[Senate Hearing 117-368]
[From the U.S. Government Publishing Office]
S. Hrg. 117-368
BUILDING A STRONGER FINANCIAL SYSTEM: OPPORTUNITIES OF A CENTRAL BANK
DIGITAL CURRENCY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE OPPORTUNITIES PRESENTED BY A CENTRAL BANK DIGITAL
CURRENCY
__________
JUNE 9, 2021
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
48-634 PDF WASHINGTON : 2022
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
______
Subcommittee on Economic Policy
ELIZABETH WARREN, Massachusetts, Chair
JOHN KENNEDY, Louisiana, Ranking Republican Member
JACK REED, Rhode Island TIM SCOTT, South Carolina
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
TINA SMITH, Minnesota KEVIN CRAMER, North Dakota
JON OSSOFF, Georgia STEVE DAINES, Montana
Gabrielle Elul, Subcommittee Staff Director
Natalia Riggin, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
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WEDNESDAY, JUNE 9, 2021
Page
Opening statement of Chair Warren................................ 1
Prepared statement........................................... 35
Opening statements, comments, or prepared statements of:
Senator Kennedy.............................................. 3
Prepared statement....................................... 36
Chairman Brown............................................... 5
Senator Toomey............................................... 6
WITNESSES
Neha Narula, Director, Digital Currency Initiative, Massachusetts
Institute of Technology........................................ 7
Prepared statement........................................... 36
Responses to written questions of:
Senator Cortez Masto..................................... 60
J. Christopher Giancarlo, Senior Counsel, Willkie Farr &
Gallagher...................................................... 9
Prepared statement........................................... 42
Responses to written questions of:
Senator Cortez Masto..................................... 62
Lev Menand, Academic Fellow and Lecturer in Law, Columbia Law
School......................................................... 10
Prepared statement........................................... 48
Responses to written questions of:
Chairman Brown........................................... 64
Senator Cortez Masto..................................... 65
Darrell Duffie, Adams Distinguished Professor of Management and
Professor of Finance, Stanford University Graduate School of
Business....................................................... 12
Prepared statement........................................... 52
Responses to written questions of:
Senator Cortez Masto..................................... 65
Additional Material Supplied for the Record
Statement submitted by eCurrency................................. 67
Statement submitted by the American Bankers Association.......... 77
(iii)
BUILDING A STRONGER FINANCIAL SYSTEM: OPPORTUNITIES OF A CENTRAL BANK
DIGITAL CURRENCY
----------
WEDNESDAY, JUNE 9, 2021
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Economic Policy,
Washington, DC.
The Subcommittee met at 2:30 p.m., via Webex, Hon.
Elizabeth Warren, Chair of the Subcommittee, presiding.
OPENING STATEMENT OF CHAIR ELIZABETH WARREN
Chair Warren. This hearing will come to order.
This hearing is in the virtual format, so I want to do a
few reminders before we begin.
Once you start speaking, there will be a slight delay
before you are displayed on the screen. To minimize background
noise, please click the mute button until it is your turn to
speak or to ask questions. And you should all have one box on
your screens that is labeled ``Clock'', and it will show how
much time you have remaining.
For witnesses, you will have 5 minutes for opening
statements. You can submit a written statement that is as long
as you want.
For all Senators, the 5-minute clock also applies for your
questions.
Now, at 30 seconds remaining for your statements and
questions, you are going to hear a little bell ring just to
remind you that your time has almost expired, and it is going
to ring again when your time has expired.
If there is a technology issue, we will just move to the
next witness or the next Senator until it gets resolved. And to
simplify the speaking order process, Senator Kennedy and I have
just agreed to go by seniority for this hearing.
So I am going to start with an opening statement here, and
let me start by saying good afternoon and welcome to this
session's second hearing of the Economic Policy Subcommittee.
Today's hearing focuses on the opportunities presented by a
central bank digital currency. This is a bipartisan hearing. In
fact, it was Ranking Member Kennedy's suggestion to hold it,
and I want to thank him and I want to thank his team for
working so closely with us to get it put together.
Now, the core subject of this hearing is not Bitcoin or
Dogecoin or any other cryptocurrency. Instead, it is the
explosion of cryptocurrencies over the last decade that has
created the context for understanding the potential value and
risks of a digital currency.
There are substantial difficulties with our current payment
system. Nearly 33 million Americans have been locked out of the
traditional banking system. They are forced to use check
cashers and payday lenders for basic banking services. And even
those with traditional checking and savings accounts find that
many of the largest banks have proven to be untrustworthy,
gouging customers for overdraft or other fees, or in the case
of Wells Fargo, just outright cheating their customers with
fake accounts and fake services for which the customers pay
dearly.
So what are the alternatives? Digital currencies have been
hyped as a solution to these problems. Early advocates claim
that cryptocurrencies would open up the financial system and
deliver fast, cheap, and secure payments to anyone with an
Internet connection. Others pointed out that crypto was a way
to avoid the risks of dealing with giant banks that squeezed
customers dry.
But crypto's promises have not come to pass. Instead, here
is what is happening in the real world with cryptocurrencies.
Cryptocurrencies have turned out to be a fourth-rate
alternative to real currency.
First, cryptocurrencies are a lousy way to buy and sell
things. Unlike the dollar, their value fluctuates wildly,
depending on the whims of speculative day traders. In just the
last 2 months, the value of Dogecoin increased by more than
tenfold and then declined by nearly 60 percent.
Now, that may work for speculators and fly-by-night
investors, but not for regular people who are looking for a
stable source of value to get paid in and to use for day-to-day
spending.
Second, crypto is a lousy investment. Unlike, say, the
stock market, the cryptoworld currently has no consumer
protection. None. As a result, honest investors and people
trying to put aside some savings are at the mercy of
fraudsters. Pump-and-dump schemes are outlawed in the case of
ordinary stock, but they have become routine in cryptotrading.
One study found that the level of price manipulation in
cryptocurrencies is, and I quote, ``unprecedented in modern
markets.''
And, third, crypto has become a haven for illegal activity.
Online theft, drug trafficking, ransom attacks, and other
illegal activity have all been made easier with crypto. Experts
estimate that last year more than $412 million was paid to
criminals in ransom through cryptocurrencies, and unlike other
payment systems that make it tougher to move money illegally, a
key feature of crypto is its secrecy. So just in the past few
weeks, cryptocurrencies made it possible for hackers to collect
the ransom to release the Colonial Pipeline hack and to free
JBS, the world's largest meat producer, from paralyzing
cyberattacks. And every hack that is successfully paid off with
a cryptocurrency becomes an advertisement for more hackers to
try more cyberattacks.
Finally, there are the environmental costs of crypto. Many
cryptocurrencies are created through proof-of-work mining. It
involves using computers to solve useless mathematical puzzles
in exchange for newly minted cryptocurrency tokens. Such mining
has devastating consequences for the climate. Some cryptomining
is set up near coal plants, spewing out filth in return for a
chance to harvest a few cryptocoins. Total energy consumption
is staggering, driving up demand for energy.
If, for example, Bitcoin, just one of the cryptocurrencies,
were a country, it would already be the 33rd largest energy
user in the world, using more energy yearly than all of the
Netherlands.
And all those promised benefits, the currency that would be
available at no cost to millions of unbanked families and that
would provide a haven from the tricks and traps of big banks,
well, those benefits have not materialized.
Meanwhile, cryptocurrency has created opportunities to scam
investors, assist criminals, and worsen the climate crisis. The
threats posed by crypto show that Congress and Federal
regulators cannot continue to hide out hoping crypto will go
away. It will not. It is time to confront these issues head on.
Crypto has significant problems, but our current payment
system also has significant problems. Both the Government and
banks have dragged their heels for years, resisting innovation
and evidently taking the same hide-and-wait approach to facing
the worldwide movement into cryptocurrencies. Central bank
digital currency, which is often called ``CBDC''--because the
world needs another acronym. Digital currency from central
banks has great promise. Legitimate digital public money could
help drive out bogus digital private money. It could help
improve financial inclusion efficiency and the safety of our
financial system if that digital public money is well designed
and efficiently executed, which are two very big ifs.
So I am looking forward to hearing from our witnesses today
about how a central bank digital currency would work, why it
might be necessary, how it intersects with cryptocurrency, and,
most importantly, how it should be set up so that all Americans
can enjoy its benefit.
And, with that, I will turn to you, Senator Kennedy. Would
you like to do an opener here?
OPENING STATEMENT OF SENATOR JOHN KENNEDY
Senator Kennedy. I would, Madam Chair. Can you hear me OK?
Chair Warren. I can hear you just fine.
Senator Kennedy. I thought Chair Warren did a very good job
of outlining the disadvantages of cryptocurrency--that is not
really what I want to focus on--and the challenge in terms of
how our regulatory platforms deal with those disadvantages. I
was reading an article the other day that made the point--some
may agree, some may disagree, but the quickest way to get rid
of ransomware and what it is doing to our various countries is
to get rid of cryptocurrency. I am not sure I am ready to go
that far, but I thought it was a salient point.
I jotted down a few notes which I am going to refer to
here. I do not normally do this, but I want to be as concise as
possible so we can get to our witnesses.
This is an important topic. I see this as an opportunity
today to explore the advantages and disadvantages of a central
bank digital currency. As Chair Warren referred to, we call
that ``CBDC.'' I agree with her about the need for another
acronym. Will it work for the United States? Will it work for
the world? What value, if any, will it contribute to U.S.
monetary policy and world monetary policy?
Technology continues to emerge in our financial system and
specifically in our payment system. I think the demand for
digital payments and the influx of what I will call ``non-legal
tender'' like cryptocurrencies, to me it is clearly going to
continue to explode. These forms of payments I think we all
know have operated outside our traditional payments
infrastructure. As the Chair pointed out, they have proved to
be volatile. They have proved to be controversial. They have
proved to be speculative. They have proved to be subject to
manipulation in some cases. We have seen that with respect to
Bitcoin. And I do not mean just to pick on Bitcoin. There are
other forms of cryptocurrency.
Cryptocurrencies and Stablecoins, though, I think we have
to--if we are honest with ourselves, we have to admit that they
are on the rise, and we need to examine the risks that a
decentralized currency would pose to the Federal Reserve's
control of monetary policy. Maybe that is self-evident, but I
think it needs to be stated.
The United States is leading the world in innovation and
technology. The United States dollar--and we are all very proud
of this--has remained the world's primary reserve currency. We
want to keep it that way. Many Governments around the world, as
you know, are exploring a CBDC for use in today's digital
world. I think the United States should also do that, explore
it, as we are doing.
But we have to understand, it seems to me--and I hope we
will learn more about this today--that whether public demand
exists, who would benefit most from a CBDC has to be asked, and
who would benefit least and who would not benefit at all and
who would be perked. And we also have to take an honest look at
whether the juice is worth the squeeze when it comes to cost,
when it comes to security risks.
Now, as we know, China has created its own digital
currency. We have all read about it, the digital yuan. It uses
that--not the people of China, who I have great regard for, but
the Government of China, which I have little regard for because
it is run by a bunch of pirates. The Government of China has
used the digital yuan to monitor everyday transactions of its
citizens. It has used it to broaden its massive surveillance
system. I think there is a lesson there.
Additionally, China is using its CBDC to maintain greater
control over its economy and to expand China's monetary
influence in the world. And I think we need to be mindful of
that, and we have got to analyze the implications of a Chinese
CBDC on global competitiveness, on international commerce, and
the U.S. dollar's position as the global world currency.
I will try to cut through some of this. I also need to
mention this. I am very concerned--I do not want to overstate
it, but it is a question that has to be addressed--about
proposals that would use the CBDC to fundamentally change our
current banking system. I think we need to explore that. I am
not convinced that CBDC should be used to replace the paper
dollar or to replace bank deposits. If the U.S. chooses to hold
a CBDC, it needs to do so, it seems to me, in a way that
complements our current financial system.
There was a superb article in, I think, The Economist last
week or the week before last that talked about a CBDC not just
as a payment system but its implications for the credit
markets. Do we want the Federal Government to get into the
business of credit? And if it does, what does that mean for our
commercial banking system?
So I guess my point is we need to strike the right balance.
We need to ask the hard questions. We need to listen and learn.
And I want to thank our witnesses for being here today and for
sharing some of their time and educating us.
Thank you, Madam Chair.
Chair Warren. And thank you, Senator Kennedy.
And now, Senator Brown, you are recognized for an opening
statement.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. Thank you, Chair Warren and Ranking Member
Kennedy, and thanks to my friend Ranking Member Toomey for
being part of this hearing, too.
Senator Warren and Senator Kennedy both, thanks for making
this Subcommittee as active as it has become already. I am glad
that our Subcommittee on Economic Policy convened this hearing
to explore how a central bank digital currency can be designed
to maintain our country's leadership in the global economy, to
make our economy work better for workers and their families.
That is kind of the whole point.
Other countries around the world are already taking steps
to establish central bank digital currencies. I think we agree
the United States must not be left behind. We need to lead the
way.
As millions of working families in this country know, it is
expensive to be poor--check-cashing fees, transfer fees, late
fees, overdraft fees. We hear all kinds of promises about how
crypto and digital currencies would be more inclusive
alternatives to the current banking system, but the approaches
offered by cryptocompanies so often are just simply not
solutions. They are just another volatile risky asset for Wall
Street speculation and put some people's hard-earned money and
potentially our entire financial system at risk.
One way we give Americans more control over their money is
through my plan for no-fee accounts available to every American
at a post office or a small bank or a credit union backed by
the Federal Reserve. Americans should not have to pay
exorbitant fees just to use the money they have already earned.
People could receive money, take out cash, pay their bills
online without fees.
A central bank digital currency can work with these no-fee
accounts to make sure working families have access to the
payment system and full participation in our economy. It is
time for our banking system, Madam Chair, as you know, to work
as well for everyone as it does for Wall Street.
Thanks for giving me a couple minutes, Madam Chair.
Chair Warren. Well, thank you very much for joining us,
Chair Brown, who is the Chair of our Banking and Housing
Committee, and I appreciate your being here today.
Senator Toomey, I appreciate your being here today as well.
You are recognized if you would like to make an opening
statement.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Yes, thank you, Chair Warren, and I, too,
want to thank you and Senator Kennedy for having this hearing.
This is a fascinating and very important topic.
I would just like to suggest that as we consider the
creation of a central bank digital currency in the United
States, one of the most fundamental questions we need to ask
ourselves is: What problem is the central bank digital currency
trying to solve? In other words, do we need one?
It is not yet clear to me that we do. I know there are some
who think that a central bank digital currency would be helpful
because it would enable the Fed to provide retail banking
accounts to Americans. Now, in my view, turning the Fed into a
retail bank is not a good idea. Retail banks actually do a
great job of serving the needs of consumers because they
compete with one another in the private sector.
But it is not just banks. Beyond banks, rapidly evolving
technology companies are expanding access to the financial
system, providing all types of financial products and services
to consumers, including people of very modest means. I do not
think we need a State-sponsored bank interfering with this very
successful free enterprise system.
Nor do we want a Government entity like the Fed positioned
to possibly infringe on our privacy, able to track our personal
information and monitoring our banking transactions.
And does anyone think that the Government would provide the
high-quality customer service that consumers want from a retail
bank? The Fed, after all, has absolutely no experience in that
realm.
I know others suggest that the U.S. needs to create a
central bank digital currency in order to compete with China.
The fact that China may well be creating a digital currency
does not mean it is inevitable that the yuan would replace the
dollar as the world's reserve currency. In fact, there are a
lot of reasons to believe China's digital currency will not be
terribly appealing. China, after all, has a State-controlled
economy, has a repressive authoritarian Government that has got
capital controls on the yuan that make it unattractive as a
reserve currency. And, let us face it, China's motivation for
launching a digital currency in the first place undoubtedly
includes tightening its grip on its economy and enhancing
surveillance of its citizens, and it would like to be able to
surveil others. China likely wants to track every single
transaction done with its digital currency and directly control
this currency. With features like this, it is doubtful, in my
view, that people will flock to the digital yuan and abandon
the U.S. dollar as the world's reserve currency.
While I am not at all certain that we need a central bank
digital currency, I think we should consider the development of
private digital currencies. After all, it has been the private
sector, not the Government, that has been responsible for
developing cryptocurrencies, including Stablecoins, which, by
the way, can be perfectly stable with respect to the dollar and
have no price volatility at all with respect to the dollar.
Private digital currencies have the potential to increase
access to financial services for all Americans while increasing
individual privacy.
Now, people have raised legitimate, important issues about
private digital currencies, including their use in illicit
activity and the possibility they could affect monetary policy
and our existing financial infrastructure. I think we need to
discuss these, we need to understand these issues, and we may
well need to address them. But we should not lose sight of the
tremendous benefits that the underlying technology that digital
currencies offer and that disintermediated payments can offer
as well. That is why I think we should encourage the continued
development of private digital currencies.
I look forward to today's discussion, and I thank our
witnesses for sharing their expertise.
Chair Warren. Thank you, Senator Toomey, and, again, I
appreciate your being here today.
So now I am going to introduce today's witness panel. First
we have Dr. Neha Narula, who serves as the director of the
Digital Currency Initiative at the Massachusetts Institute of
Technology.
Next we will have the Honorable Chris Giancarlo, senior
counsel at Willkie Farr & Gallagher and the former Chairman of
the U.S. Commodity Futures Trading Commission.
After that, we will have Mr. Lev Menand, an academic
fellow, lecturer in law, and postdoctoral research scholar at
Columbia Law School.
And, last, we will hear from Dr. Darrell Duffie, the Adams
Distinguished Professor of Management and Professor of Finance
at Stanford Graduate School of Business.
So I thank all of our witnesses for being here today, and
let us start with you, Dr. Narula. You have 5 minutes.
STATEMENT OF NEHA NARULA, DIRECTOR, DIGITAL CURRENCY
INITIATIVE, MASSACHUSETTS INSTITUTE OF TECHNOLOGY
Ms. Narula. Great. Thank you, Chair Warren, Ranking Member
Kennedy, and Members of the Subcommittee, for the opportunity
to testify today.
My name is Neha Narula, and I am the director of the
Digital Currency Initiative at MIT. We focus on cryptocurrency
and digital currency design. I would like to note that my views
are my own and not the views of MIT or the Federal Reserve Bank
of Boston, with whom we are engaged in a multiyear research
collaboration, Project Hamilton. We will be releasing a paper
and open-source software this summer.
Today I am going to do three things: define CBDC and its
benefits; give examples of questions that need to be answered
before launching a U.S. CBDC, a digital dollar; and suggest
ways to answer those questions.
The high fees, long delays, inequitable access, and low
innovation in our traditional payment systems have caused
central banks to consider issuing digital forms of their
currency to the public. Traditional systems simply have not
kept pace with the demand for online commerce. Many central
banks are engaging in work on CBDC to improve payment
efficiency, facilitate financial inclusion, and maintain
financial stability.
A general purpose or retail CBDC is defined as a digital
liability of a Nation's central bank that is broadly accessible
to the general public. That it is a central bank liability
distinguishes it from commercial bank money and credit cards.
Its digital nature sets it apart from cash, and it is different
from central bank reserves in that users can hold it directly.
The promise of a CBDC goes beyond payment efficiency and
financial inclusion. Digital currency offers an opportunity for
a ground-up redesign of our payment systems. If built in the
right way, a digital dollar might empower users and create a
platform for innovation in payments, much as the Internet
created a platform for innovation by facilitating the transfer
of information.
Now, though promising, the way forward is not entirely
clear. There are many open questions regarding how a U.S. CBDC
should operate, how users might access it, how consumer privacy
would be protected, and if a CBDC is the best way to achieve
goals such as increasing financial inclusion.
For example, 36 percent of those in the U.S. who lack bank
accounts also do not have smartphones. Many Americans do not
have reliable Internet connectivity. Such people could not use
a digital currency that requires a mobile app or a constant
connection to the Internet. At MIT, we are investigating
designs that would enable forms of secure offline transactions.
Financial transactions reveal sensitive data about our
lives, and protecting privacy is essential for human dignity
and a democratic society. Consumer privacy is a requirement for
a U.S. CBDC as well as a potential competitive advantage. Yet
much work remains to determine how to guarantee privacy while
still providing the information necessary to combat illicit
activity.
More research is needed to determine how a CBDC might
address these challenges. It would be a mistake to move to
using a CBDC without understanding the implications for
financial inclusion and privacy. Extensive collaboration
between academic researchers and the public and private
sectors, as well as research funding, is needed to make
progress on these key questions.
The first step is to obtain agreement on goals. In
parallel, the Treasury Department and the Federal Reserve
should be investing more in research and development, not to
build the digital dollar but to fully understand its
possibilities and implications as well as spur technology
development.
To build consensus across various stakeholders and create a
neutral environment where the best ideas can flourish, we
should rely on the principles of open-source software
development. The Government's typical way of building systems--
outsourcing to a third-party vendor--will not, in my opinion,
work here. What is possible in terms of policy is inextricably
linked to the technical implication. The U.S. cannot outsource
monetary policy to a vendor.
As a first step, I recommend expanding the type of work
that MIT is currently doing with the Boston Fed and expanding
other collaborations between academia and the public sector.
In conclusion, we have a once-in-a-century opportunity to
redesign the dollar. Central bank digital currency might have
the potential to increase financial inclusion, reduce
transaction costs, and become a platform for innovation in
payments, if designed and implemented well. I commend this
Subcommittee for raising this important issue and encouraging
this critical dialog.
Thank you, and I look forward to your questions.
Chair Warren. Thank you very much, Dr. Narula.
Mr. Giancarlo, you are recognized for 5 minutes.
STATEMENT OF J. CHRISTOPHER GIANCARLO, SENIOR COUNSEL, WILLKIE
FARR & GALLAGHER
Mr. Giancarlo. Thank you, Chair Warren, Ranking Member
Kennedy, and Members of the Committee. I am Chris Giancarlo,
senior counsel at Willkie Farr & Gallagher.
I am here today on behalf of the Digital Dollar Project, a
nonpartisan think tank formed over a year ago to discuss the
merits of a tokenized form of a U.S. central bank digital
currency that we termed a ``digital dollar.'' I commend this
Committee for considering the challenges and opportunities of a
digital dollar, including its potential for greater access,
inclusion, and betterment of the financial system.
Twelve months ago, we proposed a tokenized bearer
instrument issued by the Federal Reserve, distributed through
the two-tiered banking system, and operated alongside physical
currency and commercial bank money. This digital dollar would
mirror many of the properties of physical cash, enjoying the
full faith and credit of the U.S. Government, but in a digital
form.
Instead of withdrawing paper dollars from an ATM and
putting them in a leather wallet, you could withdraw digital
dollars into a digital wallet on a smartphone. You could then
spend digital dollars directly, peer-to-peer, at the corner
grocery or online around the globe.
Many thoughtful commentators, including Members of this
Committee, are rightly concerned with the risks of such a
digital dollar, including its impact on fractional banking and
financial stability, energy consumption, current payment
models, economic privacy, and the reserve currency status of
the dollar. And I assume you, as a former chief regulator, I
share the inclination to look at what could go wrong with new
innovation, including digital money.
However, as a thought experiment, I would also like to
consider for just a moment what could go right. Some worry that
a digital dollar might decrease money held in commercial banks.
Well, what if the opposite happens? What if more money moves
into the banking sector, especially if previously un- or
underbanked communities shift digital dollars into bank
accounts because of the ease of doing so? And what if mobile
devices and digital wallets provide attractive on-ramps to
banking services offering interest on deposits and Government
insurance? And what if greater ease in converting commercial
bank money into digital dollars would make people less likely
to do so in a panic?
Now, I know many of you are rightly concerned with energy
consumption. But what if a digital dollar used much, much less
energy than Bitcoin and other decentralized proof-of-work
digital assets? What if it also used even less energy than is
currently used for physical mining, minting, and distribution
of paper dollars and metal coins?
Now, some are concerned that a digital dollar could
negatively impact current business models for payments. What if
a digital dollar actually lowers payment costs and bank fees
for consumers and small businesses? But what if it provides
instantaneous settlement, reducing cash-flow stress that
plagues small businesses and American consumers with costly
overdraft and other fees? And what if the economic benefits of
increased activity from digital money results in expanding
economic opportunity, small business formation, and
productivity?
Now, all of us are rightly concerned with infringing
individual privacy from mass surveillance of digital money. But
what if a digital dollar was carefully engineered from the
outset to incorporate Americans' reasonable expectations of
individual privacy consistent with our Fourth Amendment? And
what if we strike the right balance between the legitimate
needs of law enforcement with constitutional protections of
individual privacy? And what if a digital dollar with such
American legal and due process limitations provides superior
protection of individual privacy compared to many other
sovereign and, indeed, nonsovereign commercial digital
currencies?
And, last, some argue that the dollar's status as the
world's reserve currency is so well entrenched it requires no
further innovation. But what if a digital dollar improves
financial stability, productivity, and efficiency while
enhancing the dollar with new functionality, ease of use, and
smart contract programmability? And if we add to these
enhancements our recognized competitive advantages of the
dollars--that is, the backing of a robust and strong economy
and good governance and the rule of law--what if we do all
those things while protecting individual privacy in faith to
our finest national ideals? Would we not then have done our
duty to prepare the U.S. dollar to serve our fellow citizens in
the coming digital future of money?
In closing, I thank this Committee for considering this
topic with appropriate prudence, caution, and thoughtfulness,
and in doing so, I hope we not forget to consider what could go
right. Only real-world testing will show whether the juice is
worth the squeeze, in Senator Kennedy's words.
Thank you.
Chair Warren. Thank you, Mr. Giancarlo. I appreciate it.
And now, Mr. Menand, you are recognized for 5 minutes.
STATEMENT OF LEV MENAND, ACADEMIC FELLOW AND LECTURER IN LAW,
COLUMBIA LAW SCHOOL
Mr. Menand. Thank you. Chair Warren, Ranking Member
Kennedy, Members of the Committee, thank you for the
opportunity to testify this afternoon. I am a lecturer in law
and academic fellow at Columbia Law School, and in June of
2018, along with Morgan Ricks and John Crawford, I proposed
that Congress authorize the Federal Reserve to offer a retail
central bank digital currency through a program we called
``FedAccounts.''
FedAccounts would be available to any U.S. resident or
business in digital wallets operated by community banks and the
post office. These wallets would charge no fees and have no
minimum balances. They would come with debit cards, direct
deposit, and bill pay. Their balances would be nondefaultable
no matter how large--just like physical cash. They could be
exchanged instantly, 24 hours a day, 7 days a week. They would
have customer service, privacy safeguards, and fraud
protection. If you lost your password, there would be someone
you could call. And they would earn interest at the same rate
that the Fed pays to banks.
To understand how this system would work, it helps to
situate it within our existing money and payment system.
The Government currently creates two types of dollars for
the general public: physical dollars and deposit dollars. It
creates the first type directly through the Mint and the Fed.
It outsources the second type to publicly chartered, privately
owned banks.
The second type is more important. We use it to pay the
rent, receive our salaries, and save up for a rainy day. These
are digital dollars already, and there are over 17 trillion of
them circulating, more than 10 times the amount of cash in
circulation domestically.
This system is stable--with people treating their deposit
balances as equivalent to cash--only because the Government
stands behind deposit balances. The Government is the
franchisor; it charters banks and backs them. The banks are the
franchisees. They interact with the depositors and create the
deposits.
The Government also facilitates transfers. When depositors
want to pay a customer of another bank, the Fed assists through
a program called ``FedWire'' and another program called
``FedACH.'' If depositors want cash instead of deposits, banks
can go to the Fed and get cash at a program called the
``discount window.'' If a bank makes too many bad loans and
fails, a Government corporation, the FDIC, steps in to ensure
that the bank's deposits can still be exchanged for cash.
But there are a variety of problems with this system, with
the digital dollars we already have. It leaves a lot of people
out. Over 6 percent of U.S. households do not have access to
deposit money at all. It is costly. Banks charge high fees for
transferring and holding deposits. And it is slow. Checks drawn
on deposit accounts take up to 2 days to clear.
There is also an urgent second-order problem: dangerous
deposit substitutes that are not issued by banks. One group of
these deposit substitutes has been around for decades and
crashed the economy in 2008. These are eurodollars, repos, and
money funds. Another group is new. These include Stablecoins
and cryptocurrencies like Bitcoin and Ethereum. In good times,
these alternative monies can be exchanged faster and more
efficiently than bank digital dollars. In the long run, they
undermine financial stability, threaten severe recessions,
weaken the U.S. internationally, and enable ransomware attacks,
money laundering, and tax evasion.
On its own, a CBDC like FedAccount cannot solve all these
problems, but it can help. It can bring millions of people into
the mainstream financial system. It can speed up payments. It
can reduce high fees. It can bolster financial stability by
crowding out dangerous deposit substitutes. It can reduce
regulatory complexity. It can improve monetary policy
transmission. And it can generate revenue for the Government.
For all these reasons, Congress should authorize the Fed to
update our money and payment infrastructure for the 21st
century. I look forward to answering your questions.
Chair Warren. Thank you very much. I appreciate it, Mr.
Menand.
And now we come to our final witness, Dr. Duffie. You are
recognized for 5 minutes.
STATEMENT OF DARRELL DUFFIE, ADAMS DISTINGUISHED PROFESSOR OF
MANAGEMENT AND PROFESSOR OF FINANCE, STANFORD UNIVERSITY
GRADUATE SCHOOL OF BUSINESS
Mr. Duffie. Thank you so much, Chair Warren, Ranking Member
Kennedy, and Members of the Committee. Today I would like to
explain why I believe you should authorize the Fed to go ahead
and develop a central bank digital currency. The decision to
deploy this digital dollar can be delayed until a resulting
design can be evaluated for the costs and benefits that we have
all been discussing today.
This development process will require significant resources
and time, perhaps even more than 5 years. Designing an
effective central bank digital currency that safeguards privacy
while controlling illegal payments will be challenging, as Dr.
Narula has explained and as I detail in my written testimony.
While developing the digital dollar, relevant U.S.
Government agencies should address shortcomings of the existing
U.S. bank payment rails which are generally slow and expensive
to use. Regulation that promotes a competitive payments market
and the development of a viable CBDC may spur firms that
provide the current bank-railed payment system to compete more
aggressively in terms of both pricing and technology
innovation. And as noted last month by Federal Reserve Governor
Lael Brainard, the United States should also position itself
with a seat at the table of international discussions regarding
standards for the design and appropriate uses of CBDCs.
The U.S. should also prepare a muscular strategy for
deflecting undesirable and invasive types of cryptocurrencies
as they gain traction in U.S. payments. As you said, Chair
Warren, a digital dollar can play a role here by providing an
attractive and officially supported alternative.
U.S. banks, though, are capable of providing an effective
low-cost payment system, but they have not done so. Current
regulations, network effects that limit entry, and profit
incentives have not promoted an open, innovative, and
competitive market, as I explain in my written testimony.
Calls for alternatives such as fintech payment firms,
private stablecoins, and CBDCs have been incited by the low
efficiency and high cost of the current bank-railed payment
system. The Fed has had to step in with the development of its
own real-time payment system, FedNow. FedNow will improve the
speed of payments and offers other efficiencies, but brings no
assurance of significantly improved competition for payment
services.
A further impetus for the digital dollar is financial
inclusion, as my colleagues on the panel have explained. Also,
as Dr. Narula explained, this is not a simple matter.
Looking at the international side, China's new digital
currency will not add much of a threat to the global dominance
of the U.S. dollar, but will likely open commercial
opportunities for China in some emerging market economies. This
will increase China's influence in these countries, which U.S.
foreign policy experts may wish to consider very carefully,
supporting Senator Kennedy's remarks. It advantages the U.S. to
have its own digital currency technology to offer to countries
that wish to lower the costs or advance the development time
for introducing their own CBDCs. The United States should also
support the development of international agreements that would
set standards of care for protecting foreign monetary systems
from disruption by another country's CBDC.
In conclusion, the United States should now begin a
significant program for the development of a digital dollar.
The design should prioritize the efficiency of payments,
privacy, financial inclusion, and the ability to monitor
payments for compliance. Even a well-resourced development
program can be expected to take a number of years to achieve a
successful design. The final decision to deploy the digital
dollar can be delayed until more is learned.
In parallel with the development of a digital dollar,
increased efforts should be made to improve the competitiveness
and efficiency of the existing bank-railed payment system.
Regulations can be changed to further encourage innovation and
competition. The Fed, for example, has recently considered
offering accounts to ``novel'' payment firms under appropriate
conditions.
The United States should also take a leadership position in
intergovernmental discussions of CBDCs, particularly with
respect to their cross-border uses.
Thank you very much for your time.
Chair Warren. Thank you very much, Dr. Duffie. I appreciate
your being here today.
So let us start our questions. I recognize myself to get
started here for 5 minutes.
As our witnesses have described, digital currencies offer a
lot of potential advantages over cash in your wallet or even
the electronic balance on your debit card. You do not have to
worry about carrying cash around and losing it or having it
stolen. If you want to send money to somebody else, digital
currency can be easier and faster.
But in order for those advantages to be realized, the
digital version of cash needs to be secure, stable, and
accepted everywhere. Your local grocery store is only going to
accept digital currency if it knows that the digital version of
the $100 that you use to pay for your groceries is actually
worth $100. Your babysitter is only going to keep showing up if
she knows that the digital $20 you sent her is really worth
$20.
So let us talk about using cryptocurrency like Bitcoin to
pay for groceries or to pay for a babysitter.
Dr. Narula, is the value of cryptocurrency like Bitcoin
generally stable and reliable?
Ms. Narula. Thanks for the question, Senator Warren. No, it
is not. Unfortunately, we just witnessed the value of the
entire cryptocurrency ecosystem dropping by about 40 percent
over the course of the last 2 months.
Chair Warren. And how much money was that? Do you know, in
dollars, what we think the value of that drop was?
Ms. Narula. I believe it was close to $1 trillion.
Chair Warren. About $1 trillion that this thing dropped.
But think about what it means for an individual seller. It
means the grocery store could take in $100 in Bitcoin to pay
for groceries, but by the end of the day, the Bitcoin could be
worth only $60, in which case the store loses out.
So these wild swings in value mean that Bitcoin is a
terrible currency. In fact, that is why, except for criminals,
most people are holding Bitcoin as a speculative investment, a
way to make money, rather than as a substitute for money as a
way to buy this week's groceries or to pay their babysitter.
Now, the cryptoindustry knows about this problem, so they
came up with so-called Stablecoins, and I think we have heard a
couple of references to that already today. This is a kind of
cryptocurrency that claims to be pegged to the value of a fixed
asset like the dollar.
Professor Menand, are these so-called Stablecoins as safe,
reliable, and stable as, say, a digital dollar that is issued
by the Federal Reserve?
Mr. Menand. No, Senator, certainly not. They are much
riskier. They are dangerous to both their users and, as they
grow, to the broader financial system. So whereas Bitcoin is
something we really have not seen before, Stablecoins are--they
are the devil we know just wearing new clothes. They are tech'd
up versions of money market mutual funds in certain respects.
They are a type of deposit substitute, and deposit substitutes
are very unstable because the people who issue them do not have
bank charters, they do not have deposit insurance, they do not
have access to the Fed's discount window. And if people lose
confidence in Stablecoins, there is a good chance they will
dump them en masse in sort of a classic run dynamic. And the
people who are slow to get out could be left with significant
losses.
Chair Warren. OK. As you rightly point out, this is not the
first time that we have had private sector alternatives to the
dollar. In fact, I am going to go back further than you did.
In the 19th century, wildcat notes were issued by banks
without any underlying assets, and eventually the banks that
issued these notes failed, and public confidence in the banking
system was undermined.
The Federal Government stepped in, taxed these notes out of
existence, and developed a national currency instead. And that
is why we have had the stability of a national currency.
So, in theory, a digital currency issued and backed by a
central bank could provide the advantages of cryptocurrency
without those risks. The Federal Reserve, a trusted
institution, could provide a digital version of cash to the
public that is secure, stable, and accepted everywhere.
So let me ask you, Professor Menand, what role could a
central bank digital currency play in reducing these kinds of
risks to financial stability?
Mr. Menand. So a well-designed CBDC could serve as a public
alternative to these cryptocurrencies and potentially crowd out
their usage. In contrast to private digital currencies, CBDCs
would be sovereign, nondefaultable money. They would be cheaper
to use, and they would not be subject to bank-run dynamics.
Chair Warren. Right. So that is very helpful. Thank you.
You know, there are reasons why cryptocurrencies are
popping up like weeds. Our current banking system offers bad
service or no service to millions of people and businesses, and
swindlers have figured out how to skim profits off investors by
buying and selling in a marketplace that has no cop on the
beat. The risks of replaying the experience of the 19th century
are real. These private actors issue their own dollar
substitutes that they convince everyone are just as safe as the
dollar itself, until, of course, a crisis hits, their dollar
substitutes fail, they threaten the entire financial system,
and drag down the whole economy.
So I think what this hearing is about is exploring how a
central bank digital currency could serve the American people,
but it is clear we need to improve our banking and payment
systems, but the testimony and facts discussed here make it
clear also that we need to address the threats that
cryptocurrencies pose.
So let me stop there and, Ranking Member Kennedy, would you
like to ask some questions?
Senator Kennedy. I would, Madam Chair. Can you hear me?
Chair Warren. I can hear you just fine.
Senator Kennedy. I want to separate out for the moment
cryptocurrencies. I think the failings and the advantages of a
cryptocurrency, we could spend four or five hearings on that.
And I know our regulatory authorities are trying now to
understand how we should deal with it. But I want to put that
aside and talk about a digital dollar or a digital currency,
which I define as one initiated by the central bank.
And I get the part that the current payment system through
private banks can be slow. It can be expensive. I think in one
of our last hearings Chair Warren pointed out the amount of
money made by one of our larger banks in the United States in
overdraft fees. It was in the billions. I did not know that.
So I get that it can be expensive, and I can see
conceptually how a digital currency--let me use the term
``digital dollar''--could be faster and it could be cheaper.
What are the other advantages, though? And an inverse way
of asking that question, aside from gaining more information
about its people, why is China doing it? I want to hear from
all of you. Let me start with Chairman Giancarlo, who was
formerly Chair of the CFTC.
Mr. Giancarlo. Thank you, Senator Kennedy. You know, when I
look around the globe, I see that the BIS says that over 80,
close to 90 percent of reporting central banks are now looking
at a central bank digital currency, and I think three-fifths of
them actually have existing experiments underway. Why is that?
Well, I look and I see maybe six imperatives that are
driving central banks here but also around the world to take a
close look at this. The first one is just as you said. It is
about capturing data. I think that is what drove China first
with two of its commercial enterprises, Alipay and WeChat Pay,
being so successful at capturing its citizens' data. But I also
think that drove a number of Western observers, too, with the
launch of the potential for a digital currency by a social
media platform, and suddenly I think policymakers were
concerned about who was going to have the personal data of its
citizens.
But there have also been initiatives for infrastructure
modernization, and certainly Singapore and our neighbor to the
north, Canada, have got some very advanced experiments looking
at infrastructure modernization.
And then there are issues of financial inclusion. You know,
our neighbor to the south, the Bahamas, has something called
the ``Sand Dollar'' because they have citizens on out-islands
that have mobile service, but do not have banking access. And
so they are looking at it from a point of view of financial
inclusion. And I think we ourselves in the United States are
recognizing that that is a possibility, but so is precision
distribution of funds as a matter of monetary policy. Certainly
during the COVID crisis, when we tried to get checks into hands
of our fellow citizens, it did not work out so well for those
citizens that did not have bank accounts or were stuck at home
or otherwise could not work with a paper check.
And then there comes the issue of geopolitical influence,
which I think is certainly a driver for China, with combining a
central currency with its Belt and Road Initiative.
But, last, and this perhaps for me is perhaps the most
important reason, and that is, who is going to set the
standards? If the future of money is digital--and certainly for
the past 10 years, society, outside the official sector, has
been experimenting with digital money around the world. If the
future is digital, then who is going to set the standards? And
China, by the way, has been very advanced in looking to set the
standards, and that is one of the reasons why I think the
United States needs to be more out front of experimenting with
that so that we can be a standard setter and a leader in
standard setting. Thank you.
Senator Kennedy. In any additional time in a second round
that the Chair provides to us, I am going to ask all of you to
answer this. Why don't you get started for me, Dr. Duffie? If
you could tell me, other than speed and cost, why else would we
want to do a digital dollar in your opinion, if at all?
Mr. Duffie. In addition to the advantages that Honorable
Giancarlo just mentioned, I will mention one that came up
earlier today, which is the fact that if a type of
cryptocurrency that you do not want is starting to get heavily
used in your payment system, you are having difficulty
monitoring the legality of transactions, money laundering, for
example, or consumers may have difficulty with the volatility
of the currency that we just discussed, those can nevertheless
become popular because cryptocurrencies have certain advantages
for smart contracting, for token-based applications in the new
digital economy, the Internet of Things, and making payments
that do not require waiting for the banks to open, things like
that.
So what you want a central bank digital currency to do is
to provide those services and displace the undesirable
cryptocurrencies before they get traction in your economy. Now,
that is not to say that CBDCs win the day in terms of all costs
and benefits. But on that point, I think many countries are
currently exploring them for that specific reason to head off
the invasion of an undesired cryptocurrency. That is what the
Bank of Canada, for example, says that it is doing.
Senator Kennedy. All right. I am out of time. I will come
back to Dr. Narula and Mr. Menand and defer back to our Chair
here.
Chair Warren. OK. Thank you, Senator Kennedy.
Senator Reed.
Senator Reed. Thank you very much, Madam Chairman.
Mr. Menand, following on this discussion of central banks
and the use of these new digital currencies, is it inevitable
that the United States will go to a digital currency in order
to avoid having the dollar displaced as the currency of record
of the world, at least at this moment?
Mr. Menand. Senator, I do not think anything is inevitable.
Unfortunately, going to a digital currency is going to take a
lot of work. But I think that there is a high likelihood that
over time more and more people will think that a digital
currency issued by the central bank is something that the U.S.
should be involved in, and so it is important to start that
work now.
Senator Reed. Do you feel that China in particular has a
long-term strategy to develop a digital renminbi, I guess it
would be, and deploy that as it does so many other instruments
of power, with a deliberate rationale of displacing the U.S.
currency?
Mr. Menand. Yes, I do, Senator. I think this is a source of
serious concern. The launch of China's digital yuan last year
poses a significant risk to the United States. The main problem
is with the sanctions tool. One of the ways the U.S. advances
its interests around the world is through the sanctions tool,
and one of the ways the sanctions tool works is through the
international payment system, and that system revolves around
financial institutions. And because those institutions are all
connected and they all pretty much do business in dollars, even
those based abroad like the Chinese commercial banks have to
comply with U.S. sanctions or risk being disconnected from the
system.
The Chinese CBDC is going to ultimately offer parties
intent on evading U.S. sanctions a way to conduct business
without interacting with financial institutions and, therefore,
without touching the dollar payment system. So, for example, a
company in Thailand might be able to sell materials to North
Korea or a company in Iran by paying in what the Chinese are
calling ``eCNY,'' potentially without the transaction hitting
any Thai banks or other financial institutions. That is a
serious risk to the United States.
Senator Reed. Just a final question. Right now these
cryptocurrencies are not supported by and promoted by and part
of the national central banks of any nation, except the
Chinese, as you point out, are trying to do that. Even if every
major country went into a position of issuing a digital
currency, would the private digital currencies still exist? And
would they be disruptive to monetary policy, i.e., when we try
to raise interest rates in the United States, they could take
the contrary action?
Mr. Menand. Yes, unfortunately I think they would still
exist. So while we can expect a central bank digital currency
to crowd out some of these cryptocurrencies that we are seeing
sprout up, we need other policy responses as well in order to
address the harms though cryptocurrencies are posing. A central
bank digital currency will be far from sufficient.
Senator Reed. So you could envision perhaps an
international agreement which made these private
cryptocurrencies illegal and legitimate only the centrally
backed or central bank-backed currency, something like that?
Mr. Menand. I think there is definitely need for
international coordination, and there is a range of different
tools that the Government--that global Governments together
have at their disposal. A ban of some sort is certainly one of
the options; the U.S. Government has used those types of tools
in the past. During the Great Depression, for example, there
was a ban on holding monetary gold in private possession. So
that is sort of the nuclear option, but there are a variety of
other tools that Government can look at using as well to try to
deal with these currencies, including the sanctions tool itself
and taxing tools which, as Senator Warren pointed out, is
something that the Congress employed in the 19th century to
create order in the monetary system and avoid chaotic panic
situations.
Senator Reed. Thank you very much.
Thank you, Madam Chairman.
Chair Warren. Thank you, Senator Reed.
Senator Hagerty.
Senator Hagerty. Senator Warren, Senator Kennedy, thank you
for holding this hearing.
You know, innovation is what will keep America's financial
and capital markets the envy of the world. But the pace of
change of financial technology and especially with digital
assets makes our job challenging. The Federal Reserve should
continue to explore a digital dollar. Nearly every other
country is doing that. And when I asked Chairman Powell about a
digital dollar in February, I appreciated his answer that we
have a responsibility to get it right. I could not agree more.
So the Fed must explore a digital dollar promptly and
carefully, and the Fed should engage with the private sector.
There are currently a number of products that are available in
the private market that highlight some of the possibilities,
and we should not take steps that could threaten to
disintermediate, destabilize, or drain significant deposits
from the private sector lenders that underpin the strongest and
most exceptional economy in the world.
We also understand the true problem that we are looking to
solve with the digital dollar. What are the questions we are
trying to solve? Is a Fed-run digital dollar necessary to
defend the U.S. dollar's supremacy as the world's reserve
currency and to maintain stability of the global financial
system? Would China's digital currency suffer from the same
drawbacks as its hard currency? And are there better ways to
address potential risks from China's efforts?
How would a Fed-run digital dollar impact cross-border
payments? Could we better help those who are unbanked and
underbanked by removing costly regulations or by continuing to
encourage banks to expand their coverage rather than providing
a publicly run banking option at the Fed?
We also need to be practical about a digital dollar. We
need to understand what are the costs to taxpayers to set this
up and how long will it take, especially with everything else
that the Fed is working on, including monetary policy, bank
supervision, and FedNow real-time payments.
We need to understand what are the cybersecurity risks, and
we need to understand the privacy concerns for our citizens.
None of us know exactly how financial innovation will evolve,
but the last thing we want to do is constrain innovation. These
discussions, providing market parity and removing unnecessary
regulatory obstacles, all help to move the ball forward.
My first question is coming to you, Chairman Giancarlo. You
discussed what China is developing and the prudential
implications for that. In your mind, what are the biggest risks
to the United States? Is it the loss of our ability to deploy
sanctions? Is it the economic coercion? There are a number of
reasons now why people are reluctant to hold China's currency.
Would those reasons still apply to a digital renminbi?
Mr. Giancarlo. Thank you, Senator Hagerty. You know, in my
testimony I talked about the strength of the dollar as the
reserve currency being underpinned by many strong pillars, and
one is the fact that many of the world's most important ag and
energy commodities, such as wheat and soybeans and crude oil,
are priced in U.S. dollars. That means that our farmers do not
have to take foreign exchange risk, while overseas customers
have to hold dollars. And these dollar prices are set not in
cash markets but in deep and liquid American commodity futures
markets overseen by the CFTC, where I had the honor to serve.
China recognizes this advantage. As the world's largest
consumer of many of these products such as soybeans and crude
oil and iron ore, China would much prefer they were priced in
the Chinese currency, and that is one of the reasons why they
have recently opened their futures markets to overseas
participation in iron ore and crude oil futures.
When I was Chairman, the Louis Dreyfus Corporation
conducted the first large shipment of American soybeans to
China entirely using distributed ledger technology, and all
contractual aspects of that shipment from bills of lading to
receipt of shipment were conducted with all parties on one
universal ledger.
China is very advanced in distributing ledger technology.
They have launched a national blockchain service network to
lead innovation. No other country, including the United States,
has anything like it.
It is only a matter of time before China will combine its
lead in blockchain technology with its new digital currency and
its futures markets to facilitate the entire process of
logistics, payments, and price hedging for key world
commodities in one integrated Chinese-controlled blockchain.
And that is why we must explore a tokenized form, I believe, of
the U.S. dollar that enables programmability with smart
contracts, embedding the most complex business logic into CBDC
tokens, including contracts for hedging, logistics, and
distribution of world commodities. Losing our edge to China in
the pricing of key commodities is not just a concern to
American agriculture; it is a concern to the U.S. economy.
Senator Hagerty. Well, thank you, Chairman Giancarlo, for
your leadership, for all of your work in this area, and I
applaud you for your continued interest and support as we move
forward.
Mr. Giancarlo. Thank you so much.
Chair Warren. Thank you, Senator Hagerty.
Senator Warner.
Senator Warner. Thank you, Madam Chair, and I appreciate
you having this hearing. This is a subject that I am quite
interested in as well. I am actually stepping out of an Intel
hearing that I am chairing, so I want to ask the panel--and I
think I will start with Dr. Narula and just go down the list.
We have seen both kind of good news and bad news recently, and
I know this is not directly to the notion of a digital currency
per se, but we have seen cryptocurrencies used as the preferred
payment model for ransomware. On the other hand, we have seen
the very good news recently that perhaps there is not as much
anonymity as some had promoted in the ability to trace back to
that Bitcoin wallet and be able to ferret out some of those
dollars that went to bad guys on Colonial Pipeline.
But based on your research and engagement with
cryptoissues, as we think through digital currency and other
related issues, how big a challenge is the--obviously, the
security risks, the misuse of these currencies, have we been
able to quantify that risk as we weigh the up-and-down
benefits? And, again, Dr. Narula, why don't we start with you?
And I would love everybody's comments.
Ms. Narula. Thank you, Senator Warner. I think
cybersecurity and security is the first-order concern with any
digital currency that the United States might decide to issue.
Whatever system underpins it would be national critical
infrastructure, so we definitely have to make sure that we get
that right.
When it comes to things like the recent spate of ransomware
attacks, I think the real underlying problem here is that we
have this valuable data that has not been properly secured. It
is true that cryptocurrency seems to be the vector of choice;
however, it is also the case that because of its open sort of
auditable nature, it is able to be a tool for law enforcement,
as you pointed out, to then track those funds and return them.
However, ransomware, fundamentally, I think we have to
address that by fixing our systems and securing them. A central
bank digital currency, if launched, would probably not look
like a cryptocurrency exactly. And it is possible to build in
safeguards to make it more trackable and to prevent it being
used for ransomware. However, as I said, criminals will
probably shift to whatever is easiest, and the real way to fix
ransomware is to solve the underlying security problem.
Senator Warner. Agreed. Mr. Menand? And I want to make
sure--I have got 2 minutes left, and I have got three more
folks to talk.
Mr. Menand. Sure. I see cryptocurrencies as posing a
serious security threat. I think that they enable a type of
ransomware that would be impossible otherwise. Think about it
this way: If you wanted to hold up a U.S. company for $5
million and there were no cryptocurrencies, you would have to
ask for cash or check. If you ask for cash, you have to
physical take delivery, which gives law enforcement the ability
to easily track you. If you ask for a check or a wire, you have
to identify your bank account information.
So it is just impossible. Crypto offers the ability, if you
do it right, to use the mixers and tumblers and to convert
between multiple currencies and to use various special
cryptocurrencies that are private or different from blockchain,
like Zcash, to hide your trail. And that is a major, major risk
to U.S. law enforcement and national security going forward.
Senator Warner. I agree, although I do think we are trying
to find some other tools there.
Dr. Duffie and then Mr. Giancarlo.
Mr. Duffie. I agree with the reply from Dr. Narula and Mr.
Menand. The U.S. central bank digital currency needs to be
bulletproof and needs to use very muscular regulatory
strategies to tamp down the use of cryptocurrencies that are
undesirable like Bitcoin. The less accepted Bitcoin is in the
broader economy, the more difficult it is for those that would
wish to use it for illegal means can convert it into
consumption or dollars. And so every effort should be made. In
the end, though, as Mr. Menand said, it is going to exist on
the fringe, and it is just a question of how muscularly you can
try to reduce its use.
Senator Warner. Mr. Giancarlo.
Mr. Giancarlo. Yes, indeed. So I would just add to, I
think, the very thoughtful comments my predecessor said. One of
the benefits of perhaps a consensus-based mechanism which we
can learn from other forms of cryptocurrency is the actual
difficulty in hacking those systems when you build it on a
broad-based distributed ledger system. Now, those are
architectural issues, and our colleagues at the Bank of Boston
and MIT have been working on some of that core architecture. We
are looking forward to their report. But I think that there are
advantages that need to be explored in distributed ledger
technology to make the system more resilient than perhaps the
account-based system we have today, which has been hacked
numerous times, even at the Federal Government level.
Senator Warner. Thank you, Madam Chair. I look forward to
working with you on this issue, and Senator Kennedy and others.
Chair Warren. Very much. Thank you, Senator Warner.
Senator Lummis.
Senator Lummis. Thanks very much, Madam Chair and Ranking
Member Kennedy, for holding this hearing on the future of the
U.S. dollar.
You know, if we build a central bank digital currency in
the right way, we can strengthen the global role of the U.S.
dollar and secure a strong financial future for next
generations here in America. So we have been working in my
office on some cornerstone principles that we think should be
used to judge a CBDC proposal, and among those is privacy. So
my first question is for Mr. Giancarlo. It is nice to see you
again.
One of the key motivations behind China's digital yuan is
surveillance and control of their financial system. So it is
clear that we cannot follow China down this road. Any U.S. CBDC
should have greater privacy, even the same or greater than
physical cash today.
So do you agree that we must provide at least the same
level of privacy? And how can strong privacy protections
enhance the dollar's value on the global stage?
Mr. Giancarlo. Thank you, Senator. By the way, my
compliments on the launch of your Innovation Initiative, which
I think is really terrific.
Senator Lummis. Thanks.
Mr. Giancarlo. I think privacy comes down to one of the key
issues behind design of a central bank digital currency. There
is no question that China views their development of a digital
currency as a tool of State surveillance. That seems very
clear. And it would be very much in keeping with the nature of
their Government.
We in the United States have a very different approach to
economic privacy. We have a Fourth Amendment. And although the
jurisprudence of that needs to be extended beyond where it is
today to extend to a digital currency, if we get the issue of
privacy right--and that is a big issue, but if we get it right
in a way that is consistent with our values, a digital dollar,
believe it or not, could be the killer app of digital
currencies worldwide. And why do I say that? Well, we know that
the Chinese currency will be used for State surveillance.
Europe is working, the EU is working on one, and they are
guided by something called their ``GDPR,'' their privacy
protection law. But that only protects from commercial
exploitation of data, not from Government use of data. We know
that there are commercial entities that would like to develop
coins that are tied to social media and others that presumably
will mine their currency for data. Only a currency actually, I
believe, promulgated by the U.S. Government with proper Fourth
Amendment protections could provide the type of privacy that we
need.
Now, it has got to be balanced against appropriate law
enforcement usage, and we have, again, a long tradition of
subpoena process. So a lot of work here for policymakers and I
think a big task for Congress is to make sure the social values
that are enshrined in the dollar today, the rule of law,
economic privacy, free enterprise, are enshrined in a digital
dollar tomorrow if we go down that road.
But I will end with this. I think if we get this right, a
digital dollar could serve for another generation or more
because we have enshrined the privacy rights that got us to
where we are today into the future.
Senator Lummis. Well, we can see that digital currencies
are going to be important in the future based just on what El
Salvador has just done. Haiti wants to follow suit. Any country
that has remittances as a major part of their economy is going
to be the first users of digital currency, and it is very
apparent why. It is upon us, so we absolutely need to do this
right. So I really look forward to working with you in the
future to make sure we do do it right.
Now, Dr. Menand, I want to turn to your comments on
financial stability. A 2016 Bank of England study found that
CBDCs have the potential to reduce systemic counterparty risk
between financial institutions, especially in times of market
stress. A CBDC could allow final settlement in central bank
money direct between payer and payee across the Fed's balance
sheet. So this would reduce or eliminate capital and collateral
that is required to be posted for transactions, including in
relation to intra-day overdrafts, putting it to more productive
use.
So do you agree that central bank digital currency has the
potential to reduce systemic risk in settlements?
Mr. Menand. Yes, I completely agree. We have focused so far
in the hearing a lot on the retail side and the benefits for
CBDC for ordinary businesses and individuals and households.
But there are also very large benefits for the financial system
more generally, and the Bank of England report that you
referenced is a good example of some of them.
One thing we have done is we have expanded access to Fed
master accounts since the last financial crisis, and that is
seen as having stability-enhancing effects. And so, yes, I
agree with that, Senator.
Senator Lummis. Thanks so much for having this hearing,
Madam Chair. I yield back.
Chair Warren. All right. Thank you, Senator Lummis.
Senator Cortez Masto.
Senator Cortez Masto. Madam Chair, thank you. Thank you so
much for the opportunity to participate in this important
discussion today. I really appreciate all the panelists and the
conversation so far.
Let me start here. Dr. Narula and maybe Mr. Menand, 6.3
percent of the population in Nevada is unbanked, so my question
for you is: How could a Federal Reserve-run digital currency
system make it easier to connect to those unbanked and provide
financial relief directly, maybe making sure they can access
unemployment insurance, Social Security benefits, et cetera?
Dr. Narula, let me start with you.
Ms. Narula. Thank you, Senator. So I think the key
technique here is to remove sources of friction that keep
people from being able to access such a digital construction, a
U.S. digital dollar. We need to make sure that there are not
onerous restrictions, that people who want to transact in small
amounts can do so very, very easily. We also need to make sure
that there are the right types of interfaces on top of a
digital currency. It cannot just be a mobile app because so
many of the people you reference might not have smartphones. So
we have to think about people who are not necessarily very
technically literate.
And so this means that a digital currency, if issued, would
need to have a wide variety of ways to access it, and that
means providing the right kind of interface and making sure
that it is a platform that other businesses and applications
can build on top of as well.
Senator Cortez Masto. Thank you.
Mr. Menand, anything to add?
Mr. Menand. Yeah, I agree with that. I would just add that
if you are poor today, a bank account can be dangerous for you.
It has a lot of fees; you might not understand when those fees
are going to be levied. So you are in a terrible position. You
have to choose between two bad choices: either you are outside
of the banking system and it is really hard for you to get
Government stimulus payments and to buy things online and to do
all sorts of things; or you go in, but you have a small amount
of money, and you are going to get hit with account maintenance
fees that people with more money do not get hit with and
overdraft fees that people with more money do not get hit with,
and it might end up costing you a lot.
And so one of the benefits of a CBDC, of a no-fee account
offered by the Federal Reserve, central bank digital money, is
it would be provided to the public without profitability
considerations. So, you know, there would be no sign-up costs,
no fees. So people who face that choice right now, they would
not have to worry about that because the Government would not
be trying to make money off of this program. They would be
providing critical public infrastructure to people.
Senator Cortez Masto. And let me add to that, because I
often hear from merchants as well about the high fees for
cashless transactions. Would this address that issue as well
for merchants?
Mr. Menand. Yes, there would be huge benefits for merchants
and small businesses to be able to have an account or central
bank digital currency in some form. Huge.
Senator Cortez Masto. I appreciate that. Thank you.
Let me jump back to the privacy issue but the security as
well and fraud. Really, this is an issue from my background I
am always cautious about, and I am really interested in your
thoughts. Let me open it up to the panel. We have seen fraud
has been a major problem with cryptocurrencies, but how should
a Federal Reserve-issued digital currency be designed, be
implemented, and regulated to reduce the risk of fraud? I know
we have talked around the edges, but is there something
specifically we should be thinking about? And let me open it to
the panel. Anybody want to take that on?
Mr. Giancarlo. Senator, at the Digital Dollar Project, we
convened a privacy subcommittee of a number of our advisory
board members, and they set out four principles that they
believe a central bank digital currency should carry. The
first, of course, is economic privacy for users of a digital
dollar, as I said before, properly balanced against law
enforcement needs.
But the second one is that the system must be secure. The
ability to use a digital dollar must carry with it security of
one's wealth, of one's value, of one's usage.
And then, third, the system must provide greater
accessibility than we have, as Professor Menand just mentioned,
for populations that are traditionally underbanked.
And then, last, the system must have sufficient
transparency so that users of the system can know that
transactions done on the system have been completed, that there
is settlement certainty, that there is payment certainty. And
those are core values that we think a central bank digital
currency must embody?
Senator Cortez Masto. Thank you. Thank you again. I know my
time is up. I really appreciate the opportunity to talk with
all of you.
Chair Warren. Thank you, Senator Cortez Masto.
Senator Daines.
Senator Daines. Thank you, Chairman Warren. I appreciate
it. And thanks to the witnesses who are here today.
I want to start off by talking about the threat we are
seeing from China in this particular space. China, of course,
has launched a digital yuan which they hope will 1 day displace
the dollar as the world's dominant reserve currency. And even
beyond the digital yuan, it is no secret that China and many
other countries are well ahead of us with regard to financial
innovation.
For example, India is also among the fastest-growing
fintech markets in the world. In fact, India processed nearly
10 billion more real-time payments than China in 2020, $25.5
billion versus $15.7 billion with China. The U.S. processed
just $1.2 billion of real-time payments. While I am not yet
convinced we need a digital dollar, I strongly support further
exploration in this important area. It is for this reason I am
heartened by the nonprofit Digital Dollar Project which will
launch five pilot programs over the course of the next 12
months. This type of private sector research will provide data
policymakers with what they need to inform the debate about the
next steps that we ought to take.
Mr. Giancarlo, can you describe what the world look like,
looking out 5 years perhaps, if we continue to let China and
others like India race ahead of us in this important area?
Mr. Giancarlo. Thank you, Senator Daines. You know, the
reason why we launched this Digital Dollar Project is we really
believe that the nature of money is changing. You know, the
Internet has been a remarkable thing, and it is not done
weaving its magic web on society. It started by changing the
nature of information dissemination and changing industries
like entertainment and publishing and travel and leisure and so
many things. Well, now it has set its sights on money and in
many ways financial services itself.
The use of distributed ledge technology with tokenized
money may present a future very different than the one we know
today. Today we think of a global network of banking
institutions that have been very useful to the United States in
sanctions power and other areas, but also to clean up money
laundering and surveil that banking network. But in the future,
we may see very different networks, networks of digital
currency. There may be a yuan network. There may be a dollar-
based network. And how these networks interact with each other
is going to be of critical importance. And the work of China in
looking at blockchain technology and hoping to set the
standards of interoperability between these networks is going
to be of critically importance. And that is why we so strongly
advocate that the United States, whether we eventually want a
digital dollar or not, is almost a second order of magnitude
issue. The first issue is that we lead in the technological
development, we lead in the standard setting. China's standards
will be using a network for surveillance of its citizens. Is
that what we want in the United States? Or are our values
different? And how do we make sure that the values that got us
here, the rule of law, of economic privacy, of appropriate law
enforcement needs, are encoded in that digital future, those
standards for the future?
Senator Daines. Commissioner Giancarlo, thank you for that.
I am going to ask Mr. Duffie the same question. I am also
reminded that India had an order of magnitude more actual
transactions real-time last year than China did, so we have got
some important players here.
Mr. Duffie, anything to add to that?
Mr. Duffie. I completely agree with Chair Giancarlo. This
is about technology. At this stage the United States has fallen
behind even India and China with respect to digital currency
technology. And the competition for commercial services
internationally is very important. U.S. banks have been ceding
ground to Chinese banks internationally. And if the United
States wants to compete, it is going to have to invest in
technology in this area, particularly with respect to the new
uses of digital ledger technology. If the United States were to
even develop the technology for a central bank digital currency
in a private-public partnership, its firms could provide those
services internationally and compete with Chinese firms that
are already positioning to do that, firms like Alibaba. So I
totally agree with Chair Giancarlo.
Senator Daines. Thanks, Mr. Duffie.
I want to shift to the issue of ransomware and
cryptocurrencies. These are another part of the problem, and
what we need to continue to study is the case of Bitcoin.
Seventy-five percent of it is mined in China, although
businesses in Montana--keep an eye on what is going on in
Montana in towns like Butte and Hardin and others in the United
States. They are starting to grow mining operations for Bitcoin
and other cryptocurrencies in massive, massive scale.
Importantly, these high-performance computing operations
are capable of building much more than just mining
cryptocurrency. For example, they can be used for artificial
intelligence, machine learning applications to help us win the
future race against China and others.
However, I am worried about the increasing use of
cryptocurrencies to pay ransomware to malicious actors. In the
case of the Colonial Pipeline, it was encouraging to see the
DOJ claw back much of the ransom that was paid, but I think we
were given a bit of a lucky break on that one for that
clawback.
Mr. Giancarlo, what can we do to help law enforcement crack
down on the illicit use of cryptocurrency as well as to combat
this trend of ransoms being paid following a cyberattack?
Mr. Giancarlo. So this is a new area, and I will tell you,
as the former head of an agency with enforcement capability,
wherever you have got money, you are going to have criminality,
and a lot of enforcement work is just an evolving process of
cops and robbers. The robbers learn a new technique, and then
the cops learn a way to react to it. And that has been since
the beginning of history, and that will be.
This new technology, though, presents some interesting both
challenges and opportunities. So the accounts-based system
always begin with identification of identity, and so,
therefore, you have that buried into a transaction, and you can
work your way back to it as a law enforcement matter.
This system is pseudonymous, but it does provide the
ability to track transactions, this new distributed ledger
technology, and that is what we saw in this case. We saw in
this case that both Bitcoin was a means for criminality but it
was also actually a means for law enforcement. We are going to
get better at using this technology, but it is--you know, how
do they call it? It is old wine in new bottles. At the end of
the day, the bad guys are going to figure out some new
techniques, and the cops are going to be right behind them. And
if we do our job--I say this as a former regulator--we should
not be too far behind in catching up to the bad activity.
Senator Daines. Thank you, Mr. Giancarlo .
Chair Warren. Senator Daines, I know that you are over your
time, but would you like to ask this of any of the rest of the
witnesses? You do not have to, but I just thought it was a
really important question.
Senator Daines. Well, Madam Chairman, thank you for that,
because I think it is a really important question. Now that,
you know, the world is flat, the cops and robbers and so
forth--of course, this is all of a global nature and can be
attacked from anywhere literally in the world.
Anybody else want to answer? Thanks for that opportunity,
but I just wanted to----
Mr. Menand. Sure, I will jump in on that. Thank you,
Senator. I agree with Chairman Giancarlo. I would just add that
it is not clear to me that the Department of Justice and the
FBI tracked the Bitcoin on the public ledger and that is how
they clawed back the Bitcoin from the ransomware attack the
other day, as opposed to doing old-fashioned police work and
capturing the physical servers that the criminals in this case
were using and then find out what wallet they were storing the
cryptocurrencies in. And I think we need to be very concerned
about the incentives that cryptocurrencies provide for
criminals to do ransomware attacks because we know that with
various mixers and tumblers and other cryptocurrencies that you
can trade into, like Zcash, that criminals who do it right can
really make it extremely difficult, if not impossible, to track
them using the cryptocurrency, using the money system.
There might be other ways to track them down because they
exist in the real world and we might be able to recover the
money, but the sort of traditional ways that rely on the dollar
payment system may not be available.
Senator Daines. Thank you for that comment.
Mr. Duffie, you can have the last word if you want on this.
Mr. Duffie. Well, as has been emphasized, it is very
difficult to stop the use of Bitcoin, but you can make it
criminal in many different countries if you have an
international agreement among countries that Bitcoin will not
be permitted to be converted into the local currency; then the
criminals will be trapped with owning Bitcoin that they cannot
spend. And I think the best thing to do is for the U.S. and
other countries to get together and agree that in none of their
countries will Bitcoin be convertible into the local currency.
Senator Daines. Right. Well, thank you very much for your
thoughtful comments.
Madam Chair, this is a great hearing, great discussion, and
thanks for holding this hearing.
Chair Warren. Thank you for joining us.
I want to say thank you for everybody who got a first-round
question, and some of us want to do a second round, so I am
going to recognize myself to do some questions here.
You know, we have been talking this afternoon about how our
banking system has cut out too many Americans for too long. We
have nearly 33 million households, disproportionately Black and
Hispanic, who are underbanked or unbanked altogether, and they
pay steep fees to cash checks and pay bills and borrow a little
money until payday.
But as we were talking about earlier, even when people have
access to bank accounts, some of those banks use a whole array
of abusive practices that harm struggling families like
overdraft fees and fake accounts opened without customers'
permission and egregious data breaches, just to name a few of
these.
So I understand why Americans can be very dissatisfied with
the banking industry, and the cryptoindustry has stepped in
with the promise of a better and more inclusive financial
system for all Americans. The idea is that digital assets and
blockchain technology are going to drastically reduce the cost
of financial services and improve their quality by eliminating
fees and boosting access to capital and providing greater
financial privacy and protection.
So, Professor Menand, let me go back to you. I know you
agree that our banking system is failing to live up to its
responsibilities to the American people, but I want to make
sure we get this clearly stated. Do cryptocurrencies offer a
safer alternative to the traditional banking system for
consumers?
Mr. Menand. No, Senator, absolutely not. The cryptomarket
is rife with consumer abuses. You know, in the traditional
financial space, we have regulations and consumer protections
in place. Those do not apply in the cryptomarket, so there are
companies that offer cryptocustody services that have lost
customers money. There are a lot of players that manipulate
prices, which leaves ordinary users stuck paying high fees. It
is not a safe place to keep your money or to invest.
Chair Warren. And I understand the FTC has now said that
cryptocurrency scams have skyrocketed, and they say that in the
5 months between October 2020 and March 2021, just in that 5-
month period, nearly 7,000 people lost more than $80 million,
and that is nearly a 1,000-percent increase from the same
period a year earlier. And this just happens in brazen
cryptocons. So we are seeing egregious fraud cases, but also
manipulation in the markets, scams, pump-and-dump tactics.
So, Professor Menand, are there steps that regulators and
policymakers could take today to limit the harm to consumers
and investors in the cryptocurrency market?
Mr. Menand. Yes, I think so. So we urgently need more
regulation, more funding for regulation, so Congress should
increase appropriations for the SEC and for Chairman
Giancarlo's former agency, the CFTC, so that, you know, they
can keep up with all the new coin schemes that are being
launched. You know, Chairman Giancarlo spoke about the race
between cops and robbers, as it were. We need to fully fund the
cops, or they are going to lose the race. Congress should also
give these agencies additional authority over cryptoexchanges,
and the banking agencies should not allow Government-backed
banks to warehouse these instruments for their customers.
Chair Warren. OK. That is very helpful. Thank you. You
know, it is clear that Congress and financial regulators need
to take action to protect consumers, to protect markets, and to
protect our financial system.
Dr. Narula, could a well-designed central bank digital
currency actually help people who are poorly served by our
current banking system?
Ms. Narula. Thanks for the question, Senator. I think that
really depends on how it is designed. So if it is designed in
such a way that you require, for example, a commercial bank
account in order to transact in the central bank digital
currency, it is not really going to provide much help beyond
the system that we have today. So I think it is really
important to think about accessibility, making sure that it is
open, and that people--we remove frictions in the way of people
getting access to such a central bank digital currency.
Chair Warren. Thank you. Big banks are too focused on
boosting the multimillion-dollar pay of their CEOs instead of
serving their customers. But cryptocurrencies are not the
solution that their promoters claim that they are. With no cop
on the beat, this unregulated market draws in rip-off artists
promising massive returns. Americans need trustworthy and
affordable ways to store and use their money, not a way to get
scammed more efficiently. A well-designed and carefully
implemented central bank digital currency could bring more
households into the banking system and ensure that everyone has
access to the financial services they need if the design is
right. So thank you all.
Senator Kennedy, would you like to do a second round of
questions?
Senator Kennedy. I would, Madam Chair. Can you hear me?
Chair Warren. I can.
Senator Kennedy. First, let me thank all our witnesses. You
have been terrific. I have got a couple of quick questions. I
would like to get all four of you to experience the expertise
of each of you, so if you could just give me some brief
answers.
Number one, one of the advantages, it seems to me, of, let
us say, cryptocurrency, Bitcoin, people like the fact that it
is a decentralized ledger. They like the fact that it is
private in the sense that the information is encrypted. I guess
what I am saying is--let me start with Dr. Narula. Could we
establish a digital dollar where the information, the
transactions are encrypted using blockchain technology?
Ms. Narula. Thank you, Senator. Yes, so blockchain
technology has gotten a lot of attention, but encryption and
techniques like it existed well before the first blockchain,
which was Bitcoin. But, yes, indeed, I think that encryption
will form a core part of any central bank digital currency that
is launched simply because it is best practice. And it is a
very important tool to enable privacy.
Senator Kennedy. OK. Great. Thank you.
Professor Menand--is ``Men-and'' or ``Men-ahnd''?
Mr. Menand. ``Men-and,'' Senator.
Senator Kennedy. Professor, other than--and I am not
minimizing what I am about to mention, but other than making
our payment system more efficient, cheaper, quicker, what other
advantages do you see to a digital dollar? Somebody mentioned
the ability of China, through its digital yuan, to access some
new commercial possibilities. Maybe you want to elaborate on
that. I do not know. I do not mean to give you the answer.
Mr. Menand. Look, Senator, I think easy and cheaper to
transfer, these are the cardinal virtues of a money and payment
system. So one response is just what more do you need than a
system that--but I would say that offering nondefaultable money
with no maximum amount would be stabilizing for the U.S.
financial system in ways that people have not thought about. So
large companies right out do not have access to that, and it
would be very helpful to large companies to be able to hold
very, very large cash balances in nondefaultable amounts, and
this could crowd out a lot of unsafe and unstable alternative
products that those companies use right now. And I think if we
call up the CEOs of the top, you know, S&P 500, they would all
like to be able to do that to have safer digital money. And
that is an additional benefit that is different from easy and
cheap to transfer.
Senator Kennedy. Dr. Duffie.
Mr. Duffie. Yes, well, in addition to everything that was
mentioned, a central bank digital currency is fungible. It is
interoperable. What that means is when I go into your store and
I want to pay for something, I do not have to fish around for
the correct application or button on my mobile phone to use.
When I want to pay a friend for dinner, I do not have to ask
him, ``Well, do you have Venmo or Zelle, or can I just give you
some paper money?'' We can just instantly move money back and
forth. That makes money move faster. It makes it easier for the
central bank to implement monetary policy because when the Fed
raises interest rates, for example, or lowers interest rates,
interest rates throughout the economy will follow very closely
because it is the same kind of money moving everywhere very
quickly. So that is an additional advantage, getting the
central bank monetary policy implemented well.
And, again, the technology can be exported for commercial
advantage to other countries if the U.S. has the technology,
but if it waits for China to develop the technology first, then
the U.S. is going to lose commercial advantage.
Senator Kennedy. Chairman Giancarlo, let me ask you this in
the few minutes I have left: Does the Federal Reserve have the
authority, in your opinion, to do all this unilaterally on its
own? Or does it need congressional authority?
Mr. Giancarlo. Well, rather than my opinion, perhaps what
is more important is Chairman Powell's opinion. I think he said
recently that the Federal Reserve would require more authority
to do this.
Having said that, I think there is a fair amount of
authority to do some basic level exploration, work that is
already being done at the Federal Reserve Bank of Boston with
Professor Narula's help, but also in the private sector, and
that is what we are doing at the Digital Dollar Project. We are
going to bring the resources of the private sector to bear to
do some experimentation, do it on a fully transparent basis,
make everything that comes out of our experiments fully
available, and do it in a way that it complements the work of
the Fed, does not conflict with it, look at some of the social
use cases, the commercial use cases, the societal use cases,
and, working with responsible actors, make that information
available for use by the public sector. Ultimately, these big
decisions are going to be made by Congress. They are going to
be made by an administration. They are big, weighty issues, but
the public does have something to say on these issues, and so
we can bring that to bear. Hopefully the decision that comes
out is one that meets our social needs and also meets our
monetary needs and the core value of money, which is a social
good.
Senator Kennedy. Well, let me thank you all again. It is
somewhat unusual to have as many Senators as we had today
participate in a Subcommittee hearing like this, and I think
that is an indication of how interesting this topic is and the
expertise which you bring to it. Thank you all, and I thank our
Chair for doing this.
Chair Warren. So thank you, Senator Kennedy, and with your
indulgence, I have one more issue I would like to talk about.
Senator Kennedy. Absolutely.
Chair Warren. Good. And you are welcome to do another round
of questions if you want.
Senator Kennedy. Is it about overdraft fees?
Chair Warren. No. This is a little different.
Senator Kennedy. I had to ask.
Chair Warren. OK. Thank you.
We have talked a lot today about the dangers that
cryptocurrencies pose to our economy. We have talked about the
rip-offs, the instability, the extent to which they are used to
help criminals with cyberattacks like the attack on Colonial
Pipeline and JBS. But there is another piece, too: the adverse
environmental impacts of the computing activity used to mint
many of these digital currencies in the first place.
Bitcoin consumes more energy than entire countries, and it
is projected to consume as much energy as all the data centers
in the whole world this year. One Bitcoin transaction, a single
purchase, sale, or transfer, uses the same amount of
electricity as the typical U.S. household uses in more than a
month.
Senator Kennedy. Whoa.
Chair Warren. Yeah. So, Dr. Narula----
Senator Kennedy. Can you say that again, Elizabeth?
Chair Warren. Yes. A single Bitcoin transaction--that is,
one purchase or one sale or one transfer--uses the same amount
of electricity as the typical U.S. household uses in more than
a month. I think the estimate is 53 days.
Senator Kennedy. Wow.
Chair Warren. Yeah. So, Dr. Narula, could you explain why
cryptocurrencies like Bitcoin eat up so much energy?
Ms. Narula. Certainly, Senator Warren. So what I think is
important to note here is that, at least from a computer
science perspective, Bitcoin was doing something that we had
never done before, which was building a system that was secure
enough to support a massive currency, and at the same time
allow anyone to participate.
The technique that the creator of Bitcoin used in order to
do that, Satoshi Nakamoto, was what we refer to as ``mining''
or ``proof of work.'' And the idea is that the participants in
the Bitcoin network protocol, because we do not necessarily
know who they are and we want to make the protocol open for
anyone to join without being able to flood the system with
copies of a person, for example, is that they prove who they
are by contributing compute power.
So the way that Bitcoin works is that in order to build the
next block on the blockchain, the participants in the network
compete to solve a puzzle. It is a very, very difficult puzzle
to solve at the moment, and, in fact, the puzzle difficulty
changes depending upon how many participants there are in the
network.
What that has led to, as the price of Bitcoin has gone up,
is more and more resources being brought to bear, more and more
compute resources being brought to bear to solve this puzzle.
And as a result, that has used quite a bit more energy. That is
also how the blockchain is secured. The idea is that once these
participants have expended this energy and expended this
compute power, in order to rewrite the blockchain, in order to
change history, one would have to expend an equivalent amount
of power and energy. So it is a pretty fundamental part of the
underlying security of Bitcoin.
Chair Warren. So it is built right into it that there are
computers all over the world right now spitting out random
numbers around the clock in a competition to try to solve a
useless puzzle and win the Bitcoin reward. And the amount of
computational power and energy for this is a disaster for our
planet.
Now, some cryptoadvocates claim that these environmental
costs are worth it because of the security the proof-of-work
validation process provides to the system. And you were talking
about this. This is the security that is built in.
But let me ask you, Professor Menand, do you think the
environmental costs inflicted by cryptocurrencies like Bitcoin
are worth whatever potential benefits they provide?
Mr. Menand. No, absolutely not, especially for countries
like the United States where the benefits of crypto are largely
illusory. They are not a better means of payment. They
undermine the Government's ability to maintain robust economic
growth over time. They circumvent important safeguards that we
have been talking about that prevent extortion. And the
environmental costs are very, very large, and so I think the
cost-benefit analysis on Bitcoin is clear.
Chair Warren. All right. So let me ask you, then, Professor
Menand, what is the endgame for Bitcoin? Will more and more
miners keep doing more and more useless, complicated math
problems that consume a larger and larger share of the world's
energy for the next 100 years until the last coin is mined?
What is the future of Bitcoin and the future of our planet?
Mr. Menand. I think a lot depends on how the people in this
Zoom react. You know, if Governments like ours continue to sit
on the sidelines while alternative currency systems develop or
even if they give succor to that development, we are going to
see Bitcoin use continue to expand because there is a growing
group of people who would like to move sort of the whole
financial system to decentralized ledgers. And that is going to
mean more and more environmental damage, so Congress, I think,
really needs to act here.
Chair Warren. Yeah. So as we think about how to build a
better banking system, we need to rethink the use of
environmentally wasteful cryptocurrencies. If I can, let me
just get through these quickly.
Dr. Narula, let me ask you, from the research you and your
colleagues at MIT have done, is it possible to design a central
bank digital currency that does not require miners to perform
random number generation puzzles?
Ms. Narula. Yes, it is.
Chair Warren. And could you design it so it would not
consume more energy than a middle-size country?
Ms. Narula. Yes, you can.
Chair Warren. And could we have a central bank digital
currency that does not exacerbate the climate crisis and
undermine environmental justice?
Ms. Narula. I think you could build a central bank digital
currency which does not consume vast amounts of energy, yes.
Chair Warren. Good. I am glad to hear this.
Look, cryptocurrencies like Bitcoin are terrible for the
environment, and that would be true regardless of whether we
were getting anything productive out of that energy usage or
not. The fact that we are not makes it even more scandalous.
One of the easiest and least disruptive things we can do to
address the climate crisis is crack down on environmentally
wasteful cryptocurrencies, and now is the time to do it. So I
want to thank all of our witnesses for being here today. I want
to thank you for providing testimony. You have just been
terrific.
I want to----
Senator Kennedy. Madam Chair, can I ask Dr. Narula one
other question?
Chair Warren. Of course. Of course, you can.
Senator Kennedy. It is in line with the ones you--I just
want to follow up one last question in line with your
questions. Can we design that digital currency in a way that
respects people's privacy?
Ms. Narula. I certainly hope so, Senator Kennedy, and I
think if we cannot design it in such a way, then that is a very
important factor to take into account when considering whether
to launch. But my hope is that we can, and that is the research
that we are engaging in now.
Senator Kennedy. Thank you.
Senator Cortez Masto. And, Madam Chair, if it is all right,
I have a follow-up to that.
Chair Warren. Of course. Senator Cortez Masto.
Senator Cortez Masto. Dr. Narula, you have been at this for
a period of time, so can you talk about, with respect to
digital currency, why you recommend that the platform have an
open application programming interface?
Ms. Narula. Yes, Senator, I think this is critical. So I do
not think that we will realize the true benefit of digital
currency unless we upgrade it into the 21st century, so to
speak. We have another particular here to learn from what has
happened in the cryptocurrency world, and I understand a lot of
the Senators here are not big fans of that world. But what I
see there is a lot of very exciting applications that are being
built and a lot of experimentation that is happening that,
granted, also comes along with a lot of scams.
However, I think we would be missing an opportunity if we
did not take a look at what was happening there and try to
learn lessons from the cryptocurrency world and bring some of
that back into a central bank digital currency design. I think
that if we were able to create a well-designed interface to a
central bank digital currency, we could do for the transfer of
value what the Internet did for the transfer of information,
which is create a platform for innovation, so create a platform
where we could have new applications and new businesses
facilitating the transfer of value in exciting new ways.
Senator Cortez Masto. Yes, but, if you would, talk a little
bit about the security piece of that, because that means there
are more eyes. When you have an open application program
interface, there are more people engaged in watching what is
going on that you bring more of that security. Is that correct?
Ms. Narula. Absolutely. So I am a firm believer that open-
source software is critical for security. The more people who
are looking, the more likely you are to find bugs and to find
problems.
Senator Cortez Masto. Along with the innovation, but there
is the security?
Ms. Narula. Yes, Senator.
Senator Cortez Masto. Thank you so much.
Thank you, Madam Chair. Thank you, Ranking Member.
Chair Warren. You bet.
Anyone else have a question? Are we good?
[No response.]
Chair Warren. Good. Well, as I was saying, I want to say
thank you to our witnesses. Obviously, you were very engaging
today, and I appreciate your being here. I want to thank
Senator Kennedy for being such a great partner and for
suggesting this hearing. Thank you, Senator Kennedy.
For any Senators who want to submit questions for the
record, those questions are due a week from today--that is,
Wednesday, June 16th.
For our witnesses, you will have 45 days to respond to any
of those questions. And, again, thank you very much.
With that, this hearing is adjourned.
[Whereupon, at 4:22 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIR ELIZABETH WARREN
Good afternoon, and welcome to this session's second hearing of the
Economic Policy Subcommittee. Today's hearing focuses on the
opportunities presented by a central bank digital currency. This is a
bipartisan hearing--in fact, it was Ranking Member Kennedy's suggestion
to hold it--and I want to thank him and his team for working so closely
with us to put it together.
The core subject of this hearing is not Bitcoin, or Dogecoin, or
any other cryptocurrency. But the explosion of cryptocurrencies over
the last decade creates the context for understanding the potential
value and risks of digital currency.
There are substantial difficulties with our current payment
systems. Nearly 33 million Americans have been locked out of the
traditional banking system. They are forced to use check cashers and
payday lenders for basic banking services. And even those with
traditional checking and savings accounts find that many of the largest
banks have proven to be untrustworthy, gouging customers for overdraft
and other fees or, in the case of Wells Fargo, outright cheating their
customers with fake accounts and fake services for which customers paid
dearly.
What are the alternatives? Digital currencies have been hyped as a
solution to these problems. Early advocates claimed that
cryptocurrencies would open up the financial system and deliver fast,
cheap, and secure payments to anyone with an internet connection.
Others pointed out that crypto was a way to avoid the risks of dealing
with the giant banks that squeezed customers dry.
But crypto's promises haven't come to pass. Instead, here's what's
happening in the real world with cryptocurrencies: Cryptocurrencies
have turned out to be a fourth-rate alternative to real currency.
First, cryptocurrencies are a lousy way to buy and sell things.
Unlike the dollar, their value fluctuates wildly depending on the whims
of speculative day traders. In just the last 2 months, the value of
Doge coin increased more than ten-fold. Then declined by nearly 60
percent. That may work for speculators and fly-by-night investors--but
not for regular people looking for a stable source of value to get paid
in and to use for day-to-day spending.
Second, crypto is a lousy investment. Unlike, say, the stock
market, the cryptoworld currently has no consumer protection--none. As
a result, honest investors and people trying to put aside some savings
are at the mercy of fraudsters. Pump and dump schemes are outlawed in
the case of ordinary stock, but they have become routine in
cryptotrading. One study found that the level of price manipulation in
cryptocurrency is--and I quote--``unprecedented in modern markets.''
Third, crypto has become a haven for illegal activity. Online
theft, drug trafficking, ransom attacks, and other illegal activity
have all been made easier with crypto. Experts estimate that last year
more than $412 million was paid to criminals in ransom through
cryptocurrencies. Unlike other payment systems that make it tougher to
move money illegally, a key feature of crypto is its secrecy. In just
the past few weeks, cryptocurrencies made it possible for hackers to
collect a ransom to release the Colonial pipeline hack and to free JBS,
the world's largest meat producer, from a paralyzing cyberattack. And
every hack that is successfully paid off with a cryptocurrency is an
advertisement for more hackers to try more cyberattacks.
Finally, there are the environmental costs of crypto. Many
cryptocurrencies are created through ``proof-of-work'' mining that
involves using computers to solve useless mathematical puzzles in
exchange for newly minted cryptocurrency tokens. Such mining has
devastating consequences for the climate. Some cryptomining is set up
near coal plants, spewing out filth in return for a chance to harvest a
few cryptocoins. Total energy consumption is staggering, driving up
demand for energy. If, for example, Bitcoin--just one of the
cryptocurrencies--were a country, it would already be the 33rd largest
energy user in the world--using more energy yearly than all of the
Netherlands.
And those promised benefits--the currency that would be available
at no cost to millions of unbanked families and that would provide a
haven from the tricks and traps of big banks--those benefits haven't
materialized.
Meanwhile, cryptocurrency has created opportunities to scam
investors, assist criminals, and worsen the climate crisis. The threats
posted by crypto show that Congress and Federal regulators can't
continue to hide out, hoping that crypto will go away. It won't. It's
time to confront these issues head on.
Crypto has significant problems, but our current payment system
also has significant problems. Both the Government and banks have
dragged their heels for years, resisting innovation and evidently
taking the same hide-and-wait approach to facing the worldwide movement
into cryptocurrencies.
Central bank digital currency--often called CBDC because the world
needs another acronym--has great promise. Legitimate digital public
money could help drive out bogus digital private money, while improving
financial inclusion, efficiency, and the safety of our financial
system--if that digital public money is well-designed and efficiently
executed, which are two very big ``ifs.''
I'm looking forward to hearing from our witnesses today about how a
central bank digital currency would work, why it might be necessary,
how it intersects with cryptocurrency, and--most importantly--how it
should be set up so that all Americans can enjoy its benefits.
______
PREPARED STATEMENT OF SENATOR JOHN KENNEDY
Thank you, Chairman Warren. This is a very important topic, and
this hearing is an opportunity to explore if a Central Bank Digital
Currency (CBDC) would work for the United States and what additional
value a CBDC could provide to U.S. monetary policy.
As technology emerges in the payment system, the demand for digital
payments and the influx of nonlegal tender, like cryptocurrencies, has
exploded. These forms of payments have operated outside our traditional
payments infrastructure and have proved to be volatile, controversial,
and even speculative, as it has been with Bitcoin.
Further, with cryptocurrencies and stablecoins on the rise, we need
to examine the risks that a decentralized currency would pose to the
Federal Reserve's control of monetary policy.
The U.S. is leading the world in innovation and technology, and the
U.S. dollar has remained the world's primary reserve currency.
As many Governments around the world are exploring a CBDC for use
in today's digital world, so should the United States. However, moving
forward, we must understand whether public demand exists, who stands to
benefit most from a CBDC, and if the juice is worth the squeeze when it
comes to cost and security risks.
China has created its own digital currency, the digital yuan, which
it uses to monitor the everyday transactions of its citizens, and to
broaden its massive surveillance system. Additionally, China's using
its CBDC to maintain greater control over its economy and grow China's
monetary influence in the world.
The United States must analyze the implications of a Chinese CBDC
on global competitiveness, international commerce, and what that means
for the U.S. dollar's position as the global reserve currency.
Security must be the foremost priority during any consideration of
a CBDC. As the Federal Reserve looks to develop a digital currency,
ensuring a safe network while prioritizing privacy for consumers must
be first achieved.
Additionally, I am very concerned with proposals that would use
CBDC to fundamentally change the current banking system. CBDC should
not replace the paper dollar, or bank deposits. If the U.S. chooses to
hold a CBDC, it should do so in a way that complements our current
financial system.
We must strike the right balance, and I look forward to that
discussion. In closing, I would like to thank the witnesses for being
here and lending your expertise on the issue. With that, I turn it over
to Chairman Warren. Thank you.
______
PREPARED STATEMENT OF NEHA NARULA
Director, Digital Currency Initiative, Massachusetts Institute of
Technology
June 9, 2021
Thank you Chair Warren, Ranking Member Kennedy, and Members of the
Subcommittee, for the opportunity to testify today.
My name is Neha Narula and I am the Director of the Digital
Currency Initiative at the Massachusetts Institute of Technology. We
are a research group based within the MIT Media Lab focusing on
cryptocurrency and digital currency design and implementation,
addressing challenges in security, scalability, and privacy. I have
taught five graduate cryptocurrency courses across departments at MIT
and during the course of my Ph.D. work I conducted research in MIT's
Computer Science and Artificial Intelligence Laboratory on databases
and distributed systems. Last year we began a research collaboration
with the Federal Reserve Bank of Boston on Project Hamilton, to engage
in research to understand the technology tradeoffs involved in a
hypothetical digital currency. I'd like to note that my views are my
own, and not the views of MIT, the Board of Governors, or the Federal
Reserve Bank of Boston, nor am I offering any insight into Federal
Reserve policy or perspectives.
The Problem and Opportunity
Traditional electronic transaction systems today have high fees,
limit access, and have not evolved fast enough to keep pace with the
demand for online digital payments. Our legacy payment rails require
expensive delays because they were created at a time when the
technology did not support settling every transaction in real time, and
the pace of updates has been slow due, in part, to structural problems
in the payment ecosystem making it difficult to coordinate large-scale
change.
At the same time, we are seeing experimentation in the realm of
cryptocurrencies built on open networks which do not require a
traditional financial intermediary. This area serves as a laboratory
showing what innovation and functionality might be possible if we were
not constrained by legacy financial rules and systems. However, this
area is still developing and comes with many risks, not least of which
is the immaturity of the technology and its ability to provide widely
available, highly secure, and scalable payment transactions. This is an
active area of research where my group spends much of its time.
For these and other reasons central banks across the world are
considering issuing digital forms of their currency to the public. A
Bank for International Settlements survey of 65 central banks found
that 86 percent are actively engaging in some sort of work on Central
Bank Digital Currency (CBDC), for reasons including improving payment
efficiency and robustness, facilitating financial inclusion, and
maintaining financial stability. \1\
---------------------------------------------------------------------------
\1\ Boar, Codruta, and Andreas Wehrli. ``Ready, Steady, Go?
Results of the Third BIS Survey on Central Bank Digital Currency''.
(2021).
---------------------------------------------------------------------------
It is important to note that a CBDC might not be the only way to
address some of these problems; for example, in the U.S. we might
improve financial inclusion by requiring commercial banks to provide
free, no-minimum accounts to users, or by limiting or eliminating fees,
as these were some of the reasons listed when the U.S. unbanked were
asked why they don't have bank accounts. \2\ Determining how a CBDC
might compare to other approaches to solving financial inclusion
issues, and how exactly we could build a CBDC to be effective in
addressing these challenges are still significant open areas of
research requiring time and investment. At MIT we are beginning to
investigate the possibilities of CBDC as a vehicle for increased
financial inclusion, but as of yet, the promise is unverified in either
a U.S. or global context.
---------------------------------------------------------------------------
\2\ FDIC. ``How America Banks: Household Use of Banking and
Financial Services''. FDIC Survey (2019).
---------------------------------------------------------------------------
The potential promise of a CBDC goes beyond payment efficiency and
financial inclusion. Digital currency is an opportunity for a ground-up
redesign of our legacy payment systems. If designed in the right way, a
system to create and support a digital dollar might increase
competition and standardize disparate data models, leading to more
interoperability and creating a platform for innovation in payments,
much as the Internet created a platform for innovation on top of the
transfer of information. It is possible that in this redesign
additional opportunities for increasing financial inclusion and solving
challenges in the legacy financial system will also be uncovered.
Though promising, the way forward is not entirely clear. There are
many remaining open questions regarding how a U.S. CBDC should operate,
how users might access it, and how to protect consumer privacy. In what
follows I offer a few of the choices to be made in how the United
States might issue a digital dollar. It would be irresponsible to
consider launching a digital dollar until we can make progress on these
questions, but addressing them will require investment now, and
extensive collaboration between academic researchers and the public and
private sectors.
How We Should Think About International Exploration of CBDC
Other countries have issued a CBDC, are considering issuing one, or
are exploring CBDC viability for different reasons. For example, in
October 2020 the Central Bank of the Bahamas issued the Sand Dollar to
promote financial inclusion and access. Sweden is exploring an e-krona
because of the decline in the use of cash in payments, and the Riksbank
wants to continue its mandate of providing a public option for
payments. The People's Bank of China is engaging in late stage digital
currency pilots and might launch the eCNY \3\ to, in part, bring
China's massive fintech industry back under the umbrella of the central
bank after the enormous success of payment platforms like Alipay and
WeChat Pay, which together comprise 93 percent of mobile payments in
China. \4\ Each of these countries is using a different technology
stack and has made different initial choices in how to involve
commercial banks and how the CBDC might be accessed by users.
---------------------------------------------------------------------------
\3\ In China there have been mixed messages as to whether the eCNY
even is a CBDC: Former PBOC Governor Zhou Xiaochuan said in December
2020 that eCNY would not be a liability of the PBoC, contradicting
statements by Mu Changchun, Director-General of the Digital Currency
Institute at the PBoC, and Fan Yifei, Deputy Governor at the PBoC.
\4\ Zhang, M. ``China Moves Further Towards Cashless Society as
Payment Giants Alipay, WeChat Pay Gain Ground''. Retrieved from South
China Morning Post: www.scmp.com/business/companies/article/2130400/
china-movesfurther-towards-cashless-society-payment-giants. (2018).
---------------------------------------------------------------------------
Currencies compete; it is certainly possible that consumers might
be attracted to a digital currency which is easy to use, has no or low
fees, and comes with interesting features. But the concerns of the
United States are unique in that the dollar plays a critical role in
the global economy as the world's reserve currency. The once in a
century opportunity to redesign the U.S. dollar should not be rushed.
It is important to carefully consider how we might want a U.S. digital
dollar to operate and what effect different choices will have on
accessibility, overall financial stability, and the potential for a
U.S. digital dollar to be a platform for innovation.
What Is a CBDC?
A general purpose, or retail, CBDC is defined as a digital
liability of the central bank which is broadly accessible and usable by
the general public. It is distinguished from commercial bank money,
credit cards, and mobile payment application balances in that it is a
liability of the central bank, it is different from cash in that it is
entirely digital, and it is different from central bank reserves in
that users might hold it directly. This is in contrast to what is known
as wholesale CBDC, which is a digital liability of the central bank
which is limited to certain financial institutions and is not available
to the general public.
From this basis, definitions start to vary widely. Some purport
that a CBDC must be built on distributed ledger technology; this is
putting the cart before the horse. We should first determine how a CBDC
should operate before choosing an implementation technology. Also, it
is important to distinguish between the underlying datastore of a CBDC
implementation, and the interface to the CBDC and how it is
intermediated and accessed. These different aspects are often conflated
under the general term ``distributed ledger technology.'' For example,
a CBDC could act as a legal bearer instrument with a programmable
interface even if it is built on top of traditional database
technology.
Accessibility: How Is the CBDC Accessed and Managed?
In order to achieve goals of financial inclusion, a CBDC should be
broadly accessible and usable. Every point of intermediation involved
in a user obtaining and using CBDC is another potential friction that
could inhibit access.
For example, international studies on financial inclusion have
shown that requiring strong forms of identification prohibits the poor
from accessing financial services. \5\ One of the benefits of cash is
that it can be used by anyone without requiring identification or
signing up for an account, which is, in part, what makes it the payment
system of choice for the poor. However, at the same time, policymakers
would like to limit the potential use of CBDC in illicit activity. One
way to address this tension is by creating tiers of access which
require different levels of identification. In the Bahamas, there is a
low-value tier of access to the Sand Dollar that requires only an email
address or mobile number to sign up, but limits balances to $500 and
transaction volume to $1,500 per month. \6\
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\5\ Demirguc-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya
Ansar, and Jake Hess. ``The Global Findex Database 2017: Measuring
Financial Inclusion and the Fintech Revolution''. The World Bank, 2018.
\6\ Central Bank of the Bahamas. ``Consumer-Centric Aspects of the
Proposed Regulations for the Bahamian Digital Currency''. (2021).
---------------------------------------------------------------------------
It is important to consider users who might not be able to use
mobile payment applications; in the U.S., 36 percent of the unbanked do
not have smartphone access. \7\ To help with financial inclusion, a
U.S. CBDC could be available via smart cards, which could limit certain
aspects of its design. We also cannot expect even U.S. users to have
consistent internet connectivity; my research team is prioritizing
designs which allow some forms of secure offline transactions.
---------------------------------------------------------------------------
\7\ FDIC survey.
---------------------------------------------------------------------------
Data Protection: What Data Is Visible to Whom, and Under What
Circumstances?
Transaction data can vary widely; at minimum it includes sender and
recipient, amounts, and the time of the transaction. Some transaction
systems collect user data like name, date of birth, social security
number, and address, or other passive information like a user's IP
address, GPS location, browser, or mobile operator. All of this
information can then be used to track users and build profiles of their
habits and behavior across websites and applications.
Financial data can reveal uncomfortable information about a
consumer's preferences and habits; our finances give a window into our
lives. Any U.S. CBDC should prioritize user privacy and data
protection. In addition, collecting and storing personally identifying
user data at all makes it vulnerable to accidental leaks or malicious
hacking attempts, so the design of a U.S. CBDC should strive to
minimize data collection to only what is critically necessary to safely
process transactions.
The private sector has an incentive to collect and monetize all
these different forms of data. Whether through regulation or by
providing a public option, we must consider how to protect user data.
In particular, it should not be the case that those who can afford it
can pay for services which protect their data while the poor are left
to services which monetize them.
A CBDC which is in some part run by the central bank does not
necessarily require the central bank to have visibility into fine-
grained transaction data. Legitimate public policy goals relating to
combating criminal activity can be fulfilled while preserving the
privacy of the public and preventing a central bank being drawn into
the commercial surveillance models which are now prevalent in the
private sector. \8\
---------------------------------------------------------------------------
\8\ Ali, Robleh, and Neha Narula, ``Redesigning Digital Money:
What Can We Learn From a Decade of Cryptocurrencies''. Digital Currency
Initiative, MIT Media Lab (2020).
Figure 1 shows seven different architectures to consider in CBDC
design, ranging from those closer to our existing system to entirely
new models for accessing central bank currency. For each architecture I
describe its potential to improve financial inclusion and to serve as a
platform for innovation.
Under the basic definition given earlier, we already have wholesale
CBDC since financial institutions hold electronic balances with the
Federal Reserve. The first design is to simply expand access to the
Federal Reserve balance sheet to a larger set of institutions, for
example by extending access to mobile payment application providers.
This might reduce settlement costs and improve competition, and through
that, improve access and innovation, though it will also require
increased regulatory scrutiny of these new participants, which might
limit their ability to provide accounts to those currently left out. It
is not clear it will help promote interoperability and standards,
leading to a platform for innovation.
The next two proposals shown in Figure 1 do not fit under the
definition of CBDC provided above in that they are not direct
liabilities of the central bank: One option is to expand support and
regulatory clarity for so-called stablecoin providers, who issue
dollar-pegged tokens on public or permissioned blockchains. These fall
into two categories: Those that are 1:1 backed by commercial bank
deposits or other relatively stable, liquid assets like U.S.
Treasuries, and algorithmic stablecoins which operate in a smart
contract on a public blockchain, and are usually heavily
overcollateralized using cryptocurrency assets or other stablecoins,
with the peg managed by a software algorithm running in the smart
contract. To date, U.S. dollar-denominated stablecoins have a market
capitalization of over $100B, with the vast majority of that value in
the first category. \9\ They appear to be primarily used as a mechanism
for facilitating cryptocurrency trading and I am not aware of any
rigorous evidence that stablecoins help improve financial inclusion,
though this is an area deserving more research. Architecture 3 is what
the IMF deems ``synthetic'' CBDC, in that it is issued by commercial
banks and not actually a liability of the central bank, but is backed
1:1 by central bank reserves. \10\ It is also unclear exactly how this
architecture might help promote access and financial inclusion beyond
our existing system, or become a platform for innovation.
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\9\ https://coinmarketcap.com/view/stablecoin/
\10\ Adrian, Tobias, and Tommaso Mancini-Griffoli. ``The Rise of
Digital Money'', Annual Review of Financial Economics 13 (2019).
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Architectures 4, 5, and 6 (contained in the solid box) are the most
discussed designs for CBDC, though there are still many choices and
variations within these proposals. Architecture 4 is deemed ``two-
tier'' CBDC in that it is expected that the CBDC will only be
accessible through commercial banks. \11\ This implies that a user will
need to obtain an account with a commercial bank in order to receive
and transact in the CBDC. This design is appealing because it preserves
the current structure in electronic payments, but at the same time, it
is unclear how this design alone will help promote financial inclusion
in the U.S. because it does not appear to address the main reasons why
the unbanked do not use banks. Figure 2 is copied from Figure ES.3 from
the FDIC's 2019 survey on ``How America Banks: Household Use of Banking
and Financial Services'' and shows survey responses for why unbanked
households do not have bank accounts. The success of this architecture
in addressing financial inclusion will depend on exactly how commercial
banks would administer CBDC accounts; if it is not different from how
they administer traditional checking accounts, they are unlikely to
address any of the unbanked's concerns.
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\11\ The CBDC might also be available through additional regulated
financial service providers. We should compare and contrast this type
of two-tier model with the benefits and risks of the first
architecture, which is expanding the set of institutions that can
access the central bank's balance sheet, without issuing a new form of
CBDC.
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How successful this design will be in providing a platform for
innovation also depends on whether or not the commercial banks
cooperate to provide compatible APIs (Application Program Interfaces)
to facilitate building new applications that transfer CBDC. Under the
status quo it is unlikely a two-tier CBDC would help promote innovation
in payments, since commercial banks currently do not provide these
interfaces widely and do not interoperate.
Architecture 5 is also known \12\ as FedAccounts: giving retail
users the option of holding an account directly with the Federal
Reserve, a privilege currently limited to regulated financial
institutions. The authors of the FedAccounts proposal have written
extensively on how the proposal might help with financial inclusion.
\13\ It is unclear whether or not the FedAccounts proposal would
promote innovation in payments beyond improving competition.
---------------------------------------------------------------------------
\12\ FDIC survey.
\13\ Ricks, Morgan, John Crawford, and Lev Menand. ``Central
Banking for All: A Public Option for Bank Accounts''. The Great
Democracy Initiative Report (2018).
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Architecture 6 is what we deem digital cash: a CBDC that can be
held directly by users without requiring an intermediary commercial
bank account. It is important to note that a digital currency cannot be
entirely peer-to-peer as is cash; digital information, unlikely
physical objects, can be easily copied, so at some point a recipient
needs to check that the payment they are receiving has not already been
previously spent (this is called a ``double spend''). One option for
doing this is to employ secure hardware, which will prevent the double
spend in the first place; however, this requires relying on the
correctness and integrity of secure hardware implementations, which
might have bugs. The more common way is to reconcile with a ledger
managing the issuance of the digital currency. There is a lot of leeway
in the design of how exactly that ledger is accessed and when, and what
controls that ledger has in terms of permitting, denying, or reversing
transactions. In a CBDC designed to look more like digital cash, the
ledger could simply prevent double spends.
This architecture could improve financial inclusion if it is easy
to use and implemented in a way that is widely accessible, because it
would not necessarily require users to sign up for accounts to receive
payments, \14\ and users would have an already existing mental model
(cash) for how it works and how to use it. Note that banks or other
third-party providers could custody digital cash for users, if desired.
This architecture could also provide a standard to use as a layer of
interoperability among payment providers, promoting a platform for
innovation. At MIT, we are currently actively researching how to design
safe, efficient, and useful digital cash.
---------------------------------------------------------------------------
\14\ Identity checks could be done depending on the amount
transacted, as described earlier.
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Architecture 7 is proposed by some blockchain advocates; they
suggest that a central bank issue digital currency on an existing
blockchain system. This might be a smart contract platform like
Ethereum or a permissioned blockchain like Facebook's Diem. Under this
type of architecture, a central bank could control issuance of the
digital currency, but would give up all other control to the governance
of the underlying blockchain. For example, the participants in the
blockchain network might decide to reverse a transaction, as happened
in Ethereum after one of its smart contracts, the DAO, was hacked.
Ethereum developers, miners, and community members cooperated to
reverse the hack and restore funds. \15\ It is extremely unlikely any
central bank would want to put this level of control in the hands of
blockchain operators. Blockchain networks are open and accessible and
have high levels of innovation, though there has not necessarily been a
concerted effort to add features to support financial inclusion.
---------------------------------------------------------------------------
\15\ DuPont, Quinn. ``Experiments in Algorithmic Governance: A
History and Ethnography of `The DAO,' a Failed Decentralized Autonomous
Organization''. Bitcoin and Beyond (2017): 157-177.
---------------------------------------------------------------------------
All of these architectures need to be carefully evaluated for their
potential to improve financial inclusion, risks and complexity of
implementation, monetary and economic implications, and the potential
to affect the cost of credit and financial stability.
Conclusion
Central bank digital currency might have the potential to increase
financial inclusion, reduce transaction costs, and become a platform
for innovation in payments, if designed and implemented in the right
way. In order to determine and realize these benefits we must first
invest deeply in multidisciplinary research and development. I commend
this Subcommittee for raising this important issue and encouraging this
critical dialogue. Thank you and I look forward to your questions.
______
PREPARED STATEMENT OF J. CHRISTOPHER GIANCARLO
Senior Counsel, Willkie Farr & Gallagher
June 9, 2021
Thank you, Chair Warren, Ranking Member Kennedy, and Members of the
Subcommittee, for the opportunity to testify today.
I am Chris Giancarlo, Senior Counsel at Willkie Farr & Gallagher. I
am also the former Chairman of the U.S. Commodity Futures Trading
Commission.
I am here today on behalf of the Digital Dollar Project, \1\ a
nonpartisan think tank furthering public consideration of the merits of
a tokenized form of a United States central bank digital currency
(CBDC).
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\1\ https://www.digitaldollarproject.org
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The Digital Dollar Project
The Digital Dollar Project was launched in early 2020. It seeks to
serve the public interest by convening private sector thought leaders
and actors, encouraging U.S. based research and public discussion on
the opportunities and challenges of CBDC, and proposing possible models
to support the public sector as it considers development, testing and
adoption. \2\ The Project looks to advance consideration of ways to
future-proof the dollar for consumers and institutions here in America
and around the world.
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\2\ The Digital Dollar Project is not a commercial enterprise and
has no business model to promote. It operation is self-funded. Its
founders are the Digital Dollar Foundation, a not-for-profit enterprise
and the global consulting firm, Accenture PLC.
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To gain diverse perspectives from key stakeholders, the Digital
Dollar Project formed a nonpartisan advisory group that includes a
broad array of economists, business leaders, technologists, innovators,
lawyers, academics, and consumer advocates across the social and
political spectrums. \3\
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\3\ Members of the Advisory Board are listed here: https://
www.digitaldollarproject.org/advisory-group.
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Working with this Advisory Committee, the Digital Dollar Project
released its inaugural white paper at the end of May 2020. \4\ (I ask
that a copy of the Project's white paper attached hereto be made a part
of the record of this hearing.)
---------------------------------------------------------------------------
\4\ ``Exploring a U.S. CBDC: A White Paper'', Digital Dollar
Project, May 2020, at: https://digitaldollarproject.org/exploring-a-us-
cbdc/.
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The Digital Dollar Project white paper proposes for public
consideration and discussion a model of a tokenized digital dollar that
we refer to as a ``champion model.'' It provides details on the
structure, operation, and benefits of that champion model of a digital
dollar. It posits a tokenized form of the U.S. dollar enjoying the full
faith and credit of the U.S. Government operating alongside existing
forms of physical cash and commercial bank money.
Importantly, the Digital Dollar Project's champion model proposes
that the issuance, distribution and redemption of digital dollars would
take place just as cash does today: issued by the Federal Reserve to
domestic banks or regulated entities against reserves. It supports
maintenance of the existing two-tiered architecture of commercial banks
and regulated money transmitters in deploying and recording Digital
Dollars on new transactional infrastructure informed by distributed
ledger technology (DLT).
The Project's white paper proposes that commercial banks would
distribute Digital Dollars to domestic end-users' digital wallets
against bank deposits and against collateral to nonresident banks. For
consumers, digital wallets would offer essential payment
functionalities integrated with existing banking services. Payments at
points of sale could still be conducted through conventional terminals
or fully contactless solutions. Only, with Digital Dollars, the
terminals would transfer actual value from peer to peer instead of the
electronic messages we use today. Regulated entities would extend such
wallets to their customers through existing outlets for mobile phone
applications. For unbanked end-users, wallet services could come
preloaded on mobile phones.
The Project's Digital Dollar proposal is not antithetical to other
virtual currency efforts whether commercial like Diem or decentralized
like Bitcoin. The proposal is also monetary policy neutral. It takes no
view on issues of money supply. It proposes the Digital Dollar as a
tool of monetary policy, not a policy expression.
Central Bank Digital Currencies: Decentralized Fiat Money
Among the multitude of highly effective payment options in the
United States (e.g., cash payment, credit, debit, etc.), a Digital
Dollar could offer a new choice for digital transactions, instantaneous
peer-to-peer payments, and in-person transactions. It could also
potentially lower costs and further diversify payment rails. It would
facilitate financial inclusion by broadening access to services through
additional mechanisms, such as digital wallets. In particular, a U.S.
CBDC could expand the ability of currently un- or underbanked
populations to access digital financial services and transact on
ecommerce platforms that do not deal in physical cash. \5\
---------------------------------------------------------------------------
\5\ Bank notes are often used to make small payments in the
physical world, although, on average, physical cash usage is in decline
compared against other payment methods. This dynamic is likely to
progress in a post-COVID-19 world, thereby making it increasingly
important for digital financial options to extend more broadly.
---------------------------------------------------------------------------
The Digital Dollar Project proposes that the Digital Dollar would
operate on a likely permissioned network to ensure validity and
integrity of all transactions and would necessarily be built against
the highest standards of systemically important infrastructure. The
verification of transactions would rest on the complete history or
lineage of the tokens from original issuance in order to attest
authenticity and that they have not been double spent. The advantages
of tokens derive from their bearer instrument nature and the ease with
which interactions with existing banking and payment functions can be
performed. Participants only need to interact with the tokens and are
not required to be connected to a payment system. Tokens can be
exchanged multiple times ``offline'' and would resync with the system
when connectivity is available enabled by the logic encapsulated in the
tokens themselves.
DLT network participants would include the central bank and
commercial banks, other financial intermediaries, and new entities that
can help afford greater resilience in payment processing. The
distributed nature of the DLT platform would enhance security as
manipulation of the network would be computationally near impossible.
The DLT platform would add to payment system diversification by
operating on separate Internet-based payment rails that is
complimentary to the existing banking system.
A U.S. Digital Dollar would be far superior to Bitcoin in
environmental sustainability. A Digital Dollar would not need to be
``mined'' consuming enormous amounts of energy to demonstrate proof of
work and earn newly minted coins. Instead, Digital Dollars would be
created cryptographically by the Fed and distributed electronically.
Such distribution would make a Digital Dollar environmentally superior
even to our current use of fiat money that has an overlooked
environmental cost in the operation of electronic ATMs and the physical
mining, minting and distribution of notes and coins.
Financial Inclusion
One area of great promise with respect to a Digital Dollar is in
expanding financial access and inclusion for unbanked populations. A
2017 Federal Deposit Insurance Corporation survey found that roughly 14
million American adults lack a bank account--a figure that has become
all the more important during the COVID-19 lockdown. \6\ The pandemic
revealed fundamental shortcomings in the capacity of existing
Government payment relationships to swiftly channel financial resources
to the nonbanked public. The U.S. Federal Reserve has no direct
relations or connectivity with the nonbanked public. It cannot
therefore efficiently distribute or coordinate crisis relief directly
to deserving households short of paper checks that are costly to
convert to cash. Away from the Federal Reserve, Federal and State
government agencies have only partial direct banking relationships with
the general public through tax administration and social benefits
distribution, but their reach is not universal.
---------------------------------------------------------------------------
\6\ ``2017 FDIC National Survey of Unbanked and Underbanked
Households'', Federal Deposit Insurance Corporation, October 2018, at:
https://www.fdic.gov/householdsurvey/2017/2017report.pdf.
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Had a Digital Dollar been in circulation during the COVID-19 crisis
with a means of digital identification, it would have enabled the
immediate sending of monetary relief to the digital wallets of targeted
beneficiaries.
During noncrisis conditions, a Digital Dollar could be a useful
tool in the distribution of other Government assistance payments, such
as social security benefits, school meal vouchers and food stamps,
among others. It may also serve to expand financial inclusion for
underserved populations due to lower system costs and the ready
availability of digital wallets. Given their relatively limited but
critical functionality, there is greater precision and efficiency
associated with digital wallet services that policymakers should
consider, particularly given the broad range of programs and Government
benefits that can be distributed utilizing wallet services and the
historic waste and abuse that could be eliminated. This would also
allow private sector providers certain opportunities and advantages to
expand coverage of such services to un- or underbanked populations that
have access to mobile devices.
In order for this to be true, however, the digital wallet will need
to prove to be less expensive to offer from a technology,
telecommunications, regulatory, and administrative perspective, and
with manageable risk, particularly with respect to privacy and
security. This hypothesis can be tested in real-world pilot programs.
In situations where private sector solutions are not viable, policy
solutions could be developed around public wallet Government programs
or services that fill remaining gaps in coverage.
Assuming the technological efficiency and potentially reduced
regulatory costs associated with offering a digital wallet, one can
imagine smart phones and devices preloaded with such a solution, or at
a minimum, the application programming interfaces to allow for mobile
applications to function. The wallet could be readily registered
through a regulated hosting intermediary performing requisite Know Your
Customer/Anti- Money Laundering (KYC/AML) checks. Because not everyone
always has a cell signal where they live, end-users could make in-
person CBDC transactions offline that upload to the network as soon as
they regain cellular service.
In fact, development of a Digital Dollar along with smart phone
wallet services may be only the starting point for financial service
providers to offer new and more beneficial services for populations
that have historically been underserved by traditional banking
services. Georgetown University Law Professor Chris Brummer has
written:
. . . the potential advantages of a tokenized dollar from the
standpoint of financial inclusion are impossible to ignore . .
. . The supporting rails for a digital dollar could be opened
up to other kinds of applications that could help contribute
holistically to a transformation of the very model of financial
inclusion, . . . [including] services like Government
sanctioned digital IDs, alternative credit scoring tools, and
savings programs. even robo-advising and financial education
services for low-income people. \7\
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\7\ Medium.com, ``Thinking Big on Fed Accounts, Digital Dollars
and Financial Inclusion'', June 23, 2020, Chris Brummer, at: https://
medium.com/@chrisbrummer.
The Digital Dollar Project believes the opportunity is at hand not
just to imagine such an ecosystem, but to actually begin exploring it
today. Inclusionary financial services for low-income and underbanked
communities are in such dire need that we are compelled to consider
opportunities to provide them.
Tokenized, Programmable Money: A Glimpse at Its Future
The Project's interest in a U.S. CBDC is not just about saving
transaction costs, enjoying new conveniences, or the possibility of
serving historically underserved segments of our population, as
worthwhile as they are. It is also about preserving American
predominance in the global economy and, as I'll argue a bit later,
enshrining democratic values in the future of money.
Throughout recorded history, sovereign and nonsovereign currencies
have competed for patronage in global commerce. Many factors enabled
some currencies to trade at discounts or premiums to others, especially
social trust based on the issuers' economic strength and stability.
However, technological superiority often gave advantage to one currency
over another, such as China's innovative paper currency in the Eleventh
Century or an instrument from which the U.S. currency derives its name:
the Spanish Dollar that from the 15th through 18th centuries was easily
divisible into ``pieces of eight'' for greater commercial convenience.
\8\
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\8\ Shepard Pond, ``The Spanish Dollar: The World's Most Famous
Silver Coin'', Bulletin of the Business Historical Society, The
President and Fellows of Harvard College, Vol. 15, No. 1 (Feb., 1941)
at: https://www.jstor.org/stable/i356449.
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Society is today experimenting in far ranging ways with digital
money and assets. As we go into the future, the continuing evolution of
the Internet is rendering things of value into tokenized and ultimately
programmable digital instruments, from cryptocurrencies like Bitcoin
and Ethereum, to innovative ``stable coins'' and nonfungible digital
tokens or ``NFTs.'' We must carefully consider what role the U.S.
Dollar will play in this digital future.
As former CFTC Chairman, I am cognizant of the fact that prices for
most of the world's key tradable commodities and contracts are today
set in America's deep, transparent and well-regulated commodity futures
markets. Those prices are set in U.S. dollars. As a result, those
global commodities are paid and accounted for in U.S. dollars. This
dynamic is an important pillar of the U.S. dollar's primary reserve
currency status.
In the not too distant future, contracts for delivery and exchange-
traded futures on those U.S. dollar-denominated commodities, contracts,
and other significant items of value will be rendered into digitized,
tradable tokens and coupled with algorithmically driven smart
contracts. The question is: Will the digital commodities and contracts
of the future still be priced and accounted for in U.S. dollars if the
U.S. currency remains an analog instrument, not digital and
programmable? Or, rather, will key global commodities be priced and
accounted for in some other currency that is digitized and
programmable?
We must face these questions today. It would be foolish to take the
Dollar's predominant status in the international financial system for
granted. Careful examination of a Digital Dollar is necessary to insure
that the United States preserves the leadership role of the U.S.
Dollar.
Global Competition for the Future of Money
There is an enormous amount of work being done currently by
overseas central banks on central bank digital currency. The Bank for
International Settlements reports that almost ninety percent of central
banks recently surveyed said they were considering the pros and cons of
issuing digital fiat, while three-fifths of central banks are now
actively experimenting with CBDC. \9\
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\9\ Bank for International Settlements (BIS), ``Ready, Steady,
Go?--Results on the Third BIS Survey on Central Bank Digital
Currency'', January 27, 2021, Codruta Boar and Andreas Wehrli at:
https://www.bis.org/publ/bppdf/bispap114.pdf.
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China is particularly far along, working on what it calls the
Digital Currency Electronic Payment (DCEP) system. A number of large,
important Chinese businesses have joined this initiative as partners in
implementing the technology. Today, both Chinese citizens and
noncitizens can download digital wallets from six major Chinese banks
and fund them with Digital Renminbi (or RMB). \10\ And, with the
wallets they can shop in select stores in Beijing and Shanghai. \11\
This is just the beginning for domestic use of Digital RMB.
---------------------------------------------------------------------------
\10\ SMSH, ``Yes, Foreigners Can Use China's New E-CNY Digital
Currency: Alipay and WeChat Pay Are so 2020'', Shanghai Life, May 21,
2021, at: https://www.smartshanghai.com/articles/activities/how-to-use-
china-digital-yuancbdc.
\11\ Id.
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Yet, domestic use is only one purpose of China's CBDC. Another is
to integrate Digital RMB into China's high-priority global
infrastructure development strategy, known as ``one belt, one road.''
Such integration could encourage dozens of participating economies to
make payments using Digital RMB. Additionally, China could lure
developing economies throughout South East Asia and Africa to peg their
digital domestic currencies to that of China.
Chinese technological dominance in digital currency systems would
pose serious challenges for the U.S. and other democratic societies. If
CBDC payment systems can bypass the Western-dominated global, account-
based banking system, the United States would lose a powerful policy
tool for economic sanctions. \12\ In addition, if foreign central banks
come to maintain smaller amounts of dollar reserves to fund purchases
of a shrinking amount of global commodities priced in dollars demand
would decline for U.S. Government bonds. That would result in higher
interest rates for both the U.S. Government and American consumers.
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\12\ Whatever one's opinion of specific instances or frequency of
utilization of economic sanctions, they are certainly less widely
destructive than a key alternative of statecraft: warfare.
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Assuring Democratic Values in the Future of Money
The dollar's ascendance during the post-World War II period was
accompanied by a historical rarity: the birth of a truly global market
for goods and services. That, in turn, helped millions of historically
impoverished people lift themselves into the middle class. As a
consequence of this ascendancy of the U.S. dollar as a global reserve
currency, today more people than ever before in human history enjoy
improved health, child welfare, and all the educational and civil
liberty benefits that accompany material wherewithal.
This remarkable late 20th century improvement in human well-being
is related to the global embrace of democratic ideals of individual
liberty, freedom of speech, personal privacy, free enterprise, and the
rule of law of democratic societies. These ideals are encoded in the
U.S. currency, the Dollar.
Some of those ideals are also set out in U.S. Constitution. One in
particular, is the Fourth Amendment's right to privacy. From it stems a
rich body of jurisprudence defining the balance between an individual's
right to privacy--including financial privacy--and the State's limited
ability to abridge that privacy in pursuit of legitimate law
enforcement, national defense, or other overriding objectives. Amongst
the major democracies--and certainly when compared to autocracies--the
United States has some of the most robust constitutional protections
against Government infringement of individual financial privacy.
With the proper Fourth Amendment jurisprudence and thoughtful
design choices relating to anonymity and individual privacy, the
Digital Dollar could well enjoy privacy protections superior to many
competing instruments--whether provided by commercial interests or
other sovereign nations.
This would especially be true compared to central bank digital
currency of antidemocratic regimes that, undoubtedly, will be used as
instruments of State surveillance. Highly autocratic Governments will
seek to use sovereign digital currency to operate ``social credit''
systems, by which individuals and businesses will be tracked and
evaluated for political trustworthiness. Criticism of an authoritarian
regime may one day result in one's digital money being disabled from
paying for, say, access to electronic media, transportation outside of
one's village, or even necessities like food.
Accordingly, privacy rights may turn out to be an ace the United
States can play in the contest over the future of digital money.
Encoding traditional American ideals of economic freedom and privacy
into a Digital Dollar will surely enhance its global appeal. Hundreds
of millions of people in the developing world may well be reluctant to
surrender their growing economic security and autonomy to authoritarian
State surveillance, simply for the convenience of digital payments. As
it has so often in its history, the United States has the opportunity
to lead in a way consistent with its finest ideals.
That is why it is so important that advocates for economic privacy
be fully engaged and heard as a U.S. CBDC is being analyzed and
considered. We must make sure that the values that are enshrined in the
Dollar today--values like individual liberty, freedom of speech,
personal privacy, free enterprise and the rule of law--are encoded in
the Digital Dollar of the future.
Piloting Development of the Digital Dollar
Like it or not, we are entering a new world, a world in which many
intangible assets will be rendered as digital tokens recorded on
distributed ledgers. It has already begun.
When it comes to sovereign money, the questions are: Who will
design and engineer digital currency systems? Who will set the key
standards and protocols for interoperability? And what social values
will be incorporated into them? If the U.S. dollar is to remain the
world's primary reserve currency in this new era, then we must consider
whether to evolve it from an analog to a digital currency that
effectively measures, supports, and transacts with the world's
digitally tokenized things of value.
The Digital Dollar Project believes that well-architected, durable
and universal U.S. CBDC, with trusted privacy protections, may well be
in the national interest of the United States and, we believe, in the
interest of the world economy. Crafting it will be an enormous and
complicated undertaking.
Considering the launch of a Digital Dollar needs to be done
carefully, thoughtfully and deliberately. To create something in
keeping with the complexity and worth of the U.S. dollar's global
importance requires that any such consideration not be conducted in a
hurried manner. It will take time and seriousness to get it right.
Nevertheless, now is the time to get started. The recent launch of
SpaceX reminds us that the United States explored outer space and the
lunar surface through a series of pilot programs known as Mercury,
Gemini, and Apollo. So too, should the U.S. explore a Digital Dollar in
a series of well-conceived and executed pilot programs.
The Federal Reserve is looking thoughtfully at central bank digital
currency. We are encouraged by the strong and positive statements by
Chairman Jerome Powell \13\ and Governor Lael Brainard \14\ on
exploring and seeking public input into design of the Digital Dollar.
The Federal Reserve Bank of Boston has assembled some fine researchers
working with The Massachusetts Institute of Technology's Digital
Currency Initiative, whose Director is also giving testimony today.
That collaboration is exploring core technological architecture of a
U.S. CBDC.
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\13\ ``Federal Reserve Chair Jerome H. Powell Outlines the Federal
Reserve's Response to Technological Advances Driving Rapid Change in
the Global Payments Landscape'', May 20, 2021, at: https://
www.federalreserve.gov/newsevents/pressreleases/other20210520b.htm.
\14\ Lael Brainard, ``Private Money and Central Bank Money as
Payments Go Digital: An Update on CBDCs'', Board of Governors of the
Federal Reserve System, May 24, 2021, at: https://
www.federalreserve.gov/newsevents/speech/brainard20210524a.htm.
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The work of the Digital Dollar Project is intended to complement
and not controvert the work of the Federal Reserve, including by
Federal Reserve Bank of Boston with MIT. We look forward to the Federal
Reserve's upcoming discussion paper and examining its important
conclusions.
Yet, notwithstanding the important work of the Federal Reserve, a
great deal of exploration still must be done to confirm valuable use
cases, understand user behavior and sociological implications, and
explore public policy challenges and opportunities of CBDC through
broad stakeholder participation and discussions. That is why the
Digital Dollar Project recently announced the launch of a neutral,
open< and collaborative forum working with the private sector to
conduct pilot programs to explore those policy challenges and
opportunities. \15\ This research platform will serve as a ``test
ground'' for collaboration by a wide range of commercial and
noncommercial stakeholders.
---------------------------------------------------------------------------
\15\ ``Digital Dollar Project to Launch Pilot Programs to Explore
Designs and Uses of a U.S. Central Bank Digital Currency,'' May 3,
2021, at: https://newsroom.accenture.com/news/digital-dollar-project-
to-launch-pilot-programs-toexplore-designs-and-uses-of-a-us-central-
bank-digital-currency.htm.
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The Project seeks broad and even-handed public sector engagement.
It will select pilot programs and participating institutions according
to criteria approved by the Project's nonpartisan Advisory Group. It
will explore, analyze and understand technical and functional
requirements, test applications and approaches and consider promising
use cases for both retail and wholesale commercial utilization. The
pilot programs will be designed with an unbiased and nonprofit
perspective that seeks to uncover and present the raw data unencumbered
by commercial influence or priorities.
The Digital Dollar Project believes its initiative will help
examine three of the key preconditions for a CBDC identified by
researchers at the Federal Reserve: broad stakeholder support, robust
technology and market readiness. \16\ The Project will release the
results of the pilots to the public for use in academic study, as well
as policy consideration by Congress, the Federal Reserve, the U.S.
Treasury, and the wider stakeholder community.
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\16\ Jess Cheng, Angela N. Lawson, and Paul Wong, ``Preconditions
for a General-Purpose Central Bank Digital Currency'', Board of
Governors of the Federal Reserve System, Fed Notes, February 24, 2021,
at: https://www.federalreserve.gov/econres/notes/feds-notes/
preconditions-for-a-general-purpose-central-bank-digitalcurrency-
20210224.htm identifying the following five broad preconditions:
``clear policy objectives, broad stakeholder support, strong legal
framework, robust technology, and market readiness.''
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When the U.S. has led the world in technological innovation--
whether exploring outer space in the last century or cyberspace at the
turn of this century--it has done so through public/private
partnerships. \17\ In these partnerships, the U.S. Government has
directed central policy frameworks to further the public interest while
the private sector supplied technological innovation large-project
management capability and competitive urgency. Without the blending of
the two, exploration of the lunar surface and cyberspace may have been
delayed beyond the twentieth century into the twenty-first.
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\17\ In the 1960s, NASA partnered with a host of private sector
vendors, engineering firms, and contractors to land a man on the moon
and accomplish America's then highest priority. Also in the 1960s, the
Pentagon's Defense Advanced Research Projects Agency (DARPA) contracted
to the private sector development of key Internet components while,
later in the century, the National Science Foundation created NSFNET to
contract with both private companies and public universities to lay the
groundwork for the Internet as we know it today.
---------------------------------------------------------------------------
It may be argued that developing a dollar CBDC is so important to
the national interest that it should be the exclusive work of the
public sector and not involve the private sector. We disagree. It is
because the development of a dollar CBDC is so important to the
national interest that it must involve collaboration by both.
Collaboration was the basis for successful exploration of both outer
and cyberspace. It is the way America succeeds in doing big
technological things. It is the right way to explore the future of
money.
This global wave of digital currency innovation is quickly gaining
momentum. The challenge for the United States is to play a leadership
role and assure that its democratic values are brought to bear. If the
U.S. fails to lead this wave of CBDC innovation it must be prepared to
accept that the digital future of money will incorporate the values of
America's global adversaries.
It is naive to think that the Internet, in its continuing
evolution, will not transform money in the same way it has transformed
information, social networking, retail shopping, local transportation,
travel and leisure, photography, and the music and entertainment
industries. For money itself, that transformation has already begun.
\18\ The pace of innovation will never again be as slow as it is today.
It is incumbent upon policymakers to consider modernizing the Dollar
for the same reason we must modernize all economic and commercial
infrastructure--to keep pace and benefit from advanced, new
architectures of technology and innovation. It is about pursuing less
friction, less cost, better policy tools and broader social inclusion.
It is about exploring new digital monetary architecture alongside its
old analog foundation.
---------------------------------------------------------------------------
\18\ It is estimated that annualized stablecoin trading volume is
$16 trillion compared to U.S. wholesale payment volume of $25 trillion.
See Caitlin Long, ``Ten Stablecoin Predictions and Their Monetary
Policy Implications'', Cato Journal, Spring/Summer 2021, at: https://
www.cato.org/cato-journal/spring/summer-2021/ten-stablecoin-
predictionstheir-monetary-policy-implications.
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We should modernize the Dollar to make sure that the values that
are enshrined in the Dollar today--values like freedom of speech,
individual economic privacy, free enterprise, and the rule of law--are
encoded in the digital future of money.
The time has come to explore the opportunities and challenges of a
U.S. CBDC through well-crafted and carefully executed pilot programs
conducted in thoughtful partnership between the public and private
sectors in the best tradition of American innovation.
The time has come to explore the Digital Dollar.
______
PREPARED STATEMENT OF LEV MENAND
Academic Fellow and Lecturer in Law, Columbia Law School
June 9, 2021
Chair Warren, Ranking Member Kennedy, and Members of the Committee,
thank you for the opportunity to testify this afternoon. I am a
lecturer in law and academic fellow at Columbia Law School where I
research money and banking. My work focuses on the design of monetary
systems and the institutional structures that Congress has created to
supply the U.S. economy with dollars.
In June of 2018, along with Morgan Ricks and John Crawford, I
proposed that Congress authorize the Federal Reserve to offer a retail
``central bank digital currency'' or CBDC through a program we called
``FedAccounts.'' \1\ FedAccounts would be available to any U.S.
resident or business in digital wallets operated by the Fed, the Post
Office, or one of the country's several thousand community banks. These
wallets would charge no fees and have no minimum balances. They would
come with debit cards, direct deposit, and bill pay. Their balances
would be nondefaultable no matter how large--just like physical cash.
They could be exchanged in real time, 24x7x365. They would have
customer service, privacy safeguards, and fraud protection--if you lost
your password, there would be someone you could call. And they would
earn interest at the same rate that the Fed pays to banks.
---------------------------------------------------------------------------
\1\ Morgan Ricks, John Crawford, and Lev Menand, ``Central Banking
for All: A Public Option for Bank Accounts'', The Great Democracy
Initiative, June 2018. See, also, John Crawford, Lev Menand, Morgan
Ricks, ``FedAccounts: Digital Dollars'', 89 Geo. Wash. L. Rev. 113
(2021).
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In the past 3 years, the case for authorizing FedAccounts has only
grown. To understand how and why, it helps to review some of the
shortcomings with our existing money and payments system.
I. Money and Banking in the United States.
Our economy is built around the U.S. dollar, which the First
Congress established as the country's ``unit of account'' in 1791. \2\
The Government creates two types of dollars that are available to the
general public: physical dollars and deposit dollars. It creates the
first type directly. The U.S. Mint issues dollar denominated coins, and
the Federal Reserve issues dollar denominated paper notes. There are $2
trillion of coins and notes outstanding, although most of this cash
circulates abroad. \3\
---------------------------------------------------------------------------
\2\ 31 U.S.C. 5101 (``United States money is expressed in
dollars.'').
\3\ Bd. of Governors of the Fed. Rsrv. Sys., Monetary Base:
Currency in Circulation, Fred: Fed. Rsrv. Bank of St. Louis; J.P.
Koning, ``How Much U.S. Currency is Held Overseas?'', Bullionstar (Jul.
3, 2019) (estimating that 60 percent of U.S. banknotes are offshore).
---------------------------------------------------------------------------
The second type of money, deposits or account money, is the more
important type. Deposits are not physically certificated like paper
notes. They are ledger entries. Imagine a simple spreadsheet with two
columns. Column A is a list of people and legal entities. Column B is a
list of numbers. Each entry is a deposit. There are over $17 trillion
of deposits like this outstanding today. That is more than ten times
the amount of cash in use domestically. \4\ Since cash can be lost,
stolen, or destroyed, people use deposits to save. And since cash is
hard to move around, especially in large amounts, people and
institutions also use deposits to conduct transactions. They pay their
rent with deposits. They receive their salary in deposits. They settle
their credit card bills using deposits. Most businesses depend on
deposits to operate. \5\
---------------------------------------------------------------------------
\4\ Bd. of Governors of the Fed. Rsrv. Sys., ``Deposits, All
Commercial Banks'', Fred: Fed. Rsrv. Bank of St. Louis.
\5\ Paul Samuelson and William D. Nordhaus, Economics 228 (13th
ed. 1989) (``today is the age of bank money'' . . . ``[i]f we calculate
the total dollar amount of transactions, nine-tenths take place by bank
money, the rest by paper money'').
---------------------------------------------------------------------------
But, unlike cash, the Government does not issue deposits directly
to the general public. It outsources this function to publicly
chartered, privately owned banks. And although people treat bank
account balances as equivalent to Government-issued cash, banks don't
actually hold cash to back them. In fact, they create deposits out of
thin air. The way it works is fairly simple: Someone asks to borrow
money. The bank agrees and lends deposits by plussing up the borrower's
deposit account balance at the bank. In other words, the bank edits
Column B in the spreadsheet. All it takes is the stroke of a keyboard.
This system is stable--with people treating their deposit balances
as equivalent to cash--only because the Government stands behind
deposit balances. The Office of the Comptroller of the Currency, the
Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC)
are the franchisors: they charter the banks and back them. The banks
are the franchisees: They interact with the depositors and create the
deposits. \6\
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\6\ To ensure that banks operate in the public interest, Congress
has enacted a series of laws to (1) prevent banks from dominating other
industries by separating them from private commerce, (2) diffuse their
power by spreading them out across the country and preventing any one
bank from becoming too large, and (3) hold them in check through
rigorous, informal oversight by special Government supervisors. For a
discussion of these safeguards and how they have eroded in recent
decades, see Lev Menand, ``Why Supervise Banks? The Foundations of the
American Monetary Settlement'', 74 Vand. L. Rev. 951 (2021).
---------------------------------------------------------------------------
Although we treat deposits like they are all on one big
spreadsheet, they're not. Each bank has its own ledger (technically
speaking, it issues its own money). When depositors want to make
transfers to customers of other banks, the Government enables the
transfer using programs called FedWire and FedACH. If depositors want
cash instead of deposits, banks can go to the Fed and get cash at a
program called the discount window. If a bank makes too many bad loans
and fails, the FDIC steps in to ensure that the bank's deposits can
still be exchanged for cash. In each case, the Government ensures bank
deposits are good money.h
II. Shortcomings in the U.S. Money and Banking System
This system is not working particularly well. Banks are not meeting
the needs of our increasingly digital economy. And nonbanks are trying
to fill the gaps left by banks with dangerous deposit substitutes.
Consider a few of the biggest problems with the system:
It leaves a lot of people out. Over 6 percent of U.S.
households do not have access to deposit money at all. Most of
them either don't trust banks or don't have enough money to
open and maintain an account. That's millions of people stuck
on the sidelines, at a significant disadvantage when it comes
to getting a job, finding a place to live, or participating in
the online economy. \7\
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\7\ See Mehrsa Baradaran, ``How the Other Half Banks: Exclusion,
Exploitation, and the Threat to Democracy'' (2015); Mehrsa Baradaran,
``How the Poor Got Cut Out of Banking'', 62 Emory L. J. 483 (2013);
Michael Barr, ``No Slack: The Financial Lives of Low-Income Americans''
(2012).
It is costly. Banks, which are organized for profit, charge
high fees for using deposit money. Most accounts have minimum
balance requirements and monthly account maintenance fees. They
often charge substantial amounts for checks and wires.
Estimates of annual bank overdraft fees, another way banks
extract rents from their privileged position, run into the tens
of billions. Banks also earn large amounts through interchange
fees that are imposed on card-based payments--a huge cost for
small businesses and consumers. \8\
---------------------------------------------------------------------------
\8\ See Aaron Klein, ``A Few Small Banks Have Become Overdraft
Giants'', Brookings Inst. (Mar. 1, 2021).
It is slow. Checks drawn on deposit accounts take up to 2
days to clear. Even wire transfers do not settle until the end
of the day and credit card payments may not settle for up to 2
days. A bank account transfer made before Memorial Day Weekend
on Friday May 28, for example, likely did not clear until
Tuesday, June 1. Five days to edit a couple of cells in a
spreadsheet is far too long in a world where billions of people
can communicate near-instantly using mobile devices. \9\
---------------------------------------------------------------------------
\9\ See Aaron Klein, ``The Fastest Way To Address Income
Inequality? Implement a Real Time Payment System'', Brookings Inst.
(Jan. 2, 2019). This problem was particularly severe during the COVID-
19 pandemic: It took between 3 weeks and 3 months for the Government to
distribute stimulus payments. See Aaron Klein, ``70 Million People
Can't Afford To Wait for Their Stimulus Funds To Come in a Paper
Check'', Brookings Inst. (Mar. 31, 2020).
It is complex. With thousands of banks operating different
ledgers, it takes a lot of work by the Fed and the banks to
---------------------------------------------------------------------------
ensure that transactions between the different ledgers clear.
These are all first order problems with the Government's existing
monetary offerings. There is also an urgent second-order problem: a
range of unstable private sector alternatives. These alternatives are
basically monetary ledgers maintained by nonbank financial
institutions. In the short run, these ledgers might operate faster and
more efficiently; in the long run, they undermine financial stability,
threaten to trigger severe recessions, weaken the U.S. internationally,
and fuel ransomware attacks, money laundering, and tax evasion.
One group of workarounds--eurodollars, repos, commercial paper, and
money market mutual funds--has been around for several decades. These
deposit substitutes brought down the U.S. economy in 2008. They are
issued by firms that operate like banks but lack a charter from the
Government to issue deposits (shadow banks). Most Americans are
unfamiliar with these deposit substitutes because they are used
primarily by businesses, institutional investors, high-net worth
individuals, and financial companies. Nevertheless, these instruments
compete with deposits to satisfy money demand: they offer better
security (deposit insurance maxes out at $250,000) or better returns
(banks don't pay a lot of interest to their depositors). But they are
highly unstable: their issuers do not have access to the Fed's discount
window and in the face of economic uncertainty the people who hold them
often decide all at once to switch back to deposits, unleashing chaos
in financial markets. \10\
---------------------------------------------------------------------------
\10\ See Morgan Ricks, ``The Money Problem: Rethinking Financial
Regulation'' (2016).
---------------------------------------------------------------------------
Although eurodollars, repos, commercial paper, and money funds
remain a serious problem--they triggered another financial crisis in
2020, which the Fed quelled by launching an unprecedented round of
backstopping \11\--now another, equally dangerous breed of deposit
substitute is spreading. These are deposit substitutes marketed at a
retail level to ordinary households and businesses.
---------------------------------------------------------------------------
\11\ See Lev Menand, ``The Federal Reserve and the 2020 Economic
and Financial Crisis'', 26 Stan. J. of L., Bus. & Fin. (2021).
---------------------------------------------------------------------------
The new retail deposit substitutes come in many shapes and sizes.
One type aims to displace the dollar entirely. The most prominent of
these are cryptocurrencies called Bitcoin and Ethereum. They do not
have a central issuer (like bank deposits) but operate using
distributed ledger technology: each currency user has a copy of the
entire spreadsheet. These deposit substitutes offer users the ability
to make anonymous transfers across national boundaries in a matter of
minutes instead of hours or days. Although they are unlikely to ever
displace dollar money instruments fully, as their use grows, so do the
harms they threaten.
For example, if more transactions are denominated in
cryptocurrencies, it will be more difficult for the Fed to stimulate
economic activity through monetary policy. The use of multiple
currencies in the same economy will also increase transaction costs and
incentivize arbitrage. (There is a reason why the Japanese Yen, despite
being a stable currency, is not used in Los Angeles.) In addition,
widespread use of cryptocurrencies may hamper price discovery. People
in the U.S. value goods and services and tangible and intangible
property in dollars and use vast stores of information about how much
things are worth in dollars to order their economic lives. New units of
account are unmoored by comparison.
Perhaps even worse, cryptocurrencies divert limited social
resources (including energy \12\ and the technical skills of thousands
of computer scientists and entrepreneurs) away from more productive
endeavors. And they offer malicious actors a way to bypass U.S. money
laundering and tax laws. Hackers use them to extort U.S. companies.
\13\ Foreign adversaries use them to attack American hospitals and
Government agencies and to finance nuclear missile programs. \14\
---------------------------------------------------------------------------
\12\ Cambridge Bitcoin Electricity Consumption Index, University
of Cambridge (last accessed Jun. 6, 2021) (estimating that Bitcoin's
decentralized ledger technology consumes 115 Terawatts of electricity
per year, more than countries like the Netherlands and the Philippines,
accounting for over 0.5 percent of worldwide electricity consumption).
\13\ David Uberti and James Rundle, ``U.S. Looks Into
Cryptocurrency's Role in Ransomware Hacks'', Wall St. J. (Jun. 3,
2021).
\14\ See Lev Menand, ``Regulate Virtual Currencies as Currency'',
Just Money (Feb. 14, 2020).
---------------------------------------------------------------------------
Another new type of retail deposit substitute is more familiar. It
is denominated in dollars. The best-known example is Venmo, which is a
money issued by the financial technology firm PayPal. Venmo is growing
rapidly, and now has over $30 billion of balances. The cryptocurrency
version of this substitute is called a stablecoin and uses distributed-
ledger technology. The most prominent stablecoins are Tether and USD
Coin, with over $80 billion in balances between them.
Stablecoins and Venmo balances are economically equivalent to
deposits--they are dollar denominated ledger entries--but they are not
issued by chartered banks and are not backed by the FDIC. In other
words, their issuers are shadow banks, among the biggest in the United
States. They don't have access to the Fed's discount window. And they
are highly susceptible to runs and panics. If Congress does not act
soon to address the risks posed by Venmo, stablecoins, and
cryptocurrencies, they may ultimately trigger a financial calamity and
recession worse than 2008. \15\
---------------------------------------------------------------------------
\15\ See Jamie McAndrews and Lev Menand, ``Shadow Digital Money''
(Apr. 8, 2020); Dan Awrey, Lev Menand, and Jamie McAndrews, ``Comment
Letter to the Office of the Comptroller of the Currency Warning of the
Dangers Posed by the Shadow Payment System and Shadow Digital Money''
(July 31, 2020).
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III. How CBDC Could Help
A CBDC like FedAccount cannot solve all of the first and second
order problems with our money and banking system. But it can help in a
variety of ways. For example:
It can bring millions of people into the mainstream
financial system. The primary reason six percent of households
lack bank accounts is that it is unprofitable for banks to
operate deposit accounts for people with low balances. \16\
FedAccounts would make digital dollars available regardless of
the balance and the Fed would ensure that anyone who is
eligible could open an account regardless of cost.
---------------------------------------------------------------------------
\16\ See Aaron Klein, ``America's Poor Subsidize Wealthier
Consumers in a Vicious Income Inequality Cycle'', Brookings Inst. (Feb.
6, 2018) (``It can cost banks between $250 and $400 to establish a new
checking account and another several hundred dollars a year to maintain
it.'').
It can speed up payments. FedAccount payments would clear
---------------------------------------------------------------------------
immediately for in-network users.
It can reduce the fees banks and other financial
institutions charge their customers. FedAccounts would charge
no fees.
It can bolster financial stability. FedAccounts would offer
many businesses and other institutions what they are looking
for when they pile into deposit substitutes: riskless money
with a positive yield. A bigger supply of such money will crowd
out some of the bad money that has been proliferating in recent
years. By offering people a safe and effective form of digital
cash, they will be less likely to turn to stablecoins and other
unstable financial technology products.
It can reduce regulatory complexity. Many rules promulgated
since the 2008 financial crisis are directly or indirectly
targeted at deposit substitutes. By crowding out these
instruments, FedAccounts would reduce the need for these
regulations. FedAccounts could also potentially reduce the size
of the largest U.S. financial institutions. To the extent that
these firms, due to their size and wide range of activities,
are hard to supervise or enjoy subsidies because of a
perception they are ``too big to fail,'' FedAccounts could
bring them more in line with other large regional banks and
reduce their systemic importance.
It can improve monetary policy transmission. Since 2008,
the Fed has paid interest to banks as part of its standard
monetary policy framework. These payments are called interest
on reserves or IOR. In theory, IOR ``passes through'' to
everyone, allowing the Fed to influence macroeconomic
conditions. But pass through has been lackluster in practice.
Banks do not increase the rates they pay depositors in
parallel. \17\ FedAccounts would mitigate this problem by
paying people IOR on their FedAccount balances.
---------------------------------------------------------------------------
\17\ Morgan Ricks, ``Money as Infrastructure'', 2018 Colum. Bus.
L. Rev. 757 (2018).
It can generate revenue for the Government. The returns on
the Fed's asset portfolio typically exceed its interest
payments and other expenses by a wide margin. These earnings,
known as ``seigniorage,'' represent the fiscal revenue from
money creation. If a robust CBDC expanded the Fed's balance
sheet, remittances to the United States. Treasury could
increase substantially, even after accounting for the costs of
operating the new program. By recapturing seigniorage,
FedAccounts would remove existing distortions in financial
---------------------------------------------------------------------------
markets and reduce rent extraction.
It can protect national security. The growth of
cryptocurrencies, which are increasingly demanded as payment in
ransomware attacks on American companies, is driven at least in
part by a perception that the U.S. dollar is difficult to use.
Accordingly, a faster, safer U.S. dollar money instrument will
likely blunt demand for these alternatives.
Some people argue that a CBDC, especially one with robust customer
protections and privacy safeguards that also offers interest, would
threaten the banking system. This need not and should not be the case.
To the contrary, a well-designed FedAccounts program can strengthen the
banking system and protect it from growing threats posed by unstable
and unregulated deposit substitutes. For example, the Fed might
contract with banks to provide retail services as its agents. The Fed
could also hire banks to do compliance. Moreover, Congress can direct
the Fed to pass back to banks any lost deposit funding with special
discount window loans. In this way banks can continue to serve as the
Government's franchisees for lending, while simplifying the overall
monetary architecture and improving the usefulness of account money.
IV. Conclusion
Money is basic infrastructure. It is the backbone of the economy
and a core public good. \18\ Unfortunately, our monetary system is
antiquated and decaying. If the Government allows it to become even
more private, dominated by cryptocurrencies, deposit substitutes, and
foreign fiat money, we are bound to face worse financial crises and
economic contractions. A CBDC like FedAccounts can be part of the
solution. By improving the Government's existing money offerings, it
can help strengthen our financial system and our economy.
---------------------------------------------------------------------------
\1\ See Christine Desan, ``Making Money: Coins, Currency, and the
Coming of Capitalism'' (2014). This point is even conceded by some
libertarians. See, e.g., Milton Friedman, ``A Program for Monetary
Stability'' 8 (1960) (arguing that money provision is ``an essential
governmental function on a par with the provision of a stable legal
framework'').
---------------------------------------------------------------------------
______
PREPARED STATEMENT OF DARRELL DUFFIE
Adams Distinguished Professor of Management and Professor of Finance,
Stanford University Graduate School of Business
June 9, 2021
Chair Warren, Ranking Member Kennedy, and other distinguished
Members of the Subcommittee, thank you for the opportunity to provide
input to your analysis of U.S. strategy regarding a central bank
digital currency (CBDC).
The United States should begin the development of an effective and
secure digital dollar, a direct obligation of the Federal Reserve that
could be distributed to the public at large by regulated private-sector
payment service providers. While developing a digital dollar, the
relevant U.S. agencies should also attempt to trigger major
improvements in the conventional U.S. payment system. Perhaps it will
ultimately not be necessary for the Fed to deploy a digital dollar.
Maintaining cybersecurity and privacy while controlling illegal
payments is a challenging design problem for an effective CBDC-based
payment system. Without thoughtful engagement of the private sector, a
centralized payment system could also impair innovation. Nevertheless,
it seems likely to me that a U.S. digital dollar will ultimately be
deployed. A major effort to get the design right should begin now.
The development of an effective and secure digital dollar will
require significant resources and time, perhaps more than five years.
The development process itself will lead to a much deeper appreciation
of the costs and benefits of ultimately deploying a CBDC and could
generate large beneficial technology spillovers into other parts of our
new digital economy. Further, the development of a viable CBDC may spur
firms that currently provide bank-railed payment services to compete
more aggressively, in terms of both pricing and technology innovation.
Success will call for unleashing the innovative power of the
private sector while increasing the reach and quality of Government
regulation. This approach can protect the safety and soundness of
payments while advancing U.S. productivity with next-generation digital
technology.
As noted last month by Federal Reserve Governor Lael Brainard, \1\
the United States should also position itself with a seat at the table
of international discussions regarding standards for the design and
appropriate uses of CBDCs. The ability of the United States to maintain
its leadership in global discussions and in international payment-
related markets will rest in part on the knowledge and credibility
associated with having developed state-of-the-art CBDC technology to a
fully deployable level.
---------------------------------------------------------------------------
\1\ See Brainard (2021).
---------------------------------------------------------------------------
The U.S. should also prepare a strategy for deflecting undesirable
and invasive types of cryptocurrencies as they gain traction in U.S.
payments. A digital dollar can play a role here by providing an
attractive and officially supported alternative.
I am guessing that Dr. Narula will update you today about CBDC
research progress with ``Project Hamilton'' work by the MIT Digital
Currency Initiative and the Federal Reserve Bank of Boston. \2\ This is
the ``R'' part of ``R&D.'' The transition from research to development
implies a significant additional commitment of resources and a plan for
building an effective digital dollar. There are many open design
options. In particular, who has access to which personal data and who
has responsibility for monitoring the legality of payment transactions
must be decided in a way that assures Americans of their privacy while
protecting them from corrupt payments. Under this constraint, achieving
a high degree of efficiency is not a simple matter.
---------------------------------------------------------------------------
\2\ See Rosengren (2021).
---------------------------------------------------------------------------
I very much look forward to the release this summer of the Fed's
discussion paper on the benefits and risks of CBDCs (Powell, 2021).
Why Can't Banks Do This?
U.S. banks are capable of providing an effective low-cost payment
system but have not done so. Regulations, network effects that limit
entry, and profit incentives have not promoted an open, innovative, and
competitive market.
Even centuries ago, Alice could pay Bob by asking her bank to debit
her deposit account in favor of Bob's account at his bank. Today, banks
handle the vast majority of payments, whether domestic or cross border,
by this straightforward method. U.S. banks take reasonable care to
protect the privacy of their customers while monitoring payments for
their legality. Commercial bank deposits can be provided in
interoperable forms suitable for smart contracting. An advanced
interoperable payment system based on bank deposits is feasible but not
currently under development, to my knowledge.
Calls for alternatives such as fintech payment firms, private
stablecoins like Diem, \3\ and CBDCs, have been incited by the low
efficiency and high cost of the current bank-railed payment system.
Many Americans are wondering, ``If China has such an advanced low-cost
retail payment system, then why can't we?''
---------------------------------------------------------------------------
\3\ See Catalini (2021).
---------------------------------------------------------------------------
It takes too long for U.S. merchants to receive their payments,
often more than a day. Based on McKinsey data, moreover, Americans pay
about 2.3 percent of GDP for payment services, far more than Europeans,
particularly because of extremely high fees for credit cards, as
illustrated in Figure 1. This is not because Americans are getting
better quality service. Further, the primary payment instrument of
Americans, their bank deposits, is compensated with extremely low
interest rates. When wholesale market interest rates rise, consumer
bank deposit interest rates remain much lower, typically near zero. \4\
---------------------------------------------------------------------------
\4\ See, for example, Driscoll and Judson (2013), Drechsler,
Savov, and Schnabl (2017), and FDIC historical data.
---------------------------------------------------------------------------
U.S. banks and credit card providers operate what Rochet and Tirole
(2003) call a two-sided market. On one side of the market, merchants
pay high payment fees. On the other, consumers are offered low direct
payment fees, and sometimes rewards. This approach, combined with the
positive network effects of a common payment system that is convenient
for consumers to use, binds all market participants to the bank-railed
system. So far, competitive entry into this market has been difficult.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Ultimately, consumers bear some of the burden of merchants' payment
fees through higher prices for goods and services. In order to make
their payments, moreover, many consumers borrow money at high interest
rates on their card accounts or store the cash that they will use to
make payments in bank accounts that offer woefully low interest rates.
It's not easy for many Americans to shop aggressively for deposit and
payment services. Banks have ``walled gardens''--with little to gain by
making it simple for their customers to move their cash to the highest
bidder.
Banks have also underinvested in payment technologies that would
improve the speed, interoperability, and programmability of payments.
The Fed has had to step in with the development of its own real-time
payment system, FedNow, which will be ready in a few years. FedNow will
improve the speed of payments and offer other efficiency gains but
brings no assurance of significantly improved competition for payment
services. For this reason and for the other reasons that I have
outlined, I believe that it is time for Congress to give the Fed the
legal power to introduce a digital dollar and to encourage or direct
the Fed to develop and field-test an effective digital-dollar
technology to the point at which it could be deployed on reasonably
short notice. There is no need to decide now to deploy the digital
dollar. We will learn a lot more about the associated costs and
benefits before digital-dollar technology is ready to use. Moreover,
common knowledge that a digital dollar could be deployed might
encourage banks to offer Americans a better payment system. Under
current regulations and market structure, banks simply do not have
sufficient incentives for this.
Congress could also direct the U.S. Treasury to update Congress
regularly on the latest developments and its thinking on ways to
advance the U.S. payment system, including CBDC technology.
Surely many banks realize that their profitable stewardship of the
payment system will eventually be taken away from them unless they
offer a better deal to their customers. Low-cost fintech payment firms,
especially if given Fed accounts, might grab bank payment franchises.
This happened in China, where 94 percent of mobile payments are now
processed by Alipay and WeChatPay, with 90 percent of residents of
China's largest cities using these services as their primary method of
payment. \5\ Or, stablecoins like Diem might disintermediate banks. Or,
here in Congress, you could ask the Fed to introduce a digital dollar.
Banks have not yet aggressively taken up the challenge to offer better
and cheaper payment services because the technology upgrade is costly
and because the first banks to offer a truly open and competitive
service may cede significant profits. Some banks may also believe that
Congress will not act aggressively in this arena. Congress can help to
correct a market failure by opening a path by which consumers and
businesses can get access to better options, such as a CBDC or other
new types of fintech payment services. If incumbent banks do not
respond, then one or more of these options should be deployed.
---------------------------------------------------------------------------
\5\ See Klein (2020) and ``Alipay Retains Leadership Position With
55 Percent Market Share in China's Mobile Payments Market'', Business
Today, July 9, 2020.
---------------------------------------------------------------------------
A further impetus for a digital dollar is financial inclusion. A
2020 study by the Federal Deposit Insurance Corporation estimates that
about 7.1 million U.S. households are unbanked. Many additional
households are underbanked. As noted by Treasury Secretary Janet
Yellen, \6\ a digital dollar could improve the access of unbanked
Americans to basic payment services. The use of paper money in U.S.
payments declined from 51 percent in 2010 to an estimated 28 percent in
2020 (McKinsey, 2020). If the acceptability of paper currency declines
sufficiently, those without access to electronic payments would be
further isolated from parts of the economy. Ironically, a CBDC could
accelerate a decline in the use of paper currency, implying that
special attention should be given to unbanked and underbanked
Americans, whether or not a digital dollar is deployed.
---------------------------------------------------------------------------
\6\ In a February 22, 2021, New York Times DealBook video
interview Secretary Yellen said: ``Too many Americans don't have access
to easy payments systems and banking accounts, and I think this is
something that a digital dollar, a central bank digital currency, could
help with.''
---------------------------------------------------------------------------
CBDC technology also offers options for more efficient
implementation of fiscal and monetary policy. For example, the COVID-19
pandemic revealed the big difference that a digital dollar could make
for the speed of dissemination of Government relief payments to
millions of Americans. \7\ With CBDC, it may also be possible for the
Fed to improve the transmission of monetary policy into the
macroeconomy by exploiting digital-currency technology, real-time
measurement of monetary variables, and perhaps use the option to offer
interest on CBDC.
---------------------------------------------------------------------------
\7\ See Digital Dollar Foundation and Accenture (2020), p. 7.
---------------------------------------------------------------------------
Challenges for a CBDC
There are also challenges for a potential CBDC to overcome.
The greatest challenge for CBDC designers is protecting the privacy
of transactions while at the same time effectively monitoring payments
for their legality, particularly with respect to money laundering and
financing terrorism. If these responsibilities are absorbed by a
central regulator, vast data repositories will need to be protected
from cyberattacks and undue surveillance. While new cryptographic
technologies can address these concerns, centralized databases
containing personal information may not be popular in the United
States. China has not hesitated to concentrate CBDC payment data in the
hands of its central bank, but China is an authoritarian State.
As one possible approach, the designers of a digital dollar could
consider including design features that would allow consumers, perhaps
at their option, to access the payment system with standardized
biometric identities. \8\
---------------------------------------------------------------------------
\8\ D'Silva, Filkova, Packer, and Tiwari (2019) summarize lessons
learned from India's UPI interoperable payment interface.
---------------------------------------------------------------------------
The U.S. could opt for a decentralized approach to holding and
monitoring CBDC personal identity and payment data at the level of
payment service providers such as banks and fintech firms (Digital
Dollar Foundation and Accenture, 2021). This includes a risk that the
resulting two-tiered market structure might come to resemble the
current bank-railed system. To manage against a similarly inefficient
outcome, payment service providers should be tightly regulated for open
access, service levels, and interoperability \9\ standards. One might
then ask: ``Why can't the existing bank-railed payment system be
similarly regulated so as to achieve a roughly similar beneficial
effect?'' This question has not yet been answered satisfactorily.
---------------------------------------------------------------------------
\9\ Regarding the critical importance of maintaining
interoperability, see Darko, Duffie, and Mathieson (2021).
---------------------------------------------------------------------------
Another potential downside of a CBDC is that technology innovation
could become more centralized within Government agencies. This is not
usually a formula for success, especially in consumer-facing
businesses. I am optimistic, though, that this concern can be overcome
with carefully designed public-private partnerships.
A further worry is that if the Fed were to make an unlucky misstep
with its CBDC design or if its CBDC has an operational accident, many
millions of Americans could be adversely affected. Because the Fed is
ultimately answerable to Congress, this could impinge on the Fed's
independence as a central bank. The digital dollar should not be
deployed for broad public use until the technology is ``bullet proof,''
within the limits of the latest technology. This raises the importance
of giving the Fed a green light to begin work now.
I do not expect that the impact of a CBDC on the risk of bank runs
will be a major disadvantage of a digital dollar. Bank runs are already
a concern without a CBDC. For this reason, banks have substantial
regulatory liquidity requirements and are able to pledge their assets
to the Fed in exchange for temporary cash loans that can be used to
meet deposit redemptions. Access to a CBDC could make it easier to
quickly withdraw deposits from a bank. That risk should be carefully
analyzed and managed, but I do not expect that it will rule out a CBDC.
The greater mobility of money associated with a CBDC would force
banks to compete more aggressively for deposits, driving up deposit
interest rates. This would be good for consumers but not for bank
shareholders. With this, I do not expect that the amount of credit
offered by banks would suffer significantly. Banks do not currently
offer unprofitable loans using the irrational justification that they
can recoup the associated losses by exploiting their below-market
deposit rates. For given macroeconomic conditions, the set of loans
that are profitable for banks to offer would probably remain about the
same. In any case, the U.S. Government should not allow an inefficient
payment system to persist so that depositors can subsidize banks. \10\
---------------------------------------------------------------------------
\10\ It should be alerted that I am a member of the board of
directors of TNB Inc., which wishes to offer narrow-bank deposits but
has been unable to obtain a deposit account at the Fed. TNB's charter
prevents it from offering payment-related products and services. I am
not compensated by TNB, whether with equity or otherwise.
---------------------------------------------------------------------------
In short, I don't believe that the potential for disrupting banks,
while real, should be viewed as a major reason for avoiding CBDCs. The
banking industry is likely aware that disruption is coming, one way or
another, and should prepare to offer Americans a better payment system.
International Implications
Much has been written about the potential impact of eCNY, China's
new CBDC, on the international dominance of the U.S. dollar. Concerns
that the renminbi will rival the dollar in international markets are
not warranted at this time, and these concerns are not a good reason to
rush out a digital dollar before it is carefully designed. The
international dominance of the U.S. dollar rests on the relative lack
of U.S. barriers to cross-border capital flows, the depth and liquidity
of globally accessible markets for U.S. Treasuries and other U.S.
financial instruments, reliance by global financial market participants
on the fairness and stability of the U.S. legal system, and the
reliability of U.S. monetary and financial policy. \11\ The collective
effect of these and other strengths of the U.S. system will not be easy
for China to replicate within a significant period of time.
---------------------------------------------------------------------------
\11\ For these and other sources of support for the dominance of
the U.S. dollar, see, among other research Gopinath and Stein (2021),
Gourinchas (2019), Jiang, Krishnamurthy, and Lustig (2020), and
Maggiori, Neiman, and Schreger (2021).
---------------------------------------------------------------------------
That said, China has taken a big lead over the U.S. in retail
payment technology. Domestically, China's mobile payment service
providers are technically advanced and have extremely deep market
penetration. Limiting the dominance of these private payment service
providers was one of the key motivations of China for introducing eCNY.
It's already apparent that eCNY will be part of a rich payment
ecosystem supporting a wide range of access methods and use cases.
Although representatives of the People's Bank of China have emphasized
that eCNY is not intended for ``yuanization'' of the economies of other
countries, \12\ China is making arrangements \13\ for cross-border use
of eCNY with other CBDCs, including those of Thailand, Hong Kong, and
the United Arab Emirates. There are also potentially important
business-to-business cross-border applications of eCNY (Ekberg and Ho,
2021).
---------------------------------------------------------------------------
\12\ See Bloomberg News (2021), Zhou (2021), and Sun and Yan
(2021), who quote Peoples Bank of China Deputy Governor Li Bo as saying
(in an unofficial translation) ``The internationalization of the RMB is
a natural process. Our goal is not to replace the U.S. dollar or other
currencies, but to let the market make choices to further facilitate
international trade and investment.''
\13\ See Hong Kong Monetary Authority (2021).
---------------------------------------------------------------------------
eCNY technology will likely open commercial opportunities for China
in some emerging-market economies. This will increase China's influence
in EM countries, which U.S. foreign policy experts may wish to consider
carefully. It may advantage the U.S. to have its own CBDC technology to
offer to countries that wish to lower the costs or advance the
development time for introducing their own CBDCs. Especially for small
open economies, the threat of an invasive digital currency can be
mitigated by the early adoption of an effective domestic CBDC. For the
same reason, the United States should be cautious about the impact that
a digital dollar could have on small open economies through its
potential for interference with local monetary policy. The United
States should support the development of international agreements that
would set standards of care for protecting foreign monetary systems
from disruption by another country's CBDC.
If the United States becomes an active developer of CBDC technology
using public-private partnerships, there would probably be increased
opportunities for U.S. firms to benefit commercially in the provision
of payment technologies in international markets. U.S. banks have been
ceding commercial advantage to Chinese banks in international markets,
in part because of U.S. regulations and sanctions. The tradeoffs here
should be carefully weighed by the U.S. official sector, case by case.
As I have said, citing Governor Brainard's remarks, the U.S. should
prioritize the development of its CBDC technology for reasons that
include influence in international forums setting technical standards
and intergovernmental agreements for the cross-border use of CBDCs.
Such agreements are already coming into G7 discussions. \14\
---------------------------------------------------------------------------
\14\ See the G7 Finance Ministers and Central Bank Governors
Communique of June 5, 2021. See also Auer, Haene, and Holden (2021),
and Associated Press (2021).
---------------------------------------------------------------------------
A majority of the world's central banks are now working on CBDCs
(Boar and Wehrli, 2021). While few central banks have specific plans to
issue CBDCs, some have moved from research to active development.
Active CBDC developers include the Peoples Bank of China, The Central
Bank of Sweden (Sveriges Riksbank), \15\ the Bank of Canada, \16\ the
European Central Bank, \17\ the Bank of Korea, \18\ and the Bank of
Japan. \19\ Among major economies, only China has committed to
deploying a CBDC.
---------------------------------------------------------------------------
\15\ See Sveriges Riksbank (2021).
\16\ Bank of Canada (2021) states: ``The Bank currently has no
plans to launch a CBDC. Rather, as a contingency plan only, the Bank
will build the capacity to issue a retail, cash-like CBDC should the
need to implement one ever arise. Two scenarios have been identified in
which launching a CBDC could enable the Bank of Canada to fulfill its
mandate. Either scenario could materialize very quickly, warranting
vigilant attention to evolving developments in payments. Because of
this and given the time required to create a viable CBDC, the Bank has
decided to pursue a contingency strategy designed to create a State of
sufficient policy and operational readiness to launch a CBDC relatively
quickly should that decision be made.''
\17\ The European Central Bank (2021) states: ``We have not yet
decided whether to issue a digital euro. We are currently in a
preparation phase: we are developing the concept, conducting practical
experimentation, listening to the views of the broader public and
engaging with stakeholders. We will decide whether to launch a digital
euro project towards the middle of 2021, in order to be prepared for
the possible issuance of a digital euro at some point in the future.''
\18\ See reporting by Cynthia Kim of Reuters, ``South Korea's
Central Bank Moves To Develop Pilot Digital Currency'', May 23, 2021.
\19\ The Bank of Japan (2021) states: ``The Bank of Japan has been
undertaking preparations to begin experiments on Central Bank Digital
Currency (CBDC) in early fiscal year 2021, to test the technical
feasibility of the core functions and features required for CBDC. As
necessary preparations are now complete, Proof of Concept (PoC) Phase 1
begins today. In PoC Phase 1, the Bank plans to develop a test
environment for the CBDC system and conduct experiments on the basic
functions that are core to CBDC as a payment instrument such as
issuance, distribution, and redemption. This phase will be carried out
through March 2022, for a duration of one year.''
---------------------------------------------------------------------------
Conclusions
The United States should now begin a significant program for the
development of a digital dollar. The design should prioritize the
efficiency of payments, privacy, interoperability, financial inclusion,
and the ability to monitor payments for compliance. Even a well-
resourced development program can be expected to take a number of years
to achieve a successful design. The final decision to deploy the
digital dollar can be delayed until more is learned.
In parallel with the development of a digital dollar, efforts
should continue to be made to improve the competitiveness and
efficiency of the legacy U.S. payment system. FedNow is an important
milestone in that effort. Regulations can be changed to further
encourage innovation and competition for payment-related services. The
Fed, for example, has recently considered offering accounts to
``novel'' payment firms under appropriate conditions. \20\
---------------------------------------------------------------------------
\20\ See Board of Governors of the Federal Reserve System (2021).
In its associated press release, the Board quoted Federal Reserve
Governor Lael Brainard, who said ``With technology driving rapid change
in the payments landscape, the proposed Account Access Guidelines would
ensure requests for access to the Federal Reserve payments system from
novel institutions are evaluated in a consistent and transparent manner
that promotes a safe, efficient, inclusive, and innovative payment
system, consumer protection, and the safety and soundness of the
banking system.''
---------------------------------------------------------------------------
The U.S. should take a leadership position in international
official discussions of CBDCs, particularly with respect to the cross-
border use of CBDCs.
References
Associated Press (2021) ``Japan Wants G7 Finance Chiefs To `Thrash Out'
Digital Currency Policy at Talks as China Trials Continue'', South
China Morning Post, February 9.
Auer, Ralph, Phillipp Haene, and Henry Holden (2021) ``Multi-CBDC
Arrangements and the Future of Cross-Border Payments'', Working
Paper, BIS Papers, No 115.
Bank of Canada (2021) ``Contingency Planning for a Central Bank Digital
Currency'', Bank of Canada, February.
Bank of England (2021) ``New Forms of Digital Money'', Discussion
Paper, Bank of England, June.
Bank of Japan (2021) ``Commencement of Central Bank Digital Currency
Experiments'', Press release, Bank of Japan, April.
Bloomberg News (2021) ``China Says It Has No Desire To Replace Dollar
With Digital Yuan'', Online News Article. April 18.
Board of Governors of the Federal Reserve System (2021) ``Proposed
Guidelines for Evaluating Account and Services Requests'', Federal
Reserve Board, May.
Boar, Codruta, and Andreas Wehrli (2021) ``Ready, Steady, Go?--Results
of the Third BIS Survey on Central Bank Digital Currency'', Working
Paper Number 114, Bank for International Settlements, January.
Brainard, Lael (2021) ``Private Money and Central Bank Money as
Payments Go Digital: An Update on CBDCs'', Speech At the Consensus
by CoinDesk 2021 Conference, Washington, DC, Federal Reserve Board,
May.
Catalini, Christian (2021) ``From Cryptocurrencies, Stablecoins and
Diem to CBDCs'', Diem, OMFIF conference, May.
Digital Dollar Foundation and Accenture (2020) ``The Digital Dollar
Project: Exploring a U.S. CBDC'', Digital Dollar Project, May.
Drechsler, Itamar, Alexi Savov, and Philipp Schnabl (2017) ``The
Deposits Channel of Monetary Policy'', The Quarterly Journal of
Economics, Volume 132, Pp. 1819-1876.
D'Silva, Derryl, Zuzana Filkova, Frank Packer, and Siddharth Tiwari
(2019) ``The Design of Digital Financial Infrastructure: Lessons
From India'', BIS Paper Number 106, Monetary and Economic
Department, Bank for International Settlement, December.
Duffie, Darrell, Kelly Mathieson, and Darko Pilav (2021) ``Central Bank
Digital Currency: Principles for Technical Implementation'',
Digital Asset White Paper, April.
Driscoll, John, and Ruth Judson (2013) ``Sticky Deposit Rates'',
Working paper, Finance and Economics Discussion Series Divisions of
Research & Statistics and Monetary Affairs, Federal Reserve Board,
Washington, DC, October.
Ekberg, Jason, and Michael Ho (2021) ``A New Dawn for Digital
Currency'', Report, Oliver Wyman, May.
European Central Bank (2021) ``A Digital Euro'', European Central Bank.
Federal Deposit Insurance Corporation (2020) ``How America Banks:
Household Use of Banking and Financial Services'', FDIC,
Washington, October.
G7 Finance Ministers and Central Bank Governors (2021) ``Communique'',
June 5, 2021.
Gopinath, Gita, and Jeremy Stein (2021) ``Banking, Trade, and the
Making of a Dominant Currency'', The Quarterly Journal of
Economics, Volume 136, pp. 783-830.
Gourinchas, Pierre-Olivier (2019) ``The Dollar Hegemon: Evidence and
Implications for Policy Makers'', Presentation at the 6th Asian
Monetary Policy Forum, Singapore, May 2019.
Group of 30 (2020) ``Digital Currencies and Stablecoins: Risks,
Opportunities, and Challenges Ahead'', Working Group on Digital
Currencies, Group of 30, Washington, DC, July.
Hong Kong Monetary Authority (2021) ``Joint Statement on Multiple
Central Bank Digital Currency (m-CBDC) Bridge Project'', The
Government of Hong Kong Special Administrative Region, February.
Jiang, Zhengyang, Arvind Krishnamurthy, and Hanno Lustig (2020)
``Dollar Safety and the Global Financial Cycle'', NBER Working
Paper 27682, August.
Klein, Aaron (2020) ``China's Digital Payment Revolution'', Brookings
Global China Discussion paper, April, 2020.
Maggiori, Matteo, Brent Neiman, and Jesse Schreger (2021)
``International Currencies and Capital Allocation'', Journal of
Political Economy, Volume 128, pp. 2019-2066.
McKinsey and Company (2020) ``The 2020 McKinsey Global Payments
Report'', McKinsey, October.
Powell, Jerome (2021) ``Message on Developments in the U.S. Payments
System'', Federal Reserve Board, May 20.
Sveriges Riksbank (2021) ``E-Krona Pilot: Phase 1'', Sveriges Riksbank,
April.
Rochet, Jean-Charles, and Jean Tirole (2003) ``Platform Competition in
Two-sided Markets'', Journal of the European Economic Association,
Volume 1, pp. 990-1029.
Rosengren, Eric (2021) ``Remarks at the Panel Discussion, `Central Bank
Perspectives on Central Bank Digital Currencies' '', Program on
International Financial Systems, Harvard Law School, May.
Sun L. and Pan, Y. (2021) ``Central Bank: The Current Development Focus
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sina.com, April 19 (in Chinese).
Zhou, Xiaochuan (2021) ``China's Choices in Developing Its Digital
Currency System'', Caixin, February 20.
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM NEHA NARULA
Q.1. Distribution of Federal and State Benefits--Could digital
currency improve access to Federal benefits for people who lack
access to a local financial institution or affordable ATM? If
so, how?
A.1. In theory, a digital currency could help improve access to
Federal benefits for people who lack access to bank accounts or
ATMs. However, doing so safely, securely and effectively would
require implementing a fair amount of financial infrastructure
and educational material surrounding the digital currency
first. For example, users would need to be educated about
digital currency and be convinced of its safety and security,
or they might simply choose not to use it. The Federal
Government would need a way of tying an internal Federal
benefits identifier to the recipient's digital wallet to
administer the funds; this information would have to be
collected and maintained. The digital currency would need to be
widely accepted by merchants in the recipient's community, or,
the recipient would need a convenient way of converting the
digital currency into cash or an electronic form that is widely
accepted, like a prepaid card or mobile payment application
account. The recipient would need to be familiar with the
software used to interact with the digital currency, and if it
requires a smartphone, they would need to have safe access to
one.
It helps to compare issuing benefits via a digital currency
to issuing benefits via a prepaid card. Both require some way
of tying the user's identity and receiving address (whether
physical or digital) to the account in the Federal benefits
database. Both could have some restriction on how they can be
used, for example the way that SNAP benefits can only be used
to purchase eligible items. Users already know how to use
prepaid cards and they are mostly accepted at merchants.
However, prepaid cards are physical, meaning that the person
must either be reached in person to obtain one or have a secure
mailing address to receive the card in the mail. At any point
the card could be stolen or lost. A digital currency could be
issued remotely without physical access in a way that could not
be stolen in transit, but doing so safely would require
confidence that the recipient at the other end really
controlled the digital wallet address to which the funds were
being sent.
India recently launched the e-RUPI to deliver Government
benefits electronically via digital vouchers. \1\ The e-RUPI is
``a QR code or a SMS-string based e-voucher which is delivered
directly to the phone of the beneficiary. A statement said that
the beneficiary will be able to redeem the voucher without a
card, digital payments app, or internet banking access at the
service provider.'' \2\ These are purpose- and person-specific
vouchers, meaning they can only be redeemed by the person to
whom they were issued and for that purpose. They appear to be
compatible with SMS, so users will not require a smartphone to
use the vouchers. Generally, the challenges with a mechanism
like this are achieving interoperability and preventing fraud.
India has already invested in and deployed digital identity
(Aadhar) and a widely used, unified digital framework for
payments (UPI), from which the e-RUPI can benefit.
---------------------------------------------------------------------------
\1\ ``Introducing e-RUPI''. https://www.npci.org.in/what-we-do/
upi/upi-erupi, Accessed August 6, 2021.
\2\ Sarkar, Shankhyaneel, ``PM Modi Launches e-Rupi Digital
Payment System''. Hindustan Times, August 2, 2021.
Q.2. Could a digital currency reduce or eliminate mass fraud by
foreign or domestic criminals in State benefits such as
Unemployment Insurance? If so, how could a Central Bank Digital
Currency help States deliver unemployment insurance more
---------------------------------------------------------------------------
efficiently while avoiding making fraudulent payments?
A.2. Fraud in unemployment insurance is a serious issue and has
risen during the pandemic. It is unlikely digital currency
alone could help curb this fraud. Answering the question of if
digital currency could be a part of a solution to reduce or
prevent unemployment insurance fraud would require a deeper
study into the techniques used to commit fraud in unemployment
insurance and the systems used to determine when and how
unemployment benefits are issued.
Q.3. Could digital currency establish bank accounts at birth
tied to one's Social Security number and providing a direct and
secure account for future benefits throughout one's life?
A.3. Banks could create accounts for citizens from birth today,
but they do not. It is unclear if any of the reasons why they
do not would be addressed by digital currency.
Social security numbers are notoriously insecure. In 2009
Carnegie Mellon researchers developed an algorithm to predict a
person's social security number with startling accuracy knowing
just their date and location of birth. \3\ Attackers have
stolen hundreds of millions of social security numbers, along
with names and addresses, in data breaches. \4\ \5\ Based on
this, mere knowledge of a social security number is not enough
to establish a secure account tied to the individual who was
officially issued that social security number.
---------------------------------------------------------------------------
\3\ Acquisti, Alessandro, and Ralph Gross. ``Predicting Social
Security Numbers From Public Data''. Proceedings of the National
Academy of Sciences 106.27 (2009): 10975-10980.
\4\ Mathews, Lee. ``Equifax Data Breach Impacts 143 Million
Americans''. Forbes, September 7, 2017.
\5\ Krebs, Brian. ``Data Breach at Health Insurer Anthem Could
Impact Millions''. Krebs on Security, February 15, 2015.
---------------------------------------------------------------------------
It is possible to connect users' real-world identity with,
instead of a social security number, a public key identifier
which does not need to be kept secret. This can be used in
tandem with a mathematically related secret key only the user
knows to verify a user's identity (in combination, one might
think of this as a user's digital credential). However, this is
not currently how social security numbers are generated. In
addition, at any point in time there is the risk the user loses
access to their secret key or it becomes compromised, at which
point they will need to generate an entirely new public key
identifier. There must be some mechanism for users to request a
new public key identifier and to resolve accounts if an
attacker obtains access to a user's account. Estonia is an
example of a country that has developed a rich infrastructure
around digital credentials, making it easier to vote, pay
taxes, and open bank accounts. \6\
---------------------------------------------------------------------------
\6\ https://e-estonia.com/solutions/e-identity/id-card/
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM J. CHRISTOPHER GIANCARLO
Q.1. Distribution of Federal and State Benefits--Could digital
currency improve access to Federal benefits for people who lack
access to a local financial institution or affordable ATM? If
so, how?
A.1. I believe that the tokenized form of U.S. central bank
digital currency (CBDC)--or Digital Dollar--that serves as the
Digital Dollar Project's ``champion model'' \1\ could improve
access to Federal benefits and other Government assistant
payments, including emergency relief payments, social security
benefits, school meal vouchers, and food stamps for people who
lack access to a local financial institution or affordable
ATMs. Accordingly, a Digital Dollar could facilitate greater
financial inclusion and more efficient benefit distribution by
broadening access to services through innovative mechanisms
including digital wallets.
---------------------------------------------------------------------------
\1\ ``Exploring a U.S. CBDC'', The Digital Dollar Project, May
2020 at: http://digitaldollarproject.org/wp-content/uploads/2021/05/
Digital-Dollar-Project-Whitepaper-vF-7-13-20.pdf.
---------------------------------------------------------------------------
In 2020, the U.S. enacted a variety of emergency relief
measures to respond to the COVID-19 pandemic and related
economic crisis, including direct payments to individuals to
offset lost income. This initiative revealed deficiencies in
the American financial system as 70 million Americans,
including roughly 14 million unbanked adults, \2\ waited one
month or longer to receive their stimulus payments via paper
check and often faced burdensome costs to cash their checks.
Americans cumulatively paid an estimated total of $66 million
in check cashing fees just to access these crucial benefits
during the pandemic. \3\
---------------------------------------------------------------------------
\2\ ``2017 FDIC National Survey of Unbanked and Underbanked
Households'', Federal Deposit Insurance Corporation, October 2018, at:
https://www.fdic.gov/householdsurvey/2017/2017report.pdf.
\3\ ``Economic Impact Payments: Uses, Payment Methods, and Costs
to Recipients'', Brookings Institution, February 2021, at: https://
www.brookings.edu/wp-content/uploads/2021/02/20210216-Murphy-
ImpactPayments-Final-3.pdf.
---------------------------------------------------------------------------
Had a U.S. Digital Dollar been in circulation during the
COVID-19 crisis with an effective means of identification, it
would have enabled the sending of monetary relief
instantaneously to the electronic wallets of targeted
recipients with minimal or no costs for beneficiaries.
A Digital Dollar could also improve financial inclusion for
un- and underbanked during noncrisis conditions and might even
hold advantages over traditional bank accounts in terms of
expanding access for underserved populations due to lower
system costs and the ready availability of digital wallets.
Given the limited but critically functional scope of a digital
wallet, it is possible that the costs associated with providing
individuals wallet services might be lower than the costs of
hosting a traditional bank account, potentially removing a
significant barrier to the financial system for too many
Americans.
These digital wallets could allow the Federal Government to
distribute a range of programs and Government benefits while
allowing private sector providers to expand coverage of such
services to un- or underbanked populations that have access to
mobile devices. The wallet could easily be registered through a
regulated hosting intermediary performing requisite Know Your
Customer/Anti- Money Laundering (KYC/AML) checks and could come
preloaded on mobile phones.
In order for this to be true, the digital wallet would need
to prove to be less expensive from a technology, regulatory,
and administrative perspective than alternatives and the
current system.
Ultimately, the proposition that digital currency could
improve access to Federal benefits for people who lack access
to a local financial institution or affordable ATM is best
tested in real-world pilot programs. It is one of the key
propositions that the Digital Dollar Project intends to
explore. \4\
---------------------------------------------------------------------------
\4\ ``Digital Dollar Project: Exploring a United States Central
Bank Digital Currency--Proposed Pilot Programs'', The Digital Dollar
Project, October 2020, at: http://digitaldollarproject.org/wp-content/
uploads/2021/05/PilotScenarios10-12-20.pdf.
Q.2. Could a digital currency reduce or eliminate mass fraud by
foreign or domestic criminals in State benefits such as
Unemployment Insurance? If so, how could a Central Bank Digital
Currency help States deliver unemployment insurance more
---------------------------------------------------------------------------
efficiently while avoiding making fraudulent payments?
A.2. Yes, a tokenized Digital Dollar recorded on new
transactional infrastructure, potentially informed by
distributed ledger technology (DLT), could be configured to
provide the infrastructure necessary to support transactional
security standards including antifraud and anticounterfeiting
measures and could help States deliver unemployment insurance
more efficiently and securely.
Fraud is among the most important challenges faced by State
and local government assistance agencies. The United States
Government Accountability Office estimates that fraudulent or
improperly filed charges accounted for 1 out of 10 benefit
payments in 2016 for a total of $77.8 billion in payments that
were found to be fraudulent. \5\
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\5\ ``Important Welfare Statistics for 2020'', Lexington Law, at:
https://www.lexingtonlaw.com/blog/finance/welfare-statistics.html.
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A tokenized Digital Dollar could allow State and local
agencies to distribute Government benefits directly to
recipients with improved efficiency and transparency. The
programmable nature of Digital Dollars would enable specific
Government agencies to tailor how benefits are used and to whom
they are distributed. A Digital Dollar could also reduce the
cost and time associated with physically cashing a check.
Furthermore, a Digital Dollar could inherently encompass
qualities such as instantaneous verification to reduce
counterfeit efforts and potential fraud and could be informed
by distributed ledger technology (DLT), which enables multiple
parties to keep records of transactions, improving
reconciliation and further reducing fraud.
State government agencies do have partial direct banking
relationships with some of the public through tax and social
benefits, but their reach is not universal. A Digital Dollar,
built securely to ensure antifraud measures, coupled with
digital wallets opened with prerequisite KYC/AML checks, could
enable States to distribute benefits efficiently and securely.
This is another important topic that the Digital Dollar Project
plans to explore with a real-world pilot program.
Q.3. Could digital currency establish bank accounts at birth
tied to one's Social Security number and providing a direct and
secure account for future benefits throughout one's life?
A.3. The Digital Dollar Project takes no position on other
digital currency proposals including Federal Reserve accounts
or ``FedAccounts'' and bank accounts tied to Social Security
Numbers. The Project's focus is on advancing exploration of a
U.S. CBDC that would fit within the existing two-tiered
architecture of commercial banks and regulated money
transmitters.
The Project proposes that the issuance distribution and
redemption of Digital Dollars would take place just as cash
does today: issuance by the Federal Reserve to domestic banks
or regulated entities against reserves. It supports the
maintenance of the existing two-tiered architecture of
commercial banks and regulated money transmitters in deploying
and recording Digital Dollars on new transaction infrastructure
potentially informed by DLT.
The existing two-tiered system supports economic and legal
advantages while inviting innovation and accessibility.
Commercial banks and potentially other regulated intermediaries
would exchange reserves for Digital Dollars to be distributed
to end-users like how they currently issue physical cash to
customers through ATMs.
While the Project's proposed ``champion model'' of a
tokenized Digital Dollar would not establish bank accounts at
birth tied to Social Security Numbers, end-users could access
bank and digital wallet services through their smartphones.
They could download a digital wallet app to make and receive
payments with Digital Dollars after going through simple AML/
KYC protocols. This digital wallet could act as an easy on-ramp
to financial services and offer a more cost-effective tool to
bring more un- and underbanked Americans into the financial
system than any alternative that exists today.
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RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM LEV MENAND
Q.1. Millions of people in the United States do not have bank
accounts or access to the payment system, which makes it
difficult and expensive to participate in our economy. How
should we design a central bank digital currency (CBDC) or
digital dollar so that it makes our financial system and
economy safer and stronger for workers and businesses? How can
a CBDC work with the no-fee accounts in my Banking for All Act?
A.1. The no-fee accounts in the Banking for All Act should be
the foundation of any U.S. CBDC. These accounts would be
nondefaultable sovereign money in digital form, a liability of
the Federal Reserve. It is critical that these accounts include
fraud protection and customer service: if you lose your
password there should be someone you can call. They should also
have no minimum or maximum balances: there are no public
benefits to restricting the use of nondefaultable sovereign
money. To the contrary, allowing businesses and financial
institutions to hold nondefaultable sovereign money in digital
form will dramatically improve financial stability, reduce
inefficiencies in the payments system, and increase revenues to
the Federal Government in the form of seigniorage. Congress
might also consider adding further features, but at a minimum
it should require basic account services like online bill pay
and direct deposit. For more information about how the
Government might structure a U.S. CBDC, see John Crawford, Lev
Menand, and Morgan Ricks, ``FedAccounts: Digital Dollars'', 89
Geo. Wash. L. Rev. 113 (2013).
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM LEV MENAND
Q.1. Distribution of Federal and State Benefits--Could digital
currency improve access to Federal benefits for people who lack
access to a local financial institution or affordable ATM? If
so, how?
A.1. Yes. No fee public money could be designed to enable
people to receive Federal benefits in account form and to
withdraw cash at a post office without paying any fees.
Q.2. Could a digital currency reduce or eliminate mass fraud by
foreign or domestic criminals in State benefits such as
Unemployment Insurance? If so, how could a Central Bank Digital
Currency help States deliver unemployment insurance more
efficiently while avoiding making fraudulent payments?
A.2. Tying no fee, public bank accounts to individual social
security numbers would make it easier for the Government to
operate entitlement programs like unemployment insurance.
States would likely distribute fewer payments by paper check,
for example.
Q.3. Could digital currency establish bank accounts at birth
tied to one's Social Security number and providing a direct and
secure account for future benefits throughout one's life?
A.3. Yes. One important benefit of public digital money is that
it offers the Government an easy way to automatically include
all Americans within the payments system and to make payments
to people cheaply and easily without relying on third-party
intermediaries.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM DARRELL DUFFIE
Q.1. Distribution of Federal and State Benefits--Could digital
currency improve access to Federal benefits for people who lack
access to a local financial institution or affordable ATM? If
so, how?
A.1. Yes, depending on the design. For example, those without a
bank account would probably access a digital dollar with
wallets on a phone app or on a smart card. Either way, Federal
benefits could be distributed to those wallets. If by phone,
payment is immediate. If by card, payment could be collected by
the recipient at any of a system of authorized payment nodes.
Q.2. Could a digital currency reduce or eliminate mass fraud by
foreign or domestic criminals in State benefits such as
Unemployment Insurance? If so, how could a Central Bank Digital
Currency help States deliver unemployment insurance more
efficiently while avoiding making fraudulent payments?
A.2. Yes. If well designed, a UI payment could be made directly
to the recipient electronically, eliminating paper-based
payment methods and reducing the role of check-cashing agents
that extract fees or conduct fraud. There would be no need to
convert the Government's payment to another payment medium,
like paper money or a bank deposit account. See my answer to
the Question above.
Q.3. Could digital currency establish bank accounts at birth
tied to one's Social Security number and providing a direct and
secure account for future benefits throughout one's life?
A.3. I do not have the expertise necessary to judge whether the
most effective identification link is to one's social security
account number. This is one of a number of alternatives.
Additional Material Supplied for the Record
STATEMENT SUBMITTED BY ECURRENCY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT SUBMITTED BY THE AMERICAN BANKERS ASSOCIATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]