Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives (U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion)

Hearing	Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives
Committee	U.S. House Committee on Financial Services, Subcommittee on Digital Assets, Financial Technology, and Inclusion
Date	September 14, 2023

 

Hearing Takeaways:

• Central Bank Digital Currencies (CBDCs): The hearing focused on the growing interest in CBDCs and considered whether the U.S. ought to adopt its own CBDC. CBDCs are government-issued versions of digital money that can take one of two general forms: a wholesale CBDC (which would only be used by financial intermediaries) and a retail CBDC (which could be used by consumers and businesses). Subcommittee Republicans, many Subcommittee Democrats, Dr. Michel, Ms. Paridon, and Ms. Skinner expressed concerns that the adoption of CBDCs could threaten civil liberties and undermine the functioning of the current banking and payments system. However, some Subcommittee Democrats and Mr. Carrillo stated that the adoption of CBDCs can support payments and banking innovations and financial inclusion. They also stated that such adoption could ensure that large private companies do not come to dominate the payments system.
  • Surveillance and Privacy Concerns: Subcommittee Republicans, Dr. Michel, Mr. Rooz, and Ms. Skinner raised concerns that a CBDC could enable governments to surveille the payments activities of their citizens. Ms. Skinner commented that there will always exist an inherent tradeoff between identity verification and privacy in CBDCs. She stated that central banks will tend to prefer identity verification over privacy because central banks will never feel comfortable sacrificing the national security goals that they view as accompanying robust identity verification. Rep. Tom Emmer (R-MN) mentioned how he had proposed the CBDC Anti-Surveillance State Act in response to these surveillance concerns. Subcommittee Ranking Member Stephen Lynch (D-MA) and Mr. Carrillo stated that the U.S. could employ an architecture for a CBDC that would both protect personal data and provide anti-money laundering (AML) and anti-terrorist financing features. They also stated that the private sector does not sufficiently protect data security or data privacy and argued that the private sector’s performance must be considered when evaluating digital U.S. dollar and CBDC proposals. 
  • Potential for CBDCs to Operate in a Heavy-Handed and Abusive Manner: Subcommittee Republicans and Dr. Michel expressed concerns that a government could have CBDCs restrict the scope of purchases that consumers can make. They warned that these restrictions could involve preventing people from purchasing politically disfavored items (e.g., firearms, gasoline-powered vehicles, etc.) and/or blocking certain disfavored people from using the financial system.
  • Impact on the U.S. Dollar’s Status as the World’s Reserve Currency: Dr. Michel and Ms. Skinner argued that the adoption of a U.S. CBDC is not necessary for maintaining the U.S. dollar’s status as the world’s reserve currency. They stated that the U.S. dollar’s status as the world’s reserve currency is largely based on U.S.’s commitment to the rule of law, democratic institutions, a judiciary that enforces property rights, and a currency that is a stable store of value. Ms. Skinner also warned that the adoption of a CBDC could undermine the U.S. dollar’s status as the world’s reserve currency through creating an incentive for the U.S. Federal Reserve to issue CBDCs as a debt financing mechanism.
  • Impact on Financial Inclusion: Subcommittee Ranking Member Lynch and Mr. Carrillo suggested that CBDCs and digital currencies could improve financial inclusion through expanding access to financial services. Mr. Carrillo also stated that the U.S. can take lessons from how other countries deploy CBDCs to vulnerable communities to improve access to financial services to unserved and underserved communities within the U.S. (including communities of color). Dr. Michel and Ms. Paridon argued however that a CBDC would not expand access to financial services for unserved and underserved communities. They noted how the U.S. Federal Deposit Insurance Corporation (FDIC) has found that Americans primarily lack access to financial services because they do not have enough money to have a bank account or they do not want to give their personal information to a bank or a government. They stated that the adoption of a CBDC would not mitigate these concerns.
  • Impact on Credit Availability: Several Subcommittee Members and Ms. Paridon expressed concerns that the adoption of a CBDC could reduce the overall amount of credit within the financial system. They noted how a CBDC would be considered a liability of the central bank and that banks would need to hold CBDCs in the same way that they hold custodied assets. This means that banks could not lend out the CBDCs in the same way that they lend out traditional deposits. Ms. Paridon further warned that consumers and businesses would seek to move their bank deposits to CBDCs during periods of economic downturn because CBDCs would be perceived as safer assets. She commented that this situation could exacerbate market downturns through removing money that can be lent out from the banking system. Mr. Carrillo argued however that digital fiat currencies (like CBDCs) could improve bank accounts and bolster the U.S.’s system of deposit insurance.
  • Impact on the U.S. Federal Reserve’s Independence: Subcommittee Republicans, Dr. Michel, and Ms. Skinner warned that a CBDC could undermine the U.S. Federal Reserve’s independence. They noted how a CBDCs would be considered liabilities of the central bank and that the central bank would need to increase its assets to offset these liabilities. They expressed concerns that governments could exert pressure on their central banks to purchase certain assets (e.g., U.S. Treasuries to finance deficits, corporate bonds, etc.) and that these asset purchases could erode the distinction between monetary and fiscal policy.
  • Potential Cybersecurity Risks: Rep. William Timmons (R-SC) and Dr. Michel raised concerns that a U.S. CBDC would require the U.S. Federal Reserve to hold large amounts of sensitive information on U.S. consumers, which could be vulnerable to a breach. They noted that while private companies carry cybersecurity insurance and can be sued whenever data breaches occur, they warned that a breach of the U.S. Federal Reserve would leave consumers without an avenue for recourse.
  • Foreign Consideration of CBDCs: Some Subcommittee Democrats and Mr. Carrillo discussed how more than 130 countries have begun to explore their own CBDCs and noted how China, Russia, Saudi Arabia, and India have already commenced CBDC pilot programs. They expressed concerns that the U.S.’s failure to consider a CBDC would undermine the U.S.’s global technological and financial competitiveness. Rep. Sean Casten (D-IL) and Ms. Skinner argued however that the U.S. should not pursue CBDCs given their various shortcomings of CBDCs.
  • Legal Authority for the U.S. Federal Reserve to Issue CBDCs: Subcommittee Republicans, Rep. Wiley Nickel (D-NC), Ms. Paridon, and Ms. Skinner remarked that only Congress has the legal authority to coin and regulate money under the U.S. Constitution. They argued that the U.S. Federal Reserve should therefore not pursue the development of a CBDC absent explicit Congressional authorization. They expressed support for legislation that would prevent the U.S. Federal Reserve from unilaterally pursuing a CBDC. Subcommittee Ranking Member Lynch expressed hope however that Congress would refrain from banning the U.S. Federal Reserve from researching, piloting, or issuing a CBDC.
• Non-CBDC Digital Payments Innovations: Subcommittee Members and the hearing’s witnesses also expressed interest in exploring digital payments innovations beyond CBDCs. These innovations included both public sector and private sector payments innovations that could complement and/or compete with CBDCs.
  • Stablecoins: Stablecoins are digital currencies whose value are pegged to a reserve asset (such as the U.S. dollar). Subcommittee Republicans, Dr. Michel, and Mr. Rooz expressed interest in the potential role that stablecoins could play in supporting payments innovation and stated that stablecoins would not pose the same privacy concerns as CBDCs. They highlighted how payment stablecoins already exist and have a total market capitalization between $100 billion and $200 billion. They also expressed concerns that the adoption of a U.S.CBDC would stifle stablecoin innovations and asserted that stablecoins could not fairly compete with such a CBDC. Subcommittee Republicans, Dr. Michel, Mr. Rooz, and Mr. Carrillo expressed interest in establishing a federal regulatory framework for stablecoins.
  • Electronic Cash (eCash): eCash refers to a system of digital money that would allow for individuals to make instant peer-to-peer small dollar payments using hardware devices (such as a smart card or a phone card). Subcommittee Ranking Member Stephen Lynch (D-MA) and Mr. Carrillo stated that eCash could protect against illicit activities through ensuring that transactions comply with AML rules and through setting caps on transactions and usage to support law enforcement agencies. They also stated that eCash could promote financial inclusion in a manner that protects consumer privacy. Subcommittee Ranking Member Lynch mentioned how he had introduced the Electronic Currency and Secure Hardware (ECASH) Act, which would direct the U.S. Department of the Treasury to design and pilot a digital version of cash. Rep. Bill Foster (D-IL) expressed interest in learning more about the technology underlying eCash, how it would address the double spending problem, and how it would operate offline.
  • Public Financial Services Options: Mr. Carrillo suggested that the U.S. can build a retail FedAccounts system that could expand consumer access to banking services. However, Rep. Brad Sherman (D-CA) asserted that the U.S. Federal Reserve has a poor record involving retail products and questioned the U.S. Federal Reserve’s ability to manage a personal bank accounts system. Rep. John Rose (R-TN) and Dr. Michel further highlighted how a recent federal pilot program in which the U.S. Postal Service (USPS) had offered financial services to consumers had experienced low uptake.
  • Ability of the U.S. Federal Reserve to Implement Payments Innovation: Subcommittee Chairman French Hill (R-AR) criticized the U.S. Federal Reserve for its failure to complete its modifications to existing payments infrastructure and lamented how the U.S. Federal Reserve does not have a clear schedule for completing this work. He indicated that these modifications include expanding the days and hours of the U.S. Federal Reserve’s wholesale payment services, including the National Settlement Service and Fedwire. Rep. Sherman criticized the performance of the U.S. Federal Reserve’s Automated Clearing House (ACH) system and called on the U.S. Federal Reserve to adopt a Pay As You Earn (PAYE) maxing system. 
  • Private Sector Innovations: Subcommittee Chairman Hill, Ms. Paridon, and Mr. Rooz highlighted how the U.S. already has many private sector-led payments innovations underway. These innovations include the Clearing House’s 2017 launch of the Real Time Payments (RTP) Network, the launch of bank-owned peer-to-peer payments service Zelle, and blockchain payments infrastructure (such as Mr. Rooz’s company, Digital Asset) that reduces the time it takes to issue bonds, stocks, and other financial instruments. Mr. Rooz warned however that the absence of a strong policy framework and a strong partnership between the public and private sectors could cause private sector initiatives to displace activities that are considered public goods (such as money) and that are due constitutional protections. He also remarked that leveraging blockchain technology to modernize financial infrastructure is critical to ensuring the U.S.’s continued global financial competitiveness and the U.S. dollar’s continued status as the world’s reserve currency.
  • Traceability of Digital Monetary Transactions: Rep. Bill Foster (D-IL) and Rep. Sherman argued that the U.S. must possess a system where law enforcement agencies can uncover the identities behind digital monetary transactions. Rep. Foster stated that this capability will be key for enabling the recovery of stolen funds and the reversal of ransomware payments. Dr. Michel argued however that private transactions that are not subject to AML requirements should continue to exist.

Hearing Witnesses:

1. Mr. Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset
2. Ms. Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
3. Ms. Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
4. Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
5. Mr. Raúl Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School

Member Opening Statements:

Subcommittee Chairman French Hill (R-AR):

• He remarked that the hearing seeks to develop a better understanding of CBDCs, the concept of digital money, how CBDCs compare to privately-issued payment stablecoins, and how CBDC design choices would impact consumer privacy, banks of all sizes, and monetary policy.
  • He expressed interest in exploring foreign CBDC policies from China, the United Kingdom (UK), and the European Union (EU).
• He noted how the U.S. policy conversation surrounding CBDCs have thus far focused on the U.S. Federal Reserve’s legal authority to issue a CBDC.
• He remarked that the U.S. Constitution clearly states that only Congress has the legal authority to coin money and regulate the value of such money.
  • He noted how U.S. Federal Reserve officials have previously expressed this position in their testimony before the Committee.
  • He also mentioned how U.S. Federal Reserve Vice Chair for Supervision Michael Barr had recently stated that the U.S. Federal Reserve would only issue a CBDC with clear support from the Executive Branch and authorizing legislation from Congress.
  • He further noted how the U.S. Department of Justice (DoJ) under the Biden administration had stated that there would be “substantial” legal risk to issuing a CBDC without authorizing legislation from Congress.
• He stated that there exists no support from Congress for the issuance of a U.S. CBDC except from “those on the fringes.”
  • He commented that these supporters believe that a CBDC could address many unstated global problems.
• He mentioned how several members of Congress, including himself, Rep. Tom Emmer (R-MN), Rep. Alex Mooney (R-WV), and Rep. Jake Auchincloss (D-MA), have introduced legislation stating that the U.S. Federal Reserve does not have the authority to issue a U.S. CBDC.
  • He thanked Rep. Auchincloss, Rep. Ritchie Torres (D-NY), and Rep. Wiley Nickel (D-NC) for demonstrating that this view is not controversial or partisan.
• He then stated that while a retail U.S. Federal Reserve-issued CBDC is not viable, he asserted that the U.S. payments system has many potential areas for improvement.
• He remarked that the U.S. payments system can be modernized through modifying the existing payments infrastructure through private sector-led innovations.
  • He stated that some modifications have yet to be implemented, such as expanding the days and hours of the U.S. Federal Reserve’s wholesale payment services, such as the National Settlement Service and Fedwire.
  • He commented that these developments would provide for instant payments for individuals and businesses through their financial institution.
• He criticized the U.S. Federal Reserve for its failure to complete its modifications to existing payments infrastructure and lamented how the U.S. Federal Reserve does not have a clear schedule for completing this work.
• He highlighted however that other payments infrastructure improvements are already underway.
  • He mentioned how the RTP Network has been in existence since 2017 and how the FedNow Service had been launched in July 2023.
• He then mentioned how the Committee had marked up the Clarity for Payment Stablecoins Act in July 2023 and explained that this legislation establishes a federal regulatory regime for payment stablecoins.
  • He indicated that this legislation’s federal regulatory regime includes strict reserve and capital requirements, disclosures, and attestations to protect consumers.
• He stated that the hearing would explore whether a U.S. CBDC is the most efficient and effective means to address payment inefficiencies or if private sector improvements and alternatives to the U.S.’s existing payments system and infrastructure can provide more immediate solutions.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• He recounted how he had previously held several hearings on digital currencies during his previous tenure as Chairman of the Committee’s Task Force on Financial Technology.
  • He noted how experts had discussed the potential ways that a U.S. government-issued digital U.S. dollar could support financial inclusion, protect user privacy, streamline the payments system, and prevent fraud during these hearings.
• He raised concerns over recent “false narratives” and “fear mongering” that CBDCs could be weaponized as a tool for government surveillance and control and commented that the cryptocurrency industry has fueled these false narratives and fear mongering.
  • He asserted that the Subcommittee must address the inaccurate and misleading claims made about CBDCs and commented that these claims could prevent policymakers from considering innovative policy approaches.
• He noted how a CBDC is just one type of publicly-issued digital U.S. dollar and indicated that a U.S. CBDC would be issued, backed, and regulated by the U.S. Federal Reserve.
  • He added that a U.S. CBDC would have the full faith and backing of the U.S. government.
• He stated that a U.S. CBDC could serve as an alternative to existing forms of payment and provide various benefits, including instant payment settlement, facilitation of cross-border transactions, and greater financial inclusion.
• He discussed how more than 130 countries have begun to explore their own government-backed digital currencies and noted how China, Russia, Saudi Arabia, and India have already commenced digital currency pilot programs.
  • He added that a digital Euro pilot could be launched as early as 2028.
• He stated however that the U.S. remains “far behind” these countries in its consideration of a CBDC.
• He acknowledged that while concerns about data privacy and government surveillance are legitimate, he asserted that a CBDC does not need to be designed in a manner that undermines data privacy and that enables government surveillance.
  • He stated that the U.S. could employ an architecture for a CBDC that would protect personal data while including AML and anti-terrorist financing features.
• He called it counterintuitive that CBDC critics raise data privacy concerns while thousands of domestic and foreign companies are surveilling, aggregating, and selling consumer data every day.
  • He asserted that policymakers ought to consider how a digital U.S. dollar can be designed to maximize privacy and prevent the exploitation of personal data.
• He invited members of Congress to join the Congressional Digital Dollar Caucus and stated that this forum would educate members on issues relating to the development, design, and potential implementation of a government-issued digital U.S. dollar.
  • He indicated that this Caucus plans to invite innovators, technologists, academics, and other experts to share their findings and developments.
• He also stated that he shares concerns regarding the need for digital currencies that respect privacy and anonymity.
• He noted how the use of anonymous cash has “plummeted” and discussed how an increasing percentage of transactions are occurring online and being surveilled, tracked, and aggregated by financial services companies.
  • He highlighted how China has turned their payments system into a tool for surveilling their citizens.
• He mentioned how he had introduced the ECASH Act, which would direct the U.S. Department of the Treasury to design and pilot a digital version of cash.
  • He commented that this digital version of cash would complement a U.S. Federal Reserve-issued CBDC.
• He stated that digital cash would allow for individuals to make instant peer-to-peer payments with no consumer data or transaction tracking and without the use of a bank account.
• He expressed hope that Congress would consider efforts to develop digital U.S. dollars and refrain from banning the U.S. Federal Reserve from researching, piloting, or issuing a CBDC.

Rep. Tom Emmer (R-MN):

• He noted that banks, governments, or large technology companies currently intermediate all transactions in the digital economy.
  • He stated that the U.S. must develop digital tools that function like cash.
• He asserted that digital assets must be open and freely accessible to all, not require permission from the government or anyone else, and private.
  • He called these qualities “fundamental” to a free society.
• He accused the “administrative state” of preferring a cashless economy run using a CBDC over working to embed U.S. values into digital technologies.
• He remarked that the need to protect the right to financial privacy of Americans is at an “all time high” and mentioned how he had proposed the CBDC Anti-Surveillance State Act.
  • He explained that this legislation would prevent unelected bureaucrats from creating a tool for financial surveillance.
• He asserted that a CBDC would constitute a surveillance tool that would oppress the American way of life if it is not open, permissionless, and private.
• He lastly expressed concerns that the U.S. Federal Reserve Bank of Boston has been running a “shady” CBDC pilot program.

Witness Opening Statements:

Dr. Norbert Michel (Cato Institute):

• He remarked that the U.S. should not launch a CBDC and alleged that CBDC advocates frequently ignore private sector innovations and the potential risks posed by CBDCs.
• He stated that the risks of CBDCs would outweigh any potential benefits because a CBDC is not just another form of money and noted that a CBDC in any form would be a direct liability of a government.
  • He asserted that a CBDC would “radically alter” the public-private relationship that already exists in the U.S.’s monetary arrangement.
• He remarked that the issuance of a CBDC would not help to preserve the U.S. dollar’s status and commented that such issuance would likely damage this status.
• He noted how CBDC advocates often argue that the U.S. must launch a CBDC to keep pace with other countries (such as China) or to keep pace with broader technological changes within the payments sector.
  • He emphasized that people already can transact digitally in U.S. dollars and commented that a CBDC is therefore not necessary for enabling digital transactions.
• He attributed the U.S. dollar’s renowned status to the strength of the U.S. economy and the U.S.’s legal protections for private citizens relative to other countries.
  • He highlighted how Americans are not in constant fear that the government will take their money (which is not the case in many other countries).
• He warned that U.S. dollar users would lose a layer of protection from government abuse if the U.S. were to create a CBDC.
• He then disputed the claim that a CBDC would expand financial inclusion through providing a new source of financial services for the U.S.’s unbanked and underbanked populations.
  • He commented that the private sector already supports digital transactions and has successfully reduced the number of Americans without access to financial services.
• He highlighted how the FDIC has found that Americans primarily lack access to financial services because they do not have enough money to have a bank account or they do not want to give their personal information to a bank or a government.
  • He commented that a lack of sufficient income is a much broader economic problem than a CBDC or a financial service technology.
• He noted that while some argue that a CBDC would lower the cost of providing financial services, he asserted that this claim would only be true if the government were to subsidize those costs or chooses to waive the same level of regulatory scrutiny it requires of private firms.
• He elaborated that this regulatory scrutiny causes Americans to say that they do not trust banks and requires Americans to give personal information to private companies (which may then be given to the government).
  • He commented that the removal of this regulatory scrutiny would result in no cost advantage to a CBDC.
• He lastly disputed the claim that a CBDC could enhance financial privacy.
• He discussed how Americans are currently forced to provide personal information to financial institutions and that these financial institutions are required to track transactions.
  • He indicated that the government can access this transaction information without a warrant.
• He stated that the introduction of a CBDC would place all financial transactions in either a government database or enable the government to see these transactions as part of its existing transaction monitoring capabilities.
• He concluded that the U.S. should not launch a CBDC or provide direct wallets or accounts to consumers.

Ms. Paige Paridon (Bank Policy Institute):

• She remarked that recent technological innovation has led payments, clearing, and settlement becoming faster, as well as new forms of digital money.
• She also noted how central banks have been studying and exploring the potential benefits of CBDCs.
  • She explained that a CBDC is a form of digital money that is a direct liability of a central bank.
• She expressed relief that the U.S. Federal Reserve has recognized that Congress should decide whether the U.S. should have a CBDC as both a legal and policy matter.
• She remarked that there exists little evidence that a CBDC would bring measurable benefits to the U.S. economy or consumers.
  • She further warned that a CBDC could upend the commercial banking system and create financial instability.
• She discussed how a CBDC can take one of two general forms: a wholesale CBDC (which would only be used by financial intermediaries) and a retail CBDC (which could be used by consumers and businesses).
• She noted how most CBDC research and attention to date has focused on a retail-intermediated account-based model in which consumer CBDCs would be held in an account at a bank or other financial intermediary.
  • She indicated that the CBDC could not be used by the bank to make loans and commented that any transfer of a U.S. dollar deposit from a bank to a CBDC is a U.S. dollar that is unavailable for lending to businesses or consumers.
• She stated that a CBDC would likely undermine U.S.’s commercial banking system and “severely” constrict credit availability and raise the cost of credit to the economy through attracting deposits away from banks.
• She also remarked that many of the purported benefits of a CBDC are uncertain and are achievable through alternative and less risky means.
• She noted that while some have argued that CBDCs are necessary to increase payments efficiency and foster financial inclusion, she stated that banks have led numerous efforts to improve the speed and security of payments, reduce the costs of financial products and services, and advance financial inclusion.
  • She mentioned how the Clearing House had launched the RTP network in 2017 and indicated that this network currently reaches 65 percent of U.S. demand deposit accounts.
  • She also cited Zelle as another example of bank-led innovation and explained that Zelle is a bank-owned peer-to-peer payment service through which transferred funds are made available almost immediately.
• She stated that banks stand ready to meet the demand for a blockchain technology-based cash equivalent instrument within the safety of the regulatory perimeter, such as by issuing deposit tokens.
• She then expressed doubts that a CBDC would meaningfully increase financial inclusion.
  • She noted how FDIC data indicates that many people are unbanked due to privacy concerns and commented that an intermediated CBDC is unlikely to mitigate these concerns.
  • She elaborated that a CBDC would likely be subject to Know Your Customer (KYC) requirements that currently apply to banks.
• She also discussed how banks are expanding access to safe and reliable financial services, such as low-cost banking accounts (including through the Bank On national program).
  • She highlighted how there exist over 375 Bank On nationally certified accounts that represent over 60 percent of the domestic deposit market.
• She expressed the agreement of her organization, the Bank Policy Institute, with the U.S. Federal Reserve’s view that further steps toward developing a CBDC should only be taken under certain conditions.
  • She indicated that these conditions include research indicating that there would be benefits for households, businesses, and the overall economy that would exceed downside risks, research indicating that CBDCs would be superior to alternative methods, and having the support of the Executive Branch and legislative authorization.

Mr. Yuval Rooz (Digital Asset):

• He remarked that Congress should ensure that any digitally represented U.S. dollar (whether a stablecoin or a CBDC) exists within the U.S. Constitution’s framework.
  • He commented that Americans using any digitally represented U.S. dollar should have the assurance that their privacy rights are protected under the Fourth Amendment.
• He also called on Congress to work closely with the private sector to leverage already built and proven technologies and commented that these technologies should serve as the rails for any digitally represented U.S. dollar.
  • He warned that any policy solution that ignores private sector innovation risks technological stagnation and will ultimately undermine the U.S.’s global competitiveness.
• He then discussed how his company, Digital Asset, is working to modernize the U.S. financial system’s infrastructure through a privacy-focused blockchain technology.
• He testified that Digital Asset’s clients are using the company’s privacy-focused Daml application platform and Canton blockchain protocol to reduce the time it takes to issue bonds, stocks, and other financial instruments from days to seconds.
  • He commented that this reduction in time ultimately reduces settlement risk and increases efficiency.
• He highlighted how one of Digital Asset’s clients is using the company’s technology to process over $1 trillion of tokenized repurchase agreement (repos) per month.
• He also mentioned how Digital Asset’s technology was recently used in a pilot project with the New York Innovation Center (NYIC) to demonstrate how blockchain technology can modernize the infrastructure for global U.S. dollar-based settlements.
  • He noted how this pilot project had tested a shared ledger within the existing two-tier banking system to more effectively record the movements of U.S. Federal Reserve money occurring between banks on a daily basis.
• He further highlighted how Digital Asset had recently announced (along with 29 market participants) the launch of the Canton network to help connect institutions and move value globally.
• He then attributed Digital Asset’s success to the fact that its technology is based on privacy.
  • He commented that this privacy focus makes the company’s technology well-suited for financial services.
• He remarked that the global financial competitiveness of the U.S. (including the U.S. dollar’s position as the world’s reserve currency) is at stake in the new digital era in finance.
  • He called this a critical national security issue that demands innovation led by the private sector.
• He asserted however that private sector innovation alone is not sufficient for continuing the U.S.’s global financial competitiveness.
• He warned that the absence of a strong policy framework and a strong partnership between the public and private sectors could cause private sector initiatives to displace activities that are properly considered public goods (such as money) and that are due to Constitutional protections.
  • He commented that there exists an expectation that financial transactions receive the Fourth Amendment’s privacy protections and asserted that this expectation should not change as payments become more digital.
• He stated that technology is inseparable from finance and commented that the U.S. now faces a “technological inflection point” for the financial system with blockchain technology.
  • He asserted that blockchain technology built around configurable privacy provides the financial system with increased efficiency and reduced risk, eliminates the need for maintaining multiple copies of the same information, and allows for value to be represented digitally.
• He remarked that leveraging blockchain technology to modernize financial infrastructure is critical to ensuring the U.S.’s continued global financial competitiveness and the U.S. dollar’s status as the world’s reserve currency.
  • He acknowledged however that innovation alone will be insufficient for enabling the U.S. to maintain its global competitiveness.
• He stated that there is nothing inherent or inevitable about the inefficiencies in the current financial system and warned that the U.S.’s global leadership in the financial system may be jeopardized as other countries eliminate inefficiencies in their financial systems through the use of blockchain technology.
  • He asserted that a global economic order that is aligned with U.S. values is in the U.S.’s national interest.
• He remarked that the U.S. possesses two critical advantages that can help it to maintain its leadership position in the global financial system: vibrant private sector innovation and the U.S. Constitutional system’s rule of law.
  • He commented that these advantages are strongest when wielded together.
• He commented that while private sector innovation is important, he contended that this innovation must occur within a deliberate policy framework to ensure that the innovation does not outrun or undermine the U.S.’s values or national interest.

Ms. Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania

• She discussed how Article I of the U.S. Constitution gives Congress the exclusive power to decide what money is.
  • She noted that while it is constitutionally permissible for Congress to delegate some of its monetary authority, she called it important for Congress to not abdicate that authority through ceding too much discretion to pilot or develop a CBDC.
• She indicated that her testimony would focus on three key arguments.
  • She first remarked that the introduction of a CBDC would change the relationship between the people and the government.
  • She secondly remarked that a CBDC could empower central banks while also weakening the independence of central banks.
  • She lastly remarked that there does not exist a discernible reason for the U.S. to pursue a CBDC at the present time.
• She discussed how individuals can currently enjoy comprehensive privacy in their payments transactions through using cash.
• She noted that while most central banks have suggested that CBDCs would not replace cash, she asserted that this near-term promise cannot be guaranteed over the longer term.
  • She also commented that the insinuation that CBDCs are necessary or inevitable appears motivated by a view that cash will eventually become obsolete.
• She stated that a CBDC (unless it is “radically redesigned”) will enable states to monitor or surveille the payment activities of its citizens.
• She then discussed how the U.S. Federal Reserve’s power has grown “considerably” since 2010 and noted how the issuance of CBDCs could increase the U.S. Federal Reserve’s balance sheet.
  • She explained that this issuance would increase the central bank’s liabilities if the total of bank reserves, repos, and cash balances largely remained unchanged.
  • She commented that the U.S. Federal Reserve would need to increase its assets to match these liabilities.
• She noted that while the U.S. Federal Reserve could purchase more U.S. Treasury securities to offset its CBDC liabilities, she stated that these purchases could result in pressure for the U.S. Federal Reserve to issue more CBDCs to in turn absorb more government debt.
  • She warned that this dynamic could further erode the U.S.’s limited fiscal discipline.
• She also warned that a CBDC could impact the U.S. Federal Reserve’s independence because it would establish a direct relationship between the central bank and the real economy for the first time in history.
  • She commented that this would erode the distinction between monetary and fiscal policy.
• She warned that it will become more difficult for central banks to justify the provision of liquidity to banks and the financial system over households (especially during financial crisis) once central banks begin to issue liabilities directly to people.
  • She also warned that this arrangement could open the U.S. Federal Reserve to receive political pressure to provide liquidity assistance to households during turbulent economic times.
• She then noted that while other leading central banks around the world, including the European Central Bank (ECB) and the Bank of England, have indicated their desire and intention to pursue CBDCs, she asserted that the U.S. should not rush to keep pace with these central banks.
  • She commented that the U.S. dollar being used by households and businesses both domestically and internationally is already digital.
• She remarked that it is difficult to identify any problems that CBDCs would solve.
• She asserted that CBDCs do not inherently improve financial inclusion unless CBDCs are paired with accounts for all citizens.
  • She commented however that the U.S. Federal Reserve has recognized that this approach would be infeasible.
• She also stated that CBDCs would not increase financial stability given the extent to which CBDCs will likely disintermediate the banking sector.
  • She further warned that using remuneration on CBDCs as a monetary policy instrument would invite central banks to make socially contentious judgements.
• She contended that the U.S. dollar’s global reserve currency status does not turn on whether it is a CBDC.
  • She asserted that the U.S. should preserve the global status of the U.S. dollar through its commitment to the rule of law, democratic institutions, and free market principles of innovation and well-tailored regulation.

Mr. Raúl Carrillo (Columbia Law School):

• He expressed support for a digital U.S. dollar system, which would include CBDCs, FedAccounts, and eCash.
  • He asserted that the U.S. can build a digital U.S. dollar system that respects civil rights and freedoms and that is safe for everyone to use.
• He remarked that narrowing the conversation surrounding digital U.S. dollars to CBDCs and the U.S. Federal Reserve does a disservice to the public (especially when considering retail applications of digital U.S. dollars).
• He contended that the Subcommittee’s discussion of the topic should consider the U.S. Department of the Treasury and its many bureaus that are involved in the deployment of financial technology.
  • He indicated that these bureaus include the U.S. Mint, the U.S. Bureau of Engraving and Printing (BEP), the U.S. Bureau of the Fiscal Service, and the U.S. Secret Service.
• He remarked that policymakers should compare the digital U.S. dollar system and CBDCs to the systems that are already in use when discussing privacy.
• He stated that the private sector does not sufficiently protect data security or data privacy and argued that the private sector’s performance must be considered when evaluating digital U.S. dollar and CBDC proposals.
  • He cited the 2017 Equifax data breach as an example of the private sector’s poor data security performance.
  • He asserted that financial technology (FinTech) data brokers and “super apps” engage in data maximization as a business model and embrace unnecessary complexity that undermines data security.
• He also discussed how the U.S. Federal Reserve is engaged in data-intensive financial surveillance efforts and often partners with large technology and FinTech companies on these efforts.
• He asserted that the U.S. Federal Reserve uses doctrines and technological platforms that evade data collection constraints through acquiring data from private sector entities that are not ceasing to collect that data.
  • He commented that this data can involve both centralized and decentralized ledgers.
• He contended that the major financial surveillance threat in the U.S. is in both the public and private sectors and is contained in the links between the sectors.
• He remarked that a digital U.S. dollar system provides an important opportunity to build financial privacy and security in the U.S. through public infrastructure that would benefit everyone.
  • He asserted however that a digital U.S. dollar system would not achieve these objectives if it is constructed in a manner similar to China’s digital currency system.
  • He also asserted that a digital U.S. dollar system would not achieve these objectives if the U.S. allows third party access to retail payments data beyond what is necessary to effectuate payments.
• He stated that the only way for the U.S. to evolve beyond the “surveillance status quo” is to establish a direct digital U.S. dollar interface with consumers where the Fourth Amendment and other protections apply.
  • He commented that the U.S. should treat the banking and blockchain technology industry’s appeals to partnership as suspect based on legal and technological grounds if the U.S. truly cares about privacy.
• He remarked that the U.S. can build a retail CBDC and FedAccounts system with superior protections compared to the status quo and the systems under development around the world.
• He also expressed support for the ECASH Act and commented that eCash devices that are available on either a smart card or a phone card would serve as digital counterparts to physical cash.
  • He explained that these devices would not make payments over the internet and would instead store U.S. Department of the Treasury-issued digital U.S. dollars on card hardware to enable everyday small dollar transactions.
• He noted how eCash transactions would be subject to the Bank Secrecy Act (BSA)/ AML regime and indicated that the U.S. could set privacy sensitive security controls and caps on transactions and usage to support law enforcement agencies.
  • He emphasized however that eCash cards would never be capable of generating data that companies and agencies can abuse.
• He stated that the ECASH Act is in the spirit of the banking and cash system established under President Abraham Lincoln and would support an exciting, inclusive, and safe digital future.

Congressional Question Period:

Subcommittee Chairman French Hill (R-AR):

• Chairman Hill remarked that CBDCs are ultimately a payments issue. He discussed how CBDCs are loaded on people’s mobile wallets and used to pay for retail items in the countries that have piloted or launched their own CBDCs. He expressed concerns that an unchecked government could use their CBDC system to monitor a citizen’s legal purchases (e.g., firearms purchases) and then cut off the citizen’s access to the financial system based on these purchases. He stated that payments and transaction data can provide significant information about a person, which underscores the importance of the U.S. Consumer Financial Protection Bureau’s (CFPB) rule implementing Sec. 1033 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). He also highlighted how payment stablecoins already exist and have a total market capitalization between $100 billion and $200 billion. He acknowledged that while payment stablecoins are not being widely used for retail purchases, he stated that payment stablecoins could grow in use if the U.S. were to adopt a strong federal regulatory framework for them. He commented that the Clarity for Payment Stablecoins Act of 2023 would provide such a strong federal regulatory framework. He asked Mr. Rooz to indicate whether a U.S. CBDC and payment stablecoins could and should coexist and be integrated and interoperable with one another.
  • Mr. Rooz first remarked that any technological solution for payments that the U.S. would want to pursue is possible. He then stated that trust is a big component of money and commented that trust necessitates privacy. He discussed how blockchain technology is meant to reduce reconciliation and asserted that governments must protect consumer privacy to facilitate trust in the payments system. He also remarked that there are technologies that can improve trust in stablecoins. He noted how there exist companies that can look at public permissionless blockchains and harvest information. He stated that the U.S. should therefore establish a regulatory framework for stablecoins.
• Chairman Hill asked Dr. Michel to indicate whether payment stablecoins should be interoperable with a U.S. CBDC or if payment stablecoins obviate the need for CBDCs in the blockchain technology payment space.
  • Dr. Michel remarked that payment stablecoins obviate the need for a U.S. CBDC. He expressed doubts that a private company would be able to compete with the U.S. government.
• Chairman Hill then noted how Ms. Paridon’s testimony had highlighted how CBDCs would be a liability of the central bank (and not of the banking system). He commented that this dynamic would remove the source of funding for the U.S.’s lending. He asked Ms. Paridon to elaborate on her testimony’s assertion.
  • Ms. Paridon remarked that a CBDC would be perceived as the ultimate safe asset because it would be a direct liability of the central bank. She stated that CBDCs could attract depositors to pull their money out of the banking system and put their money into the CBDC if there is perceived concern about the overall banking or financial system. She noted how every U.S. dollar held in a bank account can be deployed for useful purposes in the economy and explained that this is primarily accomplished through lending. She commented that every U.S. dollar that is pulled out of the banking system and put into a CBDC is one less U.S. dollar that can be put toward productive economic use. She asserted that the establishment of a retail CBDC would therefore pose flight to quality risks.
• Chairman Hill lastly asked Mr. Rooz and Ms. Skinner to discuss the features and technologies being used in the CBDCs being issued by other countries, as well as the benefits and drawbacks of these CBDCs. He requested that Mr. Rooz and Ms. Skinner submit their responses to this question in writing for the hearing’s record.

Full Committee Ranking Member Maxine Waters (D-CA):

• Ranking Member Waters noted how 130 countries (including the U.S.) representing 98 percent of the global economy are now exploring digital versions of their currencies. She indicated that almost half of these countries are in the advanced development, pilot, or launch stages of their CBDCs. She asked Mr. Carrillo to discuss how CBDCs may shape the future global financial landscape. She also asked Mr. Carrillo to project what would happen if the U.S. does not pursue a CBDC.
  • Mr. Carrillo remarked that the U.S. must lead the global transition to digital fiat currencies. He stated that the global transition to digital fiat currencies is already occurring and that policymakers must consider the protections that would be provided for these digital fiat currencies. He warned that the U.S.’s failure to lead in this transition will lead other countries to pursue digital fiat currencies that are less protective of privacy and data security. He then remarked that the rhetoric around an “arms race” for digital fiat currencies has been “particularly unhelpful.” He stated that the U.S. should collaborate with digital fiat currency developers in developing countries. He noted how these developing countries often require offline access and stated that the U.S. could learn helpful lessons from these countries that could support its deployment of digital fiat currencies to communities of color. He added that these lessons can support the development of digital fiat currencies that maintain privacy, security, and civil rights. He remarked that the U.S. has an obligation as the provider of the world’s reserve currency to lead the global deployment of digital fiat currencies in a manner that preserves civil rights and freedoms.
• Ranking Member Waters asked Mr. Carrillo to address whether there are any advantages associated with a U.S. pursuit of a CBDC.
  • Mr. Carrillo remarked that the future of money is being defined within the CBDC space. He mentioned how there exist concerns that CBDCs would obviate the necessity of stablecoins. He noted how the cryptocurrency industry has recently experienced volatility and collapses and stated that a combination of regulation and competition for stablecoins would be beneficial. He also mentioned how the Subcommittee has raised concerns over the power of large technology companies. He stated that large technology companies will grow even more powerful if Congress fails to create an alternative to the corporate systems that collect data or that promise to protect data and then collect it en masse. He commented that this outcome would be suboptimal. He remarked that the U.S. must therefore move forward in its pursuit of a digital fiat currency to ensure that large technology companies do not gain control over money.

Subcommittee Vice Chairman Warren Davidson (R-OH):

• Vice Chairman Davidson remarked that the greatest threat to western civilization is a wrongly structured monetary system. He noted how sound money serves as a stable store of value and an efficient means of exchange. He stated that one of the key characteristics of sound money is that it facilitates permissionless peer-to-peer transactions (like cash). He discussed how none of the over 100 countries developing CBDCs (including the U.S.) are developing permissionless systems. He noted how the U.S. Federal Reserve has stated that a CBDC should be privacy-protected, intermediated, widely transferable, and identity-verified. He asked Dr. Michel and Ms. Skinner to indicate whether a CBDC could be both privacy-protected and identity-verified.
  • Dr. Michel answered no and stated that information contained in a system will be accessible. He also stated that Congress must ensure that Fourth Amendment protections exist within the BSA/AML regime.
• Vice Chairman Davidson commented that third parties already have problematic access to consumer financial information.
  • Ms. Skinner also stated that a CBDC could not be both privacy-protected and identity-verified. She added that central banks have admitted that CBDCs could not be both privacy-protected and identity-verified. She further stated that the CBDC technology currently under development is “extremely immature.” She remarked that there will always exist an inherent tradeoff between identity verification and privacy in CBDCs. She commented that central banks will tend to prefer identity verification over privacy because central banks will never feel comfortable sacrificing the national security goals that they view as accompanying robust identity verification.
• Vice Chairman Davidson remarked that the U.S. Federal Reserve cannot conceive of an architecture that differs from their proposed CBDC architecture. He discussed how Bitcoin’s architecture is permissionless and peer-to-peer and emphasized that Bitcoin’s architecture is not identity-verified and not intermediated. He asked Mr. Rooz to indicate whether a CBDC could be both privacy-protected and identity-verified.
  • Mr. Rooz remarked that identification requirements for a CBDC would create privacy challenges. He also commented that laws like the BSA create similar conflicts between identity verification and privacy. He remarked that while technology can enable digital money that provides full privacy, he stated that this digital money must be developed with a clear policy that allows for public-private permissionless money.
• Vice Chairman Davidson stated that there currently exists private digital money and noted how no governments sponsor this type of money. He commented that governments tend to want surveillance capabilities and expressed concerns that governments will use CBDCs to undermine privacy. He noted how China maintains a CBDC that enables the government to surveil its citizens. He remarked that the U.S. should not pursue a CBDC. He mentioned how he is developing legislation that would criminalize the design, development, construction, and establishment of a CBDC. He called this legislation necessary because Congress lacks traditional appropriations tools to influence the U.S. Federal Reserve’s policies.

Subcommittee Ranking Member Stephen Lynch (D-MA):

• Ranking Member Lynch remarked that the private sector has demonstrated a tendency to maximize its collection of personal financial data, aggregate the collected data, and sell the collected data. He asked Mr. Carrillo to indicate whether private sector-led digital U.S. dollars would protect U.S. consumer privacy.
  • Mr. Carrillo remarked that the third-party doctrine creates problems because of the connection between the private and public sectors. He asserted that the suggestion that the Fourth Amendment will not apply to the public sector and will apply to the private sector is a misunderstanding of constitutional doctrine. He noted how private and public companies can work together and commented that this system can still result in mass surveillance. He stated that the laws and technologies of suggested private sector-led digital U.S. dollar models do not lend themselves to the application of the Fourth Amendment. He then remarked that leaving the private sector in charge of financial service data collection or including the private sector in an intermediated fashion within the CBDC context will necessarily improve privacy for consumers. He commented that both approaches are unlikely to improve privacy for consumers.
• Ranking Member Lynch then discussed how there are already 130 countries representing 98 percent of the global economy that are exploring CBDCs. He noted how very few of these countries have made final decisions on how they will deploy CBDCs or the architectural structures of their CBDCs. He asked Mr. Carrillo to indicate whether the U.S. would derive value from exploring a potential CBDC, especially considering how other countries are exploring CBDCs.
  • Mr. Carrillo answered affirmatively. He remarked that the U.S. needs to take a more expansive approach to public money research and lamented how the U.S. dedicates very few resources toward public money research and development (R&D). He stated that the U.S. will need to pursue public-private partnerships to develop digital money technologies. He asserted that this public-private partnership approach differs from allowing private sector entities access to retail payments data under a digital U.S. dollar system. He lastly discussed how many stakeholders are not being represented in policy conversations around digital money, including communities impacted by law enforcement, small businesses that are subject to high payment network fees, and consumers that deserve privacy.

Rep. John Rose (R-TN):

• Rep. Rose discussed how the Fourth Amendment has been “critical” in protecting the rights of individuals. He mentioned how the U.S. Supreme Court had ruled in Carpenter v. U.S. that the U.S. government must obtain a warrant before accessing cellular phone location data. He also mentioned how the U.S. Supreme Court had ruled in Riley v. California that police must obtain a warrant before searching a suspect’s cellular phone. He stated that the law is developing in these areas to protect the right to privacy for individuals. He commented however that these privacy protections still lag within the financial sector. He noted how the U.S. Supreme Court’s decisions in U.S. v. Miller (1976) and Smith v. Maryland had created the third-party doctrine. He explained that the third-party doctrine does not preclude the U.S. government from accessing information without a warrant that is voluntarily provided to a third-party. He asked Dr. Michel to explain how the third-party doctrine has impacted the financial privacy of Americans.
  • Dr. Michel remarked that Americans practically have no financial privacy because of the third-party doctrine. He discussed how the BSA requires banks to collect personal information from bank customers and noted how this law has been challenged on Fourth Amendment grounds. He stated that the combination of the BSA, Fourth Amendment issues, and the third-party doctrine have resulted in Americans having very little financial privacy.
• Rep. Rose asked Dr. Michel to address how the adoption of a CBDC would further erode the expectations of financial privacy for Americans.
  • Dr. Michel asserted that the adoption of a U.S. CBDC would remove the “last layer” of financial privacy for Americans. He stated that the U.S. government would no longer need to go through a financial institution to obtain the financial information of Americans if there were a U.S. CBDC. He elaborated that the adoption of a U.S. CBDC would enable the U.S. government to easily access this financial information through a central database or quickly obtain this information from financial institutions.
• Rep. Rose then noted how Dr. Michel’s organization, the Cato Institute, had recently released a survey that had found that 68 percent of Americans would oppose a CBDC if it allowed the federal government to monitor their spending. He asked Dr. Michel to address why the federal government would want to monitor the spending of U.S. citizens.
  • Dr. Michel remarked that there is no way to implement a CBDC and provide all of its promised benefits (including monetary policy effects) without enabling government surveillance capabilities.
• Rep. Rose also mentioned how the Cato Institute’s survey had found that 74 percent of Americans would oppose adopting a CBDC if the government could use the CBDC to control how people spend their money. He asked Dr. Michel to address why the federal government would want to control what its citizens spend money on.
  • Dr. Michel stated that the federal government’s ability to control what citizens spend money on would enable the federal government to better effectuate its monetary policy.
• Rep. Rose interjected to ask Dr. Michel to indicate whether the federal government could use a CBDC to prevent purchases of certain items (such as guns, gasoline-powered vehicles, or gas stoves).
  • Dr. Michel called CBDCs a political “nightmare” for both Democrats and Republicans. He warned that governments could leverage CBDCs to achieve their political goals and to hamstring their opponents.
• Rep. Rose interjected to comment that governments could use CBDCs to prevent people from traveling to protests or expressing their First Amendment rights.
  • Dr. Michel noted how other countries have used their payments systems to prevent people from traveling to protests and expressing their rights to petition the government. He warned that CBDCs would exacerbate these problems and asserted that the U.S. should not adopt a CBDC.
• Rep. Rose asked Dr. Michel to indicate what the FDIC’s annual survey of unbanked U.S. households suggests about the value that some Americans place on financial privacy.
  • Dr. Michel remarked that the FDIC’s findings suggest that many unbanked Americans place a high value on financial privacy. He noted that many Americans do not participate in the formal banking system because of privacy concerns.
• Rep. Rose then noted how CBDC proponents have advocated for FedAccounts and having the USPS offer financial services. He mentioned how there had been a 2021 postal banking pilot program that had received $6 million. He noted how this postal banking pilot program had just six customers and had generated less than $35 in revenue. He asked Dr. Michel to discuss the problems associated with proposals to have the USPS offer financial services.
  • Dr. Michel remarked that postal banking would be problematic for the same reasons that a CBDC and a U.S. government-backed digital U.S. dollar would be problematic. He also stated that this 2021 postal banking pilot program’s failure highlights the general success of the private sector in providing sufficient access to financial services.

Rep. Bill Foster (D-IL):

• Rep. Foster asked the witnesses to indicate whether the BSA, KYC requirements, AML rules, and Suspicious Activity Report (SAR) requirements are violations of the Fourth Amendment and should not be features of future payments systems.
  • Dr. Michel indicated that the BSA, KYC requirements, AML rules, and SAR requirements are violations of the Fourth Amendment and should not be features of future payments systems.
• Rep. Foster then asked the remaining witnesses to indicate whether future payments systems should have KYC and AML requirements to enable transaction tracing, to which all of the remaining witnesses answered affirmatively. He then stated that policymakers will need to consider ways to best implement privacy protections for future payments systems. He asked Mr. Carrillo to indicate whether there exist any privacy preserving designs for digital money and to discuss how digital money could incorporate privacy protections.
  • Mr. Carrillo discussed how the proposed ECASH Act envisions hardware devices and noted how these devices could be electronic cards (similar to credit or debit cards) or secured SIM cards on a phone. He remarked that these hardware devices would enable cash-like payments for everyday items without fear of government or corporate surveillance. He stated that government and corporate surveillance occurs in tandem when digital payments are made under the current U.S. payments system. He then noted that while these hardware devices would be encrypted under the ECASH Act, he stated that there would be security controls that could be enabled to implement AML and KYC requirements at the technological level. He noted how the BSA and AML requirements currently treat technologies differently and have unique legal regimes. He stated that the legal regime that currently applies to cash and currency would apply to the hardware devices envisioned under the ECASH Act.
• Rep. Foster asked Mr. Carrillo to provide documentation for the hearing’s record on how the ECASH Act’s proposed digital money would work technologically. He commented that he has questions regarding the degree of trust that must be placed in the proposed digital money’s hardware implementation. He also expressed interest in understanding whether the proposed digital money is blockchain technology-based, how it addresses the double spending problem, and how it would operate offline.
  • Mr. Carillo expressed his willingness to provide documentation for the hearing’s record to answer Rep. Foster’s questions. He emphasized that the point of eCash is that it does not operate online. He stated that eCash is open, permissionless, and private in the sense that one does not need a blockchain or a banking intermediary to use it. He further recommended that Congress engage with universities on this topic and commented that universities have been left out of the technology and industrial conversation being had at the hearing. He stated that universities can provide a great site for research that do not have a “pernicious, lucrative interest.” He asserted that universities need to play a stronger role in efforts to develop digital money systems.
• Rep. Foster then posited a scenario where a criminal forces a person to transfer all of their eCash or other digital assets to them. He asked Ms. Paridon to indicate whether the U.S. should have a duty to preserve the privacy of the criminal in this scenario or whether there should exist a “backdoor” that would enable the identification of the owner of the device where the stolen money was transferred.
  • Ms. Paridon remarked that there should exist a record of where the stolen money was transferred to.
• Rep. Foster interjected to ask Dr. Michel to respond to his previous question.
  • Dr. Michel stated that ransomware perpetrators currently cannot be identified. He remarked that there should exist private transactions that are not subject to AML requirements.
• Rep. Foster interjected to ask Dr. Michel to confirm that he supports a payments system that would allow for ransomware to exist.
  • Dr. Michel remarked that ransomware will always exist, regardless of whether the payments system permits it.
• Rep. Foster acknowledged that his question period time had expired.

Rep. Bryan Steil (R-WI):

• Rep. Steil expressed concerns over how CBDCs would impact the privacy of Americans. He stated that the establishment of a U.S. CBDC would be a negative development and asserted that the U.S. Federal Reserve lacks the authority to pursue a CBDC on its own. He contended that Congress should not provide the U.S. Federal Reserve with the authority to pursue a CBDC because a CBDC would provide the federal government with too much access to the information of American citizens. He stated that there exists a key distinction between whether the federal government or the private sector holds payments information. He then noted how Ms. Paridon’s testimony had asserted that a transfer of a U.S. dollar deposit from a commercial bank or credit union to a CBDC would result in a U.S. dollar that is unavailable for lending to businesses and consumers. He asked Ms. Paridon to discuss how the adoption of an intermediated CBDC would impact credit availability and the cost of banking services.
  • Ms. Paridon remarked that there exists a general misconception that a U.S. dollar transferred from a deposit account to a CBDC could be used for lending and investments in the economy (similar to how U.S. dollar deposits are used for these purposes). She stated that banks would hold CBDCs in the same way that they hold custodied assets, even if the CBDCs were intermediated. She indicated that banks could therefore not redeploy their CBDC holdings in the form of loans.
• Rep. Steil asked Dr. Michel to discuss how the adoption of an intermediated CBDC would impact monetary policy.
  • Dr. Michel remarked that the adoption of an intermediated CBDC would have a large impact on monetary policy and constitute a significant departure from the status quo. He noted how the U.S. currently has a predominantly privately provided system of money and stated that the adoption of a U.S. CBDC would change this system. He commented that this change would raise the cost of money. He also remarked that the adoption of an intermediated CBDC would enable the federal government to both add and remove money from bank accounts. He elaborated that the U.S. Federal Reserve may choose to pursue negative interest rates in response to recessionary concerns. He stated that the U.S. Federal Reserve could only accomplish its monetary objectives through providing no other payment method options. He asserted that the only way to achieve the purported benefits of a CBDC would be to make a CBDC the only payments option.
• Rep. Steil then asked Dr. Michel to confirm whether his privacy concerns regarding CBDCs relate to CBDCs being government-controlled (rather than private sector-controlled).
  • Dr. Michel answered affirmatively.
• Rep. Steil asked Dr. Michel to address how U.S. policymakers should approach the issue of privacy rights for digital currencies.
  • Dr. Michel discussed how the private sector enables companies to pursue different actions and stated that consumers have remedies when private sector companies pursue actions that they oppose. He remarked that government actions by contrast do not provide consumers with similar remedies. He commented that the Fourth Amendment was adopted to address this type of situation.
• Rep. Steil remarked that a CBDC would empower the federal government (rather than the private sector) to make important decisions.

Rep. Sean Casten (D-IL):

• Rep. Casten discussed how fractional reserve banking dates back to the 12th century. He asked the witnesses to indicate whether they find the concept of fractional reserve banking to be confusing (to which none of the witnesses responded affirmatively). He stated that many cryptocurrency enthusiasts incorrectly perceive that the value of money is merely the amount of hard currency in circulation. He then asked Ms. Paridon to confirm her statement that CBDCs must always be liabilities of an issuing central bank.
  • Ms. Paridon stated that CBDCs have been defined as liabilities of an issuing central bank.
• Rep. Casten mentioned how then-U.S. Federal Reserve Vice Chair Lael Brainard had made a similar statement in testimony before the Committee in 2022. He stated that this structure would mean that banks could not lend against CBDC deposits, which would mean that a CBDC could only grow the M1 money supply. He asked Ms.Paridon to confirm this statement.
  • Ms. Paridon stated that if the CBDC were intermediated, then banks would hold these CBDCs as a custodian. She indicated that banks could not lend out a portion of these intermediated CBDCs in the same way that they could lend out deposits.
• Rep. Casten asked Ms. Paridon to confirm that a government that increases the relative share of their M1 money supply through CBDCs is shrinking the size of its economy. He elaborated that a bank could not lend against its CBDC deposits.
  • Ms. Paridon stated that banks could fund their lending activities through different means. She noted how banks could borrow money in the wholesale market or borrow money from the U.S. Federal Reserve to fund their lending activities. She stated that the adoption of a CBDC would not completely eliminate bank lending.
• Rep. Casten discussed how central banks issue currency into the economy and noted how non-CBDC forms of currency are leverageable. He stated that CBDCs by definition are not leverageable.
  • Ms. Paridon confirmed that a retail CBDC would not be leverageable.
• Rep. Casten remarked that CBDCs are incompatible with fractional reserve banking and stated that the U.S. should therefore not care whether other countries are pursuing CBDCs.
  • Ms. Paridon indicated that the Bank Policy Institute does not support a retail CBDC and expressed agreement with Rep. Casten’s position. She asserted that there does not exist evidence to support the view that a CBDC could be beneficial. She stated that a CBDC would not increase financial inclusion and would not be necessary for increasing the speed or efficiency of payments.
• Rep. Casten stated that Congress has considered digital currencies for two years because digital currencies are appealing to many. He questioned however whether digital currencies will bring innovation or are merely a fad. He remarked that digital currency advocates must clearly explain why digital currencies have utility and are not merely a tool for money laundering or speculation.

Rep. Mike Flood (R-NE):

• Rep. Flood expressed opposition to a retail CBDC and remarked that a retail CBDC would concentrate too much power within the federal government. He stated that the adoption of a retail CBDC would put the U.S. Federal Reserve at the center of every American transaction. He warned that a retail CBDC could be used to prevent certain disfavored purchases, block certain disfavored people from using the U.S. financial system, or monitor the payment activities of political opponents. He asserted that a retail CBDC would constitute a “serious threat to liberty,” even if current political leaders were scrupulous. He warned that future political leaders could influence and change how a retail CBDC would function. He noted that there exist concerns over how private companies collect financial consumer data and indicated that CBDC supporters may argue that the government is better suited to directly oversee the payments system. He stated however that this argument does not fully contemplate the extent of the possible abuse that may come from regulators or political actors if given this tool. He asked Ms. Skinner to elaborate on her concerns that the adoption of a CBDC could threaten the U.S. Federal Reserve’s independence.
  • Ms. Skinner discussed how the issuance of a CBDC would increase the U.S. Federal Reserve’s liabilities (assuming that the U.S. Federal Reserve does not otherwise change the composition of its balance sheet). She noted that the U.S. Federal Reserve would need to purchase more assets to match these new liabilities and commented that this would likely result in the U.S. Federal Reserve purchasing more U.S. Treasury securities. She expressed concerns that this dynamic could result in the U.S. Department of the Treasury pressuring the U.S. Federal Reserve to issue more CBDCs so that the U.S. Federal Reserve would purchase more U.S. Treasury securities to finance the federal government’s debt. She asserted that this dynamic would be anathema to the U.S. Federal Reserve’s independence. She also stated that the U.S. Federal Reserve could be pressured for purchasing corporate bonds to offset the liabilities associated with issuing CBDCs. She commented that this purchase of corporate bonds could politicize the U.S. Federal Reserve because such purchases would amount to “picking winners and losers in the economy.” He stated that while the U.S. Federal Reserve has been “pretty neutral” in its approach to purchasing corporate bonds, she highlighted how the U.S. Federal Reserve has received pressure to purchase “green bonds” to facilitate the transition to a low-carbon economy. She indicated that other central banks actively purchase “green bonds.”
• Rep. Flood interjected to then note how Dr. Michel had stated that a CBDC could be programmed for specific purposes and for achieving monetary or fiscal policy goals. He asked Dr. Michel to elaborate on why these uses of CBDCs may be problematic.
  • Dr. Michel stated that CBDCs must be programmed for specific purposes if they are to achieve their purported goals. He noted how a CBDC could enable a central bank to expand the money supply during a pandemic and remove this money from the market after the pandemic. He stated that the central bank would need to decide who to give the money to and who to take the money away from in this pandemic scenario. He commented that the U.S. Federal Reserve likely does not want to be involved in such decision making efforts because these decisions would be very political in nature. He added that most Americans likely do not want the federal government to have the authority to make such decisions.
• Rep. Flood remarked that U.S. policymakers must consider the current and future threats posed by the adoption of CBDCs.

Note: The Subcommittee recessed for approximately 30 minutes at this point of the hearing for votes.

Rep. William Timmons (R-SC):

• Rep. Timmons remarked that CBDCs pose “considerable risks” and commented that these risks cannot be offset by their purported benefits to the U.S. payments system. He described a proposed U.S. CBDC as a “solution in search of a problem.” He stated that the U.S. payments system is already being modernized through private sector developments (including stablecoins) and through public sector improvements to existing payments infrastructure. He remarked that the “significant” privacy and civil liberties concerns associated with CBDCs would be mitigated in the private sector through well-regulated stablecoins or other payment innovations. He asked Dr. Michel to discuss the cybersecurity risks that are associated with CBDCs. He also asked Dr. Michel to indicate whether these risks are as apparent in the private sector.
  • Dr. Michel remarked that the main difference between pursuing a CBDC and pursuing a private sector payments innovation involves centralization. He stated that a CBDC would provide a major point of failure. He noted how a CBDC could be pursued through establishing a central database at the U.S. Federal Reserve. He stated that the U.S. Federal Reserve has previously experienced cybersecurity breaches and may be subject to future cybersecurity breaches. He remarked however that a reliance on private companies for payments services would minimize the damages associated with any cybersecurity breaches. He elaborated that only the customers of the private company that experienced a cybersecurity breach would face hardships.
• Rep. Timmons noted how the best practice for large private companies is to have cybersecurity insurance. He commented that cybersecurity breaches are inevitable and that private companies must take actions to mitigate against such breaches. He added that people can sue private companies when their personal information is compromised as part of a breach and receive compensation. He then mentioned how the CFPB had 250,000 of their files breached and asserted that this breach could have been prevented. He stated that the U.S. citizens who had their personally identifiable information (PII) compromised as part of this breach do not have any recourse. He remarked that a U.S. CBDC would not provide U.S. consumers with an avenue for recourse if and when a cybersecurity breach occurs. He stated that U.S. policymakers must be cognizant of this dynamic. He then asked Dr. Michel to address whether CBDCs have any technological advantages over private sector payments systems.
  • Dr. Michel remarked that CBDCs have no technological advantages over private sector payments systems. He described CBDCs as a “government reaction to a private innovation.” He asserted that the U.S. government views cryptocurrencies and distributed ledger technology (DLT) as threats to their control over the payments system and that CBDCs seek to take back this control.
• Rep. Timmons also mentioned how the Biden administration had sought to increase mandatory reporting of transactions over $500 to pay for their “pipe dream” legislative priorities. He then expressed interest in policies that could strengthen the U.S. dollar’s status as the world’s reserve currency. He asked Ms. Skinner to indicate whether a CBDC would strengthen or weaken the U.S. dollar’s status as the world’s reserve currency.
  • Ms. Skinner warned that a CBDC could potentially weaken the U.S. dollar’s status as the world’s reserve currency. She stated that the U.S.’s commitment to the rule of law, democratic institutions, a judiciary that enforces property rights, and a currency that is a stable store of value supports the U.S. dollar’s status as the world’s reserve currency. She warned that the establishment of a CBDC would create an incentive for the U.S. Federal Reserve to overissue CBDCs to finance deficits. She stated that this overissuance of CBDCs would undermine the U.S. dollar’s status as the world’s reserve currency.

Rep. Wiley Nickel (D-NC):

• Rep. Nickel mentioned how he is a co-sponsor of the Power of the Mint Act and asserted that only Congress has the power to authorize a CBDC. He remarked that the U.S. Constitution clearly states that only Congress has the authority to coin money and commented that the view that the U.S. Federal Reserve cannot unilaterally issue a CBDC should not be considered a partisan issue. He commended Subcommittee Chairman French Hill’s (R-AR) bipartisan approach to digital asset policy issues. He then remarked that CBDCs could be an important innovation that might enhance financial inclusion, reduce transaction costs, and increase the efficiency of U.S. monetary policy. He noted how the Atlantic Council estimates that 130 countries are currently exploring a CBDC and stated that the U.S. should explore a CBDC. He remarked that the U.S. must remain the global leader in finance, especially considering the U.S. dollar’s role as the world’s reserve currency. He stated that the U.S. must pursue CBDCs cautiously, especially considering the Chinese Communist Party’s (CCP) use of its CBDC. He indicated that he has concerns surrounding the privacy and surveillance capabilities of CBDCs and stated that the U.S. must continue studying this issue. He remarked that the CCP’s model for CBDCs raises concerns about the potential for governments to exert unprecedented control over the financial lives of their citizens. He asserted that the U.S. must protect the privacy of its citizens as part of the development of any CBDC. He then expressed concerns that CBDCs could impact the availability of credit for his constituents. He commented that these credit challenges would be especially pronounced during periods of economic stress because of the reduction in bank deposits. He asked Ms. Paridon to comment on this concern.
  • Ms. Paridon expressed agreement with Rep. Nickel’s concerns regarding how retail CBDCs may impact the availability of credit during periods of financial stress and instability. She stated that a CBDC would likely be viewed as the ultimate safe asset during these periods and that depositors would likely be incentivized to pull their deposits out of the banking system and put their deposits into CBDCs. She commented that this movement of funds would reduce the availability of deposits available for banks to lend out and increase the cost of credit.
• Rep. Nickel then asked Mr. Carrillo to discuss why it is important for the U.S. to join the 130 countries studying CBDCs.
  • Mr. Carrillo remarked that the U.S. has the privilege, freedom, and responsibility to lead on CBDC issues. He also stated that the U.S. must ensure that civil rights are incorporated into future payments systems. He remarked that the public, private, and research sectors can work together on procurements and operations for a CBDC. He recounted how President Abraham Lincoln had created cash after the U.S. Civil War to facilitate retail transactions throughout the U.S. economy. He stated that the U.S. government currently possesses “cutting edge” payments technology and highlighted how the U.S. military uses stored value cards known as EagleCash enable offline payments.

Rep. Erin Houchin (R-IN):

• Rep. Houchin noted how her constituents have raised concerns that CBDCs create privacy issues and could enable the government to de-bank its political opponents. She indicated that these constituents have stated that the potential for CBDCs to enable government surveillance and control over money outweighs any of the proposed benefits offered by CBDCs. She discussed how China is using its CBDC to surveille its own citizens. She asked Mr. Rooz to address how the U.S. could ensure that a U.S. CBDC would not resemble China’s CBDC.
  • Mr. Rooz first noted how most of the concerns discussed during the hearing relate to retail CBDCs and explained that retail CBDCs are CBDCs that are issued directly to citizens. He then remarked that any digital representation of the U.S. dollar should benefit from privacy and trust. He stated that if the U.S. government were to decide to issue a retail CBDC, then the U.S. government must demonstrate that it has no ability to see the transactions of citizens.
• Rep. Houchin mentioned how the gun manufacturers in her Congressional District have expressed particular concerns that CBDCs may be used to de-bank politically disfavored industries. She stated that the Obama administration’s Operation Choke Point had limited access to banking services and credit for many politically disfavored industries that are legal (including gun manufacturers). She remarked that a CBDC could enable the federal government to dictate the services that financial institutions could and could not provide to different businesses and to track all payments and uses of funds. She noted how Mr. Rooz had stated that Digital Asset had built its products and services with privacy at their core. She asked Mr. Rooz to explain how transactions involving Digital Asset products occur. She also asked Mr. Rooz to explain how privacy is preserved throughout the lifecycles of transactions involving Digital Asset’s products.
  • Mr. Rooz testified that Digital Asset products allow for the issuer of any asset to determine who has the rights to look into a transaction. He stated that a Digital Asset product could enable privacy through limiting the visibility into the movement of money to the sender of money and the receiver of money. He indicated that the issuer of the money in this instance would only have access to account balance information and would not have access to information regarding the underlying movement of money.
• Rep. Houchin then noted how Mr. Rooz had stated that Digital Asset is seeking to modernize financial infrastructure using blockchain technology. She commented that while this goal appears to be aligned with what wholesale CBDCs are seeking to accomplish, she stated that retail CBDCs would not accomplish this goal. She asked Mr. Rooz to indicate whether her description of Digital Asset is fair.
  • Mr. Rooz answered affirmatively.
• Rep. Houchin asked Mr. Rooz to indicate whether it would be a mischaracterization to discuss the modernization of the U.S.’s backend financial infrastructure as a wholesale CBDC.
  • Mr. Rooz answered affirmatively so long as this discussion involved the modernization of Fedwire or FedNow to eradicate reconciliation. He indicated that his answer would be no if the discussion involved the introduction of central bank digital money directly to retail customers.
• Rep. Houchin remarked that the negative consequences of a CBDC are “pretty great.” She stated that the recent stablecoin legislation passed by the Committee will establish guidelines, safeguards, and a clear path forward for a private sector payments solution. She commented that this solution would bring all of the benefits of blockchain technology without any of the privacy or politicization concerns of a government-controlled CBDC. She expressed interest in working to pass this stablecoin legislation into law and commented that this legislation would create economic opportunities and innovation without putting the privacy and financial well-being of Americans at risk.

Rep. Brad Sherman (D-CA):

• Rep. Sherman first expressed agreement with Rep. Houchin’s concerns over the Obama administration’s Operation Choke Point. He noted that while Operation Choke Point had targeted certain businesses (such as payday lenders and gun manufacturers), he stated that Operation Choke Point could have been used to target organizations like Planned Parenthood. He commented that the power to take someone out of the banking system is the power to destroy them. He then discussed how the U.S. currently works to balance privacy concerns with law enforcement concerns. He expressed opposition to a cryptocurrency ecosystem in which millions of dollars can be transferred between unnamed parties and entities without law enforcement knowing the identities of the parties behind the transactions. He stated however that he also does not want to provide the federal government with the ability to access every transaction. He noted how the U.S. currently maintains a system where suspicious transactions are reported to law enforcement agencies. He then remarked that the U.S. already possesses a digital U.S. dollar and commented that one can go several days without touching a physical U.S. dollar. He stated that the digital U.S. dollar can still be improved and commented that it remains too expensive and cumbersome to pay for goods. He then remarked that the U.S. Federal Reserve has a poor record involving retail products and services. He criticized the performance of the U.S. Federal Reserve’s ACH system and called on the U.S. Federal Reserve to adopt a PAYE maxing system. He questioned the U.S. Federal Reserve’s ability to handle millions of different accounts. He further lamented how the U.S. banking system allows parties to open bank accounts without ever needing to provide in-person proof of identity. He noted how a person can currently open an account online with a stolen paycheck, a stolen driver’s license, and a stolen bill. He asserted that people should only be permitted to open bank accounts in person and commented that the U.S. Federal Reserve could likely not support such a system. He then expressed concerns over the potential impact that CBDCs would have on deposits at regional banks and credit unions. He commented that the U.S. Federal Reserve is unlikely to lend sufficient funds to local businesses. He asked Mr. Carrillo to indicate the impact that a CBDC would have on the ability of the local businesses in his Congressional District to borrow money.
  • Mr. Carrillo remarked that the U.S.’s current system for handling bank deposits is broken. He stated that the U.S. should clarify, streamline, and bolster the U.S.’s current deposit insurance and protection structure. He asserted that digital fiat currency provides the U.S. with an opportunity to accomplish these objectives. He stated that further federal government control of the U.S.’s deposit system would provide stability and enable commercial banks to engage in credit creation and maturity transformation (which he commented should be the actual goal of banking).