House Financial Services – Monetary Policy and Trade Subcommittee Hearing (7/18/18): “The Future of Money: Digital Currency”

Below is a rough auto-transcript of a hearing held last week entitled “The Future of Money: Digital Currency” (video available at previous link).

The witnesses were:

  • Dr. Rodney J. Garratt, Maxwell C. and Mary Pellish Chair, Professor of Economics, University of California Santa Barbara
  • Dr. Norbert J. Michel, Director, Center for Data Analysis, The Heritage Foundation
  • Dr. Eswar S. Prasad, Nandlal P. Tolani Senior Professor of Trade Policy, Cornell University
  • Mr. Alex J. Pollock, Distinguished Senior Fellow, R Street Institute

We have not yet gone through the hearing record exhaustively and produced a selection of “pull quotes” of interest. However, the transcript with links to the hearing video is reproduced here anyway, as it might be useful to some.  (Watch this space for further excerpts and comments, once we analyze the record fully).


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  • The hearing may cover a wide variety of topics; thus, cryptocurrency/blockchain-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
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[00:16:01] objection the chair is authorized to declare a recess of the committee at any time and all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record this hearing is entitled the future of money digital currency and now recognize myself for five minutes to give an opening statement today we will discuss the future of money and how digital currency may feature in it when discussing the future of money it is pertinent to have a firm understanding of its defining characteristics and history economists define money as anything that acts as a store of value a unit of account and a medium of exchange various objects have been used as money such as seashells giant stone tablets and cigarettes in prisoner-of-war camps commodities such as furs rice whiskey tobacco and corresponding warehouse receipts circulated as money on the american continent in the colonial period prior to america's independence americans imported gold and silver coins from European countries to use in trade and the colonies issued their own species before they and the Continental Congress began experimenting with paper money even the US dollar has evolved since it was declared the standard unit of currency with the passage of the coinage Act in 1792 it has undergone changes in dimensions design denominations issuer and backing notably with the implementation and subsequent abandonment of the gold standard in recent decades money has been electronically stored in bank deposits and transferred with credit cards mobile phones and the Internet cryptocurrency however was designed to be something different cryptocurrency allows users to potentially store value in unlinked store value unlinked from fiat currency on a decentralized ledger and securely transact directly from person to person across a peer-to-peer network of computers apart from a commercial or central bank the central question before us today is this our digital currencies simply a new way to hold and transfer value that will have a limited impact and nisha appeal or will it or derivative of it have a far-reaching transformative effect that will change our economy forever cryptocurrency has existed for a decade since the appearance of Bitcoin in 2009 but has flown under the radar for most of its history four years after its creation it was worth little had few users and garnered sparse mainstream media attention however the media and consumers have been taking note with a stark rise in value in 2017 Bitcoin grabbed headlines as it reached a valuation of around 20,000 u.s. dollars last December also reported our controversies such as bitcoins involvement in purchases on the online black market the Silk Road and donations funding WikiLeaks the theft of hundreds of thousands of bitcoins from the exchange mount GOx and reports that hackers have stolen 1.6 billion dollars from cryptocurrency accounts over the last seven years Congress must pay close attention to the developments in this space the capital markets securities and investment subcommittee held a hearing examining the crypto currencies and initial coin offering markets in March of this year and the Terrorism and illicit finance subcommittee held a hearing to discuss illicit use of virtual currency and the law enforcement response last month as chairman of the monetary policy and trade subcommittee I am particularly interested in any impact digital currency may have on monetary policy and the international financial system we will discuss its use both in the United States and abroad thus far some countries like Vietnam and China have banned or restricted it altogether others such as Switzerland and Malta have fostered it with a mostly hands-off approach and regulatory guidance and others have adopted it including Tunisia and Ecuador by issuing their own central bank digital currencies how odd the United States government approach this new technology is of great importance some believe as former Fed Chairman Ben Bernanke highlighted in a 2013 letter to Congress that digital currency innovations quote may hold long term promised particularly if the innovations promote a faster more secure and more efficient payment system unquote some have suggested that cryptocurrency may be a catalyst for the elimination of physical currency and a foundation for a move to a purely cashless society others say that cryptocurrencies are not suitable replacements for coins and banknotes such as European Central Bank executive board member Benoist been away coy in the chair of the Bank for International Settlements market committee Jacqueline Lowe who in a joint article in The Financial Times entitled Bitcoin not the answer to a cash flow society called crypto currencies quote something of a mirage unquote cryptocurrency has attracted advocates critics sceptics entrepreneurs investors and attention from media government agencies and law enforcement today there are well over a thousand different crypto currencies with various characteristics together comprising over 250 billion dollars of total market capitalization well cryptocurrency be the future of money are they in a bubble that will burst or even just a passing fad these are the sorts of questions we will attempt to address today with our witnesses the the chair now recognizes

[00:21:45] mr. foster that for five minutes for an opening statement Thank You mr. chairman

[00:21:52] and thank you to our witnesses I'll be brief because I am actually very interested in this topic have been for a while and I'd look forward to the testimony of the witnesses and hope to hear about currencies that are not only pure crypto but asset-backed crypto and potentially digital fiat currencies and most significantly digital fiat currencies I'm concerned that if a significant central bank could issue a digital currency that it would have the potential to supplant the United States dollar now for many transactions and even for as the reserve currency around the world and despite the reports that they're exploring at countries like Russia or Venezuela are not really credible economies that could issue fiat currencies that would supplant the dollar but if however the ECB no weird issue digital euros then I think the entire world would very rapidly adopt that for many digital transactions now which should have benefits to consumers and a number of risks associated with that as well and if there is really a credible threat that a digital foreign currency would supplant the dollar we have to be prepared to respond to that threat I look forward to hearing from witnesses on the economic feasibility of another currency supplanting the dollar and whether digitization could be a catalyst in such a transition I also look forward to any thoughts the witnesses might have on some of the decision points that have to be made when you decide to create them for example a fiat currency the currencies could be traceable or not they could be traceable only with a court order whether or not trades could be busted in the same sense that a credit card purchase can be broken if you convince some entity that the that the transaction was fraudulent and who makes that call under what circumstances these are what I see the really important decisions that cannot be evaded when we when we design a digital currency and so the issue of anonymity is is really crucial and at the heart of this as well as what sort of authentication a person will have to present to transact that anything so I look forward to this hearing very much and to yield back gentleman yields back

[00:24:13] and the chair recognizes for the

[00:24:16] remainder of the time mr. shermin for opening statement two-and-a-half minutes blockchain is a good technology but it can be used to track and transfer sovereign currency there is nothing that can be done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society the role of the US dollar in an international financial system is a critical component of us power it brought Iran to the negotiating table then we argue about whether we got a good enough deal or not in the jcpoa we would have nothing had it not been for the role of the dollar we should prohibit us persons from buying or mining crypto currencies Mining alone uses electricity which takes away from other needs and/or adds to the carbon footprint as a store as a medium of exchange cryptocurrency accomplishes nothing except facilitating narcotics trafficking terrorism and tax evasion some of its supporters delight in that that if you can disempower the US government from being able to prevent terrorism narcotics trafficking and tax evasion you have somehow struck a blow for liberty that is reason enough to ban it but its role as an investment is at least as bad we have certain animal spirits in our culture or willingness to take a risk to place a bet this can be harnessed by gambling casinos which at least pay very high local taxes and created a city of Las Vegas out of a desert we can better yet harness those animal spirits to get people to invest in risky stocks startup enterprises and provide the technologies and jobs of the future or we can see those animal spirits spent doing nothing but helping create a market for tax evaders narco terrorists and others who find that the US dollar is not to their liking at a very minimum we need investor protection if we're going to have people invest in crypto currencies and crypto offering memoranda and crypto registrations are not would be considered outright fraud and reason for incarceration if they were issued by somebody selling stocks bonds or any other investment and finally there is sin I sin your age the money that we make as a country because we're the reserve currency because we can issue a greenback that does not yield interest there are people who are

[00:27:08] alive today because of the profits the US government makes on that whether it be our to fund defense or medical research all of that gets diminished with cryptocurrency I yield back

[00:27:19] the gentleman's time has expired today we welcome the testimony of dr. Rodney Garrett who holds the Maxwell Sea and mareep Elish chair on economics at the University of California Santa Barbara he has served as a technical adviser to the Bank for International Settlements a research adviser to the Bank of England and as a former vice-president of the Federal Reserve Bank of New York during his time at the Federal Reserve Bank of New York he Co led the virtual currency working group for the Federal Reserve System after leaving the the Federal Reserve Bank he consulted for payments Canada and r3 on project Jasper a proof of concept for a wholesale interbank payment system mr. Garrett received his PhD from Cornell dr. Norbert Michele who is the director of the Center for data analysis at the Heritage Foundation where he studies and writes about financial markets crypto currencies and monetary policy before rejoining Heritage in 2013 Michele was a tenured professor professor at Nicholls State University's College of Business teaching finance economics and statistics dr. Michele holds a doctoral degree in financial economics from the University of New Orleans dr. Ezra Prasad is the t'lani senior professor of trade policy and professor of economics at Cornell University he is also a senior fellow at the Brookings Institution where he holds the new century chair in international trade in economics and a research associate at the National Bureau of Economic Research he is a former head of the imf's China division his extensive publication record includes articles and numerous collected volumes as well as top academic journals he has co-authored and edited numerous books including on financial regulation and on China and India finally mr. Alex Pollock is distinguished senior fellow with the R Street Institute welcome back to the committee mr. Pollock providing thought and policy leadership on fine natural systems cycles of booms and busts financial crises risk and uncertainty central banking and the politics of Finance Alex joined our street in January 2016 from the American Enterprise Institute where he was a resident fellow from 2004 to 2015 previously he was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004 Alex received his master's in philosophy from the University of Chicago and a master's of Public Administration degree in international affairs from Princeton University each of you will be recognized for five minutes to give an

[00:29:51] oral presentation of your testimony without objection each of your written statements will be made part of the record dr. Rodney Garrett you are now recognized for five

[00:30:00] minutes if you can just push the button there to turn on your mic thank you

[00:30:10] Thank You chair bar ranking member Moore and members of the subcommittee the convenience of electronic transfers has led to a decline worldwide in the use of cash this is particularly true in countries where systems for transferring commercial bank deposits are more advanced Sweden's mobile payment systems wish has been adopted by over 60% of the population and cashews and transactions has fallen below 2% by value countries around the world are introducing their own faster payment systems including the recently launched real-time payments platform in the United States at the same time PayPal venmo and other private mobile payment platforms continue to improve convenience and speed of person-to-person and retail payments by leveraging conventional financial market infrastructures it seems likely that the use of cash will continue to fall and it's worth noting that there is a tipping point at which even if consumers seek to use cash businesses and banks will not want to deal with it what happens then one possibility is that people will be content to transact primarily and commercial bank deposits and things will be business as usual with a much smaller cash component to the monetary base another possibility is that people will demand direct access to some form of digital central bank issued money as a replacement for cash and the third possibility is that well people people will turn to privately issued crypto currencies like Bitcoin these options are not mutually exclusive nor are they independent the adoption rate of Bitcoin will depend not only on its performance as a money but also on the alternative forms of digital money that the central bank provides if consumers perceive that they have inadequate access to a cash like medium of exchange then they may then they may be more inclined to turn to alternatives on the other hand if the central bank offers a digital form of central bank money to the public with sufficient cash light properties then perhaps this will appease those who miss cash central banks are currently evaluating numerous options for digital currencies not just in response to the shift away from cash but also for meeting core objectives and the enhancement of financial market infrastructures ongoing proofs of concept by central banks and private partners consider the use of central bank crip central bank crypto currencies in wholesale systems only these applications are driven by efficiency and cost considerations and have minimal monetary policy implications in these opening remarks I will focus on the merits of a widely accessible retail oriented central bank cryptocurrency that could be used for person-to-person and retail transactions as suggested in blogger JP Kony fed coin proposal a retail central bank cryptocurrency could transact like Bitcoin however instead of having a fixed money supply rule the Federal Reserve would control the creation and destruction of these coins crucially there would be one-to-one convertibility with cash and reserves and hence a retail central bank cryptocurrency would not suffer from the high price volatility that undermines the usefulness of Bitcoin is a store in value and medium of exchange the Fed could also choose to implement a cryptocurrency on a per mission blockchain which means transaction validation could be performed by vetted actors who are accountable for their actions without costly proof-of-work proposals to increase access to digital central bank money have been made before Nobel laureate James Tobin proposed giving the public access to deposited currency accounts at Federal Reserve Bank's over three decades ago a number of things have changed since Tobin's proposal as I mentioned the use of cash has declined a major financial crisis may have changed some people's attitude towards commercial bank deposits and technological advancements offer the potential for issuing digital central bank money in a new way with enhanced features I offer two examples first the peer-to-peer aspect of cryptocurrencies could allow central banks to provide a digital money with anonymity property similar to those of cash whether or not the central bank would want to do this is a complicated issue that requires balancing legitimate demands for individual privacy against concerns related to tax evasion and other criminal activities second there is the potential to approve upon cash by creating what advocates of cryptocurrencies call programmable money programmable money allows trading partners to hardwire the terms and conditions of trades into their transactions so that they may be executed upon fulfilment of these conditions without relying on third parties this is particularly useful for transactions that span multiple legal jurisdictions any decision to implement a retail oriented central bank cryptocurrency would have to balance potential benefits against potential risks a common objection to expanding access to central bank money is that it could disintermediate banks however it is also plausible that it could produce healthy competition the risk of excessive dissident or mediation would be mitigated by making any new form of central bank money more like cash and less like deposits thank you and I would be happy to answer any questions thank you dr. Norbert Michelle you are now recognized for five minutes

[00:34:59] chairman bar rep for members of the committee thank you for the opportunity to testify today my name is Norbert Michele I'm the director of center the director of the Center for data analysis at the Heritage Foundation and the views that I expressed today are my own they should not be construed as representing any official position of the Heritage Foundation cryptocurrencies have rapidly expanded since the introduction of Bitcoin in 2008 and their underlying technology a distributed database that allows digital assets to be transferred without a third party intermediary holds the potential to transform the financial industry this innovation should be fostered not smothered my remarks today will provide four specific points relating to the use of cryptocurrencies cash and other alternative forms of money first electronic means a payment have become more widespread as technology has changed but paper currency cash is still widely a still a widely you form of payment the demise of cash has been widely and steadily predicted since at least the 1970s yet it remains a preferred method of payment for many people Federal Reserve reports show that cash is still the most frequently used form of payment in the US and that it plays a dominant role for small value transactions it also remains the leading payment instrument for expenditure categories such as person-to-person gift transfers food and personal care supplies and entertainment and transportation expenditures as the charts in my written testimonies show both the volume and value of currency in circulation in denominations including one all the way from one to one hundred dollar bills have steadily increased since the 1990s that's increased so retail establishments that prohibit customers from using cash as was recently reported in a Washington Post story do so at their own peril but this danger this this threat of consumers using an alternative form of payment possibly at an alternative place of business is exactly as it should be competitive processes should take place so that businesses and consumers can discover the best means of payment the fact that cryptocurrency is a new option for making payments though it is in its infant stages should be embraced that brings me to my second point which is that the federal government should not step in and tilt the playing field it should treat cryptocurrency in all other forms of money neutrally this means that it should not be so any particular legal advantage on any particular alternative form of money and that it should remove all legal barriers to using alternative forms of money removing capital gains taxes from purchases with alternative currencies including crypto currencies and foreign currencies would be a major step towards leveling that playing field between alternative forms of payment to further level the playing field Congress should even consider allowing the US Postal Service and other government agencies to accept these alternatives my third point is that these competitive forces are the forces that push entrepreneurs to innovate and improve products specifically to satisfy their customers they also expose weaknesses and inefficiencies in existing products the same comported the same competitive forces can and should be used to improve money the federal government's partial monopoly on money limits the extent to which competitive processes can strengthen money and it exposes our money to the mistakes of a single government entity nothing can provide as powerful a check against the federal debasement of money as a threat of competition from a viable from viable alternative forms of payment my final point is that centralizing cryptocurrencies within any government agency makes little sense the technology promises potential benefits because of its decentralized nature centralizing the technology at a central bank offers no particular advantage over a more traditional electronic database furthermore Congress and the administration should do all they possibly can to ensure that our central bank never offers retail bank accounts to the public whether via a central bank backed cryptocurrency or via a more traditional digital form of money implementing such a policy would give the federal government a complete monopoly of money and effectively nationalize all private credit markets no private entity would be able to compete with the federal government for funds even Ken Rogoff a staunch advocate for phasing out cash and forcing people to use only one type of digital money admits that the biggest threat to the value of currency is often the government itself that Rogoff quote is quite frankly an understatement giving the federal government the power to directly take money from its citizens with a few computer keystrokes in the name of some vague goal of stabilizing the economy simply amounts to the death of economic freedom is a terrible idea and it's Congress's duty to protect Americans from those sorts of tyrannical acts thank you thank you and now dr.

[00:39:56] Prasad you're recognized for five

[00:39:56] minutes Shimon bar and members of the committee thank you for the opportunity to testify in front of you on the implications of digital currency broadly defined for the US economy and financial system I should note that two years ago I faced an important choice one afternoon whether it is spend that afternoon buying Bitcoin which is not a trivial process or to start working on a paper about Bitcoin and digital currency for better or worse I chose the latter so today I have no Bitcoin but I do have a paper about the implications of digital currency it's useful to frame our discussion around three questions one should the government or the Federal Reserve provide services that the private sector can provide more efficiently and that is something that a cryptocurrency for instance could provide second what are the implications for the Fed in terms of its monetary policy objectives of low inflation high employment and most importantly financial stability if digital currencies become widely prevalent and third what are the implications for the u.s. role in the global financial system as when looks at the landscape of cryptocurrencies it's useful to keep one distinction in mind that is the distinction between central bank digital currencies which could use the same cryptographic technology as something like Bitcoin and then non official crypto currencies which are essentially created in the ether or a digital asset with no backing behind them unlike the US dollar which does have backing now there are many proponents of the US and other economies moving to digital forms of fiat currencies and I think there are some legitimate arguments about how that could reduce activity in the shadow economy reduce illicit activities improve the tax base and in some ways even make monetary policy more efficient even at the lower bound where the Fed may not be able to use interest rate policy anymore if all of us were to have non-interest bearing deposit accounts with the Fed which is fast becoming technologically feasible and this is what Professor Tobin had had suggested this would make a certain aspect of monetary policy implementation a lot easier but it's worth thinking about money in a broader sense money is created by the central bank but also to a much greater extent by commercial banks and I think this is going to have a serious implication for money creation in the economy because as new technologies new financial technologies more broadly eat away at the standard business model of banks and its non-bank financial intermediaries start playing a major role in the financial system the question remains what role banks play because those are the institutions that the Fed has direct control over and that are responsible for creating loans and therefore for creating deposits and a very important part of money the other aspect in terms of thinking about Fed the Federal Reserve's digital currency or any central banks digital currencies what it does to the payment systems right now the Fed has no role in retail payment systems it has a very important role in intermediating financial transactions among the major financial institutions in terms of clearing and settlement of their transactions with non-interest bearing deposit accounts one could well end up in a scenario where the Fed essentially starts managing a retail payment system as well it's not obvious that this is the ideal solution but it's worth thinking about the alternative if in fact we had a situation where both the retail payment systems and also the wholesale payment systems among banks are managed through distributed ledger technology which might become feasible then what happens in a time of crisis of confidence in normal times is actually might lead to significant gains in efficiency again the private sector might do far more efficiently under the government the management of these payment systems but the issue of trust in the central bank especially at a moment of crisis of confidence becomes really important so if you look around the world and think about central banks like Sweden that are thinking about introducing a digital version of the fiat currency the objective they have in mind is not to intrude or reduce innovation but basically to provide a backstop to the payment system to make sure that is not all in the private sector and subject to a crisis of confidence there are other concerns related to regulatory arbitrage and the possibility of cross-border capital flows again illicit as well as licit that could be facilitated which would certainly improve efficiency but also potentially also make underground activities easier to execute and finally on the issue of the u.s. dollars role as a global reserve currency there I worry less I think it's possible that if other countries were to issue their own currencies in digital form you could have the medium of exchange shifting towards non official crypto currencies towards other currencies but what preserves the US Dollars role as the ultimate global safe haven is not just the its role as a medium of exchange but its ability to serve as a safe haven and that requires us institutions which I think are still pretty strong and are going to retain foreign investors stress so I think as a store of value the US dollars will remain secure for now thank you thank you mr. Park you're recognized for five

[00:45:14] minutes thanks mr. chairman and mr. foster members of the subcommittee this hearing poses really interesting questions which to answer require some speculation and guessing along with thinking we hope among the intriguing question is whether Bitcoin or another cryptocurrency could become a successfully privately issued fiat currency that would mean being widely accepted it constantly used in payments and settlements used to denominator and other enforceable contracts and people going around and not asking what's the price of Bitcoin but what's the price of this in Bitcoin we're way away from that but it's imaginable as the chairman said the history of money demonstrates a wide variety of monies that have been used there have been numerous historical examples of private currencies but to my knowledge there's never been a private fiat currency those are reserved for the power of governments for private currency is an example circulating notes of state chartered banks were common in the 19th century you might have carried in those days in your wallet a five-dollar bill from the third state bank of Scone Creek for example or hundreds of others but all such notes were banked by the loans and investments in capital of the issuing bank they were not fiat money the dominant historical trend in money has been to create ever more central bank monopoly of currency over several centuries of development will the new and ubiquitous computing power of our time reverse this trend and create more competition and currency with dr. Michelle and the famous economist Friedrich Hayek think it might be a good idea but I don't think it will happen Bitcoin theorists imagine it will but I believe it's easier to imagine moving in exactly the opposite direction that is toward even greater monopolies by the central bank through digital money mr. foster made the point it's not only our own central bank but other powerful central banks we might think about in this context and many central banks are indeed interested in having their own digital currency so the general public not only banks could have deposit accounts with the central bank in addition to carrying around its paper currency and the appeal of this idea to central banks is natural it would greatly increase their size role and power with current technology this would clearly be possible the central bank could have tens of millions of accounts with individuals businesses associations invicible governments and anybody else and there's not much standing in the way of that in terms of pure financial technique but would it be a good idea no it wouldn't in such a scheme the Federal Reserve would be in direct competition with all private banks it would be a highly advantage to government competitor and it would be regulating its competitors that's what central bank evolution tried to develop out of in the American banking system they're about twelve trillion dollars and domestic deposits could a Federal Reserve digital deposit account system grab say half of them why not and it'd be six trillion dollars which would expand its balance sheet to ten trillion dollars now what's key in this is to remember that on if you have deposits on one side of your balance sheet you have something else on the other side so what would the Fed do with this mountain of deposits and as as my friend Norbert said well it would have to have to make investments and loans it would become by this means the overwhelming credit allocator of the American economic and financial system I think we can safely predict its credit allocation would unavoidably we politicized and the taxpayers would be on the hook for its credit losses the risk would be directly in the central bank as opposed to central bank support of somebody else so as as norbert said i think to have a central bank digital currency is one of the worst financial ideas of recent times still it's quite conceivable to think of as a possibility and it's good for us to think about it in conclusion I think if we look at the money of the future digitalization will continue but I don't think the fundamental nature of money will change it will surely be the monopoly issuance play it by a central bank it might be a private currency backed by reliable assets I don't think it will be a private fiat currency like Bitcoin and as we consider all this an increase in the monopoly power of central banks which already have too much should be avoided and thanks a lot for being able to share these views thank you for your testimony in the chair now recognizes himself for five

[00:50:33] minutes for questioning let me just start with this idea of cryptocurrency potentially supplanting or displacing US Federal Reserve notes as though as a as the world's reserve currency and this is for anyone who wants to chime in with greater use of electronic payments and the advent of digital currencies do you think demand for US Federal Reserve notes will decrease and what what implications does that have for the US dollar I think if you look at why the US dollar is as strong as it is and is in demand as it is you have to look beyond just the fact that we have a Federal Reserve that prints Federal Reserve notes we have an economy with strong property rights especially relative to many other countries in the world we have incredibly developed well developed industrialized infrastructure here and as long as you combine those things and have a dynamic economy then the the assets of that kind of that economy including the money that's predominantly used in that economy are going to be sought-after so that's what you should focus on if you want people to want our money if you want people to want to use our money and there's also a downside to being the the world's reserve currency and that's that we can basically sort of continue the fiction that we can print as much as we want and lend as much as we want and that's frankly not a good idea so I that's just not the way that I would think of those things anybody else want to comment on that mr. Paulk another way to think about that is that the United States does have has had and continues to have as my old friend John Macon used to say a competitive advantage in wealth storage services and that's a an advantage it arises out of social infrastructure all the things that Norbert said rule of law enforcement of a contract a strong financial system and of course a powerful government enforcing all of that and I think that will continue but we talked about bank notes and US dollar paper currency does circulate around the world as we know nonetheless I think the electronic forms of money certainly in the wholesale markets will become ever more dominant in spite of the advantages in some situations that paper currency has like privacy dr. Prasad do you want to it is difficult to see an asset that has no intrinsic value and no backing by the government maintaining value as a store of value the initial promise of something like Bitcoin is said me it might become an effective medium of exchange and that promise hasn't quite panned out because it turns out that it is very inefficient and very costly to transact using Bitcoin so in fact many of the non official crypto currencies that are gaining more traction as mediums of exchange are in fact ones that are backed by fiat currencies or other other forms of backing so there is one called tether for instance which is backed one for one with the US dollar and that is beginning to get a traction as a medium of exchange so ultimately the US dollars were just pointed out is maintained in its dominant role through u.s. institutions and the trust in the Federal Reserve let me follow up by basically well by starting with a more kind of fundamental question you talked about the volatility of digital currency and maybe that is the principal reason why it's not the best medium of exchange right now or store value but and it's very core is our crypto currencies money and and and by anyone to chime in on this and if not if crypto currencies are not money do they substitute as money do they function as money substitutes dr. Garrett yeah on that point I would point to Hayek who who didn't you like the word money as much as he liked the word currency are youing that that's a property so I think can have currency it's a different extent and so is Bitcoin money well you know I you know for regulatory purposes I mean we may not want it different to define that way the IRS CFTC has defined it as a commodity because that's necessary for for regulatory purposes but in terms of the conceptual idea of is it money it is to some extent but it's not currently a very good one for the reasons that have been articulated it's not very good as a medium of exchange because the price is so volatile that means that or a store value but as a medium of exchange it's not good because if the price is if we think the price is going to go down I don't want to receive it and if I think the price is going to go up I don't want to spend it so this volatility undermines its features both as a store of value and my time is about ready to expire but it would would what is properties as money improve what is quality as money improve when its volatility declined based on adoption rate is adoption rate all that is required to improve its qualities to get to money yeah I mean people have to start using it for transactions I mean I mean if that happens then the price volatility might start to decline the adoption rate has a lot to do with the way Bitcoin itself is set up has a lot to do with its own volatility but that's only one cryptocurrency but yes so I would just in general say yes the adoption rate has a lot to do with it my time is more than expired I will now recognize dr. Foster for five minutes thank you and thank our witnesses again um you know recently there were reports in the press the estimates of a about 20% of all Bitcoin had been lost which strikes me as implying that whatever government or central bank issues digital fiat currency if that was a representative numbers it would be a tremendously profitable enterprise to be a if if 20% of your cash never you know came back to be redeemed and that's in addition to the interest expense if there is no interest paid on these digital instruments and so it strikes me that whatever country starts doing this and becomes a de facto standard is going to have a permanent cash cow and do you see anything wrong with that analysis and Iverson and I'd say for any issuer of currency you like to have your currency lost or put away someplace you remember American Express checks which were kind of currently used to used to encourage you to put them in your attic and save them for the future which was tremendously profitable for American Express and you know and the other there have been some concern here that somehow there'd be a big evil government monopoly taking all over all banking functions it seems to me it would be pretty self limiting if there was no interest paid on these things yeah average person would maintain just a convenience level amount of this and not have all of their net worth in something that paid no interest and so it seems like you just have a reasonable fraction of everyone's net worth usable for short-term transactions and and then they would separately in a very competitive banking and investment environment allocate the main bulk of their of their investments elsewhere do you see anything wrong with that analysis Yes Doctor yes I do I think the Fed would pay interest just as they do I'm sorry yeah well as they don't on cash yeah just to be clear the notion that is being floated right now is of non-interest bearing deposit accounts right now this is not clear proposal there are different ways of thinking about how to set up a central bank digital currency but the notion of deposit accounts is of non-interest bearing deposit accounts so the concerns that you could have this asset superseding other assets is highly unlikely because again it will be a zero nominal interest rate yield instrument

[00:58:28] just like cash currently is in regard to your concern about potential technological malfeasance this goes back to the 7th century when paper currency was printed when counterfeiting was a prior concern and that's remain to this day one could argue that digital forms of fiat currency could reduce the concern about counterfeiting of paper currency but they are on the flip side and in most issues here there is a one side on the other side but the flipside here is that certainly they would make them very vulnerable to technological hacks and this is why I think most central banks are very concerned about moving forward very aggressively with this because of technological vulnerabilities that are potentially out there you know and so the the promise of blockchain is that it provides essentially a non falsifiable ledger that that would prevent a lot of malfeasance I think the kind that you still will I think forever be worried about is the business of authenticating the person who has access to move these balances around and and operate that system and that's remains an unsolved problem in the digital world is you know how you really oughta get yourself for different levels of transactions dr. Garrett I'm what how does actually Sweden handle this issue in their proposal you know for example in the Swedish proposal do swipe fees just disappear and that you can you can pay and how do you deal out of Sweden deal with a problem if someone steals your cell phone or your identity somehow and proceeds to spend a bunch of money you know is there a mechanism to get your money back when a fraudulent transaction has taken it away from you I think if you're regarding to the to the current switch system this is a system that's run by the central bank in cooperation with private banks so these are these are still centralized accounts so in the event that your your cellphone was was lost you would still have access to to go to the bank reveal your identity and and and get your account reinstated or you could probably just do that online so that the sweet sweden has has has issued as something called an e Crona report where they're considering alternative new technologies to deal with the replacement of cash but those are still just proposals okay and among those technologies that they're considering is a store value technology and in China which has just massively apparently adopted digital transactions for consumers at least that is that essentially a on account of the two big players whose name I forget to only pay and whatever the other one is so these are essentially everyone has a balance on their and I pay you by transferring some of my balance in all II paid to you or is there some government operation behind it or central bank operation behind in Li Chen essentially is based on using the WeChat platform and the Ali pay platform but with balances that are already at your bank account so you can link it to your bank account what Sweden is considering is two options say they register based system where you have this electronic deposit accounts like I mentioned or a value based system are essentially a download digital cash onto your electronic wallet which could be like a credit card so those are the two options in Sweden that are being considered thank you Yeomans time has expired the chair recognizes the vice chairman of the subcommittee mr. Williams from Texas Thank You mr. chairman and thank all of you for today's hearing we're in the exciting first stages of the digital currency movements adaption by mainstream stakeholders and it's become apparent to many that blockchain and other new technologies is the digital currency space offer solutions have the potential drastically alter the financial sector that does business as as Congress and regulars determine how best to treat these emerging products we must be mindful of the impact our actions have on innovation and the free enterprise at the same time however it's important that policymakers keep in mind the legitimate governmental interest in preventing the use of anonymous digital currency by those who wish to do us harm I look forward to discussing with the experts today on the best path forward so my first question dr. Michele is you state in your testimony that Congress had worked diligently to eliminate tax and other legal impediments to the development of alternative currencies as well as new applications for blockchain technology what are the impediments to development of alternative currencies new applications for blockchain technologies and what can Congress do about them I think the main one honestly I do believe is capital gains tax the fact that you have to contain keep track of basis in every single transaction you would make that's a that's a major impediment to using anything other than the US dollar for your transactions so that's the biggest one otherwise regulator on a regulatory side I think if we look at ESA Bank Secrecy Act any money laundering laws ensuring that nothing is treated differently yes it is true that criminals have used Bitcoin but criminals also have used airplanes computers and automobiles we shouldn't criminalize any of those instruments simply because criminals use them those components I believe are the main barriers to using tutto a more widespread adoption of these things in the u.s. thank you my next question is dr. Garrett your testimony presents three offices for consumers in the event that cash is no longer available to them number one used commercial bank deposits for everyday transactions number two demand direct access to gentles digital central bank issued money and thirdly turn to privately issued cryptocurrencies so what would cause consumers to choose options 2 and 3 when option 1 is an existing from major technology that has already become an increasingly convenient as a payment method so so first of all let me say that I I agree with what you said at the end there I mean there's this there's nothing wrong with our current banking system and people have been very and as I mentioned in my testimony new means for transferring commercial bank deposits are constantly arising it's increasing the ease with which we make not only person to business payments but particularly peer-to-peer of payments person-to-person payments so in those scenarios all I outlined the first scenario is probably the most likely but as cash actually disappears that starts to create problems in a society Sweden is currently dealing with this and the governor of the rich Bank recently wrote an opinion piece where he talked about some of the pain points that are that occur when casual and physical cash really starts to disappear and when stop receiving it and so what I'm really talking about is that that future scenario and at that point the central bank has to decide if it wants to withdraw completely from providing a payment device for the general public or whether it wants to offer some sort of digital alternative and one of those digital alternatives could be possibly down the road some form of crypto currency that's it's offered by the central bank and the primary reasons for doing that I think one would be if you wanted to allow some type of privacy component within transactions of this currency like it's currently possible with cash subject to limits and as I said balanced against the risks of tax evasion and criminal activity these are the options that the central bank will ultimately face and and and my argument is that these are something that we should be prepared for okay let me stay with you dr. Garrett with the dozens of digital currencies out there all the different attributes that make classifications difficult what is the appropriate framework for us to use if Congress approaches legislation addressing the digital currency well that's a very difficult question that's why I ask you to you well there's people have the ability to issue these private currencies and they and they're going to exist and I think just like dr. Michael said one can't make something illegal just because it might be used for illegal purposes what I'm arguing is that the is that you know I believe that the central bank does a good job at providing payment services and not only just at the interbank level but also for small payments by the public and I think the central bank should continue to provide the best possible product along those lines and what I'm arguing is is that in a future date that best possible product might involve some of these new technologies but but issued by the central bank's to me remain competitive with those payment devices as opposed to some of these private currencies which which you know our less able we're less able to monitor and and less able to tell men's time has expired that the chair recognizes the gentleman from California mr. Sherman it seems like some think tanks demand that every turn that we do things that make the federal government less able to meet its financial obligations and then they demand that we have a extensive and expensive foreign policy that costs well over a trillion dollars there's no way to square that unless we abolish Social Security and Medicare we have moved from a gold from 2,000 years ago to drafts and paper currency symbolizing gold to wear the paper currency itself has value and now for many decades what has value is paper that represents the paper I pay my rent with a check which represents paper dollars which as recently as the 1930s could be converted into gold but can no longer be and we now have an opportunity to disempower the federal government and to move that power to those a hostile to it the we need a medium exchange we need a unit of value the witnesses have demonstrated that the dollar is much better at that for honest citizens but crypto currencies offer unparalleled advantages to nations that the US government wants to sanctioned for their terrorist activities to tax evaders and criminals mr. pollak what is the this seems to be a solution looking for a problem what can an honest citizen not do to store value to effectuate a transaction I can be in the smallest hamlet in rural India and use my Visa card I've never had a problem paying somebody unless they didn't have the money so it's a good we have pretty efficient mostly digital transfers of dollars every day what's the problem we're trying to solve except for the problem that the narcotics dealers have the I think the proposal being made for private fiat currencies which as I said congressman strikes me as an unlikely outcome a private fiat currency as opposed to a convertible currency is to give optional ways of settlement for anybody but I mean I've got a means of settlement called the dollar what is the great failure and you have another one called the euro and I have many many choice you 100 views you have leases of gold so so what problem do I have that they're trying to solve unless I'm a tax evader or a narco-terrorist I don't think we can go first of all I'm not pushing I'm not pushing as you know this solution I am trying to illustrate that it is a solution only to the problems of tax evaders criminals and terrorists but I you might and it offers an opportunity for profit by speculators speculating on a currency whose sole value is to help by the aforementioned near do Wells go ahead you might argue that people should deserve just as I think dr. Michel did and in my written testimony there's a quote from Friedrich Hayek on this the freedom to choose the denomination of the transactions they want to they want we should allow people to own guns in many circumstances but if the sole advantage of a particular gun is that it has a special tape on it to prevent finger prints from adhering and you would say the honest citizen who wants to hunt wants to make sure that the deer cannot identify the finger prints of the hunter I would say the sole benefit of that particular tape on that particular gun is to facilitate criminals what other than facilitating criminals and allow people place bets on the value of some of a of a criminal tool I mean who can speculate the value of burglars tools what does this do what problem does it solve can you identify one because I can't I I don't know the extent to which crypto currencies are used in this criminal way I suspect they are some to some extent but so is cash yes rifles are chiefly used for hunting rifles with design not to have fingerprints on them or prey usually predominantly used for crime the gentleman's time has expired and the the bells signal that boats have been called on the House floor we will recess for votes in a moment but we will go to mr. Hill for five minutes of questioning then we will recess and we will return and for members who have not had an opportunity we will reconvene for the remainder of the hearing for your questions after votes at this time we will ask mr. Hill for his five minutes of questioning Thank You chairman bar appreciate the time to a very interesting panel I was at the u.s. chamber this morning talking about FinTech and the advantages of exploring how blockchain can change business economics and accounting and logistics very interesting topic today we're talking about something that is the the headline which is constantly chatter about currencies and when I listen to the your testimony I just have flashbacks not personally of course to the 1830s I'm thinking about Wildcat banking when we had no central bank thanks to President Jackson's insistence that we didn't need that and every state in every business and every town issued script or currency I have a book in my at my house of obsolete script and currency that's a collector's guide and it's very thick so help me mr. Pollock understand that that why is this any different I mean I can't imagine that anyone privately issued cryptocurrency could be any more accepted than another you know big picture since why is it not like Wildcat banking of the 1830s congressman I think it's exactly the same as I tried to suggest in my testimony I I said in my written testimony I have in my collection maybe my book isn't as fat as yours a nice copy of a $3 bill issued by the Wisconsin Marine and Fire Insurance Company which acted as a bank in the 1840s in this period you're talking about I think it's exactly the same except those currencies did have a claim on the assets of the bank if the bank had good assets thank you for that and dr. Michele you know the I think if I remember article one right coining money is a enumerated power of the of the Congress not the Federal Reserve System yet I'm always in fact chairman of power got the question this morning like chairman Powell can decide to do crypto currencies at the Fed where is all this this would still be pursuant obviously to Congress directing that we do this and so tell me your views on on that legally legally I mean I I hate to venture a guess because they they seem to be able to do quite a bit without legislation this is no surprise from your testimony yes thank you but I and then dr. Prasad a question for you you talked about potentially because of blockchain truly an innovative area that potentially you would make some forms of money or credit I'd say obsolete like an account payable receivables for example people wouldn't necessarily have as big a line of credit so you're concerned about future credit creation and open market operations I assume that's where you were coming from and your testimony artifact about the previous congressman's question about what is the point of crypto currencies there are many inefficiencies and that lurk in the financial system including ones that result in crisis but also if you think about payments either using your visa or if you think about cross-border settlement of transactions those are painfully slow sometimes quite expensive and these technologies in principle provide a way of getting around those issues they in principle again I as emphasized that could make transactions much easier to verify to follow through they could ensure finality of settlement of transactions and bring down the cost you're not quite there yet but that's the prospect and that could affect the traditional model of banking especially as non-bank financial intermediaries we talked about Alipay and Alibaba and China they take over and that could affect how the Fed thinks about financial stability and the transmission of monetary policy as well thank you very much in my in my time remaining mr. chairman since this is the monetary policy committee I have to come in to our viewing audience and to my colleagues mr. Pollock's recent writings on the 40th anniversary of the humphrey-hawkins Act one of my personal favorite laws and we celebrated today quietly here as we had Trimble tamarin pal testifying and I've always always find the goals of humphrey-hawkins odd you have full employment and price stability so I didn't get to ask my question and I'll let you have the last word mr. pollak how is price stability consistent with perpetual inflation setting an inflation target it is not that's one of the great mysteries of the Federal Reserve how stable prices which is actually the term in act is consistent with their announced strategy of perpetual inflation thank you that's one of the great mysteries of Finance I yield back a

[01:18:11] gentleman yields back

[01:18:13] from those good questions and I am informed that because this is going to be an extraordinary lay long vote series on the House floor we may be losing members and so our reverse course and call on our colleague from Ohio for the last set of questions for the hearing and that is Warren Davidson who is now recognized for five minutes

[01:18:37] for the final question of the hearing thanks for the bonus time chairman and

[01:18:42] thank you all for being here I assume you're relieved a bit so you won't be waiting for us for an hour and a half or two to get back over here so thank you for your expertise in this and I think just beginning with the nature of currency what is our currency and part of the stability of the US dollar lies not just in the resources of the United States but in the resources of the world the petro dollar everyone has to settle their current account at some level in u.s. dollars because everyone uses crude oil and so we have an effective monopoly on settlement there and it dealt somewhat effectively with the problem of mercantilism involved in gold so prevented hoarding because the oil isn't hoarded of course Congress continues to tap the Strategic Petroleum Reserve so I assume eventually maybe we can find find an end but in the background of that what creates the stability of money and I and I guess I want to get at in crypto currency we use the word for everything we use it for crypto securities that are really nothing more than you know non-voting shares and companies in some cases this is what the SEC is trying to regulate we've established that that numerous of these crypto commodities or effectively commodities but we're not quite sure that their currencies mr. pollak you summed it up well by saying there's a big gap between how much is this in Bitcoin and and so I guess that's the question I'd like the panel to explore maybe mister Michelle would you like to pursue dr. Michelle the question specifically being the nature of money in in crypto so what makes it what makes it what would make a cryptocurrency a currency not just a commodity not an asset how do you move from whether it's Bitcoin or petrol coin or Michelle coin we're in coin I like the sound of that one that's good if if we're talking about a medium of exchange then what we have is either a currency or a substitute for currency or a substitute for money if it's all digital maybe we shouldn't call it currency but the idea is a is what is the medium of exchange and my whole point is that people should be allowed to use whatever medium of exchange that they want to use the the fact that many people think that the Fed is great and the Fed is fine and we should just stick to the central bank that we have that's that's wonderful if nobody else ever believes that way and hardly anybody adopts any alternative form of money then there's no problem nobody's going to use one but if somebody comes up with something better then we should allow that to take place because you highlighted earlier you had it earlier that the government shouldn't shouldn't favor one or the other well we clearly do we coined the money and we have the official money we have the legal tender in the United States mr. pollak how do you see migrating that path for something to really become a currency to be a currency as I tried to suggest in my remarks be readily accepted in settlement of payments and debts and to be a unit which is used to denominator acts and that and that means that people in general believe that that currency is going to be available and accepted by other people and they have to believe that other people accept that and and everybody else has to believe that other people will accept that as well it's a strange social creation money that comes out of out of belief backed up by sets of enforcement of the great history history of money high garius to think about yeah I'll just build on that I mean I think I think what you're what you're really getting at with your question is you know why it is Bitcoin have any value at all and as mr. Pollock just said for a currency to have value and to function as a currency it simply has to be the case that you accept it from someone on the belief that someone down the road will accept it from you one of the interesting things that that makes that work apparently with something like Bitcoin is the is the currency supply rule there's a fixed rule for how the money increases over time but that's known and fixed and so you don't have to worry that the issuer of the currency will behavior responsibly and devalue it so that's sort of a fundamental aspect that gives Bitcoin dial you once once somehow that process has started where people have started to believe in it but it also is is it can be problematic because it means that you you have a fixed role and you are not able to provide currency in a way that might be beneficial in general for the economy thank you so much I'm sorry I couldn't get to everyone and Frank they couldn't get to nearly all my questions but nearly universal liquidity I think is the defining characteristic and then we can't get to the store of value related to petrol but thank you so much for your

[01:23:57] time and thanks for your indulgence

[01:23:59] chairman thank you for your questions

[01:24:01] and thank you for yielding back your time and I'd like to thank all of our witnesses for their testimony today again I apologize for the brevity of the hearing I think we had a lot of members with a lot of interest but because of the interruption of votes we will have to end this hearing a little bit early but given the fact that digital currencies and crypto currencies will continue to have a greater and greater impact on our financial system and the broader economy I'm sure we'll be revisiting this issue and exploring this topic further in the future without objection all members while five legislative days within which to submit additional written questions for the witnesses to the chair which will forded - the witness for the response asked our witnesses to please respond as promptly as you are able this hearing is adjourned you