[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

                              ----------                              

                        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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
     \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
     \1\ https://www.digitaldollarproject.org
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \3\ Members of the Advisory Board are listed here: https://
www.digitaldollarproject.org/advisory-group.
---------------------------------------------------------------------------
    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/.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
     \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
     \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\
---------------------------------------------------------------------------
     \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).
---------------------------------------------------------------------------
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 
    of the Digital RMB Is To Promote Domestic Use'', China Finance, 
    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\
---------------------------------------------------------------------------
     \5\ ``Important Welfare Statistics for 2020'', Lexington Law, at: 
https://www.lexingtonlaw.com/blog/finance/welfare-statistics.html.
---------------------------------------------------------------------------
    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.
                                ------                                


        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).
                                ------                                


               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.
                                ------                                


               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]