Now, the Core Subject of this hearing is not Bitcoin Or Dogecoin or any other cryptocurrency. Instead its the explosion of cryptocurrencies over the last decade that has created the context for understanding the potential value and risks of digital currency. There are substantial difficulties with our current Payment System. Nearly 33 million americans have been locked out of the traditional Banking System. Theyre forced to use check cashers and payday lenders for basic banking services, and those with traditional checking and savings accounts found that many of the largest banks have proven to be untrustworthy, gouging customers for overdraft or other fees or in the case of wells fargo, just outright cheating their customers with fake accounts and fake services for which the customerS Pay dearly. So what are the alternatives . Digital currencies have been hyped as a solution to these problems. Early advocates claim that cryptocurrencies would open up the Financial System and deliver fast, cheap and secure payments for anyone with an internet connection. OtherS Pointed out that crypto was a way to avoid the risks of dealing with giant banks that squeezed customers dry. CryptoS Promises havent come to pass. Instead, heres whats happening in the real world with cryptocurrencies. Cryptocurrencies have turned out to be a fourth Rate Alternative to real currency. First, cryptocurrencies are a lousy way to buy and sell things. Unlike the dollar, their value fluctuates wildly depending on the whims of speculative day traders. You know, in just the last two months, the value of dogecoin increased by more than tenfold and declined by nearly 60 . Now, that may work for speculators and flybynight investors, but not for regular people who are looking for a stable source of value to get paid in and to use for daytoday spending. Second, crypto is a lousy investment. Unlike, say, the stock market, the Crypto World currently has no consumer protection, none. As a result honest investors and people trying to put aside some savings are at the mercy of fraudsters. Pump and dump schemes are outlawed in the case of ordinary stroke, but they have become routine in crypto trading. One study found that the level of Price Manipulation in cryptocurrency is and i quote, unprecedented in modern markets. And third, crypto has become a haven for illegal activity. Online theft, drug trafficking, ransom attacks and other illegal activity have all been made easier with crypto. Experts estimate that last year more than 412 million waS Paid to criminals in ransom through cryptocurrencies, and unlike other Payment Systems that make it tougher to move money illegally, a key feature of crypto is it secrecy. So just in the past few weeks cryptocurrencies made it possible for hackers to collect the ransom to release the colonial Pipeline Hack and free jbs, the worlds largest Meat Producer from paralyzing cyber attacks, and every hack that is successfully paid off with a cryptocurrency becomes an advertisement for more hackers to try more cyber attacks. Finally, there are the environmental costs of crypto. Many cryptocurrencies are created through proof of work mining. It involves using computers to solve useless mathematical puzzles in exchange for newly minted cryptocurrency tokens. Such mining has devastating consequences for the climate. Some Crypto Mining is set up near coal plants, spewing out filth in return for a chance to harvest a few crypto coins. Total Energy Consumption is staggering, driving up demand for energy. If, for example, bitcoin just one of the cryptocurrencies were a country, it would already be the 33rd largest Energy User in the world, using more energy yearly than all of the netherlands. And all those promised benefits, the currency that would be available at no cost to millions of unbanked families and that would provide a haven from the trips and traps of big banks, those benefits havent materialized. Meanwhile, cryptocurrency has created opportunities to scam investors, assist criminals, and worsen the climate crisis. The threatS Posed by crypto show that congress and federal Regulators Cant continue to hide out hoping crypto will go away. It wont. Its time to confront these Issues Head on. Crypto has significant problems, but our current Payment System also has significant problems. Both the government and banks have dragged their heels for years, resisting innovation, and evidently taking the same Height And Weight approach to facing the worldwide movement into cryptocurrencies. Central bank digital currency, which is often called cbdc because the world needs another acronym, digital currency from Central Banks has great promise. Legitimate digital public money could help drive out bogus digital private money. It could help improve financial inclusion, efficiency, and the safety of our Financial System if that digital public money is well designed and efficiently executed, which are two very big ifs. So im looking forward to hearing from our Witnesses Today about how a Central Bank digital currency would work, why it might be necessary, how it intersects with cryptocurrency and most importantly, how it should be set up so that all americans can enjoy its benefits, and with that, ill turn to you, Senator Kennedy. Would you like to do an opener here . I would madame chair, can you hear me okay. I can hear you just fine. I thought Senator Warren did a very good job of outlining the disadvantages of cryptocurrency. Thats not really what i want to focus on. And the challenge, in terms of how regulatory Platforms Deal with those disadvantages. I was reading an argue the other day that made the point, some may agree, some may disagree, but the quickest way to get rid of Ransom Ware and what its doing to our various countries is to get rid of cryptocurrency. Im not sure im ready to go that far, but i thought it was a salient point. I jotted down a few notes which im going to refer to here. I dont normally do this. I want to be as concise aS Possible so we can get to our witnesses. This is an important topic. This is i see this as an Opportunity Today to explore the advantages and disadvantages of a Central Bank digital currency, as Chair Warren referred to, we call that cbdc. I agree with her about the need for another acronym. Will it work for the United States, will it work for the world, what value will it if any, will it contribute to u. S. Monetary policy. And world Monetary Policy. Technology continues to emerge in our Financial System and specifically in our Payment System. I think the demand for digital payments and the influx of what ill call nonlegal tender like cryptocurrencies, to me its clearly going to continue to explode. These forms of payments have operated outside our traditional payment structure. They prove to be volatile. They prove to be controversial. They prove to be speculative. They prove to be subject to a manipulation in some cases, weve seen that with respect to bitcoin and i dont mean to just pick on bitcoin, other forms of cryptocurrency. Cryptocurrencies and stable coins, though, if were honest with ourselves, we have to admit that theyre on the rise, and we need to examine the risks that a decentralized currency would pose to the federal Reserves Control of Monetary Policy. Maybe Thats Selfevident but i think it needs to be stated. The United States is leading the world in innovation and technology. United states dollar, and were all very proud of this has remained the worldS Primary currency. We want to keep it that way. Many governments around the world as you know are exploring a cbdc for use in todays digital world. I think the United States should also do that, explore, as we are doing. But we have to understand, it seems to me, and i hope well learn more about this today that whether public demand exists, who would benefit most from a cbdc has to be asked, and who would benefit least and who wouldnt benefit at all, and who would be hurt and we also have to take an honest look at whether the juices were squeezed when it comes to costs, when it comes to security risks. As we know, china has created its own digital currency. We have all read about it, the digital uon, it uses that, not the people of china, who i have great regard for, but the government of china, which i have little regard for because its run by a punch of pirates. The government of china has used the digital uon to monitor every day transactions of its citizens. It has used it to broaden its massive surveillance system. I think theres a lesson there. Additionally, china is using its cbdc to maintain greater control over its economy and to expand chinas monetary influence in the world, and i think we need to be mindful of that, and weve got to analyze the implications of a chinese cdbc on global competitiveness. On international commerce and the u. S. DollarS Position is the global world currency. Ill try to cut through some of this. I need to mention this, i dont want to over state it, but it has to be addressed. Proposals that would use the cbdc to fundamentally change our current Banking System. I think we need to explore that. Im not convinced that cbdc should be used to replace the Paper Dollar or to replace bank deposits. If the u. S. Chooses to hold a cbdc, it needs to do so, it seems to me, in a way that complements our currently Financial System. There was a superb article in i think the economist last week or the week before last that talked about a cbdc not just as a Payment System but its implications for the credit markets. Do we want the federal government to get into the business of credit, and if it does, what does that mean for our commercial Banking System. We need to strike the right balance, ask the hard questions, listen and learn, and i want to thank our witnesses for being here today and for sharing some of their time and educating us. Thank you, madame chair. And thank you Senator Kennedy, and now senator brown youre recognized for an opening statement. Thank you Chair Warren, and Member Kennedy, and ranking member tilly. And Senator Warren and kennedy, thank you for making the subcommittee as active as it has been already. Im glad the subcommittee convened this hearing to explore how a digital currency can be designed to maintain the Countrys Leadership in the global economy, to make the Economy Work better for the workers and families. Other countries around the world are taking steps toward establishing Central Bank Digital Currencies. I think we agree the United States must not be left behind. We need to lead the way. As millions of working families in this country know, its expensive to be poor. Check cashing fees, transfer fees, late fees, over draft fees. We here promises about how Digital Currencies would be more inclusive but the approaches offered by crypto companies so often are just simply not solutions. Theyre just another volatile risky asset, and putS Peoples hard earned money and potentially our Financial System at risk. One way we give americans control over their money, no fee accounts, available to every american at a Post Office or small Bank Or Credit union backed by the fall reserve. Americans shouldnt have to pay fees to use the money they have earned. They could pay bills online without fees. A Central Bank digital currency can work with the no fee accounts to make sure working families have access to the Payment System and full participation in our economy. Madame chair as you know to work as well for everyone as it does for wall street. Thanks for giving me a couple of minutes, madame chair. Thank you very much for joining us Chair Brown who is the chair of our Banking And Housing committee, and i appreciate your being here today. Yes, of course. Senator toomey, i appreciate you being here today. Youre recognized if you would like to make an opening statement. Thank you, Chair Warren and i want to thank you you and Senator Kennedy for having this hearing. This is a fascinating and important topic. I would like to suggest as we consider a Central Bank digital currency in the United States, one of the fundamental questions we need to ask ourselves is what problem is Central Bank digital currency trying to solve. In other words, do we need one . Its not clear to me that we do. I know theres some who think a Central Bank digital currency would be helpful because it would enable the fed to provide retail banking accounts to americans. In my view, turning the fed into a retail bank is not a good idea. Our retail banks do a great job of serving the needs of consumers because they compete with one another in the private sector. Its not just banks. Rapidly evolving technology companies are expanding access to the Financial System providing all kinds of financial products and services to consumers, including people of modest means. I dont think we need a state sponsored bank interfering, nor do we want the fed to possibly infringe on our privacy, able to track our personal information and monitoring our banking transactions. And does anyone think that the government would provide the high Quality Customer Service consumers want. The fed has no experience in that realm. Others suggest the u. S. Needs to create a Central Bank digital currency in order to compete with china. The fact that china may well be creating a digital currency, doesnt wean its, china has a state controlled economy, a repressive authoritarian government thats got capital controls on the wan that make it unattractive. And Chinas Motivation for launching a digital currency in the first place includes tightening its grip on the economy, and enhancing surveillance of its citizens and it would like to be able to surveil others. China likely wants to track every transaction done with its digital currency, and directly control the currency. With features like this, its doubtful in my view people will flock to the digital wan, and abandon the u. S. Dollar. Im not certain we need a Central Bank digital currency. I think we should consider the development of private digital currents. Its been the private government responsible for making cryptocurrency, including stable coins which can be stable with the dollar, and have no Price Volatility with respect to the dollar. Have the potential to increase access to financial services for all americans while increasing individual privacy. Now, people have raised legitimate important issues about private Digital Currencies, including use in elicit activity and the possibility they could affect monitoring policy. I think we need to discuss these, understand these issues, and may well need to address them. We shouldnt lose sight of the tremendous benefits of the underlying technologies of Digital Currencies offers, and disintermediary payments as well. We should encourage the continued development of private Digital Currencies. I look forward to Todays Discussion and thank our witnesses for sharing their expertise. Thank you, senator toomey. Im going to introduce the witnesS Panel, first, we have dr. Naja narula, at the Massachusetts Institute of technology. Next well have the honorable chris john carlo, senior council at wilkie, foreign gallagher, and after that, well have mr. Lev, an academic fellow, lecture you are in Law And Post doctoral Research Scholar at columbia law school, and lastly, dr. Daryl duffy, the adams distinguished professor of Management And Professor of finance at Stanford Graduate school of business. Thank all of our witnesses for being here today, and lets start with you dr. Narula, you have five minutes. Great, thank you, Chair Warren, ranking Member Kennedy, and members of the subcommittee for the opportunity to testify today. Im the director of the digital Currency Initiative at mit. We focus on cryptocurrency and digital currency design. Id like to note by views are my own, and not the views of m. I. T. Or the federal reserve of boston. Well be releasing a paper and open Source Software this summer. Today im going to do three things, define cbdc, and it benefits. Prooi si would be protected and if a cbdc would be the best way to achieve goals, such as increasing financial inclusion. For example, 36 of those in the u. S. Also do not have smartphones. Many americans do not have reliable internet connectivity. Such people could not use a digital currency that requires a mobile app or constant connection to the internet. At m. I. T. , were frgt more research is needed to determine how a cbdc might address these challenges. It would be a mistake to moving to cbdc without understanding the implications for financial privacy. Extensive information, as well as Research Funding is needed to make progress on these key questions. The first step is to obtain agreements on goals. In parallel, the Treasury Department and the federal reserve should be investing more in research and development, not to the Digital Dollar but to fully understand itS Possibilities and implications as well as spur technology development. To build consensus across various stake holders and create a neutral environment where the best ideas can flourish, we should rely on the principles of open Source Software development. The governments typical way of building systems, outsourcing to a Thirdparty Vendor will not, in my opinion, work here. WhatS Possible in terms of policy is inextricably linked. The u. S. Cannot out Source Policy to a vendor. I recommend expanding the type of work m. I. T. Is doing, and expanding other collaborations between academia and the public sector. In conclusion, we have a once in a Century Opportunity to redesign the dollar. Central bank digital currency might have the potential to increase financial inclusion, reduce transaction costs and become a platform for innovation and payments if designed and implemented well. I commend the subcommittee for raising this important issue, and encouraging this critical dialogue. Thank you, and i look forward to your questions. Thank you very much, dr. Narula. Mr. John carlo, youre recognized for five minutes. Thank you, Chair Warren, ranking Member Kennedy, and members of the committee, im here today on behalf of the digital Dollar Project, a nonpartisan Think Tank to discuss the merits of a tokenized form of a u. S. Central bank digital currency that we turn to Digital Dollar. I commend this committee for considering the challenges and opportunities of a Digital Dollar, including the potential for greater access, inclusion, and betterment of the Financial System. 12 months ago we proposed a tokenized instrument issued by the federal reserve distributed through the twotiered Banking System, and operated alongside physical currency, and commercial Bank Money. This Digital Dollar would mirror many of the properties of physical cash, enjoying the full Faith And Credit of the u. S. Government in digital form. Instead of withdrawing Paper Dollars and putting them in a leather wallet, you could withdraw Digital Dollars into a at the Corner Grocery or online around globe, and many thoughtful commentators, including members of this committee are rightly concerned with the risks of such a Digital Dollar, including its impact on fractional banking and financial stability, Energy Consumption and the Reserve Status of the dollars. As a former chief regulator, i share the inclination to look at what could go wrong with new innovation, including digital money. As a thought experiment, i would also like to consider for just a moment that could go right. Some worry that a Digital Dollar might decrease money held in commercial banks, but what if the opposite happens . What if more money moves into the banking sector, especially if they shift Digital Dollars into Bank Accounts because of the ease of doing so. What if mobile devices and Digital DollarS Provide onramps to banking services, offering interest on deposits and government insurance. And greater ease in commercial Bank Money would make people less likely to do so in a panic. I know many of you are rightly concerned with Energy Consumption. What if a Digital Dollar used much less energy than bitcoin, and other lessons. But what if it also used less energy, for mining, and distribution of Paper Dollars and metal coins. Some are concerned a Digital Dollar could negatively impact current business models for payments. What if a Digital Dollar lowers costs and, banks these for consumers and small businesses. What if it reduces Cash Flow Stress that plagues small businesses and american consumers would and what if the economic benefits of consumers with costly overdraft and fees . And what if the economic benefits of expanding economic opportunity, small Business Formation and productivity . Now all of us are rightly concerned with infringing individual privacy for Mass Surveillance of digital money. Consider what could go right. Only real World Test willing show. Thank you. Thank you, mr. John carlo, i appreciate it. And now mr. Menand, you are recognized for five minutes. Thank you. Chair warren, ranking Member Kennedy, ranking members of the committee, thank you for the opportunity to testify this afternoon. Im a lecturer in law and academic fellow at columbia law school, and in june of 2018, along with morgan ricks, and John Crawford i proposed that congress authorize the federal reserve to offer a retail Central Bank digital currency through a program we called fed accounts. Fed accounts would be able to any u. S. Resident or business in digital wallets operated by the community banks and the Post Office. These wallets would charge no fees and have no minimum balances. They would come with debit cards, direct Deposit And Bill pay. Their balances would be nondefaultable, just like no matter how large, just like physical cash. They could be exchanged instantly, 24 hours a day, 7 days a week. They would have customer service, privacy safeguards and fraud protection. If you lost your password, there would be someone you could call, and they would earn interest at the same rate that the fed pays the bank. To understand how this system would work, it helps to situate it within our existing money and Payment System. The government currently creates two types of dollars for the general public. Physical dollars and deposit dollars. It creates the first type directly through the mint and the fed. It outsources the second type to publicly chartered, privately owned banks. The second type is more important. We use it to pay the rent, and receive our salaries and save up for a rainy day. These are Digital Dollars already, and there are over 17 trillion of them circulating, more than ten times the amount of cash in circulation domestically. This system is stable with people treating their deposit balances as equivalent to cash only because the government stands behind deposit balances. The government is the franchise door. It charters banks and backs them. The banks of the franchisee, they interact with the deposits or the and create the deposit. The government also facilitates transfers, when depositors want to pay a customer of another bank, the fed assists through a program called fed wire and another program called fed ach. If depositors want cash, they can go to the fed and get cash at a program called the Discount Window. If a bank makes too many bad loans and fails, a government corporation, the fdic steps in to make sure the banks deposits can still be exchanged for cash. There are a variety of problems with the system with the Digital Dollars we have. It leaves a lot of people out. Over 6 of u. S. Households do not have access to Deposit Money at all. Its costly. Banks charge high fees for transferring and holding deposits. And it is slow. Checks drawn on deposit accounts take up to two days to clear. Theres also an urgent second order problem. One group of these deposit substitutes has been around for decades and crashed the economy in 2008. These are euro dollars, repos and money funds. Another group is new. These include stable coins and cryptocurrencies like bitcoin and ethereum. In good times, these alternative moneys can be exchanged faster and more efficiently than bank Digital Dollars. In the long run, they undermine financial stability, threaten severe recessions, weaken the u. S. Internationally, and enable Ransomware Attacks, Money Laundering, and tax evasion. On its own, a cbdc like fed Account Cant solve all of these problems, but it can help. It can bring millions of people into the mainstream Financial System. It can speed up payments. It can reduce high fees. It can bolster financial stability by crowding out dangerous substitutes. It can reduce regulatory complexity. It can improve Monetary Policy transmission, and generate revenue for the government. For all of these reasons, congress should authorize the fed to update our moby and Payments Infrastructure for the 21st century. I look forward to answering your questions. Thank you. I appreciate it, mr. Menand. And now we come to our final witness, dr. Duffie. Youre recognized for five minutes. Thank you so much, Chair Warren, ranking Member Kennedy and members of the committee. I would like to explain why you should authorize the fed to go ahead and develop a central currency. The decision to deploy this Digital Dollar can be delayed until a resulting design can be evaluated so the costs and benefits that weve all been discussing today. This Development Process will require significant resources and time, perhaps even more than five years. Designing an effective Central Bank digital currency that Safeguards Privacy while controlling illegal payments will be challenging as dr. Narula has explained and as i detail in my written testimony. While developing the Digital Dollar, relevant u. S. Government agency should address shortcomings of the existing u. S. Bank payment rails, which are generally slow and expensive to use. Regulation that promotes a competitive Payments Market and the development of a viable cbdc may spur firms that provide the current bank rail Payment System to compete more aggressively in terms of both Pricing And Technology innovation. And as noted last month, by federal reserve governor brainard, the unite should also position itself with a seat at the table with international discussions regarding standards for the design and appropriate uses of cbdcs. The u. S. Should also prepare a muscular strategy for deflecting undesirable and invasive types of cryptocurrencies as they gain traction in u. S. Payments. As you said, Chair Warren, a Digital Dollar can play a role here by providing an attractive and officially supportive alternative. U. S. Banks, though, are capable of providing an effective low cost Payment System, but they have not done so. Current regulations, network effects that limit and treat, and profit have not promoted an open and innovative competitive market as i explain in my written testimony. Calls for alternatives, private stable coins and cbdcs have been incited by the low efficiency, and high cost of the current bank rail Payment System. The fed has had to step in with a development of its own realtime Payment System, fed now. Fed now will improve the speed of payments and offers other efficiencies but brings no assurance of significantly improved competition for payment services. A further impetus for the Digital Dollar is financial inclusion, as my colleagues on the panel have explained. Also as dr. Narula explained, this is not a simple matter. Looking at the international side, chinas digital currency will not add much of a threat to the global dominance of the u. S. Dollar but will likely open commercial opportunities for china in some emerging market economies. This will increase Chinas Influence in these countries which u. S. Foreign policy experts may wish to consider very carefully, supporting Senator Kennedys remarks. It advantages the u. S. To have its own digital currency technology, for introducing their own cbdcs. United states should support the development of international agreements that would set standards of care for protecting foreign monetary systems from disruption by another countrys cbdc. In conclusion, the United States should now begin a significant program for the development of a Digital Dollar. The design should prioritize the efficiency of payments, privacy, financial inclusion, and the ability to monitor payments for compliance. Even a wellresourced Development Program can be expected to take a number of years to achieve a successful design. The final decision to deploy the Digital Dollar can be delayed until more is learned. In parallel with the development of a Digital Dollar, increased efforts should be made to improve the Competitiveness And Efficiency of the bankroll bank rail Payment System. Regulations can be changed to further encourage competition. The fed, for example, has recently considered offering accounts to novel payment firms under appropriate conditions. The United States should also take a Leadership Position in intergovernmental discussions of cbdcs, particularly with respect to their Cross Border uses. Thank you very much for your time. Thank you very much, dr. Duffie. I appreciate your being here today. So lets start our questions. I recognize myself to get started here for five minutes. As our witnesses have described, Digital Currencies offer a lot of potential advantages over cash in your wallet or even the electronic balance on your debit card. You dont have to worry about carrying cash around and losing it, or having it stolen. If you want to send money to someone else, digital currency can be easier and faster but in order for those advantages to be realized, the digital version of cash needs to be secure, stable, and accepted everywhere. Your local Grocery Store is only going to accept digital currency if it knows that the digital version of the hundred dollars that you use to pay for your groceries is actually worth 100. Your babysitter is only going to keep showing up if she knows that the digital 20 you sent her is really worth 20. Lets talk about using cryptocurrency, like bitcoin to pay for groceries or to pay for a babysitter. Dr. Narula is the value of cryptocurrency like bitcoin generally stable and reliable . Thanks for the question, Senator Warren. No, it is not, unfortunately. We just witnessed the value of the entire Cryptocurrency Ecosystem Dropping by about 40 over the course of the last two months. And how much money was that, do you know, in dollars what we think that value was. I think it was close to a trillion dollars. About a trillion dollars that this thing dropped. But think about what it means for an individual seller. It means the Grocery Store could take in 100 in bitcoin to pay for groceries but by the end of the day, the bitcoin could be worth only 60, in which case, the store loses out. So these wild swings in value mean that bitcoin is a terrible currency. In fact, thats why except for criminals, most people are holding bitcoin as a speculative investment, a way to make money rather than as a substitute for money as a way to buy this weeks groceries or to pay their babysitter. The Crypto Industry knows about thiS Problem, so they came up with so called stable coins, and i think weve heard a couple of references to that already today. This is a kind of cryptocurrency that claims to be pegged to the value of the fixed asset like a dollar. Professor menand, are these so called stable coins as safe, reliable and stable as, say, a Digital Dollar thats issued by the federal reserve . No, no, senator. Certainly not. Theyre much riskier. Theyre dangerous to both their users and as they grow to the broader Financial System. Whereas bitcoin is something we havent seen before, they are the devil we know just wearing new clothes. Theyre teched up versions of money mutual deposit substitutes in some cases. Theyre a type of deposit substitutes, and deposit substitutes are unstable because the people who issue them dont have bank charters. They dont have deposit insurance. They dont have access to the feds Discount Window and if people lose confidence in stable coins, theres a big Chance Theyll dump them en masse in a sort of classic run dynamic, and the people slow to get out could be left with significant losses. As you rightly point out. This is not the first time that weve had private sector alternatives to the dollar. In fact, im going to go back further than you did. In the 19th century, wildcat notes were issued by banks without any underlying assets. And eventually the banks that issued these notes failed and public confidence in the Banking System was undermined. The federal government stepped in, taxed these notes out of existence, and developed a national currency instead. And thats why weve had the stability of the national currency. So in theory, a digital Currency Issue and backed by a Central Bank could provide the advantages of cryptocurrency without those risks. The federal reserve, a trusted institution could provide a digital version of cash to the public that is secure, stable, and accepted everywhere. So let me ask you, Professor Menand, what role could a Central Bank digital Currency Play in reducing these kinds of risks to financial stability . So a well designed cbdc could serve as a public alternative to these cryptocurrencies, and potentially crowd out their usage. In contrast, a private digital currency, cbdcs would be sovereign, nondefaultable money. Theyd be cheaper to use, and they would not be subject to bankrun dynamics. Right. So thats very helpful. Thank you. There are reasons why cryptocurrencies are popping up like weeds. Our current Banking System offers bad service or no service to millions of people and businesses, and swindlers have figured out how to skim profits off investors by buying and selling in a marketplace that has no cop on the beat. The risks of replaying the experience of the 19th century are real. These private actors issue their own dollar substitutes that they convince everyone are just as safe as the dollar itself, until of course, crisis hits. Their dollar substitutes fail. They threaten the entire Financial System and drag down the whole economy. I think what this hearing is about is exploring how Central Bank digital currency could serve the american people but its clear we need to improve our banking and Payment Systems but the testimony and facts discussed here make it clear also that we need to address the threats that cryptocurrencieS Pose. So let me stop there. And ranking Member Kennedy, would you like to ask some questions . I would, madame chair, can you hear me . I can hear you just fine. I want to separate out for the moment cryptocurrencies. I think thats the failings and the advantages of a cryptocurrency, we could spend four or five hearings on that, and i know our regulatory authorities are trying now to understand how we should deal with it. But i want to put that aside and talk about a Digital Dollar or digital currency, which i define as one initiated by the Central Bank. I get the part that the Currency System through private banks can be slow. It can be expensive. I think in one of our last hearings, Chair Warren pointed out the amount of money made by one of our larger banks in the United States in overdraft fees. It was in the billions. I didnt know that. So i get that it can be expensive. And i can see conceptually how a digital currency you used the term Digital Dollar could be faster, and it could be what cheaper. What are the other advantages, though . And an inverse way of asking that question, aside from gaining more information about itS People, why is china doing it . Let me start i want to hear from all of you. Let me start with Commissioner Or Chairman giancarlo, who was formerly chair of the tftc. Thank you. When i look around the globe, i see that the bss says many are looking at digital currency and several have experiments underway. Why is that . I look and i see maybe six imperatives that are driving Central Banks here but also around the world to take a close look at this. The first one just as you said. Its about capturing data. I think thats what drove china first with its commercial enterprises being so successful in capturing its citizens data. But i also think it drove a number of western observers too with the launch of a potential for a digital currency by a social media platform. And suddenly i think policymakers concerned about who is going to have the personal data of its citizens. But theres also been issues of people looking at modernization. Certainly singapore and our neighbor to the North Canada have a experiments looking at modern financial inclusion. Our neighbors to the south have something called a Sand Dollar because they have citizens on islands that have mobile service but dont have banking access, so theyre looking at it from a point of view of financial inclusion. I think we ourselves in the United States are recognizing that thats a possibility. But so is Precision Distribution of funds as a matter of Monetary Policy. Certainly during the covid crisis, we tried to get checks into the hands of our fellow citizens, it didnt work so well for those citizens that didnt have Bank Accounts or were stuck at home or otherwise couldnt work with a paper check. Then comes the issue of geopolitical influence, which works with china on its currency with its belt road initiative. And this iS Perhaps for me the most important reason, and that is who is going to set the standards . If the future of money is digital, and certainly the past ten Years Society outside of the official sector has been experimenting with digital money around the world, if the future is digital, then who is going to set the standards . And china, by the way, has been very advanced into looking to set the standards. And thats within of the reasons i think the United States needs to be more up front of experimenting with this so we can be a leader in setting standards. Thank you. In the second round that the chair provides for us, im going to ask all of you to answer this. Why dont you get started, dr. Narula. If you could tell me what other than speed and cost, why else would we want to do a Digital Dollar, in your opinion, if at all . In addition to the advantages that the honorable giancarlo just mentioned, ill Mention One that came up earlier today, which is the fact that if a type of cryptocurrency that you dont want is starting to get heavily used in your Payment System, youre having difficulty monitoring the legality of transactions, moneylaundering, for example, or consumers may have difficulty with the volatility of the currency that we just discussed, those can nevertheless become popular because cryptocurrencies have certain advantages for smart contracting, for tokenbased applications in the new digital economy, the internet of things and making payments that dont require waiting for the banks to open, things like that. So what you want a Central Bank digital currency is to provide those services and displace the undesirable cryptocurrencies before they get traction in your economy. Thats not to say that cbdcs win the day in terms of all costs and benefits. But on that point i think many countries are currently exploring them for that specific reason, to head off the invasion of an undesired cryptocurrency. Thats what the bank of canada, for example, says that its doing. All right. Im out of time. Ill come back to dr. Narula and mr. Menand and defer back to our chair here. Okay. Thank you, Senator Kennedy. Senator reed . Thank you very much, madam chairman. Mr. Menand, following on this discussion of Central Banks and the use of these new Digital Currencies, is it inevitable that the United States will go to a digital currency in order to avoid being having the dollar displaced as the currency of record of the world, at least at this moment . Senator, i dont think everything is inevitable, and unfortunately going to a digital currency is going to take a lot of work. But i think that there is a high likelihood that over time more and more people will think that a digital Currency Issued by the Central Bank is something that the u. S. Should be involved in, and so its important to start that work now. Do you feel that china in particular has a longterm strategy to develop a digital remedy, i guess it would be, and deploy that as it does so many other instruments of power with a deliberate rationale of displacing the u. S. Currency . Yes, i do, senator. I think this is a source of serious concern. The launch of chinas digital yuan last Year Pose as significant risk to the u. S. The main problem is with the Sanctions Tool. One of the ways the u. S. Advances its interests around the world is through the Sanctions Tool. And one of the way the Sanctions Tool works is through the international Payment System. And that system revolves around financial institutions, and because those institutions are all connected and they all pretty much do business in dollars, even those based abroad like the chinese commercial banks have to comply with u. S. Sanctions or risk being disconnected from the system. The chinese cbdc is going to ultimately offer Parties Intent on evading u. S. Sanctions a way to conduct business without interacting with financial institutions, and therefore, without touching the dollar Payment System. For example, a company in thailand might be able to sell materials to North Korea or a company in iran by paying in what the chinese are calling ecny, potentially without the transaction hitting any thai banks. Thats a serious risk to the u. S. Right now these cryptocurrencies are not supported by and promoted and by part of the national Central Banks of any nation there, except the chinese as you point out are trying to do that. Even if every major country went into position of issuing a digital currency, would the private Digital Currencies still exist . And would they be disrupted to Monetary Policy, ie what we tried to raise interest rates in the United States, they could take a contrary action . Yes. Unfortunately, i think they would still exist. So while we can expect a Central Bank digital currency to crowd out some of these cryptocurrencies that were seeing sprout up, we need all their policy responses as well in order to address the harms those cryptocurrencies are posing. A Central Bank digital currency will be far from sufficient. So you could envision, perhaps, an international agreement which made these private cryptocurrencies illegal and legitimized only the centrallybacked or centralbacked currencies . Something like that . I think there is definitely need for international coordination, and there is a range of different tools that the government and that global governments together have at their disposal. A ban of some sort is certainly one of the options that the United States government has used those types of tools in the past during the great depression. For example, there was a ban on holding monetary gold in private possession. So that is the sort of nuclear option, but there is a variety of other tools that the government can look at using as well to try to deal with these currencies, including the Sanctions Tool itself and taxing tools which, as Senator Warren pointed out, is something that the congress employed in the 19th century to create order in the monetary system and avoid chaotic panic situations. Thank you very much. Thank you, madam chairman. Thank you, senator reed. Senator hagerty . Senator warren, thank you for holding this hearing. Innovation is what will keep americas financial and capital markets the envy of the world. But the pace of change in financial technology, and especially with digital assets, makes our job challenging. The federal reserve should continue to explore a Digital Dollar. Nearly every other country is doing that. When i asked Chairman Powell about a Digital Dollar in february, i appreciated his answer that we have a responsibility to get it right. I couldnt agree more. So the fed must explore a Digital Dollar promptly and carefully. And the fed should engage with the private sector. There are currently a number of products that are available in the private market that highlights some of the possibilities, and we shouldnt take steps that could threaten to destabilize or drain significant deposit from private sectors that underpin the strongest and most exceptional economy in the world. We should also understand the true problem were looking to solve in the Digital Dollar. One of the questions were trying to solve, is the fedrun Digital Dollar necessary to defend the u. S. Dollar supremacy as the Worlds Reserve Currency and to maintain stability of the global Financial System . Would chinas digital currency suffer from the same drawbacks as its hard currency . And are there better ways to addresS Potential risks from chinas efforts . Could we better help those who are unbanked and underbanked by removing costly regulations or by continuing to encourage banks to expand their coverage, rather than providing a publicly run Banking Institution by the fed. We also need to be practical about the Digital Dollar. Question need to understand what is the cost to the taxpayers to set this up and how long will it take. The fed is working on Monetary Policy, Bank Supervision and fed now realtime payments. We need to understand what are the cybersecurity risks. And we need to understand the privacy concerns for our citizens. None of us know exactly how financial invasion will evolve, but the last thing we want to do is constrain innovation. These discussionS Providing Market Therapy and removing necessary regulatory obstacles all help to move the ball forward. Our first question is coming to you, chairman giancarlo. You discussed what china is developing and the potential implications for that. In your mind, what are the biggest risks in the United States . Is it the loss of our ability to deploy sanctions . Is it the economic aversion . There are a number of reasons why people are reluctant to hold chinas currency. Would those reasons still apply to a digital currency . Oerk. Thank you, Senator Kennedy, senator haggerty. I talked about the digital currency being held by many strong pillars. And one is the fact that many of the worlds most important a Dw And Commodity such as wheat and soybeans and crude oil are priced in u. S. Dollars which means our farmers dont have to take foreign exchange risks while overseas have to hold dollars. And these dollars are set not in cash markets, but in deep and liquid american Futures Commodity marks overseen by the tftc where i had the privilege to serve. China recognizes this advantage as the worlds largest consumer of many of these products such as soybeans and crude Oil And Iron ore. China would much prefer they were priced in the chinese currency. Thats one of the reasons why they had recently opened their futures markets for paramedics for Iron Ore and oil futures. When i was chairman in the first shipment of american soybeans to china entirely using laser technology, all contractual aspects of that shipment from bills of laiding to receipt of shipment were conducted with all parties on ununiversal ledger. China is very advanced in distributing Ledger Technology. They launched a national Blockchain Service Network to lead innovation. No other country, including the United States, has anything like it. Its only a matter of time before china will combine its lead in Blockchain Technology with its new digital currency and its futures markets to facilitate the entire process of logistics, payments and Price Hedging for key word commodities in one integrated chinese controlled blockchain. Thats why we must explore a tokenized form i believe of the u. S. Dollar that enableS Programmability with smart contracts, imbedding the most complex business into cbdc tokens, including Hedging And World commodities. Losing the edge to china in key commodities is not just a concern to american agriculture. Its a concern to the u. S. Economy. Thank you, chairman giancarlo, for your leadership, for all your work in this area and i applaud your continued support as we move on. Thank you so much. Thank you, senator hagerty. Senator warner . Thank you, i appreciate you having this hearing. Its a subject im quite interested in as well. Im actually stepping out of an Intel Hearing that im chairing. I want to ask the panel, so i think ill ask the panel, and ill start with dr. Narula and just go down the list. Weve seen good news and bad news recently, and i know this is not directly to the notion of a digital currency per se, but weve seen cryptocurrencies used as a preferred Payment Model for ransomware. On the other Hand Weve seen very good news recently that perhaps there is not as much anonymity as some had promoted in the ability to trace back to that Bitcoin Wallet and be able to ferret out some of those dollars that went to the bad guys in the colonial pipeline. But based on your Research And Engagement with crypto issues, as we think through digital currency and other related issues, how big a challenge is the security risks, the misuse of these currencies . Have we been able to quantify that risk as we weigh the up and down benefits . And again, dr. Narula, why dont we start with you, and Id Love everybodys comments. Thank you, senator warner. I think Cybersecurity And Security is the first order of concern with any digital currency that the United States might decide to issue. Whatever system underpins it would be the national infrastructure, so we have to make sure we get that right. When it comes to things like the recent state of Ransomware Attacks, i think the real underlying problem here is that we have this valuable data that has not been properly secured. It is true that cryptocurrency seems to be the vector of choice. However, its also the case that because of its open sort of auditable nature that its able to be a tool for Law Enforcement, as you pointed out, to then track those funds and then return them. However, ransomware, fundamentally, i think we have to address that by fixing our systems and securing them. A Central Bank digital currency, if launched, would probably not look like a cryptocurrency exactly. And itS Possible to build in safeguards to make it more trackable and to prevent is being used for ransomware. However, as i said, criminals will probably shift to whatever is easiest, and the real way to fix ransomware is to solve the underlying security problem. Agreed. Mr. Menard . And if we could make sure. Ive got two minutes left and three more folks to talk. Sure. I see cryptocurrencies aS Posing a serious security threat. I think that they enable a type of ransomware that would be impossible otherwise. Think about it this way. If you wanted to hold up a u. S. Company for 5 million and there were no cryptocurrencies, you would have to ask for cash or check. If you ask for cash, you have to physically take delivery which gives Law Enforcement the ability to easily track you. If you ask for check for a wire, you have to identify your Bank Account information. So its just impossible. Crypto offers the ability, if you do it right, to use these mixers and tumblers and to convert between multiple currencies and use special cryptocurrencies that are private. Theyre different from blockchain by zcash to hide your trail. Thats a major, major risk to u. S. Law enforcement and national security going forward. I agree, although i do think were trying to find some other tools there. Dr. Duffie, and then mr. Giancarlo. I agree with the reply by dr. Narula and mr. Menand. The u. S. Central bank digital currency needs to be bulletproof and one needs to use very muscular regulatory strategies to tamp down the use of cryptocurrencies that are undesirable like bitcoin. The less accepted bitcoin is in the broader economy, the more difficult it is for those that would wish to use it for illegal means can convert into it consumption or dollars. So every effort should be made. In the end, though, as mr. Menand said, its going to exist on the fringe, and its just a question of how muscularly you can try to reduce its use. Mr. Giancarlo . Yes, indeed. I would just add to the very thoughtful comments of my predecessors that one of the benefits of perhaps a consensus space mechanism, which we can learn from other forms of cryptocurrency is the actual difficulty in hacking those systems when you build it on a broadbased distributed ledger system. Those are architectural issues and our colleagues at the bank of Boston And Mit have been working on that architecture. Were looking forward to the report. But i think there are advantages that need to be explored in Ledger Technology to make the system more resilient than perhaps the accountbased system we have today which has been hacked numerous times even at the federal government level. Thank you, madam chair. I look forward to working with you on this issue and Senator Kennedy and others. Very much. Thank you, Senator Warren. Senator lummis. Thank you for holding this hearing on the future of the u. S. Dollar. You know, if we build a Central Bank digital currency in the right way, we can strengthen the global role of the u. S. Dollar and secure a strong financial future for next generations here in america. So weve been working in my office on some cornerstone principles that we think should be used to judge a cbdc proposal, and among those iS Privacy. So my first question is for mr. Giancarlo. Its nice to see you again. One of the key motivations behind chinas digital yuan is Surveillance And Control of their Financial System. Its clear we cannot follow china down this road. Any u. S. Cbdc should have greater privacy, greater than physical cash today. So do you agree that we must provide at least the same level of privacy . And how can strong privacy protections enhance the Dollars Value on the global stage . Thank you, senator. By the way, my compliments on the launch of your innovation initiative, which i think is really terrific. I think privacy comes down to one of the key issues behind design of a Central Bank digital currency. There is no question that china views their development of digital currency as a tool of state surveillance. That seems very clear, and it would be very much in keeping with the nature of their government. We in the United States have a very different approach to economic privacy. We have a fourth amendment, and although the jurisprudence of that needs to extend today to extend to a digital currency, if we get the Issue Issue of privacy right, and thats a big issue, but if we get it right in a way thats consistent with our values, the Digital Dollar, believe it or not, could be the digital wrap of current policies worldwide. Why do i say that . We know they will be used for state surveillance. Europe is working on one and theyre guided by something called the private protection law. But that only protects from commercial exploitation of data, not from Government Use of data. We know there are commercial entities that would like to develop coins that are tied to on social media and others that presumably will mine their currency for data. Only a currency actually i believe promulgated by the u. S. Government with proper fourth amendment productions could provide the type of privacy that we need. Now, its got to be balanced against proper Law Enforcement usage, so a lot of work and i think a big test for congress to make sure the social values that are enshrined in the dollar today, the rule of law, economic privacy, free enterprise are enshrined in a digital Dollar Tomorrow if we go down that road. Ill end with this. Finger we get this right, a Digital Dollar could serve for another generation or more because weve been given the privacy rights that got us where we are today into the future. Well, we can see that Digital Currencies are going to be important in the future based on just what El Salvador has just done. Haiti wants to follow suit. Any country that has remittances as a major part of their economy is going to be the first users of digital currency, and its very apparent why. Its upon us, so we absolutely need to do this right. So i really look forward to working with you in the future to make sure we do do it right. Now, dr. Menand, i want to turn to your comments on financial stability. A 2016 bank of England Study found that cbdcs have the potential to reduce systemic party risks especially between financial institutions, especially in times of market stress. A cbdc could allow final settlement in Central Bank money direct between Payor And Payee across the feds balance sheet. So this would reduce or eliminate Capital And Collateral that is required to be posted for transactions, including in relation to intraday overdrafts, putting it to more productive use. Do you agree that Central Bank digital currency has the potential to reduce systemic risk in settlements . Yes, i completely agree. Weve focussed so far in the hearing a lot on the retail side and the benefits for cbdc and for ordinary businesses and for individuals and households. There are also very large benefits for the Financial System more generally, and the bank of england report you referenced is a good example of some of them. One Thing Weve done is weve expanded access to fed master accounts since the last financial crisis and that is having a stability and enhancing effect. Yes, i agree with that, senator. Thanks so much for having this hearing, madam chair. I yield back. All right. Thank you, senator lummis. Senator cortez masto. Madam chair, thank you. Thank you so much for the opportunity to participate in this important Discussion Today and really appreciate all the panelists and the conversation so far. But let me start here. Dr. Narula, mr. Mr. Menand. 6. 3 of the population in nevada is unbeijinged. So my question for you, how could a federal Reserve Run digital Currency System, make it easier to connect to those unbanked and provide financial relief, direct maybe making sure they can access unemployment insurance, social security benefit, Et Cetera and dr. Narula, let me start with you. Thank you, senator. I think the key technique here is to remove sources of friction that keep people from being able to access such a digital currency, a u. S. Digital dollar. We need to make sure there arent owners restrictions, that people who want to extract contract in small amounts can do so very easily. We also need to make sure there are interfaces on top of a digital currency. It cant be just a mobile app, because so many of the people you referenced might not have smartphones. So we have to think of people who arent necessarily technically literate. This means that digital currency, if issued would need to have a wide variety of ways to access it. And that meanS Providing the right kind of interface and making sure that its a platform that other businesses and applications can build on top of as well. Thank you. Mr. Menand, anything to add . Yeah, i agree with that. I would just add that if youre poor today, a Bank Account can be dangerous for you. It has a lot of fees you might not understand when those fees are going to be levied. So youre in a terrible position. You have to choose between two bad choices. Either youre outside of the Banking System and its really hard for you to get government stimuluS Payments and to buy things online and to do all sorts of things, or you go in, but you have a small amount of money and youre going to get hit with Account Maintenance fees that people with more money dont get hit with and overdraft fees that people with more money dont get hit with, and it might end up costing you a lot. So one of the benefits of a cbcd, of a nofee account offered by the federal reserve of Central Bank digital money is it would be provided to the public without profitability considerations. So there would be no signup costs, no fees. So people who face that choice right now, they wouldnt have to worry than, because the Government Wouldnt be trying to make money off of this off of thiS Program. They would be providing critical public infrastructure to people. And so and let me add to, that because i often hear from merchants as well about the high fees for cashless transactions. Would this address that issue as well for merchants . Yes, there would be huge benefits for merchants and small businesses to be able to have an account or Central Bank digital currency in some form. Huge. Yeah, no, i appreciate that. Thank you. Let me jump back to the privacy issue, the Security Issue as well, and fraud. Really, this is an issue from my about background. Im always cautious about, and im really interested in your thoughts. Let me open it up to the panel. We have seen fraud has been a major problem with cryptocurrencies, but how should federal Reserve Issue digital currency be designed, be implemented and be regulated to reduce a risk of fraud . I know weve talked around the edges, but is there something specifically we should be thinking about . Let me open it to the panel. Anybody want to take that on . Senator, at the digital Dollar Project, we convened a of Privacy Subcommittee of a number of our advisory board members, and they set out four principles they believe a Central Bank digital currency should carry. The first is, of course, economic privacy for users of the Digital Dollar, as i said, properly balanced against Law Enforcement needs. But the second one is that the system needs to be secure. The ability to use a Digital Dollar must carry with it security of ones wealth, of ones value, of ones usage. And then thirdly, the system must be provide greater accessibility than we have, as Professor Menand just mentioned for populations that are traditionally underbanked. And lastly, the system must have sufficient transpareny so that users of the system can know that transactions done on the system have been completed, that theres settlement certainty, that there iS Payment certainty. And those are four values that we think a Central Bank digital currency must embody. Thank you. Thank you again. I know my time is up. I appreciate the time to talk to all of you. Thank you, Senator Cord the easy masto. Senator gaines . Thank you for being here today. I want to talk about the threat of china in thiS Particular space. China of course launched the digital yuan which it hopes will one day display the dollar as the worlds dominant reserve currency. And even beyond the digital yuan, its no secret that china and many other countries are well ahead of us with regard to financial innovation. For example, india is also one of the fastest growing fintech markets in the world. In fact, india processed more nearly 10 million realtime payments than china in 2020. 25. 5 billion versus 15. 7 billion for china. The u. S. Process just 1. 2 billion of realtime payments. Well, im not yet convinced we need a Digital Dollar, i strongly support further exploration in this important area. Its for this reason im heartened by the nonprofit digital Dollar Project which will launch five pilot programs over the course of the next 12 months. This type of private Sector Research will provide data policymakers what they need to inform the debate about the next steps that we are to take. Mr. Giancarlo, can you describe what the world might look like looking at five years, perhaps, if we continue to let china and others like India Race ahead of us in this important area . Thank you, senator daines. You know, the reason why we launched this Dollar Project is we really believe the nature of money is changing. The internet has been a remarkable thing and its not done weaving its Magic Web on society. I mean, it started by changing the nature of Information Dissemination and changing industries like Entertainment And Publishing and Travel And Leisure and so many things. Well, now its set its sights on money, and in many ways, financial services itself. The use of distributing Ledger Technology with tokenized money may present a future very different than the one we know today. Today we think of a global network of Banking Institutions that have been very useful to the United States in sanctions, power and other areas but also to clean up Money Laundering and surveil that banking network. In the future we may see different networks, a network of digital currency. There may be a yuan network, there may be a dollarbased network, and how these networks interact with each other will be of critical importance. The work of china in looking at Blockchain Technology and hoping to set the standards of interoperability between these networks is going to be of critical importance. Thats why we so strongly advocate, the United States, whether we want a Digital Dollar or not is the second magnitude of issue. The first issue is we lead in the technological development, we lead in the standard setting. Chinas standard will be using a network for surveillance of its citizens. Is that what we want in the United States, or are our values different . And how do we make sure that the values that got us here, the rule of law, of economic privacy, of appropriate Law Enforcement needs are encoded in that digital future, those standards for the future. Senator, thank you for that. I ask mr. Duffie the same question. India had more transactions realtime last year than china did. So weve got some important players here. Mr. Duffie, anything you can add to that . I completely agree with commissioner giancarlo. This is about technology. At this stage, the United States has fallen behind even India And China with respect to digital currency technology. And the competition for commercial services internationally very important. U. S. Banks have been feeding ground to chinese banks internationally. If the United States wants to compete, its going to have to invest in technology in this area. Particularly with respect to the new uses of digital Ledger Technology. If the United States were to even develop the technology for Central Bank digital currency, it could in a public private partnership, its firms could provide those services internationally and compete with chinese firms that are already positioning to do that, firms like alibaba. So i totally agree with commissioner giancarlo. I want to shift to random Ransom Wear in cryptocurrencies. These are another part of the Problem And Something we need to continue to study. In the case of bitcoin, 75 is mined in china. Although businesses in montana keep an eye on whats going on in towns like montana in towns like butte and harden are starting to grow mining operations for bitcoin and other cryptocurrencies in a massive scale. Importantly, these Highperformance Computing operations are capable than doing just more than mining of cryptocurrency. For example, they can be used for artificial intelligence, Machine Learning applications to help us win the future case against china and others. However, im worried about the increasing use of cryptocurrencies to pay ransomeware to malicious act cores. In the case of the pipeline, it was encouraging to see that much of the ransom waS Paid but i think we were a little lucky on that one in terms of payback. Mr. Giancarlo, what can we do to help Law Enforcement crack down on the illicit use of cryptocurrency as well as to combat this trend of ransoms being paid following a cyber attack . This is a new area, and i will tell you as the former head of an agency with enforcement capability, whenever youve got money, youre going to have criminality, and a lot of Enforcement Work is just an evolving process of cops and robbers. The robbers learn a new technique and the cops learn a way to react to it. Thats been since the beginning of history and that will be. This new technology, though, presents some interesting both challenges and opportunities. So the Account Space System always begins with identification of identity. So, therefore, you have that buried into a transaction and you can work your way back to it as a Law Enforcement matter. This system iS Pseudanonymous, but it did provide the ability to track transactions. Thats what we saw in this case. We saw that bitcoin was both a means for criminality, but it was also a means for Law Enforcement. Were going to get better at using this technology, but how do they call it, its old wine in new bottles. At the end of the day, the bad guy is going to figure out some new techniques and the cops will be right behind them. If we do our job, and this is a formal regulator, we shouldnt be too far behind in catching up to that activity. Thank you, mr. Giancarlo. Senator daines, i know that youre over your time, but would you like to ask this of any of the rest of the witnesses . You dont have to, but i just thought it was a really important question. Madam chair, thank you for that, because i think it is a really important question. And now that the world is flat, this is a global nature and can attacked from literally anywhere in the world. Thanks for that opportunity. Anybody that would like to respond . Ill jump in on that. Thank you, senator. I agree with chairman giancarlo. I would just add that its not clear to me that the department of justice and the fbi tracked the bitcoin on the public ledger, and thats how they clawed back the bitcoin from the Ransomware Attack the other day as opposed to doing oldfashioned Police Work and capturing the physical servers that the criminals in this case were using and find out what wallet they were storing the cryptocurrencies in. I think we need to be very concerned about the incentive that cryptocurrencieS Provide for our criminals to do Ransomware Attacks, because we know with various mixers and tumblers and other cryptocurrencies that you can trade into like zcash that criminals who do it right can really make it extremely difficult, if not impossible, to track them using the cryptocurrency, using the money system. There might be other ways to track them down because they exist in the real world, and we might be able to recover the money, but the sort of traditional ways that rely on the dollar Payment System may not be available. Thank you for that comment. Mr. Duffie . You can get the last word if you want on this. Well, as emphasized, its very difficult to stop the use of bitcoin, but you can make it criminal in many different countries if you have an international agreement among countries that bitcoin will not be permitted to be converted into the local currency, then the criminals will be trapped with owning bitcoin that they cant spend. I think the best thing to do is for the u. S. And other countries to get together and agree that in none of their countries will bitcoin be convertible into the local currency. Right. Thank you very much for the thoughtful comments. Madam chair, this is a great hearing, great discussion, and thanks for holding this hearing. Thank you for joining us. So i want to say thank you for everybody who got a first round question and some of us want to do a second round, so im going to recognize myself to do some questions here. You know, weve been talking about this afternoon about how our Banking System has cut out too many americans for too long. We have nearly 33 million households disproportionately black and hispanic who are underbanked or unbanked altogether. And they pay steep fees to cash checks and pay bills and borrow a little money until pay day. But as we were talking about earlier, even when people have access to Bank Accounts, some of those banks use a whole array of abusive practices that harm struggling families, like overdraft fees and fake accounts opened without Customers Permission and egregious data breaches, just to name a few of these. So i understand why americans can be very dissatisfied with the banking industry. And the Crypto Industry has stepped in with the promise of a better and more inclusive Financial System for all americans. The idea is that digital assets and Blockchain Technology are going to drastically reduce the cost of financial services and improve their quality by eliminating fees and boosting access to capital and providing greater financial privacy and protection. So, Professor Menand, let me go back to you. I know you agree that our Banking System is failing to live up to its responsibilities to the american people, but i want to make sure we get this clearly stated. Do cryptocurrencies offer a safer alternative to the traditional Banking System for consumers . No, senator, absolutely not. The Crypto Market is rife with consumer abuses. You know, in the traditional financial space we have regulations and protections in place. Those dont apply in the Crypto Market, so there are companies after Crypto Customer services that have lost customers money. There are a lot of players that manipulate prices which leaves ordinary userS Paying high fees. Its not a safe place to keep your money or to invest. I understand the ftc has now said cryptocurrency scams have skyrocketed. In five months between october 2020 and october 2021, just in that five month period, 7,000 people lost nearly 80 million, and thats nearly a 1,000 increase from the same period a year earlier. This just happens in brazen crypto cons. So were seeing egregious fraud cases, but also manipulation in the markets. Scams, Pump And Dump tactics. Professor menand, are there steps that regulators and policymakers could take today to limit the harm to consumers and investors in the Cryptocurrency Market . Yes, i think so. We urgently need more regulation and more funding for regulation, so congress should increase appropriations for the sec and for chairman carlos, the cstc so they can keep up with all the new coin schemes being launched. Chairman giancarlo spoke about the race between cops and robbers, as it were. We need to fully fund the cops or theyre going to lose the race. Congress should also give these agencies additional authority over crypto exchanges, and the banking agencies should not allow governmentbacked banks to warehouse these instruments for their customers. Thats very helpful, thank you. Its clear that congress and financial regulators need to take action to protect consumers, to protect the market and to protect our Financial System. Dr. Narula, could a well designed Central Bank digital Currency Help people who are poorly served by our current Banking System . Thank you for the question, senator. I think that really depends on how its designed. If its designed in such a way that you require, for example, a commercial Bank Account in order to transact in the Central Bank digital currency, its not really going to go beyond the system we have today. So its really important thinking about accessibility and making sure that its open and that we remove frictions in the way of people getting access to such a Central Bank additional currency. Thank you. Big banks are too focused on boosting the multimilliondollar pay of their ceos instead of serving their customers. But cryptocurrencies arent the solution that their promoters claim they are. With no cop on the beat, this unregulated market draws in ripoff artistS Promising massive returns. Americans need trustworthy and affordable ways to store and use their money, not a way to get scammed more efficiently. A welldesigned and carefully implemented Central Bank digital currency could bring more households into the Banking System and ensure that everyone has access to the financial services they need if the design is right. So thank you, all. Senator kennedy, would you like to do a second round of questions . I would, madam chair. Can you hear me . I can. First, let me thank all of our witnesses. You have been terrific. Ive got a couple quick questions. Im like to get to all four of you to experience the expertise of each of you so if you could just give me some brief answers. Number one, one of the advantages it seems to me, of lets say bitcoin, a cryptocurrency, bitcoin, people like the fact that its a decentralized ledger. They like the fact that itS Private in the sense that the information is encrypted. I guess what im saying is let me start with dr. Narula. Could we establish a Digital Dollars where the information, the transactions are encrypted using Blockchain Technology . Thank you, senator. Blockchain technology has gotten a lot of attention, but encryption and techniques like it existed well before the first blockchain which was bitcoin. Yes, indeed, i think encryption will form a critical part of any digital cryptocurrency that is launched simply because its best practice and a very important tool to enable privacy. Thank you. Professor menand is it Menand Or Menand . Menand, senator. Professor, other than and im not minimizing what im about to mention but other than making our Payment System cheaper, quicker, what other advantages do you see to a Digital Dollar . Somebody mentioned the ability of china through its digital yuan to access some new commercial possibilities. Maybe you want to elaborate on that, i dont know. I dont mean to give you the answer. Look, senator, i think easy and cheaper to transfer, these are the cardinal virtues of a Payment System. Some answer, what more do you need . I would say offering nondefaultable money with no maximum amount would be stabilizing for the u. S. Financial system in ways that people havent thought about. So large companies dont have access to that, and it would be very helpful to large companies to be able to hold very, very large cash balances in nondefaultable amounts and this could crowd out unsafe and unstable alternative products that those companies use right now, and i think if we called up the ceos of the top S P 500, they would all like to be able to do that, to have safer digital money. Thats an additional benefit that is different from easy and cheap to transfer. Dr. Duffie . Yeah. In addition to everything thats mentioned, Central Bank digital currency is fungible, its interoperable. What that means is when i go into your store and i want to pay for something, i dont have to search around for the correct button on my mobile phone to use. When i want to pay for a friend for dinner, i dont have to ask, do you have venmo or zelle, we can just move money back and forth. That makes money move faster. It makes it easier for the Central Bank to implement Monetary Policy because when the fed raises interest rates, for example, or lowers interest rates, for example, or raises interest rates, interest rates in the economy will follow very closely because its the same money moving everywhere very quickly. Thats an additional advantage getting the Central Bank Monetary Policy implemented well. And again, the technology can be exported to other countries if the u. S. Has the technology. But if it waits for china to develop the technology first, then the u. S. Will lose commercial advantage. Chairman giancarlo, let me ask you this. Does the federal reserve have the authority, in your opinion, to do all of this unilaterally on its own, or does it need congressional authority . Well, rather than my opinion, and more important is Chairman Powells opinion, i think he said recently that the federal reserve would require more authority to do this. Having said that, i think there is a fair amount of authority to do some basic level exploration, work thats already being done at the federal Reserve Bank of boston with professor narulas help, but also in the private sector, and thats what were doing with this digital Dollar Project. Were going to bring the resources in the private sector to bear to do some inspection, do it on a private basis, make sure everything that comes out is available and make sure the work with the fed doesnt conflict with it. Look at some of the social use cases, commercial use cases, societal use cases, and working with responsible actors, make that information available for use by the public sector. Ultimately these big decisions are going to be made by congress, theyre going to be made by the administration. Theyre big weighted issues but the public does have something to say on these issues, so we can bring that to bear and hopefully the decision is one that meets our social needs and also meets our monetary needs and the Core Value of money which is a social good. Thank you all again. Its somewhat unusual to have as many senators as we had today participate in a Subcommittee Hearing like this, and i think thats an indication of how interesting this topic is and the expertise to which you bring to it. Thank you, all, and thank or chair for doing this. So thank you, Senator Kennedy, and with your indulgence, i have one more Issue Id like to talk about. Absolutely. Youre welcome to do another round of questions if you want. Is it about overdraft fees . No. I had to ask. Okay. Thank you. Its about weve talked a Lot Today about the dangers that cryptocurrencieS Pose to our economy. We talked about the instability, et the extent to which theyre used in attacks on the pipeline and gbs. Theres other issues, too, the environmental impacts of the Computing Activity used to mint many of these Digital Currencies in the first place. Bitcoin consumes more energy than entire countries, and it iS Projected to consume as much energy as all the data centers in the whole world this year. One Bitcoin Transaction, a single purchase, Sale Or Transfer uses the same amount of electricity as the typical u. S. Household uses in more than a month. Whoa. Yeah. So can you say that again . Yep. A single Bitcoin Transaction thats one purchase or one sale or one transfer uses the same amount of electricity as the typical u. S. Household uses in more than a month. I think the estimate is 53 days. Wow. Yeah. So, dr. Narula, could you explain why cryptocurrencies like bitcoin eat up so much energy . Certainly. Senator warren. So what i think is important to note here at least from a computer science perspective, bitcoin was doing something we never done before, building a system which was secure enough to support a massive currency, and at the same time allow anyone to participate. The technique that the creator of bitcoin used in order to do that, was what we refer to as Mining Or Proof of work. And the idea is that the participants in the bitcoin network protocol, because we dont necessarily know who they are and we want to make the protocol open for anyone to join without being able to flood the system with copies of a person, for example, is that they prove who they are by contributing compute power. So the way the bitcoin works is that in order to build the next block on the blockchain, the participants in the network compete to solve a puzzle. Its a very, very difficult puzzle to solve at the moment. And, in fact, the Puzzle Difficulty changes depending upon how many participants there are in the network. What that has led to, as the price of bitcoin has gone up, is more and more resources being brought to bear, more and more computer resources being brought to bear to solve thiS Puzzle. As a result that has used quite a bit more energy. That is also how the blockchain is secured. The idea is that once these participants have expended this energy and expended this compute power, in order to rewrite the blockchain, in order to change history, one would have to expend an equivalent amount of Power And Energy. So its built right into it, that there are computers all over the world right now spinning out random numbers around the clock in a competition to try to solve a uselesS Puzzle and win the bitcoin reward. And the amount of computational Power And Energy for this is a disaster for our planet. Now, some crypto advocates claim that these environmental costs are worth it because of the security, the proof of work validation procesS Provides for the system. You were talking about this is the security thats built in. But let me ask you, Professor Menand, do you think the environmental costs inflicted by cryptocurrencies like bitcoin are worth whatever potential benefits they provide . No, absolutely not. Especially from countries like the United States where the benefits of crypto are largely illusory. Theyre not a better means of payment, they undermine the Governments Ability to maintain robust economic growth over time, they circumvent important safeguards that weve been talking about that prevent extortion and the environmental costs are very, very large. So i think the Cost Benefit Analysis on bitcoin is clear. Let me ask you, Professor Menand, whats the End Game for bitcoin . Will more and more miners keep doing useless, complicated math problems that consume a larger share of energy for the next 20 years until the last coin is mined . What is the future of bitcoin and the future of our planet . I think a lot depends on how the people in this zoom react. If governments like ours continue to sit on the sidelines while alternative Currency Systems develop or even if they give succor to that development, were going to see bitcoin continue to expand because there is a growing group of people who would like to move sort of the whole Financial System to decentralized ledgers, and thats going to mean more and more environmental damage. So congress, i think, really needs to act here. As we think about how to build a better Banking System, we need to rethink the use of environmentally wasteful cryptocurrencies. If i can, let me just get through these quickly. Dr. Narula, let me ask you. From the research you and your colleagues at mit have done, is it possible to design a Central Bank digital currency that does not require minors to perform random Number Generation puzzles . Yes, it is. Could you design it so it wouldnt consume more energy than a middle sized country . Yes, you can. Can we have a Central Bank digital currency that doesnt exacerbate the climate prices climate crisis, and undermine environmental justice. I think you could build a Central Bank digital currency that does not consume vast amounts of energy, yes. Good. Im glad to hear this. Cryptocurrencies like bitcoin are terrible for the environment. And that would be true regardless of whether we were getting anything productive out of that Energy Usage or not. The fact that were not makes it even more scandalous. One of the easiest and least disruptive things we can do to address the climate crisis is crack down on environmentally wasteful cryptocurrencies and now is the time to do it. I want to thank all of our witnesses for being here today. I want to thank you for providing testimony. Youve just been terrific. Madame chair, can i ask dr. Narula one other question. Of course you can. I just want to follow up, one last question in line with your questions. Can we design that digital currency in a way that respectS PeopleS Privacy . I certainly hope so, Senator Kennedy, and if we Cant Design it in such a way, that is a very important factor to take into account when considering whether to launch but my hope is that we can, and that is a research that were engaging in now. Thank you. And madame chair, if its all right, i have a follow up to that. Senator cortez masto. Can you talk about with respect to digital currency, why the platform have an open Application Programming Interface . Yes, senator, i think this is critical, so i dont think well realize the true benefit unless we upgrade it into the 21st century, so to speak. We have an opportunity here to learn from whats happened in the Cryptocurrency World, and i know a lot of senators here are not big fans of that world, and what i see there is a lot of exciting applications being built and a lot of experimentation thats happening that granted also comes along with a lot of scams, however, i think we would be missing an opportunity if we didnt take a look at what was happening there and try to learn lessons from the Cryptocurrency World and bring some of that back into a Central Bank digital currency design. I think that if we were able to create a welldesigned interface to a Central Bank digital currency, we could do for the transfer of value what the internet did for the transfer of information, which is create a platform for innovation, so create a platform where we could have new applications and new businesses facilitating the transfer of value in exciting new ways. Yeah, but, if you would, talk a little bit about the Security Piece of that because that means theres more eyes when you have an open application program interface, theres more people engaged and watching whats going on that brings more of that security. Is that correct . Absolutely. So, im a firm believer that open Source Software is critical for security. The more people who are looking, the more likely you are to find bugs and to find problems. Along with the innovation, but there is the security. Yes. Thank you so much. Thank you, madam chair. Thank you to the ranking members. Anyone else have a question . Are we good . Good. Well, as i was saying, i want to say thank you to our witnesses. Obviously you were very engaging today and i appreciate your being here. I want to thank Senator Kennedy for being such great partner and for suggesting this hearing. Thank you, Senator Kennedy. And for any senators who want to submit questions for the record, those questions are due a week from today. Thats wednesday, june 16th. For our witnesses youll have 45 days to respond to any of those questions. And, again, thank you very much, and with that this hearing is adjourned. Cspan has your unfiltered view of government. Were funded by these television companies and more, including sparklight. The greatest town on earth is the place you call home. At spark light, its our home too, and right now were all facing our greatest challenge. Thats why sparklight is working around the clock to keep you connected. Were doing our part so its a little easier to do yours. Sparklight supports cspan as a public service along with these other television providers giving you a front Row Seat to democracy. Florida Senator Marco Rubio joined Iowa Senator Jni Ernst and Congressman Randy Feenstra hole hosted by the iowa republican party. The two senators discussed their time on capitol hill, and also talk about their respective childhoods and what drew them to politics. You have been a clas thank you, senator grassley, youve been a Class Act for a half a century, and you havent lost a single ounce of that, so thank you very much. Weve got another very special guest with us. This is got to be one of the further distances that Congressman Feenstra travels in his district. Is it 4