. That feels like a lot of what is driving the
volatility in the space, and it scares me if we don't know how
to actually identify how big a deal that is. I see I am out of
time, so I yield back. Thank you for your thoughtful responses.
Chairwoman Waters. Thank you very much. The gentleman from
Georgia, Mr. Loudermilk, is now recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. Vice Chair
Brainard, thank you.
I know this has been touched on, but I think it is very
important. I want to make sure we have a clear understanding in
Congress about this CBDC White Paper and the intention of the
Federal Reserve to potentially move forward. And I am sure it
has been said that the White Paper states that the Federal
Reserve does not intend to proceed with the issuance of a CBDC
without clear support from the Executive Branch and from
Congress, ideally in the form of a specific authorizing law.
That is a very loosely-worded phrase, and my estimation is that
the Federal Reserve does not intend to proceed with the
issuance of a CBDC without clear support from the Executive
Branch and Congress, ideally in the form of specific
authorizing law.
Could you touch on or confirm that the Fed won't proceed
with the CBDC without a specific authorizing law from Congress,
or what is the intention?
Ms. Brainard. Yes. I think the intention is just as you
described it, that we don't intend to proceed without the
support of the Executive Branch and Congress, and it would be
ideal to have authorizing legislation that is specific to this.
It is really as simple as that.
Mr. Loudermilk. Okay. If there was an authorization in the
form of an authorizing law which would indicate clear support
from Congress, but if there wasn't an authorizing law, would
there still be an intention to move forward in some way?
Ms. Brainard. I think we really want to see that support
coming both from the Executive Branch and the Congress before
moving forward on actually issuing a digital dollar if the
decision was made to move in that direction.
Mr. Loudermilk. Okay. We will keep an eye on it, because
the words, ``we don't intend,'' leave a lot of ambiguity as far
as I would like to hear that we are not going to do it without,
but I understand what you are saying. So, we will keep an eye
on it. I will move on to another subject.
One of the Fed-cited reasons why a CBDC could be helpful is
that about 5 percent of households are currently unbanked, but
the FDIC's data indicates that many of those people simply do
not want a bank account for various reasons. It is really that
a massive government undertaking with a CBDC would be vastly
out of proportion to the relatively small scope of the problem.
In my mind, that issue, digital currency alone, would not help
the unbanked because if they want to be unbanked, they will
stay unbanked.
A CBDC would have to be paired with some Fed-sponsored
checking accounts to actually have an impact on that, and I
think that would be a wildly misguided idea. Our payment
systems already work well for the most part, so the best thing
to do is to make improvements to the existing system rather
than just completely overhaul it, in my estimation.
But another concern with a CBDC is cybersecurity, which is
something that I have been very interested in since I have been
in Congress, having come from the IT sector. The Federal
Government is probably the single biggest cyber risk, and
virtually every Federal agency has experienced a data breach.
My question is, if the Fed ever did proceed with a CBDC, it
would be catastrophic if cybercriminals were able to manipulate
our currency, so how could you ensure that it would be
protected against cyberattacks?
Ms. Brainard. Yes. Operational and cybersecurity risks are
an ongoing challenge for all payment systems, and I think any
digital dollar would be the same. And of course, we already are
responsible for providing critical pieces of the wholesale
payments infrastructure and the retail payments infrastructure.
We provided both to the public and to the government. I would
just call your attention to Fedwire, to FedACH, and, of course,
we are working on FedNow. So, we already have really important
responsibilities in the payment system in collaboration with
and in support of the private sector, and we already have very
significant cybersecurity responsibilities there. And we
recognize how important those risks are and how important each
operational resilience is.
Mr. Loudermilk. Okay.
Chairwoman Waters. Thank you.
Mr. Loudermilk. Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. The gentleman's time has expired. Thank
you.
The gentleman from New Jersey, Mr. Gottheimer, who is also
the Vice Chair of our Subcommittee on National Security,
International Development and Monetary Policy, is now
recognized for 5 minutes.
Mr. Gottheimer. Thank you so much, Madam Chairwoman. And
thank you, Vice Chair Brainard. It is good to see you. Thanks
for being here to discuss digital assets and Federal Reserve's
research on central bank digital currencies.
Vice Chair, as you know, many Americans are already storing
their hard-earned dollars in privately-issued digital assets,
like stablecoins, as we have been talking about today. While
some stablecoins are less stable than others, I believe it is
possible to establish guardrails to ensure Americans can
distinguish stablecoins that are backed one-to-one with liquid
assets from others that have questionable or nonexistent
financial backing.
My draft legislation, the Stablecoin Innovation and
Protection Act, would establish a definition and requirements
for qualified stablecoins, and in the bill, qualified
stablecoins are defined as cryptocurrencies redeemable one-to-
one for U.S. dollars. This legislation would reduce financial
instability in markets, protect consumers, and support
innovation in American fintech. It would also create a pathway
for both banks and nonbanks to acquire a qualified status for
stablecoins they issue.
With Federal oversight, do you believe that non-bank
entities can be reliable issuers of qualified stablecoins if
they can prove they are fully backed by cash or cash
equivalents?
Ms. Brainard. Yes.
Mr. Gottheimer. Excellent. And if a system of qualifying
stablecoins was implemented, what specific guardrails would you
like to see in place for non-bank issuers?
Ms. Brainard. I think that the present working group put
out a variety of requirements that would be important. Of
course, they are focused on bank-issued stablecoins. But I
think any set of stablecoins would need to have a similar, very
strong set of protections regarding assets, the actual consumer
protections, investor protections, transparency, and
cybersecurity. There is a very important list of protections
that would be very important for a stablecoin to be able to
redeem reliably and to not be subject to consumer and investor
fraud and other kinds of protection concerns.
Mr. Gottheimer. Thank you so much. I appreciate your
insight, and I am looking forward to continuing with the
conversation there. I would like to shift, if it is okay, with
you a bit to discuss the need to support continued innovation
in digital assets. In the Federal Reserve's recent report,
``Money and Payments: The U.S. Dollar in the Age of Digital
Transformation,'' the Fed explored the potential benefits and
risks associated with issuing a central bank digital currency,
as you have also obviously been addressing. The technology that
supports digital assets is rapidly evolving, as everyone knows,
in this area of finance and has been a great source of
innovation in recent years. And if one were established, how do
you see a CBDC interacting with privately-issued digital assets
like stablecoins?
Ms. Brainard. I think that having a digital currency that
is backed by the full faith and credit the U.S. Government as
currency is unique, and would be unique, and could actually be
an important support to a broader system of private-sector
innovation, much as the Federal Reserve today, the payment
services it provides, and the issuance of currency it provides
under BIRD private-sector innovation. In the comments we have
gotten back from innovators and payments providers, they really
talk about the potential for a digital currency issued by the
central bank to provide a neutral settlement asset on a neutral
layer in the technology stack that would enable
interoperability and be a stable underlying neutral asset.
Mr. Gottheimer. Thank you for that. I appreciate it, and I
appreciate you for your work. I yield back the remainder of my
time. Thanks.
Chairwoman Waters. Thank you. The gentleman from North
Carolina, Mr. Budd, is now recognized for 5 minutes.
Mr. Budd. I thank the Chair. Vice Chair Brainard, thanks
for being here today to discuss the Fed's plan for a CBDC or
digital dollar.
Historically, the Federal Government has not had the best
track record when it comes to innovative thinking versus the
private sector. Government innovation seems like sort of an
oxymoron, if you will. Here is what I want to know: What is the
Fed trying to achieve by issuing a CBDC that the private market
hasn't already been able to do? Here is why I asked. It is
because when I look at private-sector innovations, like
stablecoins, I already see that many of the claims of a CBDC
have been achieved by stablecoin providers, for example, USDC,
the U.S. dollar coin issued by Circle.
Ms. Brainard. Yes. First of all, no decision has been made.
We are really exploring this topic, and there are risks with
action, and risks with inaction. But the U.S. Federal Reserve
uniquely can issue currency that is backed by the full faith of
the government. Of course, no private entity can do that, so it
just plays a different role. And I think what Congress has
always asked the Federal Reserve to do is to play a role
alongside the private sector. That is why we have really
important payment systems, like Fedwire.
I think there is a general recognition that when there is a
completely secure, trusted asset that underpins the system,
private innovation can actually be stronger and more robust.
And that is really the question here, whether by being that
neutral settlement asset, that foundational layer, it might
actually lead to greater ability for the private sector to add
value and innovate.
Mr. Budd. Vice Chair, thanks for that. So, there is some
possible outcome where the Fed would say they don't need to do
anything, the private market just has this handled. You could
see that possibly being an outcome?
Ms. Brainard. Absolutely. I think that it would simply be
different, going into the international payment space with a
stablecoin as the kind of dominant digital form of the dollar
when other central banks from other countries issue their
digital currency from their central bank. That is just a really
different approach, but it is certainly one that some people
would favor.
Mr. Budd. Vice Chair, what has gotten us the most on edge
or concerned about the Fed issuing a CBDC are the concerns
around financial freedom and privacy. Privacy and the lawful
use of money without Big Brother keeping tabs is a universal
right, so I am not convinced that a centralized digital payment
system issued by the government would fully protect users'
privacy. What steps would the Fed take to prevent the
government from monitoring Americans' financial transactions or
prevent certain legal--with an, ``L''--transactions from
occurring that the government deems high risk or that the
government just doesn't generally support?
Ms. Brainard. Privacy is a huge issue. It is incredibly
important. And that is why the discussion paper that we put out
in January says that one of the core principles of any such
digital currency, digital dollar is that it would need to be
privacy-protected. And what the paper talks about is an
approach that is just like your bank deposits today, that there
would be no direct connection between the Federal Reserve and
consumers, that it would be an intermediated system. Banks
could play the same role as they do now with having the
transaction records or having obligations in terms of the
privacy of those transaction records and being responsible for
verifying identities. So, it wouldn't be any different from the
system we have today in that regard.
Mr. Budd. Thank you, Vice Chair. I yield back.
Chairwoman Waters. Thank you. The gentlewoman from
Massachusetts, Ms. Pressley, who is also the Vice Chair of our
Subcommittee on Consumer Protection and Financial Institutions,
is now recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman. The creation of
a digital dollar is certainly a hefty responsibility. This
technology, if properly designed and administered, has the
potential to promote financial inclusion, enhance consumer
protection, and completely revitalize our public payment and
banking services. Today's hearing is on a CBDC, but I do want
to begin by highlighting the currently outdated payment system
that brought us here, a system where families still have to
wait days at a time just to access their own hard-earned money.
While the U.K. switched to a real-time payment system back in
2007, the Fed delayed action for an entire decade, and the
FedNow system is not expected to be implemented until at least
2023 or 2024.
Vice Chair Brainard, this delay by the Fed has had
devastating consequences for working families and, some would
argue, has contributed to many people turning towards riskier
systems like cryptocurrency, stablecoins, and other private
options in search of faster payments. Why should we trust the
Fed with the responsibility of designing and implementing a
CBDC? Given the Fed's track record, is it safe to trust the Fed
with this responsibility, and how do we know this project would
not face the same decade-long delays?
Ms. Brainard. I think FedNow is going to be very important
in terms of offering real-time payments. I agree with you that
from the perspective of those small businesses and families
that need access to their funds the most quickly, real-time
payments can have the largest effect. FedNow didn't get started
for a long time because of public debate of the nature that we
are having here today. We are a public institution, so unlike a
private institution, there needs to be support from Congress
and broader support among a whole variety of stakeholders. And
that is why FedNow took some time to get that kind of support,
get off the ground, but we are now on track to deliver it at
this time next year.
And the private sector is quite excited about it at this
juncture, although there was a lot of ambivalence in the lead-
up to that announcement, and I think it is a really important
analog to today. The financial system is moving very rapidly.
It is very hard for us to see 5 years out; if we wait until 5
years to decide to launch, it will probably be another 5 years
before we could actually deliver. And that is why I think it is
really important to do that work.
Ms. Pressley. Thank you, Vice Chair. I'm sorry. I have a
couple of other questions I want to get in, so I am just going
to reclaim my time here. I think the point here is that many
countries have been able to set up a real-time payment system
much more quickly and efficiently than us, and it is critical
that our nation is meeting the evolving needs of the digital
economy. And let me be clear: The Fed is not and has never been
the sole Federal entity responsible for issuing currency or
administering public payments. The U.S. Mint issues coins, and
the Postal Service provided postal banking services for decades
until it was shut down. Today, Treasury's Bureau of the Fiscal
Service partners with banks to issue prepaid debit cards to
millions of unbanked and underbanked individuals.
Vice Chair Brainard, do you agree that instead of expecting
the Fed to solely shoulder the burden of determining any kind
of CBDC architecture, we should be bringing in other key
agencies and actors into this process from the onset that are
proven?
Ms. Brainard. We do partner with Treasury on those prepaid
cards. We do partner with other agencies. We provide a lot of
the services in the rail. We are in partnership with a variety
of agencies. So yes, I agree with you.
Ms. Pressley. That is good to hear, because as we evaluate
how to design and build our digital currency architecture, we
should be involving other public agencies like Treasury, and
the Postal Service as well. The design and implementation of
public digital money will affect everyone, and it is imperative
that this process be as inclusive and as democratic as
possible, with an explicit focus on financial equity and
establishing faster payments while safeguarding communities'
right to privacy at the same time. Thank you, and I yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Tennessee, Mr. Rose, is now recognized for 5 minutes.
Mr. Rose. Thank you, Chairwoman Waters, and Ranking Member
McHenry, and thank you, Vice Chair Brainard, for being with us
today.
In its discussion paper, the Federal Reserve included a
request for public comment on several questions on design
considerations as well as on the benefits and risk of the Fed-
issued digital currency. One question asked, for example, if
cash usage declines, is it important to preserve the general
public's access to a form of central bank money that can be
widely used for payments. A few responses that you are probably
familiar with from commenters include, ``That is a loaded
question. Stop phasing out cash.'' Another, ``Cash is king.
Leave cash alone. Some form of cash will always be necessary.
We should always have access to non-digital forms of
currency.'' Yet another, ``There will always be a need to use
cash.'' And finally, ``We should always have access to non-
digital forms of currency.''
Vice Chair Brainard, following up on a line of questioning
from Mrs. Beatty earlier, if the use of cash declines or
continues to decline, I might say, how would individuals in
areas that lack access to broadband utilize a central bank
digital currency?
Ms. Brainard. First, let me just say, we are absolutely
committed to continuing to issue currency, and we have a lot of
investments in providing cash. So, we are really just going to
respond to consumer preferences there, but we couldn't agree
more that it is very important for access to cash. Whether
there may be less acceptance of cash and payments over time,
that is not something that we would obviously have any control
over, but we are certainly providing cash, and we think it is
very important to continue to do so.
In terms of rural areas, areas that may lack connectivity,
one of the areas of research is to think about offline
transactions stored value cards. It is a very important set of
considerations about making sure that if there were some kind
of digital currency, there would be around-the-clock access,
including offline.
Mr. Rose. And you have touched on my next line of
questioning, which is, are there any workstreams underway or
analysis being done that you could comment on, on the ability
to issue a CBDC and maintain an offline option for payments and
transmissions, and could you comment on those?
Ms. Brainard. Yes, it is one of the workstreams. It is
certainly something that we are also in collaboration with some
of our pure central banks who are very focused on this issue as
well. Obviously, for this to really be an inclusive form of
payment, there need to be solutions that address offline usage
when the access to the internet is low or nonexistent.
Mr. Rose. Another question in the Fed's request for public
comments was, ``Are there additional ways to manage potential
risks associated with CBDC that were not raised in this
paper?'' The responses included things like, ``Keep politics
out of monetary policy.'' ``The potential risk of corruption
and abuse of centralized power and control over all economic
activity is too great.'' And another, ``Once the door to the
kind of power CBDC creates is opened, it will be abused.'' And
then finally, simply, ``Don't do it.''
Vice Chair Brainard, we saw how dangerous it can be when
the government weaponizes the financial system for political
purposes under the Obama Administration's Operation Choke
Point. More recently, the Canadian government instructed banks
to freeze accounts linked to the trucker protests over vaccine
mandates. Vice Chair Brainard, without appropriate safeguards,
would a CBDC make it easier for the Federal Government to block
individuals it disagrees with from accessing the financial
system?
Ms. Brainard. I really don't see a CBDC raising questions
that are different from deposits and bank accounts, for
instance. And the paper that was released in January, in
particular, talks about an intermediary model, akin to what we
see with commercial bank deposits, where the central bank
doesn't have any direct interaction with consumers, doesn't see
transactions by consumers, but there are intermediaries, very
importantly, including banks that would be responsible for both
identity verification and for keeping that transaction data
private. So in that sense, I don't see it as really any
different than the issues that are raised with commercial bank
deposits, and privacy is one of those areas that I think is
most important to think really hard about. We asked some really
important questions there, and we got some good answers.
Mr. Rose. Thank you. I appreciate that insight and I hope
to hear more going forward. I yield back, Chairwoman Waters.
Chairwoman Waters. Thank you. The gentlewoman from
Michigan, Ms. Tlaib, is now recognized for 5 minutes.
Ms. Tlaib. Thank you so much, Madam Chairwoman, and thank
you, Vice Chair, for being with us.
I know given the reliance on electricity and internet
access for a functioning central bank digital currency, many
folks are not touching on the impact of climate, and I truly
believe that the CBDC must take into account severe weather
events and climate change impacts. Over the last several years,
I have been alarmed at companies like Greenidge reactivating a
coal-fired power plant solely for the purpose of mining energy,
intensive proof-of-work-based cryptocurrency. When our
communities are flooding and our forests are burning, this is
simply a huge step in the wrong direction and cannot be a
viable model going forward, particularly for CBDC. Vice Chair,
how is the Fed approaching these challenges when developing a
CBDC?
Ms. Brainard. Yes. I think the proof-of-work that is needed
as a consensus mechanism in some forms of blockchains is
extremely energy-intensive, as you say. Any kind of system that
is permissioned where you have a central ledger or a central
authority, like a central bank, doesn't require that kind of
very energy-intensive consensus mechanism because there is a
trusted--
Ms. Tlaib. We have these environmental concerns, and you
are talking about proof-of-work. Again, how are we addressing
those environmental concerns through the--
Ms. Brainard. Any kind of system that would be run by the
central bank or where the central bank would be the central
authority in terms of who can issue would be on an existing
payment system. It would not require those consensus mechanisms
that use up all that energy because all these servers would
have to be involved in establishing that a transaction had
taken place. So, it really wouldn't be very different from our
existing payment infrastructure, which doesn't require that
kind of energy intensity.
Ms. Tlaib. As you probably know, I represent the third-
poorest congressional district in the country. It is a
significantly unbanked and underbanked population. And
throughout the pandemic, I saw how difficult it was for many of
my neighbors who lack access to traditional banking services to
receive their stimulus checks or collect unemployment
insurance. Our traditional banking ecosystem really failed them
precisely when they really needed the money the most. I
understand the appeal of digital assets and better payment
systems. However, the Fed's current CBDC proposal requires the
use of a bank account. And earlier today, you noted that you do
not believe the Fed has the authority to authorize direct
accounts for individuals.
Vice Chair, can a digital dollar truly function, as you
mentioned, as, ``a cash analog,'' while using this intermediate
whatever model? How can we make sure that we are removing
barriers to financial inclusion, not shifting them around?
Ms. Brainard. Yes. I think what a central bank-issued
digital currency can sort of help with is reduce transaction
costs in real-time payments. What it would need to also see in
order to really make a dent in this very important underbanked
and unbanked problem that we are all very concerned about is
there would have to be other partners, I think, either
nonprofits or public partners who would be able to be that
intermediary. And, of course, banks are also now starting to
offer or are offering Bank On accounts, which are low-cost
accounts, so maybe banks can also do that.
Ms. Tlaib. Yes, I know. And Vice Chair, I have said this to
my colleagues on this Financial Services Committee. It is not
free to bank with these institutions. It actually costs money,
and that is sometimes the biggest barrier, right? If I have
time, Madam Chairwoman--I don't know if I do. But I know that
earlier this week, the Fed's 2021 report on the economic well-
being of U.S. households found that low-income and underbanked
users were more likely to use cryptocurrency for transactional
use, for obvious reasons, because of those barriers, while
high-income users were most likely to use crypto purely for
investment purposes, and typically had other retirement funds.
I am really concerned that many individuals who are currently
using cryptocurrency solely for financial access have no choice
but to expose themselves to a highly volatile ecosystem. Are
you addressing that?
Ms. Brainard. Correct. That was a very important finding in
this survey. And I agree with you that it would be really
important not just to have banks as intermediaries, but also to
potentially have other kinds of intermediaries whose business
model might be specifically to provide that bridge to consumers
who currently, for a variety of reasons, are not comfortable
with bank accounts.
Ms. Talib. Thank you. I yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Wisconsin, Mr. Steil, is now recognized for 5 minutes.
Mr. Steil. Thank you, Madam Chairwoman. And Vice Chair
Brainard, thank you for being here today.
A lot of the conversation today seems to assume that the
ease of use of other countries' CBDCs poses a threat to U.S.
dollar dominance in the future. And while I recognize that the
sophistication and liquidity of our financial markets enhances
the utility of the dollar worldwide, I think a big part of the
dollar's appeal as a reserve currency is the strong, stable
position of the United States. With that in mind, I am becoming
more and more concerned about the worsening fiscal position and
how it will threaten the U.S. dollar's central role in global
finance.
In its Budget and Economic Outlook, the CBO projected the
growing danger posed by rising interest costs. We have taken on
a lot of debt. We are running persistent deficits. Meanwhile,
interest rates are rising and by all indications are going to
continue to rise. And so, I think it is relevant for the
committee just to take stock that for reference, the last time
inflation was this high, about 40 years ago, the yield on the
10-year note was around 11 percent. We are not close to 11
percent today, but most forecasters, including the CBO, expect
the cost of debt to continue to rise. In fact, the CBO
projections show net interest costs rising from about $400
billion this year to nearly $1 trillion by the end of the
decade, and this, I think, is the number-one issue that we
should be discussing, particularly as it relates to maintaining
the supremacy of the United States dollar as our global reserve
currency.
So with that in mind, with that kind of construct, Vice
Chair Brainard, over the course of today's hearing I have
noticed that a lot of the disagreement about the structure of
the CBDC stems from our different views of what problems the
CBDCs are supposed to solve. We have kind of heard financial
inclusion. We have heard other things discussed today. And I
think one thing that is of note is in the FDIC's survey of how
Americans bank, 36.3 percent of unbanked respondents said they
didn't have a bank account because they simply don't trust
banks, 36 percent said they avoided banks for privacy reasons,
and 19.6 percent said banks don't offer the products or
services they need.
It is not obvious that a CBDC would necessarily inherently
solve these problems, so I would like your input here from a
global perspective. Other countries are exploring a CBDC.
Specifically, what problems are other countries attempting to
solve through their implementation of a CBDC?
Ms. Brainard. I think there are a variety of motivations.
Financial inclusion is certainly among the problems that some
other jurisdictions are solving. There is declining use of
cash. That is a very important motivation among several pure
central banks, and the focus there is on making sure that
consumers, households still have direct access to central bank
money as the use of cash as consumer preferences and business
preferences decline regarding cash. There is also the
motivation of concern about fragmentation of the payment system
and potential instability associated with the increased use of
stablecoins. And, of course, there is also concern about the
very opaque and costly nature of cross-border transactions.
That is just a quick summary.
Mr. Steil. Understood. But have they achieved any of these
early goals? Let us just take financial inclusion for a minute,
because it is a topic we spent a lot of time working on and
thinking about, so I think it is appropriate to discuss. As I
noted earlier, many of the reasons folks are not banking in
United States involve privacy concerns, I think made worse by
the proposals of this Administration to see aggregate inflows
and outflows of Americans' bank accounts. In other countries,
for our own lessons, have they seen any success with those
stated goals, for example, financial inclusion?
Ms. Brainard. I think it is a little too early to assess
that. The central bank digital currencies that are being issued
in foreign jurisdictions are quite recent, and other countries
are in the process of developing but have not yet issued them.
Some jurisdictions have seen some really, really big
improvements in financial inclusion through the use of a
government-provided payments app, interestingly. There is a lot
of focus, for instance, on Brazil in that regard, and there you
have seen a really big increase in financial inclusion.
Mr. Steil. I appreciate you being here. I am cognizant of
the time, Madam Chairwoman, so I will yield back.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Garcia, is now recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman, and
thank you, Vice Chair Brainard, for being here today.
I want to, of course, talk about the use of digital assets
and payment technologies. As they continue to grow and
integrate into our daily lives, it is important that we offer
safe and efficient digital tools and assets that will protect
consumers and maintain financial stability. I applaud the
Federal Reserve for taking the next steps toward improving U.S.
payment systems so that vulnerable customers are not left
behind in the digital age.
Vice Chair Brainard, I recently co-sponsored the Electronic
Currency and Secure Hardware (ECASH) Act, introduced by my
colleague, Mr. Lynch of Massachusetts, which directs the
Treasury to establish a two-stage pilot program to develop and
issue an electronic version of the U.S. dollar e-cash for use
by the public. The bill has a major financial inclusion
element, because ECASH will not require the use of a bank
account. According to the FDIC, over 7 million Americans are
unbanked. The ECASH Act ensures that those who rely on physical
cash due to mistrust or lack of access to traditional financial
services will have the option to use ECASH, allowing users to
facilitate online payments and access to the digital
marketplace.
Vice Chair Brainard, as the Fed considers its central bank
digital currency design, it seems that the Fed has a two-tier
system in which a consumer would need to go through a private
banking institution to access a central bank digital currency.
How will the Fed work to ensure that all consumers have access
to a central bank digital currency, specifically the unbanked
and underbanked population?
Ms. Brainard. I think that financial inclusion question is
one that we have and will continue to focus on in our research.
My sense is that because of the concern about privacy, and
wanting to have an intermediated solution here, or at least if
we were to go in that direction, our paper recommends that the
question about who might those intermediaries be becomes very
important for financial inclusion. And again, the private
sector can do a lot of innovation in this arena.
So, if you have a payment asset which is low cost to use,
and where you have immediate settlement, there are likely to be
nonprofits or other private intermediaries that may innovate on
top of that in order to reach underbanked consumers. And of
course, it is also true as in your suggestion that other
government agencies might be quite relevant there, but it is
not the tradition of the Federal Reserve, and statutorily, we
are proscribed from directly providing those accounts.
Mr. Garcia of Illinois. Thank you. Dr. Brainard, I would
like to shift gears briefly and discuss the use of stablecoins
for remittances. As you know, Facebook failed in its attempt to
use its own stablecoin in 2019 after this committee and other
policymakers raised serious consumer protection, financial
stability, and consolidation of economic power questions.
However, in 2021, Facebook launched a much narrower digital
wallet pilot program called Novi, which would facilitate
remittances using a stablecoin called the Paxos dollar. While
the Paxos dollar is not an algorithmic stablecoin, I worry that
there is a potential for the Paxos dollar to lose its alleged
dollar peg, like we have seen with the algorithmic stablecoin,
Terra. In fact, Tether, the largest stablecoin, briefly lost
its peg, as you know, earlier this month, due to this month's
crypto crash.
Would a U.S. central bank digital currency provide the
potential for a safer and lower-cost alternative to
remittances?
Ms. Brainard. Remittances is one of the use cases that I
think is cited most often. In terms of the potential benefits
of a digital currency, that is certainly the main motivation of
some foreign central banks, and moving to issue a digital
currency is for remittances. And as you know, remittances
currently are very, very costly. It's [inaudible] flow to make
international remittances. So yes, that is one of the areas
that is seen as most fruitful potentially.
Mr. Garcia of Illinois. Thank you. My time is up, Madam
Chairwoman. I yield back.
Chairwoman Waters. Thank you. Thank you very much.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thank you, Madam Chairwoman. And thank you,
Vice Chair Brainard, for being with us today, and
congratulations on your recent confirmation.
I want to build on what my friend, Congressman Steil, just
touched on. I believe it is more critical than ever that we
maintain the dollar as the global reserve currency. But the
current state of the U.S. economy with skyrocketing inflation,
our $30 trillion debt, and increasing erosion of the confidence
of our position as a global leader are all causing some to
bring into question the future of the dollar. Just a few years
ago, most would argue that there was no real alternative to the
dollar, but these conversations have now begun to gain
traction.
Recent events have brought forces to bear that could speed
up a potential alternative. China is working tirelessly to
challenge the dollar, and they are playing the long game. Their
Belt and Road Initiative has given them considerable leverage,
especially among developing countries all around the world.
That, combined with filling the vacuum created by U.S. and EU
financial sanctions on Russia and Belarus, gives China the
possibility of challenging the dollar far sooner than we may
have expected. As the chairwoman just said, trust and
confidence in the U.S. institutions provides the global
community the ingredients to maintain the dollar as the global
reserve currency, but China can possibly browbeat their way
past the necessary trust to get a large portion of the world to
abandon the dollar, and this is extremely concerning to me.
Additionally, the recent CBO report showed that our
national debt will continue to skyrocket to unfathomable levels
in the coming decades. Their report tells us that the debt will
be 110 percent of GDP by 2032, an all-time record, and we will
reach 185 percent of GDP by 2052, 30 years from now. This is
all driven by the staggering $72 trillion of spending over the
next 10 years, $11 trillion more than the CBO projected in
February of 2021.
Admiral Mike Mullen, in 2010 when he was the Chairman of
the Joint Chiefs, said that the greatest threat to our national
security is Congress' inability to spend within its means, and
we had $11 trillion or $12 trillion in debt then. And here we
are, we are talking about tens and tens of trillions more in
debt just in a few short years. In my opinion, this is the
single greatest threat to maintaining our global position. The
world needs to be able to trust that we can continue to pay our
bills, and the CBO report paints a picture that will make it
much harder for us to continue to make that argument.
Do you agree that debt is the greatest threat to
maintaining the dollar's current status as the world's global
reserve currency? If not, what is? And how would a potential
Fed-issued CBDC play into this discussion?
Ms. Brainard. I think the U.S. status as a reserve currency
is reflective of a host of things: the resilience and dynamism
of our economy; the depth and liquidity of our financial
markets; and the trust in our institutions and our legal
system. And when you think about other residents from around
the world, why would they wish to invest in the dollar, all of
those things go into it. And certainly, I think that fiscal
sustainability is a piece of that picture, but we do have a
very dynamic and resilient economy, as we have seen just in the
last few years.
In terms of the payments dominance of the U.S., that is
really the piece that I think a digital currency goes to. The
payments dominance of the U.S. is not something that we can
take for granted. As you noted, there are other countries who
would prefer not to be using dollars for international
payments, and who would wish to be moving away from the kind of
international payment system that is very centered around the
U.S. dollar. In that context, if other central banks issue
their own digital currencies, it is very important for the U.S.
to be at the table, to have an important leadership role at the
table in determining standards for those kinds of cross-border
transactions. And it may be very important for the U.S. to have
its own digital currency offering. That is a question, but I
think it is an important question that we should just keep in
mind as we are thinking about the pluses and minuses of the
potential future state of the U.S. and global financial
systems.
Mr. Timmons. Thank you for that answer. Madam Chairwoman, I
yield back.
Chairwoman Waters. Thank you. The gentlewoman from Texas,
Ms. Garcia, who is also the Vice Chair of our Subcommittee on
Diversity and Inclusion, is now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank
you, Madam Vice Chair, for being here with us today as we
discuss the implications of creating a digital currency. And I
am not going to call it the fancy, ``CBDC,'' because, frankly,
a lot of viewers who are listening to us probably don't
understand what that means. So, I am going to just talk
generally about the digital dollar equal to our dollar.
So if cash is king, and the dollar is king, then the queen
that is equal would be that digital dollar. And I don't mind,
for one, that we have some little princes and princesses around
the king and the queen, whether it be cryptocurrency, or debit
cards, or anything else. I just think we need to make sure that
whatever is out there, that as Mr. Scott, my colleague, said
earlier, that everyone is brought along and that everyone is
included. I know one of my colleagues said that we are all
enslaved to the phone. Well, some of us are not. I know I am
not. I still have a checkbook, and I still keep it and maintain
it, and I have a debit card that I was issued by my bank that I
almost never use. One size will not fit all, so we are going to
have to keep the options. And I find 5 years a long time to
develop this, and, quite frankly, I am not sure that China or
the Bahamas took that long.
My first question is, how long will it really take? And
then, how will we kind of wean off or balance and make sure
that we have the different options for people?
Ms. Brainard. The truth is, I don't know what the right
number of years is. It really depends on where we are in that
decision process. But the piece that takes the most time--
Ms. Garcia of Texas. I want you to wait and stop
interrupting. Where are we in the decision process, because I
am a little frustrated, and I am here toward the end, and I
have sat here and listened to all of it. It seems that when we
had the Fed Chair here, he kind of pointed the finger and said
that he was waiting for the Treasury Secretary to say
something. Then, she came in, and she said they were waiting
for the President's Working Group. Then, the Working Group came
in and they said that they need something from Congress. Where
does it stop? Who is going to decide, and how long is it going
to take, because we don't want to have to have you back here
and say, where are we, we are having to catch up. Where are we
on this? Tell us what the roadmap is?
Ms. Brainard. We have put out a discussion paper, but, of
course, Congress has this really important role to play. And
so, as we have said, we would like, in making that decision,
clear support from both the Executive Branch and Congress. Let
me just put that aside because that is really all of you.
In terms of other countries that have built, it probably
took China about 6 years to go from their decision to a pilot.
What I have said I think is important is that while the public
debate and discussion and education are really important and we
need to take the amount of time that is appropriate, we can be
doing some things at the Federal Reserve. And that is what I am
hoping that I can, and my colleagues at the Federal Reserve
can, move around.
If you were in Congress to make that decision, we would be
further along in that process. We wouldn't be starting from the
first day, but we would know a lot about those policy design
questions and technology build questions. So, that is the piece
that I think we can--
Ms. Garcia of Texas. Okay. And you keep talking about
stakeholders. Could you define what that means? Are you talking
to consumer groups? What consumer groups are at the table, what
minority groups are at the table, what women's groups, what
groups representing rural America, what groups representing
just poor people who have little access to cash but actually
don't even depend on checkbooks either? They just go cash the
check, paycheck to paycheck, and deplore payday lenders. So,
who set the table, because they were not at the table when they
were not going to be a part of the result?
Ms. Brainard. Absolutely. Part of the reason this is a long
process in our system is because we have a very rich set of
stakeholders. We get comments. That is our first step, is
soliciting comments. And consumer groups did submit important
comments: payments companies; tech companies; banks. We got a
rich set of comments, and now we are kind of systematically
going through and making sure we do reach out, particularly to
the underbanked, to rural areas, to those who do not
otherwise--
Ms. Garcia of Texas. Madam Chairwoman, I don't believe the
witness answered my question. I want to know who is at the
table, what consumer groups? So, who is it? Is it the Consumer
Federation of America, or are the credit unions at the table?
Are the community banks at the table? I think I am struggling
with trying to find out just where we are in this process, and
I was hopeful that we would get some answers today.
With that, I yield back.
Chairwoman Waters. Thank you very much.
Ms. Brainard. I am happy to go through it. We have talked
to the National Consumer Law Center and--
Chairwoman Waters. We will follow up. I will make sure.
Ms. Brainard. I have a whole list for you if that would be
helpful.
Chairwoman Waters. Okay. The gentleman from Michigan, Mr.
Huizenga, is now recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman, and it's good to
see you again, Vice Chair Brainard.
I want to follow up a little bit on a couple of my
colleagues actually on the other side of the aisle. Mr. Himes
expressed his view that the benefits of a digital currency are
quite clear. I imagine you had a chance to review the letter
that Republicans from our committee sent and the questions and
concerns highlighted throughout. The crux of the question that
Mr. Himes was referring to is whether or not the obstacles in
our payment system could best be addressed by a centralized
digital currency. And since it is obvious, I am curious, do you
believe that is the case or not?
Ms. Brainard. The kinds of issues that a central bank
digital currency is uniquely able to solve really go to having
the full faith and credit behind the issuance of currency. We
have that now in physical space. We don't have that in digital
space. The financial system is moving extraordinarily rapidly
to a primarily digital system. Consumers, households have
direct access to safe central bank money today and they can use
that for payments, but payments are moving to digital. So the
question is, in the future, do we want households to continue
to have direct access to safe central bank money? The question
also is, in the future, if stablecoins become the predominant
mechanism for a digital representation of the dollar, what
kinds of instability and fragmentation that may lead to. And if
stablecoins are the only digital representation of the dollar,
does that potentially handicap us in the international
environment? Those are just the questions--
Mr. Huizenga. I am going to interrupt you. I am getting
Fed-speaked and a little filibustered on that. So is that a,
yes, you do agree with that?
[No response.]
Mr. Huizenga. Now, I can't hear. I don't know.
Ms. Brainard. I really think the right way to think about
this is the future state of the payment system, not what the
payment system looks like today. Again, it is just evolving so
rapidly.
Mr. Huizenga. Okay. Well, I look forward to the answers
from Chair Powell, in response to our letter I assume you will
have involvement on, and so I will move on to an additional
question. And I know this was something that has been on the
mind of a number of colleagues. I am curious why you think a
well-regulated stablecoin would reduce the deposit base even
more than a CBDC, and even an intermediated CBDC, could that
still possibly erode the deposit base like the digital one?
Ms. Brainard. I don't actually have any way of knowing
whether a well-regulated stablecoin--how much that might
influence the deposit base relative to a digital dollar, really
the--
Mr. Huizenga. Okay.
Ms. Brainard. Yes. I can't assess that.
Mr. Huizenga. I want to get to my final question. In
February, when we had Treasury Under Secretary Liang here to
testify on the President's Working Group on Financial Markets
stablecoin report, I asked her about agency coordination. And
like Treasury, the Federal Reserve was part of the working
group. Just about a month or so before the release of the
report, SEC Chairman Gensler stated in an interview that
stablecoins, ``may have attributes of investment contracts,
have some attributes like banking products, but the banking
authorities right now don't have the full gamut of what they
need and how we work with Congress to sort through that.'' And
since then, the SEC has continued to offer contradictory
statements, providing little or no clarity on the issue.
Vice Chair Brainard, we have talked a lot this afternoon
about stablecoins and how a CBDC would be in direct competition
to them, but clearly the SEC has a role to play in all of this.
Can you briefly explain to the committee how the Federal
Reserve is coordinating with the SEC on that particular issue?
Ms. Brainard. Yes. I actually see a potential digital
dollar issued by the central bank as complementary to private-
sector innovation and to stablecoins as coexisting with a
central bank with commercial bank money and stablecoins and
potentially actually spurring private-sector innovation, so a
little different. And of course, we collaborate closely with
the SEC. That is very important.
Mr. Huizenga. I yield back.
Chairwoman Waters. Thank you very much. The gentleman from
Massachusetts, Mr. Auchincloss, who is also the Vice Chair of
the committee, is now recognized for 5 minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman, and Vice
Chair Brainard, I appreciate your time today and your answers
in this long session. When you get to me, you are almost done.
I am also glad that over the course of this session, you
have really cleared up that you agree that you require
congressional authorization to issue a CBDC. You had me a
little nervous there at the top of the hearing, but I am glad
because I strongly believe that both the letter and the spirit
of the law is such that you would need congressional
authorization to issue a CBDC.
And that is important because I think there is a lot of
skepticism still that I am hearing and that I share about the
utility of a CBDC, both because it is a solution in search of a
problem, although you have offered a couple of potential
solutions, because of the security cybersecurity of this,
because of its potential to infringe on Americans' privacy, and
because any time you have programmable currency in the hands of
a centralized power, you risk the fact that it can be
politicized very easily, and that would be hugely detrimental
to the United States dollar being the world's reserve currency.
However, I strongly support your pursuit of research and
development on a CBDC, because I do think it gives us better
standing in negotiations for international protocols, and so I
think the R&D is good, even though I am not sold that it should
go on to the product stage.
I want to continue with the line of questioning from my
colleague from Ohio, Mr. Gonzalez, about fragmentation. You
have offered as one of the potential reasons for CBDC, that it
is the only way that you have the full faith and credit behind
a stablecoin. I don't really understand that because a well-
audited and transparent stablecoin regime, like we have seen
with USDC, really does, de facto, have the full faith and
credit of the United States dollar behind it. Because it has
U.S. dollar-denominated securities behind it, it is really just
one step removed. Am I missing something there?
Ms. Brainard. I think it is quite different to actually
issue the digital asset as opposed to a digital asset that has
reserves behind it.
Mr. Auchincloss. Why? For purposes of actual use in the
market, why is that different? If you have a stablecoin that is
directly backed, audited, and disclosed by fiat currency that
is the full faith and credit, what is the missing link there?
Ms. Brainard. The missing link is that you would have one
tokenized asset that would be seen as having the full faith and
credit of the U.S. Government behind it, because the U.S.
Government actually issued it and--
Mr. Auchincloss. Yes. But again, we are kind of going in
circles here because something like a USDC is backed by U.S.
dollar-denominated currency that is the full faith and credit.
So as long as there is an auditing and disclosure regime for
the stablecoin, you have the full faith and credit behind it.
Now, the market can price whether they think the liquidity is
appropriate, whether it is 90-day securities or 180 day or--
Ms. Brainard. That may be right. But clearly, in the case
of money market funds, that ability hasn't been foolproof, and
so we have seen runs on money market funds repeatedly actually.
It is different to have a stablecoin than to have a currency
issued by the central bank, and there are a number of
protections that you can kind of layer on. The more you layer
on those protections, of course, the more that private sector
asset may be less able to be used in certain ways. So, there is
a tradeoff there.
Mr. Auchincloss. Reclaiming my time then, Vice Chair, you
have been promoting this idea of a CBDC also as a solution to
fragmentation and as even undergirding public-private
coexistence here. I still was unclear with your answers to Mr.
Gonzalez. How would it help fragmentation to add a CBDC into
the mix? What is the actual technical process by which you are
improving interoperability in some way?
Ms. Brainard. It is creating one asset that every other
stablecoin can be seamlessly transferred into and out of, so--
Mr. Auchincloss. We can do that without a CBDC.
Ms. Brainard. Not unless they are interoperable, which
requires a standard setting and some kind of central agreement
around interoperability.
Mr. Auchincloss. But we could focus on the standard setting
and get to the same interoperability without a CBDC.
Ms. Brainard. Yes. I think the question is just whether you
want that amount of complexity in the regulatory regime.
Chairwoman Waters. Thank you.
Mr. Auchincloss. I yield back.
Chairwoman Waters. Thank you very much. I would like to
thank Vice Chair Brainard for her testimony today.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place her 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.
With that, this hearing is adjourned. Thank you all so very
much.
[Whereupon, at 2:46 p.m., the hearing was adjourned.]
A P P E N D I X
May 26, 2022
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