Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives
House Committee on Financial Services
Subcommittee on Digital Assets, Financial Technology, & Inclusion
Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives
Thursday, September 14, 2023
Topline
- Members on both sides of the aisle expressed concerns over the impact a central bank digital currency (CBDC) would have on financial privacy and credit availability.
- Republicans said the private sector should lead on payment modernization and innovation.
Witnesses
- Mr. Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset Holdings
- Ms. Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
- Ms. Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
- Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
- Mr. Raúl Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
Opening Statements
Subcommittee Chairman French Hill (R-Ark.)
In his opening statement, Hill emphasized that only Congress has the authority to coin money and regulate the value of such money.[1] He affirmed that there is no support for a central bank digital currency (CBDC) from Congress, except from those on the fringes. Hill noted several members from both parties have introduced bills stating that the Federal Reserve does not have the authority to issue a U.S. CBDC. Hill concluded that payments can be modernized through innovations led by the private sector.
Subcommittee Ranking Member Stephen Lynch (D-Mass.)
In his opening statement, Lynch expressed concerns about recent false narratives and fearmongering about CBDC’s being weaponized as a tool of government surveillance. He said CBDCs can foster greater financial inclusion and noted more than 130 countries have begun to explore their own digital-backed currencies. Lynch added that China, Russia, Saudi Arabia, and India have already commenced pilot programs, warning the U.S. remains far behind other countries. He explained that a CBDC could employ an architecture that could protect personal data while including anti-money laundering and terrorist funding protection features.
Lynch concluded that it’s counterintuitive for his colleagues to raise concerns about data privacy while thousands of companies, both domestic and foreign, are surveilling, aggregating, and selling our data every day.
Rep. Tom Emmer (R-Minn.)
In his opening statement, Emmer said the U.S. must develop digital tools that function like cash. He called for digital assets to be open and freely accessible to all, without requiring permission from the government. Emmer emphasized the need to protect the right to financial privacy, concluding that CBDCs must be open, permissionless, and private.
Testimony
Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset Holdings
In his testimony, Rooz warned that the global financial competitiveness of the U.S.—including the dollar’s position as the world’s reserve currency—is at stake. He explained this is a critical national security issue that demands innovation led by the private sector. Rooz clarified that private sector innovation alone is insufficient, explaining that without a proper policy framework and absent a strong partnership between the public and private sectors, private sector initiatives may displace activities properly considered public goods—specifically money—that are due the protections offered by the Constitution.
Rooz explained that as other countries’ financial systems eliminate inefficiencies through blockchain technology, the U.S. risks being left behind and losing our leadership position. He concluded by making two requests. First, that Congress ensures that any digitally-represented dollar, whether a stablecoin or a central bank digital currency, lives within the Constitutional framework, so Americans using the digitally-represented dollar will have the assurance that their privacy rights are protected under the Fourth Amendment framework. Second, 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.
Rooz emphasized that any solution that ignores private sector innovation risks technological stagnation and will undermine our global competitiveness.
Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
In her testimony, Paridon noted there is little evidence that a CBDC would bring measurable benefits to the U.S. economy or consumers. She warned that a CBDC could upend the commercial banking system and create financial instability, adding that the reported benefits of a CBDC are uncertain. Paridon explained that it is unlikely that a CBDC would improve financial inclusion because of privacy concerns. She said further steps towards developing a CBDC should only be taken if research points to benefits for households, businesses, and the economy overall that exceed the risks to the banking system and economy. Paridon concluded that further steps towards developing a CBDC should only be taken with the support of the Executive Branch and if authorized by legislation.
Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
In her testimony, Skinner warned that introducing a CBDC would change Americans’ relationship with the government. She explained a CBDC would provide the ability for the state to surveil its citizens, invite pressure on the Fed to absorb more government debt, and impact the Fed’s independence by establishing a direct relationship between the Fed and the central economy. Skinner emphasized that there is no reason for the U.S. to move towards a CBDC at this time.
Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
In his testimony, Michel discussed how central banks around the world are actively exploring and have already started launching CBDCs, often pointing to a list of purported benefits for citizens. He warned that a CBDC does not offer any unique benefit to the American people, but poses serious risks to financial privacy, freedom, markets, and cybersecurity. Michel explained how a CBDC is distinct from both privately issued stablecoins and the faster payment networks recently launched by private banks and the Fed. He further cautioned that a CBDC would ultimately usurp the private sector and endanger Americans’ core freedoms, emphasizing that a CBDC has no place in the American economy. Michel concluded by asking Congress to explicitly prohibit the Federal Reserve and the Department of the Treasury from issuing a CBDC.
Raúl Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
In his testimony, Carrillo said the U.S. can build a Digital Dollar system that respects civil rights and freedom. He explained that there are two critical, faulty assumptions that dominate Digital Dollar discourse and limit innovation. The first is the concentration on CBDC as the only possible format for digital fiat currency and the focus on the Federal Reserve System as the only institution that might issue digital fiat currency or establish Digital Dollar infrastructure limits our vision. Carrillo said that at a minimum, the conversation should include a discussion of the Treasury and its many bureaus already involved in daily money creation and deployment of financial technology. He said the second faulty assumption is the profoundly mistaken assumption that we do not already live in a financial surveillance state. Carrillo explained that background laws already allow the government to evade data collection constraints by acquiring data from private sector entities, and as a result, financial institutions, technology companies (including blockchain companies), and U.S. government agencies collectively enjoy virtually unfettered access to our financial records and regularly share data, information, and knowledge.
Carrillo concluded by advocating for the inclusion of “digital cash” within the Digital Dollar System to help mitigate data collection and preserve privacy. He also voiced his strong support for the Electronic Cash and Secured Hardware (ECASH) Act. Carrillo concluded that policymakers should support an array of Digital Dollar pilot programs and develop a steady rhythm of innovation, aiming to build a safe and secure financial system for all.
Question & Answer
Privacy
Rep. Warren Davidson (R-Ohio) asked if it is possible to have privacy protected and identity verified. Michel said no, explaining that once the information is in the system, someone is going to get it. Michel added that the Bank Secrecy Act runs across the 4th Amendment. Skinner agreed that it is not possible. Rooz said requiring identification verification introduces challenges and said the Banking Secrecy Act created conflicts. Davidson responded that his office is working on a bill that would prohibit the establishment of a CBDC.
Rep. Stephen Lynch (D-Mass.) said the private sector’s method of operation is to take as much personal information as they possibly can and sell it before asking, and noted would allowing the private sector to take control of this space would produce the type of digital dollar that we want. Carrillo said the third-party doctrine creates problems because of the connection between the private and public sectors. He added that leaving the private sector in charge of financial service data collection or including it in an intermediary fashion would not improve privacy.
Rep. John Rose (R-Tenn.) said the 4th Amendment has been critical in protecting American data and privacy but noted it protections lag behind in the financial sector. Rose asked Michel to explain how the third-party doctrine has impacted American financial privacy. Michel said there is practically no financial privacy, and that the Bank Secrecy Act, the 4th Amendment, and the third-party doctrine combined have left Americans with very little financial privacy.
Rose asked how the adoption of a CBDC would further erode Americans’ reasonable expectation of financial privacy. Michel said it would remove the last layer of financial privacy that we have.
Rose asked what the findings of the FDIC’s annual survey among unbanked households tell us about the value that some Americans place on financial privacy. Michel said it reveals that a lot of unbanked Americans place a very high value financial privacy, and that it is one of the main reasons why people stay out of the banking system.
Rep. Bill Foster (D-Ill.) asked how to implement the best privacy policy. Carrillo said he envisions hardware devices, similar to cards, on a phone that would enable hardware-based transactions for people to make payments without fear of government or corporate surveillance. He added that the hardware will be encrypted and there can be security controls implemented at the technology level.
Foster asked if we have the duty to preserve the privacy of criminals. Paridon said there should be traceable record.
Rep. Mike Flood (R-Nebr.) said the creation of a CBDC gets down to one concern at the heart of our republic, which is concentrating power out of the federal government. He explained that if we adopted a retail CBDC, the Federal Reserve would be at the heart of Americans’ financial privacy.
Rep. William Timmons (R-S.C.) said privacy concerns could be mitigated in the private sector, before asking what cyber security risks appear in CBDCs and if those risks are as apparent in the private sector. Michel said if one has a CBDC, they ultimately have one major point of failure. He explained that the Federal Reserve would have to have a database, which could be hacked. Michel explained that under the current system, if one bank is hacked, it doesn’t impact every American.
Rep. Erin Houchin (R-Ind.) said her constituents have expressed that the threat of government surveillance outweighs any potential benefits of a CBDC.
Impact on the Banking System & Availability of Credit
Hill asked Paridon to expand on her testimony that CBDC’s would upend the central banking system. Paridon said a CBDC would be a liability of the central bank, so it would be perceived as the ultimate safe asset. She explained that it could attract depositors to pull their money out of the banking system and run to a CBDC if there was a concern about the banking system. Paridon noted that every dollar that is pulled out of the banking system and transferred into the CBDC is one less dollar that is put to good economic use.
Rep. Bryan Steil (R-Wisc.) asked Paridon how a CBDC would impact credit availability and the cost of banking services. Paridon said the bank would not be able to use a dollar transferred to a CBDC for lending purposes. She added it would only hold the CBDC as it holds an asset in custody. Steil asked how that would impact monetary policy. Michel explained that it would have a large impact and would allow the government to put money into accounts and take it out.
Rep. Sean Casten (D-Ill.) asked if any proportional increase in the amount of money in a CBDC would shrink the economy. Paridon said there could be shifts to other ways to fund lending.
Rep. Wiley Nickel (D-N.C.) asked if CBDCs could impact the availability of credit, especially during periods of economic stress, because of a reduction in bank deposits. Paridon said she shared that concern, explaining that a CBDC would be viewed as the ultimate safe asset, and depositors would be incentivized to pull their deposits out of the banking system in times of stress and put them into CBDCs. She added this would increase the cost of credit.
International Impact
Rep. Maxine Waters (D-Calif.) asked how CBDCs could shape the global financial landscape. Carrillo said it’s incumbent upon the United States to provide leadership, as the development of CBDCs is an inevitable process that is going to occur throughout the world. She added it is clear that we are all moving to a digital fiat currency, and the question is now what sort of protections are going to attend fiat currency. She warned the rest of the world could move on with a weaker system than our own and cited an opportunity for global collaboration.
Lynch noted other countries have already begun to explore the idea of CBDCs and asked if there is value in at least looking into a CBDC since the rest of the world is going in that direction. Carrillo said that alone is sufficient reason to explore the digital dollar.
Timmons asked if a CBDC would strengthen the dollar’s status as the world’s reserve currency. Skinner said it would not, adding it could potentially weaken it. Skinner explained the status of the dollar is undergirded by our commitment to the rule of law, democratic institutions, and property rights, and maintaining the dollar as a stable store of value. She said a CBDC could be the incentive to over issue, which would make the dollar less stable.
Nickel asked why it’s important for the U.S. to join the 130 countries studying CBDCs. Carrillo said the U.S. has the responsibility to lead on this issue and ensure civil rights are incorporated.
For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.
[1] U.S. Const. art. 1, sect. 8, cl. 5: “Congress shall have the Power To […] coin Money.”
House Committee on Financial Services
Subcommittee on Digital Assets, Financial Technology, & Inclusion
Digital Dollar Dilemma: The Implications of a Central Bank Digital Currency and Private Sector Alternatives
Thursday, September 14, 2023
Topline
- Members on both sides of the aisle expressed concerns over the impact a central bank digital currency (CBDC) would have on financial privacy and credit availability.
- Republicans said the private sector should lead on payment modernization and innovation.
Witnesses
- Mr. Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset Holdings
- Ms. Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
- Ms. Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
- Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
- Mr. Raúl Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
Opening Statements
Subcommittee Chairman French Hill (R-Ark.)
In his opening statement, Hill emphasized that only Congress has the authority to coin money and regulate the value of such money.[1] He affirmed that there is no support for a central bank digital currency (CBDC) from Congress, except from those on the fringes. Hill noted several members from both parties have introduced bills stating that the Federal Reserve does not have the authority to issue a U.S. CBDC. Hill concluded that payments can be modernized through innovations led by the private sector.
Subcommittee Ranking Member Stephen Lynch (D-Mass.)
In his opening statement, Lynch expressed concerns about recent false narratives and fearmongering about CBDC’s being weaponized as a tool of government surveillance. He said CBDCs can foster greater financial inclusion and noted more than 130 countries have begun to explore their own digital-backed currencies. Lynch added that China, Russia, Saudi Arabia, and India have already commenced pilot programs, warning the U.S. remains far behind other countries. He explained that a CBDC could employ an architecture that could protect personal data while including anti-money laundering and terrorist funding protection features.
Lynch concluded that it’s counterintuitive for his colleagues to raise concerns about data privacy while thousands of companies, both domestic and foreign, are surveilling, aggregating, and selling our data every day.
Rep. Tom Emmer (R-Minn.)
In his opening statement, Emmer said the U.S. must develop digital tools that function like cash. He called for digital assets to be open and freely accessible to all, without requiring permission from the government. Emmer emphasized the need to protect the right to financial privacy, concluding that CBDCs must be open, permissionless, and private.
Testimony
Yuval Rooz, Co-Founder and Chief Executive Officer, Digital Asset Holdings
In his testimony, Rooz warned that the global financial competitiveness of the U.S.—including the dollar’s position as the world’s reserve currency—is at stake. He explained this is a critical national security issue that demands innovation led by the private sector. Rooz clarified that private sector innovation alone is insufficient, explaining that without a proper policy framework and absent a strong partnership between the public and private sectors, private sector initiatives may displace activities properly considered public goods—specifically money—that are due the protections offered by the Constitution.
Rooz explained that as other countries’ financial systems eliminate inefficiencies through blockchain technology, the U.S. risks being left behind and losing our leadership position. He concluded by making two requests. First, that Congress ensures that any digitally-represented dollar, whether a stablecoin or a central bank digital currency, lives within the Constitutional framework, so Americans using the digitally-represented dollar will have the assurance that their privacy rights are protected under the Fourth Amendment framework. Second, 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.
Rooz emphasized that any solution that ignores private sector innovation risks technological stagnation and will undermine our global competitiveness.
Paige Paridon, Senior Vice President and Senior Associate General Counsel, Bank Policy Institute
In her testimony, Paridon noted there is little evidence that a CBDC would bring measurable benefits to the U.S. economy or consumers. She warned that a CBDC could upend the commercial banking system and create financial instability, adding that the reported benefits of a CBDC are uncertain. Paridon explained that it is unlikely that a CBDC would improve financial inclusion because of privacy concerns. She said further steps towards developing a CBDC should only be taken if research points to benefits for households, businesses, and the economy overall that exceed the risks to the banking system and economy. Paridon concluded that further steps towards developing a CBDC should only be taken with the support of the Executive Branch and if authorized by legislation.
Christina Parajon Skinner, Assistant Professor, The Wharton School of the University of Pennsylvania
In her testimony, Skinner warned that introducing a CBDC would change Americans’ relationship with the government. She explained a CBDC would provide the ability for the state to surveil its citizens, invite pressure on the Fed to absorb more government debt, and impact the Fed’s independence by establishing a direct relationship between the Fed and the central economy. Skinner emphasized that there is no reason for the U.S. to move towards a CBDC at this time.
Dr. Norbert Michel, Vice President and Director, Center for Monetary and Financial Alternatives, Cato Institute
In his testimony, Michel discussed how central banks around the world are actively exploring and have already started launching CBDCs, often pointing to a list of purported benefits for citizens. He warned that a CBDC does not offer any unique benefit to the American people, but poses serious risks to financial privacy, freedom, markets, and cybersecurity. Michel explained how a CBDC is distinct from both privately issued stablecoins and the faster payment networks recently launched by private banks and the Fed. He further cautioned that a CBDC would ultimately usurp the private sector and endanger Americans’ core freedoms, emphasizing that a CBDC has no place in the American economy. Michel concluded by asking Congress to explicitly prohibit the Federal Reserve and the Department of the Treasury from issuing a CBDC.
Raúl Carrillo, Academic Fellow, Lecturer in Law, Columbia Law School
In his testimony, Carrillo said the U.S. can build a Digital Dollar system that respects civil rights and freedom. He explained that there are two critical, faulty assumptions that dominate Digital Dollar discourse and limit innovation. The first is the concentration on CBDC as the only possible format for digital fiat currency and the focus on the Federal Reserve System as the only institution that might issue digital fiat currency or establish Digital Dollar infrastructure limits our vision. Carrillo said that at a minimum, the conversation should include a discussion of the Treasury and its many bureaus already involved in daily money creation and deployment of financial technology. He said the second faulty assumption is the profoundly mistaken assumption that we do not already live in a financial surveillance state. Carrillo explained that background laws already allow the government to evade data collection constraints by acquiring data from private sector entities, and as a result, financial institutions, technology companies (including blockchain companies), and U.S. government agencies collectively enjoy virtually unfettered access to our financial records and regularly share data, information, and knowledge.
Carrillo concluded by advocating for the inclusion of “digital cash” within the Digital Dollar System to help mitigate data collection and preserve privacy. He also voiced his strong support for the Electronic Cash and Secured Hardware (ECASH) Act. Carrillo concluded that policymakers should support an array of Digital Dollar pilot programs and develop a steady rhythm of innovation, aiming to build a safe and secure financial system for all.
Question & Answer
Privacy
Rep. Warren Davidson (R-Ohio) asked if it is possible to have privacy protected and identity verified. Michel said no, explaining that once the information is in the system, someone is going to get it. Michel added that the Bank Secrecy Act runs across the 4th Amendment. Skinner agreed that it is not possible. Rooz said requiring identification verification introduces challenges and said the Banking Secrecy Act created conflicts. Davidson responded that his office is working on a bill that would prohibit the establishment of a CBDC.
Rep. Stephen Lynch (D-Mass.) said the private sector’s method of operation is to take as much personal information as they possibly can and sell it before asking, and noted would allowing the private sector to take control of this space would produce the type of digital dollar that we want. Carrillo said the third-party doctrine creates problems because of the connection between the private and public sectors. He added that leaving the private sector in charge of financial service data collection or including it in an intermediary fashion would not improve privacy.
Rep. John Rose (R-Tenn.) said the 4th Amendment has been critical in protecting American data and privacy but noted it protections lag behind in the financial sector. Rose asked Michel to explain how the third-party doctrine has impacted American financial privacy. Michel said there is practically no financial privacy, and that the Bank Secrecy Act, the 4th Amendment, and the third-party doctrine combined have left Americans with very little financial privacy.
Rose asked how the adoption of a CBDC would further erode Americans’ reasonable expectation of financial privacy. Michel said it would remove the last layer of financial privacy that we have.
Rose asked what the findings of the FDIC’s annual survey among unbanked households tell us about the value that some Americans place on financial privacy. Michel said it reveals that a lot of unbanked Americans place a very high value financial privacy, and that it is one of the main reasons why people stay out of the banking system.
Rep. Bill Foster (D-Ill.) asked how to implement the best privacy policy. Carrillo said he envisions hardware devices, similar to cards, on a phone that would enable hardware-based transactions for people to make payments without fear of government or corporate surveillance. He added that the hardware will be encrypted and there can be security controls implemented at the technology level.
Foster asked if we have the duty to preserve the privacy of criminals. Paridon said there should be traceable record.
Rep. Mike Flood (R-Nebr.) said the creation of a CBDC gets down to one concern at the heart of our republic, which is concentrating power out of the federal government. He explained that if we adopted a retail CBDC, the Federal Reserve would be at the heart of Americans’ financial privacy.
Rep. William Timmons (R-S.C.) said privacy concerns could be mitigated in the private sector, before asking what cyber security risks appear in CBDCs and if those risks are as apparent in the private sector. Michel said if one has a CBDC, they ultimately have one major point of failure. He explained that the Federal Reserve would have to have a database, which could be hacked. Michel explained that under the current system, if one bank is hacked, it doesn’t impact every American.
Rep. Erin Houchin (R-Ind.) said her constituents have expressed that the threat of government surveillance outweighs any potential benefits of a CBDC.
Impact on the Banking System & Availability of Credit
Hill asked Paridon to expand on her testimony that CBDC’s would upend the central banking system. Paridon said a CBDC would be a liability of the central bank, so it would be perceived as the ultimate safe asset. She explained that it could attract depositors to pull their money out of the banking system and run to a CBDC if there was a concern about the banking system. Paridon noted that every dollar that is pulled out of the banking system and transferred into the CBDC is one less dollar that is put to good economic use.
Rep. Bryan Steil (R-Wisc.) asked Paridon how a CBDC would impact credit availability and the cost of banking services. Paridon said the bank would not be able to use a dollar transferred to a CBDC for lending purposes. She added it would only hold the CBDC as it holds an asset in custody. Steil asked how that would impact monetary policy. Michel explained that it would have a large impact and would allow the government to put money into accounts and take it out.
Rep. Sean Casten (D-Ill.) asked if any proportional increase in the amount of money in a CBDC would shrink the economy. Paridon said there could be shifts to other ways to fund lending.
Rep. Wiley Nickel (D-N.C.) asked if CBDCs could impact the availability of credit, especially during periods of economic stress, because of a reduction in bank deposits. Paridon said she shared that concern, explaining that a CBDC would be viewed as the ultimate safe asset, and depositors would be incentivized to pull their deposits out of the banking system in times of stress and put them into CBDCs. She added this would increase the cost of credit.
International Impact
Rep. Maxine Waters (D-Calif.) asked how CBDCs could shape the global financial landscape. Carrillo said it’s incumbent upon the United States to provide leadership, as the development of CBDCs is an inevitable process that is going to occur throughout the world. She added it is clear that we are all moving to a digital fiat currency, and the question is now what sort of protections are going to attend fiat currency. She warned the rest of the world could move on with a weaker system than our own and cited an opportunity for global collaboration.
Lynch noted other countries have already begun to explore the idea of CBDCs and asked if there is value in at least looking into a CBDC since the rest of the world is going in that direction. Carrillo said that alone is sufficient reason to explore the digital dollar.
Timmons asked if a CBDC would strengthen the dollar’s status as the world’s reserve currency. Skinner said it would not, adding it could potentially weaken it. Skinner explained the status of the dollar is undergirded by our commitment to the rule of law, democratic institutions, and property rights, and maintaining the dollar as a stable store of value. She said a CBDC could be the incentive to over issue, which would make the dollar less stable.
Nickel asked why it’s important for the U.S. to join the 130 countries studying CBDCs. Carrillo said the U.S. has the responsibility to lead on this issue and ensure civil rights are incorporated.
For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.
[1] U.S. Const. art. 1, sect. 8, cl. 5: “Congress shall have the Power To […] coin Money.”