Under the Radar: Alternative Payment Systems and the National Security Impacts of Their Growth (U.S. House Committee on Financial Services, Subcommittee on National Security, International Development and Monetary Policy)

Hearing	Under the Radar: Alternative Payment Systems and the National Security Impacts of Their Growth
Committee	U.S. House Committee on Financial Services, Subcommittee on National Security, International Development and Monetary Policy
Date	September 20, 2022

 

Hearing Takeaways:

• Alternative Payment Systems: The hearing largely focused on how other countries were pursing alternative payment systems to expand their global influence and weaken the U.S.’s global economic competitiveness. Subcommittee Members and the hearing’s witnesses highlighted how China in particular was seeking to develop an alternative payment system to rival the incumbent U.S.-dominated payment system. They expressed concerns that this new payment system would deprioritize consumer privacy and property rights. They also expressed concerns that an alternative payment system could weaken the U.S.’s ability to impose sanctions. They asserted that the U.S. must maintain its dominant position in the international payment system to ensure that this system reflects U.S. values and principles.
  • Foreign Central Bank Digital Currencies (CBDCs): Rep. Warren Davidson (R-OH), Mr. Dueweke, and Dr. Norrlöf highlighted how a very large number of countries are currently considering whether to develop their own CBDCs. Rep. Davidson expressed concerns that none of these countries are studying a true distributed ledger system that would facilitate permissionless peer-to-peer transactions. He asserted that these CBDCs were meant to serve as tools for coercion and control and not as a store of value or a means of exchange.
  • Development of a Chinese CBDC: Subcommittee Members, Ms. Jin, Mr. Dueweke, and Mr. Redbord noted how China had launched its own CBDC and stated that this CBDC was intended to reduce the U.S.’s influence in the global payment system. Subcommittee Members expressed particular concerns over the surveillance features being incorporated into China’s CBDC.
  • China’s Cross-Broder Interbank Payment System (CIPS): Ms. Jin highlighted how China had recently launched CIPS, which she described as a renminbi clearing and settlement mechanism that facilitates cross-border renminbi transactions. She asserted that CIPS was not yet China’s version of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and noted that CIPS did not provide messaging services broadly to global financial institutions. She warned that CIPS and could challenge incumbent financial institutions and asserted that the U.S. must immediately respond to this challenge.
• Maintaining the U.S. Dollar’s Global Dominance: Subcommittee Members and the hearing’s witnesses emphasized that the U.S. dollar’s strength enabled U.S. authorities to more easily impose financial sanctions and isolate regimes that violated international norms. They expressed concerns that the embrace of alterative payment systems could reduce the U.S. dollar’s global strength.
  • Prospect of a U.S. CBDC: One proposed solution during the hearing for maintaining the U.S. dollar’s dominance was having the U.S. establish its own CBDC. Subcommittee Members and the hearing’s witnesses suggested that the U.S. should at a minimum consider this option. Dr. Norrlöf explicitly stated that the U.S. should pursue its own CBDC. Of note, Dr. Norrlöf, Mr. Radford, and Mr. Levin all asserted that the U.S. Federal Reserve ought to lead the U.S.’s efforts regarding the development and oversight of a CBDC.
  • Leveraging of Stablecoins: Another proposed solution during the hearing for maintaining the U.S. dollar’s dominance involved the leveraging of private stablecoins. Mr. Redbord stated that stablecoins were already proliferating internationally and highlighted how 99 percent of fiat currency-backed stablecoins were backed by the U.S. dollar. He commented that this dynamic provided the U.S. with an opportunity to export its values and principles abroad through private technology. Mr. Dueweke raised concerns however that the absence of controls for stablecoins could enable the stablecoins to be converted into less trackable currencies. He indicated that these less trackable currencies could include privacy coins and centralized virtual currencies based in hostile countries (such as Russia). Of note, Full Committee Chairman Maxine Waters (D-CA) mentioned how the Committee was currently developing legislation to address stablecoins and noted how many stablecoin issuers had previously misrepresented the assets backing their stablecoins.
  • Russian Efforts to Diversify Away From the U.S. Dollar: Rep. French Hill (R-AR) discussed how Russia had worked to diversify away from the U.S. dollar since 2014 through having its central bank purchase larger shares of non-U.S. dollar currencies (including the Euro, the Japanese yen, and the renminbi). He also highlighted how Russia had launched its own domestic credit card company (Mir) to become less reliant on Visa and MasterCard. Mr. Dueweke remarked however that Mir did not have the same level of use that Visa and MasterCard previously had in Russia. Rep. Hill further raised concerns that China was failing to prevent UnionPay from being a global interchange for Mir cards.
  • Development of a Strategy for Maintaining the U.S. Dollar’s Global Dominance: Rep. Hill and Ms. Jin stated that the U.S. should draft a long-term strategy document to signal the direction of U.S. financial statecraft and the U.S.’s strategy for maintaining the U.S. dollar’s strength. Rep. Hill highlighted how he had introduced the bipartisan 21st Century Dollar Act, which would direct the U.S. Department of the Treasury to study ways to maintain the U.S. dollar’s reserve currency status.
  • Calls for Prudence in U.S. Sanctions: Subcommittee Chairman Jim Himes (D-CT), Ms. Jin, and Dr. Norrlöf recommended that the U.S. take a cautious approach to the imposition of sanctions given the high likelihood of knock-on effects related to such sanctions. They warned that an aggrieve approach to sanctions could drive many countries to adopt alternative payment systems, which would ultimately reduce the U.S.’s global influence. Chairman Himes further noted how China held significant amounts of the U.S.’s debt and engaged in significant trade with the U.S. and other countries. He remarked that an aggressive stance from the U.S. toward China could therefore have devastating impacts for both the U.S. and global economies.
• Growth in the Use of Cryptocurrencies: Mr. Levin and Mr. Redbord highlighted the significant growth of cryptocurrencies and expressed optimism that this technology could lead to more competitive markets, economic growth, and the advancement of U.S. national security objectives. They also asserted that this technology was consistent with U.S. values and posed a real and competitive threat to China’s financial innovation strategy. They acknowledged however that the same qualities that made blockchain technology a force for good (including its permissionless and decentralized nature and its ability to facilitate instantaneous cross-border value transfers) also made the technology attractive to illicit actors.
  • Use of Blockchain Intelligence Services: Mr. Redbord and Mr. Levin highlighted how the native properties of public blockchains could enable law enforcement and regulators to identify risks more readily, as well as more effectively and efficiently investigate financial crime. They discussed how their companies (TRM Labs and Chainalysis, respectively) offered blockchain intelligence services that employed analytical capabilities to review public blockchains and identify illicit money flows. They highlighted how this analysis had helped to identify and recover funds from hacks and ransomware attacks involving North Korea and Iran. Mr. Dueweke asserted however that public blockchain analysis systems could not adequately determine money flows after a cryptocurrency was converted into a privacy coin, a centralized virtual currency, or other alternative payment systems. He remarked that traditional “follow the money” approaches often failed to comprehend the role played by the alternative payment system. He added that these approaches often failed to account for the varied and constantly morphing set of alternative payment companies and services. Mr. Levin and Mr. Redbord stated however that their companies had developed methods to track funds that had gone through mixing services (which are services meant to obscure the whereabouts of a given cryptocurrency transaction or holding).
  • Ability of Cryptocurrencies to Support Privacy: Rep. Anthony Gonzalez (R-OH) highlighted how the Biden administration had recently sanctioned the mixing service Tornado Cash due to its prevalence in money laundering. Rep. Gonzalez and Mr. Redbord stated that while mixing services could be used to obstruct the ability of law enforcement to identify illicit cash flows, they asserted that mixing services could advance legitimate privacy needs. They specifically highlighted how mixing services could be useful in terms of sending cryptocurrencies to a country under attack (such as Ukraine), enabling employers to keep their payments to their employees private, and guarding against state surveillance. Mr. Redbord asserted that regulators must work to ensure that their efforts to pursue mixing services that enabled illicit activities did not harm mixing service users that did not engage in illicit activities. He suggested that better data could enable more targeted enforcement actions against mixing services.

Hearing Witnesses:

1. Mr. Scott Dueweke, Global Fellow, Science and Technology Innovation, The Wilson Center
2. Ms. Emily Jin, Research Assistant for the Energy, Economics and Security Program, The Center for a New American Security
3. Dr. Carla Norrlöf, Nonresident Senior Fellow, Economic Statecraft Initiative, GeoEconomics Center, The Atlantic Council
4. Mr. Ari Redbord, Head of Legal and Government Affairs, TRM Labs
5. Mr. Jonathan Levin, Co-Founder and Chief Strategy Officer, Chainalysis

Member Opening Statements:

Subcommittee Chairman Jim Himes (D-CT):

• He called payment systems the “lifeblood” of the financial sector and stated that the U.S. (and the U.S. dollar in particular) occupied a “privileged” role in the payment sector.
  • He noted how the U.S. dollar was the world’s reserve currency and was the most widely used currency in global trade and cross-border payments.
• He remarked that the U.S. dollar’s strength enabled U.S. authorities to more easily impose financial sanctions and isolate regimes that act against “broadly shared international values.”
• He recounted how the U.S. and its allies had responded to the Russian invasion of Ukraine through limiting the Russian government’s ability to obtain U.S. dollars and restricting Russian banks from accessing vital international financial messaging systems.
  • He commented that these actions had created challenges for the Russian economy and had made Russian President Vladimir Putin and his allies into international pariahs.
• He remarked however that the strengths and privileges of the U.S. dollar were “far from uncontested” and highlighted how U.S. allies and adversaries were taking steps to reduce the reliance of their economies on the U.S. dollar.
  • He stated that foreign governments often pursue these alternative payment systems as proactive measures to mitigate economic sanctions and international vilification.
  • He also stated that foreign governments often pursue alternative payment systems to expand their global influence and weaken U.S. economic competitiveness.
• He contended that U.S. regulators and the international community would need to refine their sanctions strategies, closely monitor international trends, and keep pace with the “rapidly evolving” payment ecosystem.
• He expressed interest in working to preserve and maintain the U.S.’s status in the global payment system, defend against threats presented by alternative payment systems, and equip policymakers and national security officials with the necessary tools to defend the U.S. economy.

Subcommittee Ranking Member Andy Barr (R-KY):

• He remarked that the rise of foreign alternative payment systems (particularly in China) has deepened Congress’s interest in ensuring that the U.S.’s payment infrastructure remained preeminent.
  • He also commented that China’s development of a digital renminbi has raised the possibility of China removing itself and other countries from a U.S. dollar-based financial system.
• He called on Congress to foster domestic payment innovation so that U.S. dollar payments were quick, efficient, and secure.
  • He commented that this would entail continuing to upgrade the U.S.’s payment capabilities.
• He noted how the U.S. Federal Reserve’s FedWire system currently processed nearly $4 trillion per day and highlighted how this system had double digit annual growth in terms of the volume and value of its transfers.
  • He stated that next year’s rollout of the U.S. Federal Reserve’s FedNow system should further facilitate U.S. dollar payments for individuals and businesses.
• He mentioned how Committee Republicans had called on the U.S. Federal Reserve to prioritize cybersecurity to defend critical payment systems.
  • He also mentioned how Committee Republicans had emphasized the importance of data privacy and cooperation with commercial banks as part of the U.S. Federal Reserve’s consideration of a CBDC.
• He asserted that the U.S. must reject the Chinese model of using financial technology (FinTech) as a tool for government surveillance and control.
• He also stated that the private sector would play a key role in ensuring the dominance of the U.S. payment system and noted how the U.S. and Europe had launched a diverse array of new payment services.
  • He commented that these new payment services ranged from FinTech startup companies to large technology companies.
• He expressed confidence that the U.S.’s commitment to competition, free enterprise, and the rule of law would influence global standards for payments.
• He also remarked that the U.S. must not politicize its financial institutions and asserted that activists were working to mobilize the U.S. Federal Reserve, the U.S. Securities and Exchange Commission (SEC), banks, and Silicon Valley technology companies against anyone that did not share their beliefs.
  • He specifically criticized the application of environmental, social, and governance (ESG) criteria to U.S. financial institutions.
• He then stated that the effectiveness of the U.S.’s sanctions and anti-money laundering (AML) regime was dependent on the dominance of the U.S. dollar.
  • He commented that attempts by foreign countries to evade U.S. law enforcement would be limited so long as the U.S. dollar remained dominant.
• He attributed the U.S. dollar’s dominance to the fact that its value is market determined, the U.S.’s support for free capital flows, and the U.S.’s strong legal system that protected investors.
• He discussed how China was currently pursuing numerous controversial policies, including its “zero-COVID” strategy and its current partnership with Russia.
  • He also highlighted how the Chinese real estate sector was currently in a precarious position.
• He asserted that China should not be allowed to dominate the world’s financial architecture and commented that this sentiment was bipartisan.

Full Committee Chairman Maxine Waters (D-CA):

• She noted that while alternative payment systems could drive inclusion and offer convenience, she stated that these payment systems also offered opportunities for sanctions evasion and other financial crimes.
• She also remarked that alternative payment systems could rival U.S. dollar-led trade and payment systems, which could undermine the strength of the U.S. dollar.
  • She commented that this undermining of the U.S. dollar’s strength could undermine the U.S.’s ability to apply economic and trade sanctions.

Witness Opening Statements:

Ms. Emily Jin (The Center for a New American Security):

• She first explained that China’s CIPS was a renminbi clearing and settlement mechanism that facilitates cross-border renminbi transactions.
  • She asserted that CIPS was not yet China’s version of SWIFT and noted that CIPS did not provide messaging services broadly to global financial institutions.
• She then explained that the digital renminbi constituted the digital version of China’s national currency.
  • She discussed how the digital renminbi was mostly domestic and retail in nature and noted how it had been implemented across all levels of Chinese society.
  • She stated however that the digital renminbi increasingly had the potential to be used in cross-border applications.
• She remarked that CIPS and the digital renminbi were currently not threats to the mainstream financial system.
• She warned however that CIPS and the digital renminbi were growing in terms of their technical sophistication and their domestic adoption.
  • She noted how CIPS use was on an upward trajectory and mentioned how digital renminbi pilot projects were penetrating through all levels of Chinese society.
• She remarked that CIPS and the digital renminbi could gain traction internationally and scale up if China were ambitious about these payment systems.
• She warned that Chinese alternative payment systems and coalitions of alternative payment systems could eventually erode the U.S.’s ability to use financial sanctions as either deterrents or punishments.
  • She cautioned that this dynamic could prove especially problematic in the event of an international crisis involving Taiwan.
  • She also stated that CIPS and the digital renminbi could challenge incumbent financial institutions and asserted that the U.S. must immediately respond to this challenge.
• She noted that while the U.S. could not control how other countries were developing their payment systems, she remarked that the U.S. could develop sound policies to influence global payment innovations and maintain U.S. leadership in the global financial system.
• She first recommended that the U.S. government support institutions that conduct research on the financial statecrafts of the U.S. and China.
  • She suggested that the U.S. Department of the Treasury, the U.S. Federal Reserve Board of Governors, and the U.S. Federal Reserve Banks should designate units of analysts to conduct annual assessments of currency flows in the global payment system.
• She then recommended that Congress consider mandating that a long-term strategy document be drafted to signal the direction of U.S. financial statecraft and the U.S.’s strategy for maintaining the U.S. dollar’s strength.
  • She indicated that this document could be updated once every two to four years and commented that it would provide needed assurances to the private sector and U.S. allies.
• She lastly recommended that the U.S. Department of the Treasury develop policy measures to prevent sanctioned entities from taking advantage of alternative payment systems.
  • She stated that the U.S. Department of the Treasury should be cautious in its imposition of any sanctions given the high likelihood of knock-on effects related to such sanctions.

Mr. Scott Dueweke (The Wilson Center):

• He remarked that the scope of alternative payment systems extended beyond cryptocurrencies and encompassed familiar companies (including PayPal and Western Union), as well as many lesser-known systems.
  • He highlighted how criminals made use of some of these lesser known systems (including the Russian systems WebMoney and PerfectMoney).
  • He further mentioned how Russians used the QIWI system to purchase Facebook advertisements that were intended to influence the 2016 Presidential Election.
• He stated that there existed a clear nexus between adversarial and illiberal regimes and cybercrime cartels acting on behalf of such regimes that used alternative payment systems.
• He remarked that alternative payment systems were not small and highlighted how China’s centralized virtual currencies (including WeChat Pay and Alipay) had processed 294.6 trillion digital yuan (which is equivalent to $45.6 trillion) in 2020.
  • He commented that this amount dwarfed the estimated $15.8 trillion in all cryptocurrency-related transactions that had occurred in 2021.
• He noted how public blockchain analysis systems, including Chainalysis, TRM Labs, and Cipher, were beginning to do peel chain analysis to identify when cryptocurrencies were being exchanged for other cryptocurrencies to obfuscate their origins or usage.
  • He asserted however that public blockchain analysis systems could not adequately determine money flows after a cryptocurrency was converted into a privacy coin, a centralized virtual currency, or other alternative payment systems.
• He remarked that traditional “follow the money” approaches often failed to comprehend the role played by the alternative payment system.
  • He added that these approaches often failed to account for the varied and constantly morphing set of alternative payment companies and services.
• He also contended that an exclusive focus on cryptocurrency risks would result in the overlooking of the threats posed by alternative payment systems.
• He stated that virtual currencies, mobile payment systems, remittance systems, and stored value card systems fueled the “shadow economy,” as well as enabled “very positive” changes for unbanked and underbanked individuals.
  • He commented that anonymity and misattribution were very common in these payment systems and asserted that know your customer (KYC) practices were being poorly applied or entirely ignored in these systems.
• He remarked that financial open-source intelligence (FOSINT) should be developed as a discipline and called for the development of tools to better understand the alternative payment ecosystem.
• He stated that the explosion in popularity and the viability of the alternative payment ecosystem was threatening the traditional global financial ecosystem.
  • He highlighted how the alternative payment ecosystem provided a growing and capable set of interconnected, non-bank financial channels that may or may not ever touch the traditional financial system.
• He asserted that traditional bank-centric financial systems were “under siege” due to the “awakening” of a significant unbanked and underbanked population, as well as a burgeoning global middle class.
• He stated that frequent use of financial sanctions had contributed to this shift toward alternative payment systems as new Chinese and Russian payment systems bypass SWIFT and other Western-dominated financial systems.
• He contended that CBDCs would play a key role in alternative payment systems and highlighted how nine countries had already launched CBDCs.
  • He further mentioned that an additional 15 countries were in the pilot phase for their CBDCs and that an additional 16 states were in the development phase for their CBDCs.
• He noted that while the U.S. had not yet entered the CBDC space, he commented that President Biden’s recent Executive Order (EO) on Ensuring Responsible Development of Digital Assets constituted a “positive statement of intention” to enter the CBDC space.
• He stated that CBDCs and other new payment systems were limiting the ability of the U.S. to track cross-border money flows.
• He asserted that the lack of U.S. leadership and standard setting would have long-term geopolitical consequences, especially if China were to develop a first mover advantage regarding CBDCs.
  • He stated that a Chinese-dominated alternative payment system could materialize sooner than predicted and would reduce the West’s ability to exert influence over the global financial system.

Dr. Carla Norrlöf (The Atlantic Council):

• She remarked that alternative payment systems posed national security risks because they could undercut the U.S. dollar’s dominant role in the international currency system.
  • She noted how the U.S. dollar was by far the most frequently and most widely used currency by both governments and private actors.
  • She also highlighted how the U.S. dollar was used across all currency functions and asserted that the U.S. dollar was the only currency that was truly global.
• She stated that while there was no immediate or medium-term threat to the U.S. dollar’s global dominance, she warned that other payment systems could threaten the U.S. dollar’s relative dominance.
  • She commented that there had already occurred a relative decline in the U.S. dollar’s global status.
• She discussed how the international currency system had become less unipolar after 2017 and reiterated her warning that the relative decline of the U.S. dollar could become an issue.
• She stated that sanctions were likely motivating some countries to diversify away from the U.S. dollar and to devise alternative payment systems.
  • She explained that these alternative payment systems would enable these countries to avoid the use of the U.S. dollar for storing assets in countries where the assets could be seized.
• She noted however that countries joining U.S. sanctions efforts and countries supporting U.S. sanctions objectives continued to have geopolitical incentives to diversify into the currencies of the sanctioning coalition (which included the U.S. dollar).
  • She mentioned how preliminary analysis of diversification out of Western currencies following the February 2022 sanctions against Russia suggest “very modest” diversification out of U.S. dollars.
• She stated that the expansion of alternative payment systems to involve many countries and private users and to cover a wide array of commercial and financial transactions would lead the U.S. dollar to lose prominence.
  • She commented that a decline in the U.S. dollar’s importance in the international economy would lead the U.S. to lose out on the economic and geopolitical benefits that stemmed from its issuance of the world’s dominant currency.
• She remarked that an acute weakening of the U.S. dollar’s dominant role would jeopardize the U.S.’s ability to influence, stabilize, and enforce international order.
  • She commented that this could have “significant” national security ramifications.
• She contended that the U.S. should work with allies to gain support for major sanction initiatives whenever possible.
• She also recommended that the U.S. avoid sanctions that would be considered unfair or overly harsh to mitigate the growth of alternative payments.
  • She stated that the U.S. should first exhaust soft or diplomatic influence attempts before pursuing sanctions.
  • She asserted that this approach would increase the likelihood that undecided nations would remain within the traditional U.S. dollar-based payment system.
• She lastly remarked that the U.S. could not afford to simultaneously adopt a “hard line” towards foes and allies on economic measures.
  • She commented that the sharpest decline in the polarity of the international finance system had coincided with an uptick in U.S. sanctions during the Trump administration.

Mr. Ari Redbord (TRM Labs):

• He testified that his company, TRM Labs, analyzed public data from 25 blockchains and over one million digital assets.
  • He noted how TRM Labs combined this publicly available data with advanced analytics and proprietary threat intelligence to provide unique insights on fraud, crime, and national security risks to cryptocurrency businesses, financial institutions, and law enforcement and regulatory agencies worldwide.
• He discussed how the U.S.’s adversaries and allies were currently exploring alternative payment systems that might circumvent the U.S. financial system.
  • He commented that these alternative payment systems might impact the primacy of the U.S. dollar, the efficacy of U.S. sanctions, and the ability of the U.S. to monitor financial crime.
• He remarked that the U.S. could enable the free market to innovate faster on payment solutions that incorporated democratic principles and stated that this innovation was currently occurring within the blockchain technology space.
  • He asserted that blockchain technology was supporting more competitive markets, economic growth, and U.S. national security objectives.
• He highlighted how stablecoins (which were an application of blockchain technology) enabled consumers to seamlessly send money internationally.
  • He commented that stablecoins could spur financial inclusion, foster more competitive markets, and provide consumers with lower prices and more choices.
• He noted how TRM Labs had found that 99 percent of fiat currency-backed stablecoin value was tied to the U.S. dollar.
• He remarked that the U.S. could support the growth of U.S. dollar-backed stablecoins that were operated by regulated U.S. entities through establishing rules that ensure stability, security, and interoperability.
  • He commented that these actions could help protect the U.S. dollar’s primacy, ensure the efficacy of U.S. sanctions, and spread democratic principles throughout the world.
• He stated that the native properties of public blockchains (which included transparent, traceable, public, permanent, private, and programmable data) could enable law enforcement and regulators to more readily identify risks, as well as more effectively and efficiently investigate financial crimes.
• He further asserted that the public nature of blockchains facilitates the implementation of effective sanctions.
  • He recounted how the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) had used blockchain intelligence to quickly trace the stolen funds associated with North Korea’s March 2022 hack of the Ronin Bridge.
  • He indicated that OFAC had used this intelligence to quickly sanction the addresses holding the stolen funds and the mixing services used to launder said funds.
• He contended that the strength of U.S. sanctions was not exclusively derived from the U.S. dollar’s primacy and largely attributed this strength to the fact that the U.S. was home to innovative companies and people transacting in the global economy.
  • He asserted that the key to effective U.S. sanctions was to ensure that the top businesses in the digital economy would remain in the U.S. and serve U.S. customers.

Mr. Jonathan Levin (Chainalysis):

• He first remarked that his company, Chainalysis, was the world leader in cryptocurrency investigative and compliance solutions.
• He then discussed how China had made “enormous progress” regarding financial innovation and mobile payments over the previous 15 years and noted how China was now looking to export their domestic payment systems internationally.
  • He indicated that China’s payment system export efforts were being made through their domestic companies, foreign investments in other FinTech funds, and CBDC innovations.
• He contended that the U.S. must be prepared to respond to China’s growing influence within the global payment system.
• He remarked that cryptocurrencies marked the first innovation that was consistent with U.S. values and posed a real and competitive threat to China’s financial innovation strategy.
  • He asserted that China should not be allowed to pursue a payment system that prioritized strong guarantees over property rights and financial privacy.
• He contended that the U.S. must work to mitigate the national security risks associated with cryptocurrencies to unlock their strategic potential.
• He discussed how government agencies around the world used Chainalysis’s tools to investigate illicit uses of cryptocurrencies.
  • He emphasized that the transparency of cryptocurrencies enhanced the abilities of governments to detect, attribute, and ultimately disrupt illicit uses of cryptocurrencies.
• He asserted that it was often easier to investigate cases involving the illicit uses of cryptocurrencies than other traditional means of payment or alternative payment systems.
  • He further indicated that the percentage of illicit activity involving cryptocurrencies was “well below” global money laundering estimates.
• He stated however that the transparent nature of cryptocurrencies had led to many stories regarding illicit activities involving cryptocurrencies.
  • He noted how the cryptocurrencies involved in these illicit activities were often identified and recovered and mentioned how the U.S. Department of Justice (DoJ) had used Chianalysis tools to recover $30 million worth of cryptocurrency in the recent Ronin Bridge hack.
• He remarked that cryptocurrencies and stablecoins were already providing payment services to consumers and businesses.
  • He mentioned how Chainalysis had just released its Global Cryptocurrency Adoption Index and indicated that Vietnam, the Philippines, and Ukraine were among the world’s top adopters of cryptocurrencies.
• He stated that the Committee could help to ensure that U.S. payment rails were used around the world and that these payment rails were built by U.S. companies to serve U.S. principles.

Congressional Question Period:

Subcommittee Chairman Jim Himes (D-CT):

• Chairman Himes stated that there existed an “understandable instinct” for the U.S. to aggressively target China because of China’s aggression towards its neighbors, human rights abuses, and intellectual property (IP) theft. He highlighted however that China held significant amounts of the U.S.’s debt and engaged in significant trade with the U.S. and other countries. He remarked that an aggressive stance from the U.S. toward China could therefore have devastating impacts for both the U.S. and global economies. He expressed concerns with proposals that seek to isolate China and prevent China from accessing global capital markets. He asked the witnesses to provide recommendations for how the U.S. could approach China in a manner that would avoid significant economic consequences. He also asked the witnesses to specifically address how the U.S. should approach Chinese payment platforms, including Alipay and CIPS.
  • Mr. Levin remarked that the U.S.’s approach towards Russia was not necessarily applicable to its approach towards China. He asserted that the U.S. needed to play a “more long-term game” with China given how the U.S. was engaged in significant technology competition with China on semiconductor chips and artificial intelligence (AI). He stated that the U.S.’s values regarding financial systems were completely different from China’s values regarding financial systems. He remarked that the U.S. should work to foster strong property rights and privacy protections so that the global financial system reflects U.S. values.
  • Mr. Dueweke expressed agreement with Mr. Levin’s response. He remarked that China’s distributed ledger system did not constitute a conventional blockchain system. He stated that China did not want a blockchain system with auditability, transparency, and property rights. He asserted that China instead desired the ability to collect information about people and to consolidate that information for their own purposes. He remarked that a more competitive U.S. blockchain industry and improved cybersecurity capabilities would be beneficial. He also stated that the U.S. must work to prevent China from expanding into areas where they could benefit from having geolocation features incorporated into their payment systems. He noted how China was attempting to deploy geolocation payment features into Europe. He further remarked that the U.S. should directly respond to Chinese systems that support money laundering and threat financing.
• Chairman Himes interjected to ask the remaining witnesses to indicate whether they disagreed with the responses from Mr. Levin and Mr. Dueweke.
  • Mr. Redbord remarked that the U.S. needed to apply pressure to China for its actions against the U.S. (particularly regarding IP theft). He stated however that the U.S. should prioritize innovation in its efforts to compete with China. He discussed how China was currently building blockchain infrastructure that was devoid of democratic values and that sought to promote state surveillance.
• Chairman Himes interjected to note that his question period time had expired.

Subcommittee Ranking Member Andy Barr (R-KY):

• Ranking Member Barr remarked that there were two narratives surrounding digital assets and cryptocurrencies with regard to law enforcement and sanctions evasion issues. He indicated that the first narrative was that the pseudonymity of digital assets and cryptocurrencies enabled criminal activity. He indicated that the second narrative was that blockchain intelligence firms were able to use blockchain technology to assist law enforcement in their pursuits of criminal activity. He asked the witnesses to indicate which of the two narratives was the correct narrative.
  • Mr. Redbord remarked that the same qualities that made blockchain technology a force for good (including its permissionless and decentralized nature and its ability to facilitate instantaneous cross-border value transfers) also made the technology attractive to illicit actors. He asserted that the current transparency into financial flows was unprecedented and commented that this transparency enabled law enforcement agencies to trace these financial flows. He mentioned how there were recent arrests related to the 2016 hacking of the cryptocurrency exchange Bitfinex. He stated that the transparent and immutable nature of blockchains had enabled law enforcement agencies to trace and track the funds stemming from this 2016 hacking.
  • Mr. Levin remarked that cryptocurrencies enabled an unprecedented amount of openness in the financial system, which made it possible for the Executive Branch to proactively pursue threats within the financial system. He stated that Chainalysis had demonstrated the feasibility of using blockchain technology to proactively pursue criminals. He contended that the U.S. would need to take a more proactive approach in its monitoring of the financial system for threats as cryptocurrencies proliferate.
• Ranking Member Barr then asked the witnesses to indicate whether a U.S. Federal Reserve-issued CBDC or a regulatory framework that supports fiat currency-backed stablecoins would be better for preserving the U.S. dollar’s dominance.
  • Mr. Redbord discussed how the Executive Branch was currently assessing whether the U.S. ought to pursue CBDCs. He stated however that stablecoins were already proliferating internationally and highlighted how 99 percent of fiat currency-backed stablecoins were backed by the U.S. dollar. He commented that this dynamic provided the U.S. with an opportunity to export its values and principles abroad through private technology. He called on the U.S. to provide legislative and legal clarity for stablecoins as it considered the feasibility of CBDCs.
• Ranking Member Barr stated that stablecoins would enable the U.S. to compete with China in a manner that did not compromise American values.

Full Committee Chairman Maxine Waters (D-CA):

• Chairman Waters mentioned how the Committee was currently developing legislation to address stablecoins and noted how many stablecoin issuers had previously misrepresented the assets backing their stablecoins. She asked Mr. Redbord to address why it was important for the U.S. to develop a legal and regulatory framework for stablecoins. She also emphasized the need to include AML and sanctions protections in the legal and regulatory framework for stablecoins.
  • Mr. Redbord called it important for the U.S. to adopt a well-devised legal and regulatory framework for stablecoins. He noted how other foreign policymakers and regulators have been moving to adopt their own legal and regulatory frameworks following the collapses of various stablecoins. He remarked that the U.S.’s adoption of stablecoin rules that ensured the security, stability, and interoperability would be key to establishing U.S. leadership within the stablecoin space.
• Chairman Waters asked Mr. Redbord to discuss the role that blockchain technology could play in the identification of alternative payment systems that might undermine the U.S.’s interests.
  • Mr. Redbord remarked that blockchains allowed for unprecedented visibility into financial flows. He stated that this visibility enabled observers to identify illicit financial activity, bad actors, and threats to market integrity. He remarked that the U.S. needed to ensure that American and democratic principles were incorporated into the development of blockchain networks.

Rep. Pete Sessions (R-TX):

• Rep. Sessions asked Mr. Levin, Mr. Redbord, and Mr. Dueweke to address how China was working to collect personal information from consumers through their payment systems. He also asked Mr. Levin, Mr. Redbord, and Mr. Dueweke to address the stability and security of current U.S. payment systems.
  • Mr. Dueweke noted how blockchain technology was the technology underlying cryptocurrencies. He indicated that while blockchain technology was often viewed as exclusively supporting financial applications, he asserted that blockchain technology had applications beyond the financial sector. He highlighted how health care organizations were using blockchain technology to share identities and avoid the unnecessary disclosure of personally identifiable information (PII). He stated that blockchain technology could support the delivery of financial aid through ensuring that the correct party received the aid. He then noted that while stablecoins could support the international exportation of American values, he emphasized that stablecoins were part of a blockchain ecosystem. He stated that the absence of controls for stablecoins could enable the stablecoins to be converted into less trackable currencies. He indicated that these less trackable currencies could include privacy coins and centralized virtual currencies based in hostile countries (such as Russia). He called for the adoption of more robust KYC requirements to ensure that cryptocurrencies would remain trackable. He noted how there existed person-to-person cryptocurrency exchanges that did not adhere to KYC requirements and highlighted how some of these person-to-person exchanges operated within the U.S.

Del. Michael San Nicolas (D-GU):

• Del. San Nicolas asked the witnesses to indicate whether the U.S. should pursue some form of digital currency (such as a CBDC or a stablecoin).
  • Ms. Jin answered affirmatively.
  • Mr. Dueweke answered affirmatively.
  • Dr. Norrlöf stated that the U.S. should pursue a CBDC.
  • Mr. Redbord answered affirmatively.
  • Mr. Levin answered affirmatively.
• Del. San Nicolas asked Dr. Norrlöf to indicate whether the U.S. Federal Reserve or the U.S. Department of the Treasury should lead the U.S.’s efforts to adopt a digital currency.
  • Dr. Norrlöf remarked that the U.S. Federal Reserve should lead the U.S.’s efforts to adopt a digital currency. She also called it especially important for the U.S. to make progress in adopting a CBDC and stated that China could use its CBDC to undermine the U.S. dollar’s dominance. She discussed how a Chinese CBDC would likely lead to a push towards a convertible renminbi, which she commented would make China’s currency more attractive to international investors. She also mentioned how 104 countries were currently exploring CBDCs. She asserted that there existed “real opportunities” for the U.S. Federal Reserve to assume leadership in this critical area.
• Del. San Nicolas noted how the advent of a digital currency could lead the U.S. Federal Reserve to assume the power to produce money. He indicated that the U.S. Department of the Treasury had historically held this power exclusively. He asked the remaining witnesses to indicate whether the U.S. Federal Reserve should lead U.S. currency digitization efforts.
  • Mr. Levin noted how there were already many digital U.S. dollars in existence and stated that much of the U.S.’s current payment system was digital. He remarked that the U.S. Federal Reserve was primarily responsible for the technology that supports the clearing and settlement of these digital U.S. dollars. He stated that policymakers ought to consider the future of this technology and ways to ensure that financial institutions could raise cybersecurity and AML concerns with the U.S. Federal Reserve.
  • Mr. Redbord expressed agreement with Mr. Levin’s response. He stated that the U.S. Federal Reserve would have jurisdiction over a CBDC. He stated however that the U.S. Department of the Treasury might oversee and regulate U.S. dollar-backed stablecoins. He remarked that the U.S. should pursue a digital currency that reflected and exported its values. He commented that this digital currency could be either a stablecoin or a CBDC.
• Note: Del. San Nicolas’s question period time expired here.

Rep. Roger Williams (R-TX):

• Rep. Williams expressed concerns over how payment systems were being used to fund illegal activities at the U.S.’s southern border with Mexico. He criticized the Biden administration’s handling of the situation at the U.S.’s southern border with Mexico. He noted that while criminal organizations at the U.S.’s southern border with Mexico had typically used cash to engage in their illicit activities, he raised concerns that these organizations were employing cryptocurrencies to make cross-border payments. He asked Mr. Levin to describe the scale to which cash was being used for illegal activities compared to cryptocurrencies. He also asked Mr. Levin to provide recommendations for better implementing technologies to track illicit money flows.
  • Mr. Levin acknowledged that cryptocurrencies enabled seamless and instantaneous cross-border transactions and commented that these features created a perception that cryptocurrencies could facilitate illicit activities. He stated however that most illicit criminal networks already had established processes for moving money. He noted how these criminal networks tended to rely heavily upon traditional financial networks (which were very cash dependent). He remarked that observers could proactively track cross-border cryptocurrency transfers and noted how Chainalysis provided cryptocurrency tracking services to law enforcement agencies. He stated that the tracking of these cryptocurrency transfers had led to the discovery of criminal networks in several instances.
• Rep. Williams then mentioned how there were news reports that the Biden administration was seeking to revive the Iran Nuclear Deal and criticized the Biden administration for not briefing Congress about these efforts. He noted how OFAC had recently taken actions against ten Iranian individuals and multiple businesses for their roles in various ransomware attacks. He asked Mr. Levin to describe the methods that Iran was using to commit cybercrimes.
  • Mr. Levin noted how OFAC reported that an Islamic Revolutionary Guard Corps (IRGC) affiliated group was perpetrating cyberattacks using known vulnerabilities and gaining unauthorized access to devices to extort victims. He stated that the transparent nature of cryptocurrencies enabled OFAC and its law enforcement partners to track and trace stolen funds and list some of the addresses being used to extort victims. He commented that these capabilities weakened the financial motivations for perpetrating cybercrimes. He remarked that the U.S. had historically demonstrated an ability to track down some of the Iranian criminal networks that perpetrated ransomware attacks and cybercrimes. He further stated that the U.S. law enforcement agencies could pursue these criminal actors with the right tools.

Full Committee Vice Chair Jake Auchincloss (D-MA):

• Vice Chair Auchincloss noted how Ms. Jin had published a January 2022 article that stated that the Chinese government hoped to leverage digital currencies and electronic payments to advance the Chinese Communist Party’s (CCP) domestic political agenda. He commented that a Chinese CBDC would likely impinge on privacy and individual freedoms. He asserted that the U.S. did not need to necessarily issue its own CBDC in response to a potential Chinese CBDC. He stated that the U.S. could instead support a regulated and competitive marketplace for stablecoins. He asked Ms. Jin to provide recommendations for how the U.S. could support the development of a stablecoin ecosystem. He also asked Ms. Jin to address how stablecoins might help the U.S. to compete with a Chinese CBDC.
  • Ms. Jin remarked that China ran its CBDC in a manner that maximized the data it collects on its citizenry. She stated that the Chinese government could use this collected data to make predictions about its citizens and the economy. She remarked that the U.S. payment system by contrast had respect for digital financial privacy. She predicted that the U.S. payment system would be more productive than the Chinese payment system if the U.S. maintained clearer regulations and enabled companies and financial institutions to pursue innovation.
• Vice Chair Auchincloss interjected to comment that the Committee was making progress in its development of bipartisan stablecoin legislation. He asked Ms. Jin to indicate whether the U.S. needed to have its own CBDC so that it could outcompete China.
  • Ms. Jin remarked that the U.S. did not necessarily need its own CBDC to outcompete China. She noted however that many federal agencies were currently considering the possibility of a U.S. CBDC.
• Vice Chair Auchincloss stated that research and development (R&D) into CBDCs could help the U.S. to enforce international norms regarding CBDCs. He asked the remaining witnesses to indicate whether they believed that the U.S. needed to pursue a CBDC to compete with China.
  • Dr. Norrlöf remarked that China was attempting to become competitive with the U.S. with regard to payment systems. She stated that the U.S. did not need a CBDC at this point. She commented however that the U.S. might eventually find it necessary to develop a CBDC. She contended that a CBDC was necessary for China if its payment system sought to compete with the U.S. payment system.
• Vice Chair Auchincloss asked Dr. Norrlöf to indicate whether the U.S. needed a CBDC to maintain the U.S. dollar’s global dominance.
  • Dr. Norrlöf remarked that the U.S. dollar was currently far more dominant at the international level than the renminbi. She stated that China was currently working to bolster the status of the renminbi so that it could challenge the U.S. dollar’s global dominance.
• Vice Chair Auchincloss asked Dr. Norrlöf to indicate whether a well-regulated stablecoin marketplace could help the U.S. to contest Chinese efforts to undermine the U.S. dollar.
  • Dr. Norrlöf expressed uncertainty as to whether a well-regulated stablecoin marketplace was necessary for ensuring the U.S. dollar’s global competitiveness. She stated that the U.S. should instead take a broader approach to alternative payment systems. She specifically suggested that the U.S. consider how other countries were working to bypass the U.S. dollar.
• Vice Chair Auchincloss interjected to note that his question period time had expired.

Rep. French Hill (R-AR):

• Rep. Hill first mentioned how he had introduced the bipartisan 21st Century Dollar Act, which would direct the U.S. Department of the Treasury to study ways to maintain the U.S. dollar’s reserve currency status. He indicated that this study would evaluate the feasibility of a tokenized U.S. dollar. He then contended that the renminbi’s lack of exchangeability and China’s absence of rule of law meant that the renminbi could not effectively compete with the U.S. dollar at the present time. He stated however that the U.S. could make the renminbi competitive through increasing the renminbi’s makeup of the special drawing rights (SDR) basket at the International Monetary Fund (IMF) or diminishing the value of the U.S. dollar. He commented that the U.S.’s current budget deficits posed threats to the U.S. dollar’s value. He urged the Committee to markup the 21st Century Dollar Act so that the U.S. could have a government-wide review for maintaining the U.S. dollar’s global competitiveness. He then discussed how Russia had worked to diversify away from the U.S. dollar since 2014 through having its central bank purchase larger shares of non-U.S. dollar currencies (including the Euro, the Japanese yen, and the renminbi). He also highlighted how Russia had launched its own domestic credit card company to become less reliant on Visa and MasterCard. He asked the witnesses to address how Visa and MasterCard’s suspension of services in Russia had impacted domestic issuance and acceptance of Mir cards.
  • Mr. Dueweke remarked that Mir did not have the same level of use that Visa and MasterCard previously had in Russia. He also noted how Russia had quickly converted its WebMoney system (which had traditionally been used to facilitate illicit activity) into a PayPal-equivalent following Russia’s 2014 annexation of Crimea. He highlighted how many Russian alternative payment systems had subsequently proliferated around the world.
• Rep. Hill interjected to ask Mr. Dueweke to indicate whether China had complied with secondary sanctions to prevent UnionPay from being a global interchange for Mir cards.
  • Mr. Dueweke highlighted how many Russians went to Finland to use their UnionPay cards for ATM services. He stated that China thus did not appear to be complying with current secondary sanctions.
• Rep. Hill interjected to comment that the Committee ought to raise the issue of China’s lack of compliance with secondary sanctions with the U.S. Department of the Treasury.
  • Mr. Dueweke expressed agreement with Rep. Hill’s comment. He stated that China, Russia, India, and Brazil needed an alternative payment system to facilitate trade amongst themselves. He remarked that the combination of a CBDC with current alternative payment systems (such as Alipay and WePay) could lead to a robust trading system.
• Rep. Hill interjected to note that his question period time had expired.

Rep. Warren Davidson (R-OH):

• Rep. Davidson noted how there were over 100 countries around the world that were currently studying the issue of CBDCs. He expressed concerns that none of these countries were studying a true distributed ledger system that would facilitate permissionless peer-to-peer transactions. He stated that other countries were instead pursuing CBDCs with strong surveillance features. He commented that these CBDCs under consideration would be centrally managed and controlled and would provide central banks with monopolies over money. He asserted that these CBDCs were meant to serve as tools for coercion and control and not as a store of value or a means of exchange. He remarked that the development of these new CBDCs would threaten Western principles and values. He then stated that cash was currently the only truly permissionless peer-to-peer transaction system. He asked the witnesses to indicate whether permissionless peer-to-peer financial transactions pose a threat to the financial system.
  • Mr. Levin remarked that permissionless peer-to-peer financial transactions played a key role in the U.S. economy. He stated that the U.S. must work to have its payment system reflect the innovation that was occurring.
  • Mr. Redbord remarked that permissionless peer-to-peer financial transactions would constitute a major aspect of the U.S.’s financial system moving forward. He commented that the U.S. could now leverage technology to enable these permissionless peer-to-peer financial transactions. He also stated that entrepreneurs and people would ultimately decide the world’s reserve currencies and asserted that these people would prefer to transact freely without the prospect of surveillance and state espionage.
• Rep. Davidson remarked that CBDCs with strong surveillance features would not be attractive for consumers. He predicted that most consumers outside of China would not adopt a Chinese CBDC because that CBDC would contain robust surveillance features that would be linked to a social credit system. He raised concerns that the Bank of International Settlements (BIS) was currently attempting to develop protocols that enabled surveillance features. He contended that central banks should instead seek to pursue distributed ledger permissionless peer-to-peer payment systems when considering currency digitization efforts.

Rep. Anthony Gonzalez (R-OH):

• Rep. Gonzalez noted how there were arguments that the U.S.’s failure to adopt a CBDC would render it incapable of implementing sanctions or administering an effective foreign policy. He argued however that U.S. dollar-denominated private stablecoins with U.S. dollar-denominated reserves would enable the U.S. to implement its sanctions regime. He asked Mr. Redbord to indicate whether the U.S. would need a CBDC to implement sanctions and administer its foreign policy.
  • Mr. Redbord first discussed how there existed punitive sanction measures and highlighted how these measures were being taken within the blockchain space. He mentioned how OFAC had pursued non-compliant cryptocurrency exchanges and had shut down their ability to move funds. He also mentioned how OFAC had pursued cybercrime organizations through sanctions. He then remarked that the U.S. ought to foster innovation within the payment space. He highlighted how 99 percent of fiat currency-backed stablecoins were tied to the U.S. dollar. He commented that this dynamic meant that people that used stablecoins for global transactions were using U.S. dollars. He stated that this reliance on U.S. dollars for stablecoin transactions supported the efficacy of U.S. sanctions.
• Rep. Gonzalez expressed agreement with Mr. Redbord’s response. He then discussed how the Biden administration had recently sanctioned Tornado Cash due to its prevalence in money laundering. He stated that the Biden administration viewed Tornado Cash’s technology as inherently evil and as obstructing the ability of law enforcement to perform its duties. He asked the witnesses to indicate whether it was possible for the U.S. to still conduct oversight and pursue sanctions once funds that have entered a mixing service (such as Tornado Cash).
  • Mr. Levin remarked that it was possible to follow funds through mixing services and highlighted how the U.S. had been able to seize funds from the Ronin Bridge hack, despite the use of mixing services in the hack. He stated that Chainalysis had developed technology to help law enforcement agencies investigate funds that had gone through mixing services.
• Rep. Gonzalez asked the witnesses to indicate whether there existed any legitimate uses for a mixing service. He suggested that mixing services might be useful in terms of sending cryptocurrencies to a country under attack (such as Ukraine).
  • Mr. Redbord remarked that consumers would increasingly desire privacy as more transactions occurred on public blockchains. He noted how cryptocurrency addresses were being made public through social media and other places. He suggested that many employers might begin to pay their employees in cryptocurrencies and commented that these employees might want to keep these payments private. He further stated that many people might desire a level of privacy from state surveillance. He then emphasized that there existed many blockchain intelligence tools (including those offered by TRM Labs and Chainalysis) that could help law enforcement agencies track funds that went through mixing services. He asserted that regulators must work to ensure that their efforts to pursue mixing services that enabled illicit activities did not harm mixing service users that did not engage in illicit activities. He suggested that better data could enable more targeted enforcement actions against mixing services.