On September 14, the House Financial Services Committee Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled “Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency (CBDC) and Private Sector Alternatives.” Witnesses in the hearing were:
· Yuval Rooz, Co-Founder and CEO, Digital Asset
· Paige Paridon, Senior Vice President, Bank Policy Institute
· Christina Parajon Skinner, Assistant Professor, University of Pennsylvania
· Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
· Raul Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
Attached to the hearing were the following bills:
- H.R. 3402, the Power of the Mint Act
- H.R. 3712, the Digital Dollar Prevention Act
- H.R. ____, the CBDC Anti-Surveillance State Act
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Witnesses were pressed by members with concerns about a CBDC related to privacy, potential changes to market structure, and the cost and availability of credit.
- Chairman French Hill (R-AR) highlighted that there is little support for CBDCs in Congress and urged the Subcommittee to consider modifying existing system infrastructure through private sector innovations, such as stablecoins. Hill emphasized that, should stablecoin legislation pass through Congress, they would eventually be able to fulfill the same purpose of a retail CBDC.
- Hill also pointed out that the Federal Reserve itself has been clear that it does not currently have the authority to issue a retail CBDC without specific Congressional action.
- Ranking Member Steven Lynch (D-MA) expressed his support for a CBDC, but also suggested that members could include architecture within a CBDC that would create anti-money laundering measures and protect private data.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman French Hill (R-AR)
We are here to better understand what CBDCs are and compare them to privately issued stablecoins. There is no support for a CBDC in Congress except from those on the fringes who think somehow CBDC might be a solution to many unstated global problems. Representative Tom Emmer (R-MN), Alex Mooney (R-WV), Jake Auchincloss (D-MA), and I have introduced bills stating that the Fed does not have the authority to issue a U.S. CBDC opportunity. Payments can be modernized by modifying the existing system infrastructure through innovations led by the private sector. I want this hearing to address whether a U.S. CBDC is the most efficient and effective means to address payment inefficiencies.
Subcommittee Ranking Member Stephen Lynch (D-MA)
I worry about some of the recent false narratives and fear mongering surrounding CBDCs, much of which has been fueled by the crypto industry itself. It is important to correct some of the inaccurate and misleading claims that could lead us to shut down innovative policy approaches before we have even begun a meaningful discussion. I do share some of the concerns with my colleagues about the need for privacy and anonymity, and we could include architecture within a CBDC that would create anti-money laundering measures and protect private data. I am inviting members to join the Congressional Digital Dollar caucus, which will educate members relating to the development, design, and potential implementation of a government-issued digital dollar.
Majority Whip, Tom Emmer (R-MN)
In our digital economy, all transactions are intermediated by banks, governments, or big tech. We must develop digital tools that function like cash. These digital assets must be open and freely accessible to all without requiring permission from the government. The need to protect Americans right to financial privacy is an all-time high. That is why I introduced the CBDC Anti Surveillance State Act with over fifty of my colleagues. This bill prevents unelected bureaucrats from creating a tool for financial surveillance, that is not open, permissionless, and private like cash. A CBDC is nothing more than a Chinese-style surveillance tool that will oppress the American way of life.
Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
A CBDC does not offer any unique benefit to the American people, but it does pose serious risks to financial privacy, freedom, markets, and cybersecurity. It is distinct from both privately issued stablecoins and the faster payment networks recently launched by private banks and the Fed. CBDC would damage the U.S. dollar significantly. A CBDC would ultimately usurp the private sector and endanger Americans’ core freedoms; it has no place in the American economy. Congress should explicitly prohibit the Fed and the Department of the Treasury (Treasury) from issuing a CBDC.
Paige Paridon, Senior Vice President, Bank Policy Institute
There is little evidence that a CBDC would bring measurable benefits to the U.S. economy or to consumers and substantial evidence that it could present serious risks to financial stability. Because a CBDC could undermine the commercial banking system in the United States and severely constrict the availability of credit to the economy, we agree with the Fed’s conclusion that it should only take further steps toward developing a CBDC “if research points to benefits for households, businesses, and the economy overall that exceed the downside risks, and indicates that CBDC is superior to alternative methods” and only with legislative authorization and the support of the Executive Branch.
Yuval Rooz, Co-Founder and CEO, Digital Asset
The global financial competitiveness of the United States, including the dollar’s position as the world’s reserve currency, is at stake. I ask that Congress ensures that any digitally represented dollar, whether a stablecoin or a CBDC, lives within our Constitutional framework. Americans using this digitally represented dollar should have the assurance that their privacy rights are protected under our Fourth Amendment framework. Second, I ask that Congress works closely with the private sector, and leverages technologies already built and proven, to serve as the rails for any digitally represented dollar. Any solution that ignores private sector innovation risks technological stagnation and will undermine our global competitiveness.
Christina Parajon Skinner, Assistant Professor, University of Pennsylvania
Introducing CBDC is likely to have certain costs to individual economic liberty by providing the State with more tools to establish command-and-control style public policy. Meanwhile, the introduction of a CBDC could reduce space for private innovation. Furthermore, CBDC could have profound impact on financial market structure insofar as it would almost certainly weaken banks through disintermediation. Although the United States should prioritize leadership in payments innovation and safeguard the dollar’s reserve-currency status, CBDC does not obviously advance those goals. Technology and economic geopolitics can change rapidly, to be sure; but at least right now, the costs of introducing CBDC appear to outweigh the benefits.
Raul Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
Some policymakers cast the digital fiat currency development as an arms race. I urge this Subcommittee to instead focus on collaboration, shared research, and open standards as much as competition. We have much to learn from many governments around the world that are much further in terms of innovation and have much knowledge to share, especially concerning financial inclusion. I respond to concerns regarding CBDC surveillance by advocating for the inclusion of “digital cash” within the Digital Dollar System to help mitigate data collection and preserve privacy. As such, I strongly support the Electronic Cash and Secured Hardware (ECASH) Act, reintroduced today.
Discussion
Hill (R-AR): Could a U.S. CBDC and payment stablecoins co-exist and be integrated and interoperable with one another, and should they? Rooz: The usage of blockchain technology is all about reducing redundancies. We should create a framework that helps the government set the rules for stablecoins.
Hill (R-AR): Do you think CBDCs and payment stablecoins obviate the need for one another? Michel: Yes. I do not believe any private company will be able to compete with the government.
Waters (D-CA): Can you explain how CBDCs would shape the future global financial landscape? Carillo: It is incumbent upon the U.S. to provide leadership on this inevitable process. We must move forward with digital fiat currency.
Lynch (D-MA): Is there value in the process to understand the architecture of a digital currency? Carillo: Yes, there is value, but our approach needs to be deeper and more expansive.
Timmons (R-SC): What cybersecurity risks are associated with CBDCs? What technological advantage does a CBDC have over the private sector? Michel: If you have a CBDC, you ultimately have one major point of failure. If there was a cyber security breach, it would affect everyone. A CBDC has no advantage over the private sector.
Nickel (D-NC): Why is it important to join the world in studying CBDCs? Carillo: The U.S. has the duty to be a leader in this space given our innovation capabilities.
Houchin (R-IN): What would be needed to ensure a CBDC, if adopted, would not resemble China’s? Rooz: I think the U.S. government would have to show, in evidence, that there is no ability for the government to see transactions of citizens. Davidson (R-OH): Is it possible to be both privacy protected, and identity verified? Michel: No, once it is in the system, it is in the system; Skinner: No, that is not possible. It will always be a tradeoff between privacy and identity verification, and the CBDC will always choose the latter.
Davidson (R-OH): What do you think about requiring identity verification? Rooz: Introducing identity verification requirements challenges privacy. I think technology can introduce digital money that has full privacy, but that that has to be to be developed with very clear policy guidelines.
Rose (R-TN): Can you explain how the Third-Party Doctrine has impacted American’s financial privacy? How would a CBDC impact Americans’ privacy? Michel: Between the Bank Secrecy Act, Third-Party Doctrine, and the Fourth Amendment, many Americans do not realize what little financial privacy they have at the moment. I believe an adoption of a CBDC would remove the little privacy Americans have left in the financial sector. There is no way to implement a CBDC without giving up user privacy and it will exacerbate political problems.
Foster (D-IL): Have you ever seen a privacy-preserving design implemented for a CBDC? Carillo: We envision hardware devices that would enable people to make payments as they do today with paper cash for ever day items. The hardware would be encrypted.
Houchin (R-IN): How is privacy preserved through digital asset transactions? Rooz: The product itself allows the issuer of any asset to determine who has the rights to look into a transaction.Hill (R-AR): A CBDC that is a liability of the central bank and not of the banking system would take out the source of funding for all of America’s lending. Can you expand on this idea of upending the banking system? Paridon: A CBDC as a direct liability of the central bank, would be perceived as the ultimate safe asset. During times of economic stress, it could attract depositors to pull their money out of the banking system to flee to a CBDC. We have concerns with a retail CBDC given the flight to quality risks.
Lynch (D-MA): Can you explain more about the interconnection between the private and public sector in relation to privacy with the use of a CBDC? Carillo: The Third-Party Doctrine creates problems precisely because of the connection between the private and public sectors. I would urge more robust conversation around actual privacy law. I do not believe that either leaving the private sector in charge of financial service data collection or including it in an intermediated fashion in the CBDC context is going to improve privacy.
Rose (R-TN): How would postal banking damage the economy? Michel: It highlights that the private sector does a good job providing services generally speaking.
Steil (R-WI): How would an adoption of an intermediated CBDC impact credit and the availability of banking services? Paridon: Even if intermediated, a bank would only hold a CBDC in the same matter it holds an asset, in custody. It would not be able to be redeployed in the form of loans. Michel: This would allow the government to directly put money into accounts as well as take it out. In times of economic stress, a CBDC would only be beneficial to the government if it was the sole option for consumers.
Casten (D-IL): Would a government increasing the relative share of their M1 money supply take away money in circulation? Paridon: Banks could borrow from the Fed or wholesale markets, so it is not a one-to-one ratio as you says.
Flood (R-NE): Would a CBDC lead to the Fed’s independence being threatened? Skinner: Issuing a CBDC would increase the Fed’s liability, which it would have to balance by purchasing more assets.
Flood (R-NE): How could a CBDC be used to achieve monetary or fiscal policy goals? Michel: In times of economic stress like the pandemic, the Fed would be able to flood the market with money, but at some point, they have to take that money out. It becomes problematic when they would have to decide who to take money away from and who to give it to.
Timmons (R-SC): Would a CBDC strengthen or weaken the dollar’s status? Paridon: The dollar would not be strengthened, and it could be weakened as there would be a propensity to over issue during times of economic hardship.
Nickel (D-NC): How do you respond to the concern that CBDC could impact the availability of credit? Paridon: In times of stress, this certainly would be a concern. People would be incentivized to pull the deposits out of the banking system and put them into CBDC as a safe asset. This would reduce the availability of loans and increase the cost of credit.
Sherman (D-CA): What effect will this have on local businesses to borrow money? Carillo: We need to bolster the deposit insurance structure and fiat currency provides us an opportunity to do so.