```

[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]

                      DIGITAL DOLLAR DILEMMA: THE
                     IMPLICATIONS OF A CENTRAL BANK
                      DIGITAL CURRENCY AND PRIVATE
                          SECTOR ALTERNATIVES

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON DIGITAL ASSETS,
                         FINANCIAL TECHNOLOGY,
                             AND INCLUSION

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2023

                               __________

       Printed for the use of the Committee on Financial Services
       
                            Serial No. 118-46
                            
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                            
                            
                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
54-178 PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------                              

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                    SUBCOMMITTEE ON DIGITAL ASSETS, 
                  FINANCIAL TECHNOLOGY, AND INCLUSION

                    FRENCH HILL, Arkansas, Chairman

FRANK D. LUCAS, Oklahoma             STEPHEN F. LYNCH, Massachusetts, 
TOM EMMER, Minnesota                     Ranking Member
WARREN DAVIDSON, Ohio, Vice          BILL FOSTER, Illinois
    Chairman                         JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 RITCHIE TORRES, New York
BRYAN STEIL, Wisconsin               BRAD SHERMAN, California
WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
BYRON DONALDS, Florida               SEAN CASTEN, Illinois
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
ERIN HOUCHIN, Indiana
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 14, 2023...........................................     1
Appendix:
    September 14, 2023...........................................    35

                               WITNESSES
                      Thursday, September 14, 2023

Carrillo, Raul, Academic Fellow, and Lecturer in Law, Columbia 
  Law School.....................................................    11
Michel, Norbert J., Vice President and Director, Center for 
  Monetary and Financial Alternatives, Cato Institute............     5
Paridon, Paige, Senior Vice President and Senior Associate 
  General Counsel, Bank Policy Institute (BPI)...................     6
Rooz, Yuval, Co-Founder and Chief Executive Officer, Digital 
  Asset Holdings, LLC............................................     8
Skinner, Christina Parajon, Assistant Professor of Legal Studies 
  and Business Ethics, The Wharton School of the University of 
  Pennsylvania...................................................     9

                                APPENDIX

Prepared statements:
    Carrillo, Raul...............................................    36
    Michel, Norbert J............................................    53
    Paridon, Paige...............................................    63
    Rooz, Yuval..................................................    82
    Skinner, Christina Parajon...................................    89

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written responses to questions for the record submitted to 
      Raul Carrillo..............................................   102
    Written responses to questions for the record submitted to 
      Paige Paridon..............................................   103
    Written responses to questions for the record submitted to 
      Yuval Rooz.................................................   105
    Written responses to questions for the record submitted to 
      Christina Parajon Skinner..................................   107

 
                      DIGITAL DOLLAR DILEMMA: THE
                     IMPLICATIONS OF A CENTRAL BANK
                      DIGITAL CURRENCY AND PRIVATE
                          SECTOR ALTERNATIVES

                              ----------                              

                      Thursday, September 14, 2023

             U.S. House of Representatives,
                    Subcommittee on Digital Assets,
                              Financial Technology,
                                     and Inclusion,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:13 p.m., in 
room 2128, Rayburn House Office Building, Hon. French Hill 
[chairman of the subcommittee] presiding.
    Members present: Representatives Hill, Emmer, Davidson, 
Rose, Steil, Timmons, Flood, Houchin; Lynch, Foster, 
Gottheimer, Sherman, Casten, and Nickel.
    Ex officio present: Representative Waters.
    Chairman  Hill. The Subcommittee on Digital Assets, 
Financial Technology, and Inclusion will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    I want to thank our witnesses, our excellent panel, for 
being here today.
    And I now recognize myself for 4 minutes to give an opening 
statement.
    Today's hearing is entitled, ``Digital Dollar Dilemma: The 
Implications of a Central Bank Digital Currency and Private 
Sector Alternatives.'' We are here to better understand what 
central bank digital currencies (CBDCs) are, and the concept of 
digital money, to compare CBDCs to privately-issued payment 
stablecoins, and how design choices would impact areas like 
consumer privacy, banks of all sizes, and monetary policy.
    I would like for Members to hear from our witnesses today, 
not only about communist China's proposed digital yuan, but 
what steps the United Kingdom and the European Union have taken 
and why. So far, the conversation is focused on the Federal 
Reserve's legal authority to issue a CBDC. Look, the 
Constitution is clear: Only Congress has the authority to coin 
money and regulate the value of such money. And we have heard 
the same from Federal Reserve officials before this committee, 
and most recently from Fed Vice Chair for Supervision Michael 
Barr, who last week told an audience in Philadelphia, ``The 
Federal Reserve would only proceed with the issuance of a CBDC 
with clear support from the Executive Branch and authorizing 
legislation from Congress.'' The Biden Department of Justice 
agrees, saying, ``There would be substantial legal risks to 
issuing a CBDC without such legislation.''
    Let me be unequivocally clear here for this audience. There 
is no support for a CBDC in Congress, except from those on the 
fringes who think that somehow a CBDC might be an amazing 
solution to many unstated global problems. Several Members--Mr. 
Emmer, Mr. Mooney, Mr. Auchincloss and I--have introduced bills 
stating that the Federal Reserve does not have the authority to 
issue a U.S. CBDC. I particularly want to say thank you to Mr. 
Auchincloss, Mr. Torres, and Mr. Nickel for their work on our 
bill and demonstrating that this isn't a controversial or 
partisan point of view.
    While a retail Federal Reserve-issued CBDC is not in the 
cards, there are many significant areas for improvement in our 
U.S. payment system. We need less complaining and more facts 
and progress. Payments can be modernized by modifying the 
existing system infrastructure through innovations led by the 
private sector. Some modifications have yet to be implemented, 
for example, expanding the days and hours of the Fed wholesale 
payment services, like the National Settlement Service or 
Fedwire. These developments will provide for instant payments 
for individuals and businesses through their financial 
institution. It is not okay that the Fed still hasn't finished 
this work a decade later, with no clear timetable for its 
completion. However, other improvements are already underway. 
The Real-Time Payments (RTP) network has been around since 
2017, while the FedNow Service was recently launched in July.
    Turning to innovations in blockchain payment rails, our 
committee marked up the Clarity for Payment Stablecoins Act in 
our committee during July, which establishes a Federal regime 
for payment stablecoins, with strict reserve and capital 
requirements, disclosures, and attestations to protect 
consumers. I want this hearing to explore whether a U.S. CBDC 
is the most efficient and effective means to address payment 
inefficiencies, or if, in fact, private-sector alternatives and 
improvements to our existing payment system and infrastructure 
can better provide more-immediate solutions.
    I look forward to hearing our witnesses' perspectives. I 
thank all of my colleagues on both sides of the aisle for their 
dedication to thoughtfully exploring this issue, and working 
together, we can modernize the U.S. payment system.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Massachusetts, Mr. Lynch, for 
4 minutes for an opening statement.
    Mr.  Lynch. Thank you, Mr. Chairman, for holding this 
hearing on such an important topic. As the former Chair of the 
Task Force on Financial Technology, I held a handful of 
hearings on central bank digital currencies during my tenure. 
We heard from experts who discussed the potential ways in which 
a government-issued digital dollar could be designed to promote 
financial inclusion and protect privacy, while streamlining our 
payment system and preventing fraud. I am eager to continue 
these discussions, if that is allowed, and I hope that we can 
do so in a productive way. I worry about some of the recent 
false narratives and fearmongering--much of which has been 
fueled by the crypto industry itself--around a around CBDC 
being weaponized as a tool for government surveillance or 
control. It is important to correct some of the inaccurate and 
misleading claims that could lead us to shut down innovative 
policy approaches before we have even begun a meaningful 
discussion.
    A CBDC is just one type of publicly-issued digital dollar 
and would be issued, backed, and regulated by the Federal 
Reserve, and have the full faith and backing of the U.S. 
Government. This could serve as an alternative to existing 
forms of payment and have some benefits, including instant 
payment settlement, providing a medium for cross-border 
transactions, and fostering greater financial inclusion.
    More than 130 countries have begun to explore their own 
government-backed digital currencies. China, Russia, Saudi 
Arabia, and India have already commenced pilot programs, and a 
digital euro pilot could be launched as early as 2028. 
Meanwhile, the U.S. remains far behind amid increasing and 
blatant misinformation about features of digital currency.
    While concerns about data privacy and government 
surveillance are real, especially in countries that do not 
respect human rights and privacy, a CBDC does not have to be 
designed that way. We could employ an architecture that would 
protect personal data, while including anti-money laundering 
and terrorist financing features. It is counterintuitive that 
my colleagues should be raising concerns about data privacy, 
while thousands of private companies, both domestic and 
foreign, are surveilling, aggregating, and selling consumer 
data each and every day. As policymakers, we should be asking 
questions about how a digital dollar could be designed to 
maximize privacy and prevent exploitation of personal data.
    To dive in further today, I am announcing and inviting my 
colleagues to join the Congressional Digital Dollar Caucus. 
This forum will educate Members on critical issues relating to 
the development, design, and potential implementation of a 
government-issued digital dollar. I plan to invite innovators, 
technologists, academics, and other experts to share their 
findings and development. I hope my colleagues will join me in 
this exploration.
    I should make it clear that I do share the concerns of some 
of my colleagues about the need for digital currencies that 
respect privacy and anonymity. The use of anonymous cash has 
plummeted, and more of our transactions are occurring online 
and under surveillance, tracked and aggregated by financial 
services companies.
    Indeed, China has turned that fact into a tool of full-
spectrum surveillance of its citizens. This is why I have 
introduced the Electronic Currency and Secure Hardware (ECASH) 
Act. This bill directs the Treasury to design and pilot a 
digital version of cash, and would complement the Fed-issued 
CBDC. It would allow individuals to make instant peer-to-peer 
(P2P) payments with no consumer data or transaction tracking 
and without the use of a bank account. This bill represents one 
of the many design choices of a digital dollar.
    In closing, I hope my colleagues will join me in this 
exploration rather than moving forward legislation that bans 
the Fed from issuing a CBDC, or even goes so far as to prevent 
research or pilot programs. I call on my colleagues to 
thoughtfully engage on this topic and to not succumb to 
industry-driven narratives that would prevent the U.S. from 
moving forward. Thank you, Mr. Chairman, and I yield back.
    Chairman  Hill. I thank the gentleman from Massachusetts, 
and I recognize the distinguished Majority Whip, Mr. Emmer from 
Minnesota, for 1 minute.
    Mr.  Emmer. Chairman Hill, I want to thank you. This is an 
important hearing that you are holding today, and I appreciate 
it.
    Open, permissionless, and private: What do I mean by this? 
In our digital economy, all transactions are intermediated by 
banks, governments, or Big Tech. We must develop digital tools 
that function like cash. These digital assets must be open and 
freely accessible to all without requiring permission from the 
government or anyone else, and private, safeguarding the user's 
identity. These qualities are fundamental to a free society, 
and unfortunately, the administrative state would rather have a 
cashless economy run on a central bank digital currency, a tool 
the communists have, than to work to maintain our American 
values in the digital age.
    The need to protect Americans' right to financial privacy 
is at an all-time high. That is why I introduced the CBDC Anti-
Surveillance State Act, with over 50 of my colleagues. This 
bill prevents unelected bureaucrats from creating a tool for 
financial surveillance. If not open, permissionless, and 
private, like cash, a CBDC is nothing more than a Chinese 
Communist Party (CCP)-style surveillance tool that will oppress 
the American way of life, and we are not going to allow that to 
happen.
    And Mr. Chairman, I would like to submit for the record my 
December 1st letter to Susan Collins at the Federal Reserve 
Bank of Boston about the shady CBDC pilot that they have been 
running.
    Chairman  Hill. Without objection, it is so ordered.
    And the gentleman's time has expired.
    With that, we want to welcome the testimony of our panel: 
Dr. Norbert Michel is the vice president and director of the 
Center for Monetary and Financial Alternatives at the Cato 
Institute; Ms. Paige Paridon is the senior vice president and 
senior associate general counsel at the Bank Policy Institute; 
Mr. Yuval Rooz is the co-founder and CEO of Digital Asset 
Holdings, LLC, an enterprise blockchain provider seeking to 
provide programmable smart contracts to traditional financial 
institutions; Professor Christina Skinner is an assistant 
professor at The Wharton School of the University of 
Pennsylvania, where she focuses on central banks and fiscal 
authorities; and Mr. Raul Carrillo is an academic fellow and 
lecturer at the Columbia Law School, where he analyzes 
financial regulation, technology, and innovation.
    We thank each of you for taking the time to be with us 
today. Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Dr. Michel, you are now recognized for 5 minutes.

 STATEMENT OF NORBERT J. MICHEL, VICE PRESIDENT AND DIRECTOR, 
 CENTER FOR MONETARY AND FINANCIAL ALTERNATIVES, CATO INSTITUTE

    Mr.  Michel. Good afternoon, Chairman Hill, Ranking Member 
Lynch, and members of the subcommittee. Thank you for the 
opportunity to testify today. I am Norbert Michel, vice 
president and director of the Center for Monetary and Financial 
Alternatives at the Cato Institute. The views I express in this 
testimony are my own and should not be construed as 
representing any official position of the Cato Institute.
    In my testimony, I argue that the United States should not 
launch a central bank digital currency (CBDC). Advocates for a 
CBDC tout many potential benefits, but there is nothing unique 
about the technology that would provide those supposed 
benefits. Frequently, advocates completely ignore private 
sector innovations as well as the potential risks a CBDC poses. 
Regardless of the possible design choices, such as whether a 
CBDC is direct or, as the Fed calls it, ``intermediated,'' 
these risks far outweigh any potential benefits because a CBDC 
is not, ``just another form of money.'' A CBDC in any form 
would be a direct liability of the central government, a 
digital tether to its citizens such that it would radically 
alter the existing public-private relationship that already 
exist in our monetary arrangement.
    There are many myths surrounding CBDCs, and I will use my 
time to discuss what I consider the three most important. 
First, issuing a CBDC would not help preserve the status of the 
United States dollar. It would likely damage it. Proponents 
argue that because China has launched a CBDC, the United States 
must keep up by launching its own. Others make the narrower 
claim that the U.S. must launch a CBDC to keep up with broader 
technological changes in the payment sector, but anyone who 
chooses to do so can transact digitally in U.S. dollars right 
now.
    The CBDC does not take us from a world with zero or a few 
digital transactions to one filled with digital transactions. 
Moreover, the dollar's renowned status is owed to the strength 
of the American economy and its legal protections for private 
citizens relative to many other countries. Unlike in many other 
places, Americans do not have to live in constant fear that the 
government will take their money. However, if the U.S. creates 
a CBDC, anyone who wants to use the dollar would lose a layer 
of protection from that type of government abuse.
    The second myth is that a CBDC would expand financial 
inclusion by providing a new source of financial services for 
America's unbanked and underbanked populations. Again, though, 
this is not a technological problem. In other words, the CBDC 
itself does not accomplish this goal. The private sector 
already enables us to transact digitally, and it has been 
steadily shrinking the number of Americans without financial 
services for years.
    We also know, because the FDIC asked them, that unbanked 
and underbanked Americans primarily are in that situation 
because either they don't have enough money to have an account 
or they don't want to give their personal information to a bank 
or the government. And what should be obvious is that a lack of 
sufficient income is a much broader economic problem than a 
CBDC or financial service technology.
    While some proponents argue that a CBDC lowers the cost of 
providing financial services, that is true only if the 
government subsidizes those costs or chooses to waive the same 
level of regulatory scrutiny it requires of private firms. And 
that level of scrutiny, it turns out, is more than just a 
costly mandate that the government has placed on private firms. 
It is also the one that causes those unbanked Americans to say 
they don't trust banks. It is also the same one that requires 
people to hand over their personal information to private 
companies and, as a result, potentially to the government. If 
the government removes that mandate for all financial service 
providers, there would be no cost advantage to a CBDC.
    That brings me to my last myth, the idea that a CBDC could 
somehow enhance financial privacy. Currently, Americans are 
forced to hand over personal information to financial 
institutions. Those institutions are required to track 
transactions, and the government can access that information 
without a warrant. The Fourth Amendment is supposed to protect 
Americans from the government gaining access to this kind of 
information unless they show probable cause and obtain a 
warrant, but it no longer protects Americans when it comes to 
financial information, and the only buffer left is that the 
government must go through the financial institution to obtain 
that information. Introducing the CBDC would remove this last 
layer of protection. It would place all financial transactions 
either in a government database or leave them a keystroke away. 
The United States should not launch a CBDC or provide direct 
wallets or accounts.
    Thank you for your consideration, and I am happy to answer 
any questions that you may have.
    [The prepared statement of Dr. Michel can be found on page 
53 of the appendix.]
    Chairman  Hill. Thank you, Dr. Michel. Ms. Paridon, you are 
now recognized for 5 minutes to give your oral remarks.

  STATEMENT OF PAIGE PARIDON, SENIOR VICE PRESIDENT AND SENIOR 
     ASSOCIATE GENERAL COUNSEL, BANK POLICY INSTITUTE (BPI)

    Ms.  Paridon. Thank you, Chairman Hill, Ranking Member 
Lynch, and honorable members of the subcommittee. Thank you for 
inviting me to testify. My name is Paige Pidano Paridon, and I 
am a senior vice president and senior associate general counsel 
at the Bank Policy Institute (BPI), a nonpartisan policy 
research and advocacy organization representing banks with over 
$100 billion in U.S. assets.
    Technological innovation over the last several years has 
led to the increased speed of payments, clearing and 
settlement, and new forms of digital money. In part due to 
concerns about this innovation, central banks have been 
studying and exploring the potential benefits of a central bank 
digital currency (CBDC), a form of digital money that is a 
direct liability of the central bank. Fortunately, the Federal 
Reserve Board has recognized that as both a legal and a policy 
matter, Congress should decide whether the United States should 
have a central bank digital currency.
    On balance, we believe that at this point, there is little 
evidence that a CBDC would bring measurable benefits to the 
U.S. economy or consumers. Furthermore, a CBDC could upend the 
commercial banking system and create financial instability. A 
CBDC can take one of two general forms: a wholesale CBDC, which 
would be used only by financial intermediaries; and a retail 
CBDC, which could be used by consumers and businesses. To date, 
most research and attention has been focused on a retail-
intermediated, account-based model in which consumers' CBDCs 
would be held in an account at a bank or another financial 
intermediary. Like an asset held in custody, the CBDC could not 
be used by the bank to make loans in the way that dollar 
deposits are used today. Any transfer of a dollar deposit from 
a bank to a CBDC is a dollar unavailable for lending to 
businesses or consumers. By attracting deposits away from 
banks, a CBDC likely would undermine the commercial banking 
system in the United States, and severely constrict the 
availability and increase the cost of credit to the economy.
    Many of the purported benefits of a CBDC are uncertain and, 
furthermore, are achievable through alternative, less-risky 
means. For example, some have argued that a CBDC is necessary 
to increase payments efficiency and foster financial inclusion. 
However, in the United States, banks have led numerous efforts 
to improve the speed and security of payments, reduce the cost 
of financial products and services, and advance financial 
inclusion. For example, in 2017, the Clearing House launched 
RTP, a real-time payments network which currently reaches 65 
percent of U.S. demand deposit accounts. Zelle is another 
example of bank-led innovation, a bank-owned, peer-to-peer 
payment service through which transferred funds are available 
almost immediately. In addition, banks stand ready to meet the 
demand for a blockchain-based cash equivalent instrument within 
the safety of the regulatory perimeter, such as by issuing 
deposit tokens.
    With respect to financial inclusion, a review of the 
reasons why certain individuals are unbanked makes it clear 
that a CBDC would be unlikely to meaningfully increase 
financial inclusion. For example, FDIC data reveals that many 
respondents are unbanked because of privacy concerns. An 
intermediated CBDC is unlikely to mitigate those concerns, 
given that it would presumably come with the same Know Your 
Customer (KYC) requirements that currently apply to banks.
    Furthermore, to help foster inclusion, banks are expanding 
access to safe and affordable financial services such as low-
cost banking accounts, including through the Bank On national 
program, which has the goal of ensuring that everyone has 
access to a low-cost bank account. There are over 375 Bank On 
nationally-certified accounts representing over 60 percent of 
the domestic deposit market. Ultimately, because a CBDC could 
undermine the commercial banking system and threaten financial 
stability, and because the purported benefits of a CBDC can be 
achieved through less-harmful means, we agree with the Federal 
Reserve that further steps toward developing a CBDC should only 
be taken if research points to benefits for households, 
businesses, and the economy overall that exceed the downside 
risks, and indicates that a CBDC is superior to alternative 
methods, and only with the support of the Executive Branch and 
with legislative authorization.
    Thank you again for the opportunity to testify. I look 
forward to your questions.
    [The prepared statement of Ms. Paridon can be found on page 
63 of the appendix.]
    Chairman  Hill. Thank you so much. Mr. Rooz, you are now 
recognized for 5 minutes to give your oral presentation.

    STATEMENT OF YUVAL ROOZ, CO-FOUNDER AND CHIEF EXECUTIVE 
              OFFICER, DIGITAL ASSET HOLDINGS, LLC

    Mr.  Rooz. Thank you, Chairman Hill, Ranking Member Lynch, 
and other members of the subcommittee . My name is Yuval Rooz. 
I am the co-founder and CEO of Digital Asset.
    As this committee deliberates on how best to bring the 
dollar into a digital era, I am here to make two requests. 
First, that Congress ensures that any digitally-represented 
dollar, whether a stablecoin or a CBDC, lives within our 
constitutional framework. Americans using any digitally-
represented dollar should have the assurance that their privacy 
rights are protected under the Fourth Amendment framework.
    And second, that Congress works closely with the private 
sector and leverages technology already built and proven to 
serve as the rails for any digitally-represented dollar. Any 
solution that ignores private sector innovation, risks 
technological stagnation, and will ultimately undermine our 
global competitiveness.
    I helped found Digital Asset in 2014. Digital Asset is at 
the forefront of modernizing the infrastructure of financial 
systems with our privacy-focused blockchain technology. For 9 
years, we have worked hard to carefully and responsibly 
innovate to solve real problems in financial services. Today, 
our clients are using our privacy-focused Daml application 
platform and Canton blockchain protocol to reduce the time to 
issue bonds, stocks, and other financial instruments from days 
to seconds, ultimately reducing the settlement risk and 
increasing efficiency.
    One client is using our technology to process over a 
trillion dollars of tokenized Treasury repo agreements per 
month. And our technology was recently used in a pilot project 
with the New York Federal Reserve's Innovation Center to 
demonstrate how blockchain technology can modernize the 
infrastructure for global dollar-based settlements. 
Importantly, this pilot project tested a shared ledger within 
the existing two-tier banking system to more efficiently record 
the movement of Federal Reserve money that occurs between banks 
on a daily basis. We recently announced, along with 29 market 
participants, the launch of the Canton Network to help connect 
institutions and move value globally.
    Our success is in no small part due to the fact that our 
technology is built with privacy at its core, making our 
technology well-suited for financial services.
    I am here today because as we embark upon a new digital era 
in finance, I believe the global financial competitiveness of 
the United States--including the dollar's position as the 
world's reserve currency--is at stake. This is a critical 
national security issue that demands innovation led by the 
private sector, but private sector innovation alone is not 
sufficient. As we have seen with the invention of the internet, 
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 our Constitution. We expect our financial 
transactions to be afforded the privacy protections of the 
Fourth Amendment, and this should not change as payments become 
digital.
    History has shown that technology is inseparable from 
finance. And today, we stand at yet another technological 
inflection point for financial systems blockchain technology. 
As our successful client deployments demonstrate, blockchain 
technology--when built around configurable privacy--can provide 
the financial system with increased efficiency and reduced risk 
by eliminating the need for maintaining multiple copies of the 
same information and by allowing value to be represented 
digitally.
    Leveraging blockchain technology to modernize financial 
infrastructure is critical to ensuring our continued global 
financial competitiveness and the dollar's status as the 
world's reserve currency. It is the rails on which digital 
value will be transferred.
    Of course, innovation alone is not sufficient for the 
United States to maintain its global competitiveness, but our 
role today as a global financial leader--with the dollar as the 
world's reserve currency--does require innovation. There is 
nothing inherent or inevitable about the inefficiencies in 
today's financial system, and as other countries' financial 
systems eliminate these inefficiencies through blockchain 
technology, the United States risks being left behind and 
losing our leadership position. A global economic order aligned 
with our values is in our national interest.
    We have two critical advantages that can help us maintain 
our leadership position--vibrant private sector innovation, and 
the rule of law enshrined in our Constitution and protected by 
its system of checks and balances. And our advantages are 
strongest when wielded together. While private-sector 
innovation is important, and is the engine that drives our 
economy, in an area as critical as finance, innovation needs to 
occur within a deliberate policy framework to ensure that 
innovation does not outrun or undermine our values and national 
interest. Thank you.
    [The prepared statement of Mr. Rooz can be found on page 82 
of the appendix.]
    Chairman  Hill. Thank you, Mr. Rooz. Professor Skinner, you 
are now recognized for 5 minutes for your oral presentation.

STATEMENT OF CHRISTINA PARAJON SKINNER, ASSISTANT PROFESSOR OF 
 LEGAL STUDIES AND BUSINESS ETHICS, THE WHARTON SCHOOL OF THE 
                   UNIVERSITY OF PENNSYLVANIA

    Ms.  Skinner. Thank you. Subcommittee Chair Hill, Ranking 
Member Lynch, and members of the subcommittee, thank you again 
for the opportunity to testify on this important issue of a 
CBDC and the United States.
    Although a CBDC remains hypothetical today, assessing the 
costs and benefits of a CBDC is crucial to your ability to 
establish the appropriate lane markers for the Federal Reserve 
when it comes to money and payments. After all, Article I of 
the U.S. Constitution gives Congress the exclusive power to 
decide what money is. And although it is constitutionally 
permissible for Congress to delegate some monetary authority in 
certain respects, it is important that Congress not abdicate 
that authority by ceding too much discretion to pilot or 
develop a CBDC.
    In my remarks today, I would like to highlight three 
predictive points that I elaborate on in further detail in my 
written testimony. First, introducing a CBDC would change the 
people's relationship with the State and by that, I mean the 
government. Second, a CBDC would certainly change the 
relationship with the central bank. It could empower the 
central bank, while at the same time weakening its 
independence. And third, even though CBDCs are highly popular 
among many of the world's leading central banks, there is no 
discernible reason for the United States to move toward a CBDC 
right now.
    Privacy rights are the clearest place to start. Today, 
individuals can enjoy comprehensive privacy in their payments 
transactions by using cash. Although most central banks have 
suggested that a CBDC is not going to replace cash, that near-
term promise can't be guaranteed over the longer term, and the 
insinuation that a CBDC is necessary or inevitable seems 
motivated by a view that cash will eventually become obsolete. 
But because central banks don't have the technology presently 
to offer cash-like privacy, a digital currency, unless it is 
radically redesigned, will bring with it the ability for the 
State to monitor or surveil its citizens' payments activity.
    To turn to my second point, I would like to focus on the 
impact of a CBDC on the Federal Reserve. Certainly, since 2010, 
the power and authority of the Fed has grown considerably, and 
Congress' responsibility to oversee the Fed requires it to 
understand how a CBDC could further empower the central bank, 
but also how it might weaken it.
    On the one hand, a CBDC could result in a larger central 
bank balance sheet. Issuing a CBDC would increase the liability 
side of the Fed's balance sheet if the total of bank reserves, 
repos, and cash balances largely remained unchanged. So, if the 
liabilities with a CBDC increase, so, too, must the Fed's 
assets. The Fed could buy more Treasury securities to match a 
CBDC, but that could possibly invite pressure on the Fed to 
issue more CBDCs to in turn absorb more government debt, and 
overall, that dynamic could further erode the limited fiscal 
discipline that we have remaining.
    A CBDC could also affect the Fed's independence in the way 
that it would establish a direct relationship between the 
central bank and the real economy for the first time in 
history. One result of that relationship would almost certainly 
be the further erosion of the line between monetary and fiscal 
policy. Once central banks begin to issue liabilities directly 
to the people, it will become much more difficult for the 
central bank to justify the provision of liquidity to banks and 
the financial system, as opposed to households, especially 
during a crisis. And effectively, this could open the door to 
political pressure on the Fed to provide liquidity assistance 
to households during turbulent economic times. But these sorts 
of household-level interventions would radically transform the 
central bank and its purpose and role within society.
    For my third and final point, I would like to briefly 
address the international dynamic that is currently in play. 
Leading central banks around the world, including the European 
Union, the European Central Bank, and the Bank of England, have 
much more strongly indicated their desire and intention to move 
toward a CBDC than the Federal Reserve has, but there is really 
no need to hurry for fear of missing out. It is important to 
recognize in this context that sometimes, the emperor might not 
be wearing any clothes.
    The dollar that is used by households and businesses 
domestically and internationally is already digital. In fact, 
one is hard-pressed to find a compelling problem that CBDC 
solves. It does not inherently improve financial inclusion 
unless it is paired with accounts for all citizens, which the 
central bank itself has already recognized as infeasible, nor 
does a CBDC increase financial stability, given the extent to 
which we can expect it to disintermediate the banking sector. 
And while a CBDC might expand the monetary policy toolkit, 
using remuneration on CBDC as a monetary policy instrument 
would invite the central bank to make socially-contentious 
judgments.
    Finally, in closing, I would like to add my voice to the 
chorus of those who have emphasized that the dollar's reserve 
currency status, undoubtedly a tremendous asset in the United 
States, does not turn on whether it is a CBDC. Our best 
approach is to preserve the global status of the dollar through 
our commitment to the rule of law, democratic institutions, and 
free market principles of innovation and well-tailored 
regulation.
    [The prepared statement of Professor Skinner can be found 
on page 89 of the appendix.]
    Chairman  Hill. Thank you, Professor. Mr. Carrillo, you are 
now recognized for 5 minutes for your oral presentation.

 STATEMENT OF RAUL CARRILLO, ACADEMIC FELLOW, AND LECTURER IN 
                    LAW, COLUMBIA LAW SCHOOL

    Mr.  Carrillo. Good afternoon, Subcommittee Chair Hill, 
Subcommittee Ranking Member Lynch, Full Committee Ranking 
Member Waters, and distinguished members of the subcommittee. 
Thank you for inviting me to testify. My scholarship focuses on 
financial technology, especially digital privacy and sound data 
governance. My research also draws on my experience as a 
regulator, legal services attorney, and a policy counsel. In 
addition, it draws on my experience and my upbringing in the 
U.S.-Mexico borderlands, a region under constant surveillance 
by the government, in partnership with Silicon Valley.
    Today, I support the call for a digital dollar system, 
including a CBDC, Fed accounts, and ECASH. I strongly believe 
that we can actually build a digital dollar system that 
respects our civil rights and freedoms and is safe for everyone 
to use. To frame our conversation more constructively, I will 
focus on two critical faulty assumptions that dominate digital 
dollar discourse, including this hearing today. These faulty 
assumptions limit our collective capacity for innovation.
    The first faulty assumption is a matter of design. When we 
narrow the digital dollar to a CBDC, and the conversation to 
the Fed, we do a disservice to the public. This is incredibly 
unhelpful, especially when we discuss the digital dollar at the 
retail level. At a minimum, our conversation should include a 
discussion of the Treasury and its many bureaus, including the 
Mint, the Bureau of Engraving and Printing, the Bureau of 
Fiscal Service, and the Secret Service, which are involved in 
the deployment of financial technology every day.
    Second, when discussing privacy, the digital dollar system 
and a CBDC should be compared to the existing systems that we 
are already using. As has been pointed out, the private sector 
does not protect data security or data privacy sufficiently. 
Crude opposition to a CBDC based on surveillance grounds with 
no comparison to a real baseline is blinkered and leads us to 
throw the baby out with the bathwater.
    Just 6 years ago last Thursday, Equifax revealed it had 
been breached, granting hackers access to the personal 
sensitive information of nearly every adult in the United 
States, including those without credit scores. The fintech 
world of more sophisticated data brokers and super apps engages 
in data maximization as a business model and embraces 
unnecessary complexity that undermines data security. Of 
course, the Fed is also engaged in its data-intensive financial 
surveillance, often in partnership with Big Tech and fintech. 
That part has been left out of our conversation today.
    Here, the precise problem is that the doctrine and 
technological platforms that the government uses evade data 
collection constraints by acquiring data from private-sector 
entities that are not ceasing to collect that data, whether 
their ledgers are centralized or decentralized. The major 
financial surveillance threat in the United States is not in 
the public or private sector per se, but in both and, more 
importantly, in the links between them.
    The digital dollar system presents a unique opportunity, I 
think, to actually build financial privacy and security in this 
country through public infrastructure that would benefit 
everyone. But the digital dollar system will not do so if we 
build it like the Chinese system, and it will not do so if we 
allow third-party access to retail payments data beyond what is 
necessary to effectuate payments, as the private sector does 
today. Indeed, the only way to evolve beyond the surveillance 
status quo is to establish a direct digital dollar interface 
with consumers, where the Fourth Amendment and other 
protections may actually apply.
    If we truly care about privacy, we should treat the banking 
and blockchain industry appeals to partnership as suspect based 
on legal and technological grounds alone. We can build a retail 
CBDC and Fed account system with superior protections compared 
to what exists now, and superior protections to the systems 
that are being built around the world currently.
    So today, I also advocate for the inclusion of digital 
cash, as detailed in the Electronic Currency and Secure 
Hardware Act, the ECASH Act, reintroduced by Representative 
Lynch today. ECASH devices, available on a smart card or a 
phone card, would serve as digital counterparts to cold, hard 
American cash. These devices would not make payments over the 
internet. Instead, they would store Treasury-issued digital 
dollars on card hardware to enable everyday small-dollar 
transactions for everyday people. These transactions would be 
subject to the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) 
regime, and as a boon to law enforcement, we can set privacy-
sensitive security controls and caps on transactions and usage. 
However, the cards would in no instance be capable of 
generating data that companies and agencies can abuse. We 
preserve a place for privacy within public infrastructure. The 
ECASH Act hearkens back to the past, to the days when President 
Lincoln established the banking and cash system that we still 
use today, and it also hearkens to an exciting, inclusive, safe 
digital future.
    Thank you.
    [The prepared statement of Mr. Carrillo can be found on 
page 36 of the appendix.]
    Chairman  Hill. I thank the gentleman. Before we go to 
Member questions, a note of housekeeping. This hearing will 
recess for the 3:00 p.m. vote series and immediately resume 
after votes.
    I now recognize myself for 5 minutes for questions.
    I appreciate the panel and the engagement and the good 
testimony today. Sometimes, what is lost in this conversation 
about central bank digital currency is that ultimately, for 
this conversation, it is about a payments issue. If you look at 
countries around the world that have started piloting or have 
launched their own CBDCs, it is loaded on people's mobile 
wallets and used to pay for things at a checkout counter.
    It is a big reason why some of us who oppose a U.S. CBDC 
warn, for example, that an unchecked government could monitor 
your purchases at the gun store, flag you as a threat, and cut 
off your access to your bank accounts, even though you haven't 
done anything illegal. If you think Operation Choke Point was 
bad, let that sink in. Payment and transaction data can tell 
you a lot about somebody. That is why CFPB's Rule 1033 about 
the scope of the rule and whether it should be extended to Reg 
E and Reg Z accounts or beyond is so important.
    In terms of payments, I would like to have a good 
discussion about how Congress should be thinking about CBDCs in 
a world where payment stablecoins already exist, with a total 
market capitalization of between $100 billion and $200 billion. 
They are already here. They are already functioning. They 
aren't really being used by retail holders to pay for things 
like Starbucks coffee, but if stablecoins are issued under a 
strong Federal framework, like the one we envision in our 
Clarity for Payment Stablecoins Act, they certainly could be.
    Mr. Rooz, in your view, could a U.S. CBDC and payment 
stablecoins coexist and be integrated and interoperable with 
one another, and should they?
    Mr.  Rooz. Thank you, Chairman Hill, for the question. 
First of all, I do think that any technological solution that 
the U.S. would want to carry forward is possible. As I stated 
in my opening remarks, I think that when it comes to money, 
trust is a very big component, therefore, privacy is going to 
be a very critical component of it. I think that it is 
important to understand that our perspective is that the usage 
of blockchain technology is all about reducing reconciliation. 
And I think that it is important that the government, in order 
to have trust in its payment system, whether it is by the 
private sector or by the government, has our privacy protected.
    You stated that stablecoins exist today. That is true, and 
I do think that there are technologies that can even improve 
our trust in stablecoins. As we know, today there are companies 
out there that know how to look at public, permissionless 
blockchains and harvest information. And therefore, I think 
that we should, as introduced by the bill around stablecoins, 
create a framework that helps the government also set the rules 
for stablecoins.
    Chairman  Hill. Thank you. I appreciate that.
    Mr. Michel, do you think that they obviate the need for one 
another? Do you think payment stablecoins should be 
interoperable with a CBDC, or do you think stablecoins actually 
obviate the need for a CBDC in this blockchain payment space?
    Mr.  Michel. The latter; they obviate the need for them. I 
do not believe any private company is going to be able to 
compete with the government, and that is a broader rule, and it 
applies here as well.
    Chairman  Hill. Yes. Thank you.
    Ms. Paridon, I appreciate your testimony very much. You 
talked about upending the banking system, which is something 
that doesn't get a lot of conversation on this topic, where 
these CBDCs would actually be a liability of the central bank 
and not of the banking system and, thereby, taking out the 
source of funding for all of America's lending. Could you 
expand on that, please?
    Ms.  Paridon. Sure. A CBDC, because it would be a direct 
liability of the central bank, would be perceived as the 
ultimate safe asset. From that perspective, particularly during 
times of economic stress, it could attract depositors to pull 
their money out of the banking system, and to flee or run to a 
CBDC if there was a perceived concern about the banking system 
or the financial system overall. Every dollar that currently 
resides in a bank account can be deployed for useful purposes 
in the economy, primarily through lending. Every dollar that is 
pulled out from the banking system and put into a CBDC is one 
less dollar that could be put to good economic use, and that is 
why we have a fundamental concern with a retail CBDC, given the 
flight to quality risks.
    Chairman  Hill. Thank you for that. Mr. Rooz, and Professor 
Skinner, could you each submit a written answer to my question 
on your views of what other countries that are actually issuing 
a CBDC--what you see as the features and technology and the 
pros and cons there? If you could do that in writing for me, I 
would appreciate it.
    It is now my pleasure to call on the ranking member of the 
full Financial Services Committee, the distinguished 
gentlewoman from California, Ranking Member Waters, for 5 
minutes for her questions.
    Ms.  Waters. Thank you very much. Mr. Carrillo, 130 
countries representing 98 percent of the global economy are now 
exploring digital versions of their currencies, including the 
United States. Almost half of these countries are in advanced 
development, pilot, or launch stages of their CBDCs. Can you 
discuss how CBDCs may shape the future global financial 
landscape? What would it mean for the United States if we 
instead chose to stay on the sidelines of this race?
    Mr.  Carrillo. Thank you very much for the question, 
Representative Waters. My opinion is that it is incumbent upon 
the United States to provide leadership with respect to an 
inevitable process that is going to occur across the world. It 
is clear that we are all moving to digital fiat currency. The 
question is, what sort of protections are going to attend 
digital fiat currency? If we don't get this right now, the rest 
of the world is going to move on, likely with systems in some 
places that are less protective of privacy and data security 
than our own.
    I think that the rhetoric around an arms race has been 
particularly unhelpful. In fact, there is an opportunity for 
collaboration here, not with the totalitarian systems, but with 
folks who are building digital fiat currency, especially in 
developing areas where there is a need for offline access. What 
we learn from those countries could be particularly helpful 
with respect to our own development in communities of color, 
and in maintaining privacy, security, and civil rights. Again, 
I think it is the United States' job as reserve currency leader 
to lead the way here with respect to civil rights and our 
freedoms. Thank you.
    Ms.  Waters. Thank you very much. If I could follow up for 
just a moment, there are differences of opinion on this 
committee about whether or not we should move in that 
direction. In addition to what you have just shared with us 
about what is happening around the world and with other 
countries, is there anything else that you can add to it that 
would show us at an advantage if, in fact, we moved to develop 
the CBDCs?
    Mr.  Carrillo. Yes. Absolutely, Representative Waters. 
Thank you, and I am happy to provide detailed written answers 
on this topic as well. But I will highlight for now something 
that has been, I think, a common thread throughout the 
testimonies of myself and my fellow witnesses here, which is 
that this is a space where the future of money is being defined 
in part by competition. I believe I just heard that CBDCs would 
obviate the necessity of stablecoins. In my opinion, given the 
volatility and the recent collapses in the cryptocurrency 
industry, perhaps regulating the stablecoins better with a 
little competition is quite a good thing.
    Beyond that, I would say that I hear a lot of concern 
across the political spectrum in this committee about the power 
of Silicon Valley. And if you do not create an alternative to 
the corporate systems that collect data or promise to protect 
it and then collect it en masse, which is even worse and common 
in the blockchain industry, then what is going to happen is 
that Silicon Valley is going to win. And frankly, I don't think 
anybody here wants that, but in order to preserve the space 
that we have for public money and not make it a Big Tech 
enterprise, we, in fact, have to move forward with digital fiat 
currency.
    Ms.  Waters. Thank you very much. I yield back.
    Chairman  Hill. Thank you, Ms. Waters. The gentleman from 
Ohio, Mr. Davidson, who is also the Vice Chair of this 
subcommittee, and the Chair of our Housing and Insurance 
Subcommittee, is recognized for 5 minutes.
    Mr.  Davidson. I thank the chairman for having this 
hearing. I think perhaps the biggest existential threat to 
Western civilization is a wrongly-structured system of money. 
Sound money serves as a store of value, a stable store of 
value, and an efficient means of exchange. One of the key 
characteristics of sound money is that it facilitates 
permissionless, peer-to-peer transactions like cash. Currently, 
of the 100-plus countries developing a central bank digital 
currency, none of them are developing a permissionless system. 
Every one of them is developing a permissioned system, 
including the United States Federal Reserve. When we talk about 
permissions, we can kind of get something from that, from the 
Federal Reserve's own report of that. They said in their report 
that it should be privacy-protected, intermediated, widely-
transferable, and identity-verified.
    Mr. Michel, Professor Skinner, in your view, is it possible 
to be both privacy-protected and identity-verified?
    Mr.  Michel. No, in my view, it is not. Once the 
information is in a system, somebody is going to get it, and it 
is going to get out. And I want to quickly say I am very happy 
to hear everybody here on the panel is pro-Fourth Amendment. 
The problem, of course, as you know, is that the Bank Secrecy 
Act and the Anti-Money Laundering regime runs right over the 
Fourth Amendment, so that is what needs to be fixed.
    Mr.  Davidson. It is already a problem in third-party 
hands, but this wouldn't even be in third-party hands.
    Professor Skinner, what is your view?
    Ms.  Skinner. My view is, no, that is not possible right 
now, and central banks have essentially admitted as much, and 
to the extent such technology is or could be under development, 
it is extremely immature. I think the point to emphasize here 
is that inherently, there will be a tradeoff, to the extent 
central banks create a CBDC, between identity verification and 
privacy and, more than likely, central banks will always choose 
identity verification because they will never feel comfortable 
sacrificing the national security goals that they see as 
accompanying robust identity verification.
    Mr.  Davidson. Yes. I don't think they can conceive of a 
different architecture. Fundamentally, I think a lot of people 
don't understand the difference between Bitcoin, for example--
maybe the most widely-known digital asset--and a central bank 
digital currency. Bitcoin is permissionless, peer-to-peer. The 
whole computing architecture is different. If you add zero 
knowledge proofs to that, that is a different thing, but it is 
not identity-verified. It is also not intermediated in the same 
way.
    Mr. Rooz, what is your take on this?
    Mr.  Rooz. I think that introducing requirements that 
require identification, and then privacy, does introduce 
challenges. I think that you mentioned, or it was mentioned, 
the Bank Secrecy Act. At the end of the day, those type of acts 
create similar conflicts. I think technology is capable of 
introducing digital money that has full privacy, but I think 
that has to be developed with a very clear policy that allows 
for public-private, permissionless money.
    Mr.  Davidson. Yes. In fact, digital money that is private 
is available today. It is just not sponsored by a government 
anywhere. And governments generally want to know what you do, 
they want to know what you think, and as someone famously said 
recently, I wish I could just wake up and it not be true, but 
it is, and unfortunately, when you look at the money, it is 
being undermined.
    I think you have highlighted some other ways that it is, 
but when you look at the power that is possible with a 
centrally-managed, centrally-controlled, intermediated central 
bank digital currency, China is perhaps the epitome of it. Now, 
they don't have a bill of rights, they don't have civil 
liberties there, but they do have humans, and when humans have 
access to power, they tend to use it. I have referred to a 
central bank digital currency, for the Lord of the Rings fans, 
as the one ring to rule them all, and in my view, we ought to 
cast it into the fire and destroy it. In fact, our office is 
working on a bill to actually criminalize designing, 
developing, building, and establishing a central bank digital 
currency. And why is that necessary? It is because we can use 
appropriations with Treasury and Federal agencies, but without 
ending the Fed, we can't truly influence the Fed. So, it's safe 
to say that it would be hard for me to be more opposed to this 
concept. I yield back.
    Chairman  Hill. The gentleman's time has expired. I now 
recognize the ranking member of the subcommittee, Mr. Lynch of 
Massachusetts, for 5 minutes.
    Mr.  Lynch. Thank you, Mr. Chairman. First of all, I want 
to thank all the witnesses for your willingness to help the 
committee with this work. This is a complex issue, so we 
appreciate your input.
    Mr. Carrillo, if we see what the private sector has done, 
especially with fintech and with just retail conduct in 
general, their method of operation is to vacuum up as much 
personal data as they possibly can, and they aggregate it, they 
track people, and then, they sell it. If we were to allow the 
private sector--and that is what the suggestion of some of this 
legislation is--to push the government away and put this into 
the control of the private sector, would that be the type of 
digital currency or digital dollar that we want to protect the 
privacy of the American people?
    Mr.  Carrillo. Thank you very much, Representative Lynch. 
This question allows me to first clarify a point regarding 
Fourth Amendment doctrine, which I believe has been 
mischaracterized on this panel.
    The third-party doctrine creates problems precisely because 
of the connection between the private and public sectors. To 
suggest that it is just going to not apply to the public sector 
and will not apply to the private sector is to fundamentally 
misunderstand constitutional doctrine. We could have a system 
wherein private companies work with public companies, and that 
still could lend itself to mass surveillance. So, these 
statements about the application of the Fourth Amendment are 
not particularly helpful here.
    The laws and technology of the models being suggested do 
not lend themselves to the application of the Fourth Amendment, 
so I would urge more robust conversation around actual privacy 
law in these conversations. Now, I do not believe that either 
leaving the private sector in charge of financial service data 
collection, or including it in an intermediated fashion in the 
CBDC context, is going to necessarily improve privacy, and 
indeed, is very unlikely not to do so. Thank you.
    Mr.  Lynch. Thank you. As the ranking member of the Full 
Committee mentioned, there are already 130 countries out there, 
representing 98 percent of the global economy, that have 
already begun to explore and discuss the idea of a central bank 
digital currency. Now, many of them are democracies. I am not 
sure any of them have--well, with the exception of a couple--
made final decisions on how to deploy this or what the 
architecture will be, but is there value in at least looking at 
it and examining it? If the rest of the world is going in that 
direction, even if we don't want to do that ourselves and 
deploy it ourselves, isn't there value in exploring it?
    We do a lot of research through DAPA, a government agency. 
It works well with the private sector, and we explore 
possibilities, then Congress, rightfully, makes that decision 
of whether or not to deploy it. But isn't there value in that 
whole process in trying to understand the architecture and the 
implications of a digital currency?
    Mr.  Carrillo. Absolutely, Representative Lynch. Thank you. 
I believe that is sufficient reason alone, certainly, to 
explore the digital dollar. That said, I do also agree with you 
that the approach needs to be deeper and more expansive. We do 
not dedicate resources appropriately, and hardly at all in this 
country to public money research and development. So in an 
instance, in this time right now, we will have to partner 
between institutions in the public and private sectors to 
develop the technology. That is different from allowing private 
sector entities access to retail payments data under a digital 
dollar system, but we need an all-hands-on deck approach to the 
building of both a CBDC and electronic cash.
    And I would make a special note that there are lots of 
stakeholders who are not represented, certainly in this hearing 
today, but otherwise, in other contexts, they are not 
represented as well. That certainly includes communities 
impacted by law enforcement, but beyond that, we are talking 
about small businesses and retailers that are raked over the 
coals by Visa and Mastercard with fees every day. We are 
talking about a wide swath of people who deserve privacy.
    Mr.  Lynch. Thank you. My time has expired. I yield back.
    Chairman  Hill. I thank the gentleman from Massachusetts, 
and now, we turn to Mr. Rose of Tennessee for 5 minutes.
    Mr.  Rose. Thank you, Mr. Chairman, and thank you to our 
witnesses for being here with us today.
    Dr. Michel, in recent years we have seen many cases where 
the Fourth Amendment has been critical in protecting the rights 
of individuals, cases like Carpenter v. The United States, 
which established that the government must obtain a warrant 
before obtaining cellphone location data, or Riley v. 
California, which held that the police must obtain a warrant 
before searching a suspect's cellphone.
    The law is developing in these areas to protect 
individuals' right to privacy, but it is still lagging behind 
in the financial sector. In particular, decisions in United 
States v. Miller and Maryland v. Smith gave us the third-party 
doctrine. Under that doctrine, if you voluntarily provide 
information to a third party, the Fourth Amendment does not 
preclude the government from accessing it without a warrant.
    Dr. Michel, can you explain how the third-party doctrine 
has impacted Americans' financial privacy?
    Mr.  Michel. Yes. They have practically none at the moment, 
partly because of this, but I also want to clarify because of 
something that was just said on the panel. The Fourth Amendment 
is, of course, what we are talking about, is the one that 
amends the Constitution of the United States, which protects 
American citizens from the government. So, this is exactly the 
issue, and it was brought up in the cases in the 1970s when the 
Bank Secrecy Act was challenged.
    If the Bank Secrecy Act was not there, the banks and 
financial institutions that we have would not be required by 
the government to collect the data that they are collecting. 
That is a requirement in the Bank Secrecy Act. You can go back 
and look at those cases. That was always an issue as to whether 
this was constitutional and possibly in violation of the Fourth 
Amendment. Between the combination of the Bank Secrecy Act, the 
Fourth Amendment issues, and the third-party doctrine, 
Americans--although many of them don't realize it--have very 
little financial privacy at the moment.
    Mr.  Rose. How would the adoption of a CBDC further erode 
Americans' reasonable expectation of financial privacy?
    Mr.  Michel. I believe it would remove the last layer that 
we have, quite simply. Instead of having to go through the 
financial institution, the government would have that 
information either in a central database or a keystroke away.
    Mr.  Rose. And Dr. Michel, your organization recently 
released a survey which found that 68 percent of Americans 
would oppose a CBDC if it allowed the Federal Government to 
monitor their spending. Why would the government want to 
monitor the spending of its citizens?
    Mr.  Michel. There is no way to implement a CBDC and 
provide all of the benefits that the advocates say, including 
monetary policy effects, without doing that. That is the 
absolute key there.
    Mr.  Rose. The survey also found that 74 percent of 
Americans would oppose adopting a CBDC, if it meant that the 
government could use the CBDC to control how people spend their 
money. Why would the Federal Government want to control what 
its citizens spend money on?
    Mr.  Michel. That is a great question. Aside from any 
political aspirations, that is effectively the monetary policy 
piece of this.
    Mr.  Rose. Would they perhaps want us to stop purchasing 
guns or maybe gas-powered vehicles or gas stoves?
    Mr.  Michel. Politically, it is a nightmare for either 
side. It could be used to stop labor unions. It could be used 
to stop people from spending money on gas stoves. It could be 
used under any political guise as desired.
    Mr.  Rose. Perhaps, stop them from traveling to a protest 
or expressing their First Amendment rights?
    Mr.  Michel. Which we have already seen in other countries 
without the CBDC, so I think this exacerbates all of those 
political problems. That is exactly what this does, and that is 
exactly why we shouldn't have one.
    Mr.  Rose. Dr. Michel, what does the FDIC's annual survey 
among unbanked households tell us about the value that some 
Americans place on financial privacy?
    Mr.  Michel. It tells me that a lot of them do place a very 
high value on it, and one of the reasons that some people stay 
out of the banking system is precisely because of that issue.
    Mr.  Rose. Proponents of a CBDC also advocate for Fed 
accounts and postal banking, yet a 2021 postal banking pilot 
program that was given $6 million had only 6 customers and 
generated less than $35 in revenue. Could you discuss why 
postal banking would be a bad idea for the U.S. economy?
    Mr.  Michel. It is a bad idea for the same reasons that we 
have discussed with a CBDC or a digital dollar backed by the 
U.S. Government, and it also highlights that the private sector 
in the United States actually does do a good job of providing 
financial services in general, broadly speaking.
    Mr.  Rose. Thank you. I yield back.
    Chairman  Hill. Now, it is a pleasure to turn to the 
gentleman from Illinois, my friend, Mr. Foster, for 5 minutes.
    Mr.  Foster. Okay. Let's see. I know I have lost my cheat 
sheet here. Okay. First, on sort of the foundational issue of 
privacy, how many of the witnesses feel that the current Bank 
Secrecy Act (BSA), the Know Your Customer (KYC), Anti-Money 
Laundering (AML), and all that represents a violation of the 
Fourth Amendment and should not be a feature of future payment 
systems? How many believe that?
    [Hands raised.]
    Mr.  Foster. The first witness indicated. Everyone else 
believes that for future payment systems, there should be some 
form of KYC, AML, and so on, the traceability of transactions. 
That is an interesting sort of branch point of this discussion, 
because then the question is, how do you implement the best 
policy, the best privacy?
    Mr. Carrillo, you referred to a privacy-preserving design 
for this. Is there a specific implementation that has ever been 
carried out or even designed? I presume this involves some sort 
of official government action to deanonymize transactions or 
something like that. Can you tell us more about how that might 
work?
    Mr.  Carrillo. Yes. Thank you, Representative Foster. I 
appreciate the opportunity to provide more details and to 
clarify the vision of electronic cash, especially as it 
pertains to the ECASH Act. We envision hardware devices, and 
those can be cards similar in size to an existing debit or 
credit card, or they can be secured SIM cards or something like 
it on a phone that would enable hardware-based transactions, 
for people to make payments as they do today with paper cash 
for everyday things, without fear of government or corporate 
surveillance, which occurs in tandem when we use digital 
payments today.
    As for the security question, yes, the hardware will be 
encrypted certainly, but there are security controls that can 
be enabled to implement AML/KYC at the technological level. 
Currently, BSA/AML treats different types of technology 
differently. They have each of their sub-legal regimes, so the 
regime that applies to cash and currency would, in fact, apply 
to the E-cash.
    Mr.  Foster. Okay. Could you provide for the record some 
documentation on how that actually might work? I have a bunch 
of technological questions, like the degree of trust you have 
to place in the hardware implementation of your E-cash. If it 
is blockchain-based, the double spending problem and operation 
offline.
    Mr.  Carrillo. I would be happy to do so, Representative 
Foster.
    I would clarify that the point of E-cash is that it does 
not operate online. It is actually open, permissionless, and 
private in the sense that you don't need a blockchain or a 
banking intermediary. Moreover, I would point out that I think 
it is incredibly important to engage with universities on this 
issue. They have been left out of the technology and industrial 
policy conversation that has occurred here today. Universities 
are a great site of research that we can get where there is not 
a pernicious, lucrative interest involved. Certainly, 
universities gain from these partnerships, but they need to 
play a stronger role, moving forward.
    Mr.  Foster. Maybe, I will poke again at the privacy 
question with a specific example. Let's say if someone puts a 
gun to your head, drags you into an alley and says, get out 
your phone, and transfer all of your e-cash or whatever to me 
or your crypto assets to my phone or some other device they 
have. Then, is it your view of the endpoint of privacy, that we 
have a duty to preserve the privacy of that criminal or not, or 
should there be a back door on figuring out who the heck owns 
the account or device that it was transferred into?
    Mr.  Carrillo. Thank you, Representative Foster.
    Mr.  Foster. Could I start with you, Ms. Paridon?
    Ms.  Paridon. Sure. No, I think there should be a record of 
the ability to----
    Mr.  Foster. There should be a traceable record for 
ransomware, for example, when someone says, I have encrypted 
your files.
    Ms.  Paridon. That is my personal view, yes.
    Mr.  Foster. Is that your personal view, Dr. Michel?
    Mr.  Michel. You don't have that for anybody who uses 
ransomware.
    Mr.  Foster. So, your answer is, they will find them?
    Mr.  Michel. No. I think you should be able to have a 
private transaction without AML. That is absolutely correct, 
yes.
    Mr.  Foster. Okay. So you are in favor of the ransomware 
basically, that we should not----
    Mr.  Michel. I did not say that, and I hope the record 
reflects that.
    Mr.  Foster. Okay. No, I understand, but the system that 
allows ransomware to exist is something that you are in favor 
of preserving.
    Mr.  Michel. No. Ransomware exists, whether the system 
allows it or not.
    Mr.  Foster. The payment system for ransomware has----
    Mr.  Michel. Has not allowed ransomware to exist, sir.
    Mr.  Foster. Okay. Oops, I am running out of time here, but 
I thank the chairman for having this hearing.
    Chairman  Hill. Dr. Foster, thank you very much. We now 
turn to the gentleman from Wisconsin, Mr. Steil, for 5 minutes.
    Mr.  Steil. Thank you very much, Mr. Chairman. Thank you 
for holding today's hearing. This is a really important topic.
    A CBDC gives me significant concern as it relates to 
Americans' privacy. We have seen our privacy invaded in a 
number of ways, but I think a Federal Government CBDC would be 
a worse situation. In particular, I don't think the Federal 
Reserve has the authority to do a CBDC. I think that is 
important to note. I don't think Congress should give the 
Federal Reserve the authority to do the CBDC, and the reason is 
based on the Federal Government having access into that level 
of information about American citizens.
    I think some of the distinction from the previous question, 
as it relates to the ability to track this, is whether or not 
that information is in a depository of your Federal Government 
or is in records in the private business sector, and I think it 
is important that we pull this distinction apart. If I can, let 
me shift gears slightly, though, as it relates to liquidity in 
the market.
    Ms. Paridon, in your written testimony, you wrote that any 
transfer of a dollar deposit from a commercial bank or credit 
union to a CBDC is a dollar unavailable for lending to 
businesses or consumers. Can you expand a little bit on that 
statement about how the adoption of an intermediated CBDC would 
it impact credit availability and the cost of banking services?
    Ms.  Paridon. Sure, I would be happy to. Thank you. I think 
there is a misconception generally that a dollar transferred 
from a deposit account to a CBDC--that CBDC would still be able 
to be used for lending and investment in the economy the way 
that dollar deposits currently are now. And that is not the 
case. A CBDC, even if intermediated, in other words, even if 
the services included onboarding and other services that 
commercial banks currently provide, even if those services were 
provided by banks with respect to consumers, the fact is, the 
bank would really only hold that CBDC in the same manner it 
holds an asset in custody. So, it would have to essentially 
keep that CBDC under the proverbial mattress, and it would not 
be able to be redeployed in the form of loans.
    Mr.  Steil. Thank you very much. Let me build on this, if I 
can, Mr. Michel. In particular, how that would impact monetary 
policy, if you take what Ms. Paridon just said?
    Mr.  Michel. It would have a large impact in the sense that 
it would be very different from what we are doing now, where we 
have a predominantly privately-provided system of money or 
amount of money, and you would no longer be doing that. And/or 
until you get there, you will be raising the cost of doing so 
in presumably some other method, not the traditional banking 
sector through intermediation process that we have now.
    And what everybody has to understand is that this would 
allow the government to put money directly into accounts as 
well as take it out, and nobody ever wants to talk about that 
one. And ironically, when things are going bad and a recession 
is coming, that is when you would see the Fed wanting to go 
toward negative interest rates, and everybody would stop and 
say, wait, what are we doing? And the only way to do that is to 
provide zero options for anybody to use any other payment 
method. To get all of those benefits, you have to, at some 
point, make this the only option, not just another option.
    Mr.  Steil. Let me shift gears, Mr. Michel, because I know 
you didn't have enough time to respond to this on the privacy 
question. Do your privacy concerns have to do with the CBDC 
being government-controlled rather than private-sector 
controlled?
    Mr.  Michel. Yes, that is correct.
    Mr.  Steil. And how does that play out as we think about 
maybe, China going forward with a CBDC having none of the 
constitutional privacy rights of an American citizen? And if we 
think about that, from the government standpoint versus an 
American private sector standpoint, how should policymakers 
think of that?
    Mr.  Michel. I am of the view that in the private sector, 
you have many different companies doing many different things, 
and if people decide that they are not doing something that 
they like, there is a remedy for that. There is always a remedy 
for that, whereas if you have the government dictating what can 
and cannot be done, then that is the only one thing that can be 
done, which is why we have the Fourth Amendment in the first 
place.
    Mr.  Steil. I think that is a really important distinction 
here. The CBDC puts the power in the hands of the Federal 
Government rather than the hands of the private sector. I think 
there is a major distinction between American capitalism and a 
government-centric approach that we would also see in China.
    I thank the chairman for having today's hearing, and I 
yield back.
    Chairman  Hill. The gentleman yields back. The gentleman 
from Illinois, Mr. Casten, is recognized for 5 minutes.
    Mr.  Casten. Thank you, Chairman Hill, and thank you to the 
committee for having this hearing and for the couple of years 
now that we have spent on this issue.
    I want to focus on some pretty high-level basic issues, 
because I feel like we are having conversations about theory 
that are disconnected from facts. And I don't want to sound 
cutesy, but I just want to start with something really simple. 
Remember the scene in, ``It's a Wonderful Life,'' when George 
Bailey walks through, ``the money is not here, it is in your 
house, it is in your house.'' Were any of you confused by that 
scene? Okay. Let me back up.
    As best as I can tell in about the 12th Century, the 
Knights Templar essentially invented fractional banking. It was 
this fascinating history, is part of the Crusades, that you 
could put your money in a bank in London, and there were 
scripts that went through all the way to Jerusalem, and you 
could get through and they were loaning against deposits. Does 
anybody find the basic principle of fractional banking 
confusing? Okay. All of you are smarter than 90 percent of the 
world's crypto bros. Thank you, because sometimes this 
conversation is maddening to me because it is predicated on the 
idea that the value of money is just the amount of hard 
currency in circulation.
    Ms. Paridon, I really appreciated your comment, because if 
I understood your testimony, you said that a CBDC always has to 
be a liability of the issuing central bank, correct?
    Ms.  Paridon. That is how it has been defined, yes.
    Mr.  Casten. Okay. And by the way, Fed Governor Lael 
Brainard testified to the same effect about a year ago here. 
That means that banks can't lend against deposits, which means, 
if I understand correctly, that a CBDC can only grow M1 money 
supply. Would you agree with that?
    Ms.  Paridon. A CBDC, if it was in an intermediated CBDC, 
banks would essentially hold a CBDC as a custodian, that is 
right. They wouldn't be able to lend out some portion of the 
CBDC as they do deposits.
    Mr.  Casten. Yes. Essentially, it upends what the Knights 
Templar came up with in the 12th Century. It is only M1 money 
supply.
    Ms.  Paridon. Correct.
    Mr.  Casten. Right. Isn't it also true that to the degree 
that any central government--our central government, the 
Chinese central government, the Vietnamese, I don't care, any 
central government--that increases the relative share of their 
M1 money supply that is CBDCs as opposed to traditional 
currency, aren't they de facto shrinking the size of their 
economy, because there is simply less money in circulation, 
because if you had 100 percent CBDCs with all the M1 money 
supply, you would have no lending, right? Doesn't any 
proportional increase in the amount of CBDCs in an economy 
shrink the economy?
    Ms.  Paridon. There could be shifts to other forms of ways 
to fund lending. Banks could borrow in the wholesale markets. 
They could potentially borrow from the Federal Reserve, so I am 
not necessarily sure it is a one-to-one relationship as you 
are----
    Mr.  Casten. What I am saying is, central banks are issuing 
currency into the economy, right?
    Ms.  Paridon. Correct.
    Mr.  Casten. And all of the other forms of currency they 
introduce are leverageable. We seem to be in agreement that 
CBDCs, by definition, are not leverageable.
    Ms.  Paridon. Retail CBDCs. That is right.
    Mr.  Casten. Okay. So, why do we care? We can talk about 
all the theory of all the things, that if I had a unicorn that 
could fly, I would have a shorter commute to work. But if we 
can't make the case that this actually makes sense for modern 
banking, and by, ``modern,'' I mean banking as it has existed 
since the 12th Century. And if the answer is, well, if we don't 
do it, then the Chinese will, sounds to me like it had it.
    Ms.  Paridon. We are not supportive of a retail CBDC, so I 
would tend to agree with you, and I think there are reasons 
that people believe a CBDC could be beneficial. Today, we don't 
think that there is necessarily evidence to support those 
benefits. For example, we don't believe it would increase 
financial inclusion. We don't believe it is necessary to 
increase the speed or efficiency of payments. But there are 
those who do believe it has some purported benefits.
    Mr.  Casten. We have been having these conversations for 2 
years, because there is a sex appeal to the digital currency 
space. That is true for stablecoins, it is true for Bitcoin, 
and time will tell whether this is sexy in the way that the 
advent of the internet was sexy, or sexy in the way that Beanie 
Babies were sexy. But somebody has to make the case for this 
actually being useful for currency and not just for money 
laundering, and not just for speculative bubbles, before I 
think we have something to worry about. I yield back. Thank 
you.
    Chairman  Hill. I thank the gentleman for yielding back. 
The gentleman from Nebraska, the home of the Fintech Flyover, 
Mr. Flood, is recognized for 5 minutes.
    Mr.  Flood. Thank you, Mr. Chairman, the gentleman from 
Little Rock, with a keynote at the Fintech Flyover, which was 
much appreciated.
    Let me begin by making something clear: I am firmly opposed 
to a retail CBDC. My opposition to a retail CBDC comes down to 
one simple concern at the heart of our republic, which is the 
concentration of power in the hands of the Federal Government. 
A CBDC issued by the Federal Reserve would open the door to a 
few different, troubling, potential futures, regardless of the 
intent of the original issuer. If we use a retail CBDC, the 
Federal Reserve would be at the center of every American 
transaction. It could be used to prevent certain types of 
disfavored purchases, block certain disfavored people from 
using our financial system, or monitor the payment activities 
of political opponents. That is an enormous amount of power, 
and that power would put tremendous pressure on the Federal 
Reserve.
    My concern is that once we build a CBDC, we don't have it 
just today and tomorrow with our current set of regulators. A 
retail CBDC would be a serious threat to liberty, even if our 
current leaders were angels. Once rolled out, the CBDC would 
ensure it would endure well past the time of anyone in this 
room. It will continue to be influenced and changed by future 
leaders over the coming decades.
    Some proponents of this may point to concerns over 
practices regarding how some private companies collect consumer 
financial data. They may argue that it is better to put the 
payments process under the oversight of the government directly 
than have private actors in charge. Such an argument doesn't 
fully contemplate the extent of the possible abuse that could 
come from regulators or political actors, if given this tool, 
and that is the point I would like to dig into a bit more in my 
questions.
    Ms. Skinner, in your testimony, you mentioned how a CBDC 
could lead to the Federal Reserve's independence being 
threatened. Can you speak more on that?
    Ms.  Skinner. Yes, certainly. Thank you for the question. 
In the first instance, to the extent the Federal Reserve 
doesn't change the composition of its balance sheet otherwise, 
issuing a CBDC will increase its liabilities, which means that 
it has to match that increase in liabilities by purchasing more 
assets. The first thing that we would think about when the Fed 
would purchase more assets would be buying more Treasury 
securities. That being said, with the potential for the Fed to 
issue more CBDCs, thereby giving it more headroom to buy more 
Treasury securities, that would be likely to put some pressure 
on the Fed at some point down the line from the Treasury to 
issue that CBDC to absorb more government debt, which we call 
monetary finance or monetizing the deficit.
    And before World War II, the Fed essentially operated under 
the thumb of the Treasury, so that during wartime and 
otherwise, the Fed could effectively monetize the deficit, and 
really today, that is anathema to an independent central bank. 
There were other things that the Fed could also be pressured to 
buy to match an increase in CBDC, like corporate bonds.
    Now, our recent experimentation in corporate bonds has put 
some question around whether this, too, could politicize a 
central bank because inevitably, if central banks buy corporate 
bonds, they are picking winners and losers in the economy. Now, 
the Fed has been pretty neutral in its approach, but there has 
been a lot of pressure on the central bank to, for example, buy 
green bonds in order to facilitate a transition to a low carbon 
economy, and certainly, other central banks do actively green 
their corporate bond portfolios.
    Mr.  Flood. I appreciate that, and you have a great answer 
there. I want to get to one more question.
    Dr. Michel, you spoke in your testimony about the potential 
for a CBDC to be programmed for specific purposes and even used 
to achieve monetary or fiscal policy goals. Can you elaborate 
on why that might be a potential problem?
    Mr.  Michel. It is a potential problem in the sense that 
for these potential benefits to be recognized, you have to do 
it that way. It is a completely programmable device. If you 
are, for example, in the middle of a pandemic, you would be 
able to flood the market with money, and at some point, you 
have to take that money out of the market. As soon as you do 
that, as a central bank, you have to decide exactly whom to 
give it to and exactly whom to take it away from. That is a 
political nightmare, frankly, that I don't think the Fed wants 
anything to do with, and I am positive most Americans don't 
want the government to have to make those decisions in that 
way.
    Mr.  Flood. I really appreciate that answer, and I do not 
want to engage in alarmism, but some of the things we have 
discussed today are serious possibilities that must be 
considered both within the context of today and the 
possibilities of how these risks could evolve in the future. 
With that, Mr. Chairman, I yield back.
    Chairman  Hill. I thank the gentleman. I would like to 
inform our panel that we are going to recess to vote, and we 
will have a few more questions after we vote. There are two 
votes. This is the first one. There will be one more, which 
will be shorter. Thank you for your indulgence, and the 
committee stands in recess until after votes.
    [recess]
    Chairman  Hill. We are returning to our hearing. We thank 
our panel for their patience, and we now turn to Mr. Timmons 
for 5 minutes.
    Mr.  Timmons. Thank you, Mr. Chairman. Throughout this 
hearing, it has become clear to me that CBDCs pose considerable 
risks that cannot likely be offset by the benefits they purport 
to bring to the United States payment system. Indeed, from my 
vantage point, a proposed U.S. CBDC is a solution in search of 
a problem. This reality is magnified by the fact that the U.S. 
payment system has already been modernized both through private 
sector developments, like stablecoins, and through public 
sector improvements to existing payments infrastructure. The 
significant privacy and civil liberties concerns associated 
with CBDCs, as the witnesses have discussed here today, would 
be mitigated in the private sector through well-regulated 
stablecoins for other payment innovations. Yesterday, we had a 
hearing with the Committee on Foreign Investment in the United 
States (CFIUS), where we discussed cybersecurity challenges 
facing the national security of the United States.
    Along those lines, Dr. Michel, what cybersecurity risks are 
associated with CBDCs, and are these risks as apparent in the 
private sector?
    Mr.  Michel. I believe this is a question of centralization 
versus decentralization, and if you have a CBDC, you ultimately 
have one major point of failure. One way of doing this would be 
to have the Fed have a database. We know the Fed has been 
hacked. Even if the Fed has multiple databases, it is the Fed 
being hacked as opposed to having multiple private companies 
all across the country. If Capital One, for example, has a hack 
or a cybersecurity problem, everybody in the country is not 
immediately at risk, only their customers, and that is a 
problem for them.
    Mr.  Timmons. You are going in the direction I was going to 
go. At the end of the day, best practice for large private 
companies is to have cybersecurity insurance. You have a breach 
and you do your best to mitigate it. Breach is inevitable, and 
you know that, so you insure against it, and then you take 
steps to address the breach. And then, you get sued, and you 
pay the individuals that you damaged money because you did them 
wrong. That is just how our legal system works.
    I want to point out that the Consumer Financial Protection 
Bureau (CFPB) had a quarter million of their files leaked in 
what was the most-preventable breach I have ever read about. 
And the people who were damaged, the citizens who were damaged, 
who had their personally identifiable information used to do a 
wide variety of schemes to generate money from the hackers, 
don't have any recourse. There is no recourse. So not only is 
this public option bad for a wide variety of reasons, but in 
the event of a breach, which, again, is pretty much inevitable, 
there is no recourse to make the individuals whole, so I think 
that is something that we need to think about. The government 
is not good at this stuff, and they are not good at making 
people whole when they make mistakes, so I just wanted to throw 
that out there.
    Following up on this comparison between the benefits that a 
CBDC could bring versus the benefits a private sector 
stablecoin could bring, Dr. Michel, again, I see you have 
worked to push back at the promises made by proponents of 
CBDCs. Based on your research, can you explain what, if any, 
technological advantage a CBDC has over the private sector?
    Mr.  Michel. None, and this is properly viewed as a 
government reaction to a private innovation. You can call it 
Bitcoin or you could just call it distributed ledger technology 
in general. That is what this is about. This is about the 
government seeing an innovation that possibly threatens their 
control over the payment system, and it is a movement to come 
up with something which takes that back. And it just so happens 
that what they are coming up with here is something that goes 
even further than where we are without the CBDC. It is about 
control.
    Mr.  Timmons. These are the same people who tried to 
require mandatory reporting for transactions over $500 to pay 
for their pipe dream bills that they are trying to push 
through.
    Switching gears somewhat, Professor Skinner, we had a 
hearing on CBDCs last year, and I asked former Federal Reserve 
Vice Chair Lael Brainard, what can be done to strengthen the 
dollar status as the world's reserve currency. Is a CBDC 
something that would strengthen that status or would it weaken 
it?
    Ms.  Skinner. Thank you for the question. It certainly, in 
my opinion, would not strengthen the dollar's status, and it 
could potentially weaken it for the following reasons. As I 
mentioned in my opening remarks, the status of the dollar is 
undergirded by our commitment to the rule of law, democratic 
institutions, having a judiciary that enforces property rights, 
and, perhaps most importantly, maintaining the dollar as a 
stable store of value. Therefore, it is important that the Fed 
maintain its fight against inflation, and with the issuance of 
a CBDC, there will absolutely be a propensity to overissue to, 
for example, monetize the deficit. And if that were to happen, 
it would undermine the status of the dollar.
    Mr.  Timmons. Thank you. Mr. Chairman, I yield back.
    Chairman  Hill. I thank the gentleman. I now recognize the 
gentleman from North Carolina, Mr. Nickel, for 5 minutes.
    Mr.  Nickel. Thank you, Mr. Chairman. As a co-sponsor of 
Subcommittee Chairman French Hill's and Representative Jake 
Auchincloss' Power of the Mint Act, I believe only Congress has 
the power to authorize a central bank digital currency. The 
Constitution is very clear about this. Article I, Section 8, 
states that only Congress has the authority to coin money, so 
this shouldn't be a partisan issue. Much of the work that we 
have done at the committee level, and certainly at the 
subcommittee level, has been bipartisan. And I want to 
acknowledge that Chairman Hill's approach on these issues has 
been very involved in a lot of these, and that continues with 
this issue as well.
    CBDCs do have the potential to be an important innovation. 
They could enhance financial inclusion, reduce transaction 
costs, and increase the efficiency of our monetary policy. The 
Atlantic Council estimates that 130 countries are currently 
exploring a CBDC. We should, too. The United States must remain 
the global financial leader, especially with the dollar's role 
as the global reserve currency. We can't afford to fall behind 
or lose our global influence. On the other hand, we must 
approach this innovation cautiously, especially in light of the 
Chinese Communist Party's use of its CBDC.
    I have concerns surrounding privacy and surveillance, which 
is why we need to continue studying this issue. The Chinese 
Communist Party model raises red flags about the potential for 
governments to exert unprecedented control over their citizens' 
financial lives. As representatives of a democratic nation, we 
need to be steadfast in safeguarding the privacy of our 
citizens. As we deliberate on this crucial issue, let's 
remember that our ultimate goal is to create a financial system 
that empowers all Americans, while preserving the values that 
make our nation so great.
    Thank you again to the witnesses for being here. Ms. 
Paridon, one of my concerns with CBDCs is that they could 
impact the availability of credit for my constituents, 
especially during economic stress, because of a reduction in 
bank deposits. How do you view this concern?
    Ms.  Paridon. Yes, we share that concern. A so-called 
flight to quality is something that we fear would be almost 
inevitable were a retail CBDC to be issued by the Federal 
Reserve. In times, particularly of financial stress or 
instability, a CBDC would likely be viewed as the ultimate safe 
asset, and depositors would likely be incentivized to pull 
their deposits out of the banking system and put them into 
CBDCs as a safe asset, which would reduce the availability of 
deposits available to lend out, and moreover, increase the cost 
of credit.
    Mr.  Nickel. Thank you. Mr. Carrillo, given the U.S. 
dollar's role as the world's reserve currency, why is it 
important for us to join the 130 countries studying CBDCs?
    Mr.  Carrillo. Thank you very much for the question, 
Representative Nickel. I appreciate it. I think that the United 
States has not only the privilege and the freedom, but the 
responsibility to lead on this issue, and especially to make 
sure that civil rights are incorporated into the next system. I 
believe we can do that. I believe that we have the innovation 
capabilities, and working together, entities in the public and 
private sectors, in terms of procurement and operations and in 
our research institutions, we can all move forward together. 
There are many examples of having done so before.
    President Lincoln created cash after the Civil War in order 
to help everybody have day-to-day transactions throughout our 
economy. Today, we have cutting-edge technology and various 
other sectors in the government, including in the U.S. 
military, where they use stored value cards known as EagleCash 
in order to make offline payments.
    Mr.  Nickel. Thank you. Mr. Chairman, I yield back.
    Chairman  Hill. I thank the gentleman for his questions. 
Now, I turn to Mrs. Houchin for 5 minutes.
    Mrs.  Houchin. Thank you, Chairman Hill, and Ranking Member 
Lynch. And thank you to the witnesses today for providing your 
testimony and speaking with us today.
    When I talk with my constituents back home about financial 
technology and crypto issues, a common concern that I hear is 
about the possibility of a central bank digital currency, or 
CBDC, from privacy issues to the threat of debanking political 
enemies. People back home have told me that government 
surveillance and the total control that is threatened over 
their wallets is too great a threat to balance against any of 
the proposed benefits a CBDC would bring.
    Mr. Rooz, we have all heard the stories of China utilizing 
its CBDC to surveil its own citizens. Obviously, the United 
States is a completely different country than China, but if the 
United States were to issue a CBDC, in your view, what would be 
needed to ensure that it wouldn't resemble something like 
China?
    Mr.  Rooz. Thank you for the question. I think it is 
important for this hearing, first of all, to state that most of 
the concerns that have been discussed in this hearing are 
related to retail CBDCs, meaning CBDCs that are issued directly 
to citizens. And in that case, as I stated in my opening 
remarks, any digital representation of the U.S. dollar should 
benefit from the privacy and trust, as stated in the Fourth 
Amendment. First of all, I think it is important to make that 
distinction.
    Second of all, if the U.S. Government were to decide to 
issue a retail CBDC, unlike wholesale CBDCs, I think that it is 
going to be critical for the government to show evidence that 
there is no ability for the government to see the transactions 
of citizens. I personally would be against such an act.
    Mrs.  Houchin. Thank you. And when speaking about CBDCs and 
the threat of debanking, that certainly comes up almost 
universally, especially when talking to gun manufacturers and 
such in my district. With Operation Choke Point, under the 
Obama Administration, we saw instances where Americans who were 
involved in what political opponents determined to be 
undesirable industries, like gun manufacturers, would be cut 
off from bank accounts or unjustly severed from lines of credit 
simply due to the businesses that they are in. With the CBDC, 
not only could the Federal Government tell banks and other 
financial institutions what services they can or cannot provide 
to different businesses, they would be able to track 
potentially every dollar that is in someone's wallet, where it 
goes, and what it is used for.
    Mr. Rooz, in your testimony, you emphasize that at Digital 
Asset, you build products and services with privacy as its 
core. Would you be able to walk us through a transaction that 
occurs using Digital Assets product and explain how privacy is 
preserved throughout the lifecycle of that transaction?
    Mr.  Rooz. Sure. Thank you for the question. When we design 
our product, the product itself allows the issuer of any asset 
to determine who has the rights to look into a transaction. So 
in the case we are talking about here, if we wanted to have 
privacy included in the smart contract of the money, it would 
state that any movement of money would only be visible to the 
sender of the money and the receiver of the money, for example, 
and the issuer of money would be blinded. All that the issuer 
would see is the overall balance but would not see any 
underlying movements of the money, for example.
    Mrs.  Houchin. Okay. Thank you. You also stated that 
Digital Asset is seeking to modernize financial infrastructure 
using blockchain technology. While this goal seems to be 
aligned with what wholesale CBDCs are seeking to accomplish, it 
appears a far cry from what a retail CBDC purports to do. Is 
that a fair assessment of Digital Asset?
    Mr.  Rooz. Yes.
    Mrs.  Houchin. In your view, is it a mischaracterization to 
discuss the modernization of the United States' backend 
financial infrastructure as a wholesale CBDC?
    Mr.  Rooz. As long as we are talking about modernizing 
Fedwire or FedNow, in order to eradicate reconciliation, the 
answer would be, yes. Again, if we are to introduce central 
bank digital money directly to retail customers, then the 
answer would be, no.
    Mrs.  Houchin. Okay. Thank you. As my colleagues, and the 
panel have highlighted, the negative consequences are pretty 
great. And the recent stablecoin legislation that we passed out 
of this committee will establish guidelines and safeguards and 
a clear path forward for a private sector solution that brings 
all the benefits of blockchain without any of the privacy or 
politicization concerns of a government-controlled CBDC. It is 
my hope that we can work together to see this bill become law 
to create economic opportunities and innovation across the 
country without putting constituents' privacy or financial 
well-being at risk.
    Thank you, Mr. Chairman. I yield back.
    Chairman  Hill. I thank the gentlewoman. And now, the 
gentleman from California, Mr. Sherman, is recognized for 5 
minutes.
    Mr.  Sherman. I join the last speaker and colleague in a 
concern about Operation Choke Point. I know there were some on 
the Democratic side who said, yes, go after payday lenders, go 
after gun manufacturers. How will that sound when Planned 
Parenthood can't get a bank account? The power to take somebody 
out of the banking system is the power to impair, if not 
destroy them. We currently have a balance between privacy on 
the one hand, and law enforcement on the other, and I would 
like to keep that balance pretty much the same. That is why I 
oppose a cryptocurrency ecosystem in which millions of dollars 
can go from one unnamed entity or person to another unnamed 
person, and there is absolutely no way for law enforcement to 
ever know who was on either side of that transaction.
    On the other hand, I want to maintain the current balance. 
I don't necessarily want the Fed to see every transaction. We 
have a system now where suspicious transactions are reported to 
law enforcement. We already have a digital dollar. I can go 
several days without touching a green piece of paper with a 
picture of a dead President on it, and I am still waiting for 
those Tubmans, but I think by the time we get them, we may not 
use them.
    And, look, we need a much better digital dollar. It is 
still too expensive, and too cumbersome to be able to pay money 
one way or the other, but I think we will get there with or 
without the Fed. As to the Fed, let's point out that the Fed is 
really bad at retail. We have an ACH system which they 
administer, and it is so problematic that when I bought a 
house, every single note I got from the escrow agent and 
flaming letters--I couldn't read anything else. Don't trust any 
email you get as to where to wire the funds. Why? Because in 
spite of a lot of questioning I have done in this room, the Fed 
has refused to follow Britain's lead and have a payee masking 
system.
    So, if you can convince a new homebuyer to send their money 
to account 12345, it never reaches the escrow company. It goes 
to a Nigerian prince. They don't even have to open an account 
in the name of the escrow company. I can imagine how the Fed 
would deal with thousands, correction, millions of different 
accounts. But we already have a system, unfortunately, where 
you can open an account at a bank without ever showing up in 
person. All you need to do to steal my paycheck is to steal my 
paycheck, and my driver's license, and maybe a cable television 
bill. Then, you open up an account in my name, and you flash my 
driver's license. The fact that your picture doesn't look 
anything like me--in which case, be thankful--doesn't prevent 
you from opening up an account in my name.
    I would like to see a system where human beings have to 
talk to another human being to open up an account that is in 
their name. And I can't imagine that Fed Chair Jay Powell is 
going to be a part of something that is retail, but I join with 
others on this concern.
    And I have a question for Mr. Carrillo. I am concerned 
about the effect this is going to have on deposits at regional 
banks and credit unions and smaller banks. We tend to focus on 
the financial system, but we need to see local business loans 
made, and, ``Uncle Jay Powell,'' is not going to loan money to 
my local pizzeria. What effect do you think this is going to 
have on the ability of local businesses in my district to 
borrow money?
    Mr.  Carrillo. I believe the question is directed at me. Is 
that correct?
    Mr.  Sherman. Yes.
    Mr.  Carrillo. Thank you very much. I appreciate it. I 
would say that our deposit insurance structure, our system of 
how we handle deposits legally right now, is actually quite 
broken, and I would welcome revisitation of that post-Silicon 
Valley Bank crisis. I think we are looking at a situation where 
we need to clarify, streamline, and bolster the deposit 
insurance and protection structure, and, in fact, digital fiat 
currency provides us with an opportunity to do so. I would say 
that further Federal Government control of the deposit system 
should actually be welcomed in the sense that it provides 
stability and also allows and creates space for commercial 
banks to engage in credit creation and maturity transformation, 
which should be the actual goal of banking.
    Mr.  Sherman. Thank you.
    Chairman  Hill. The gentleman yields back. I would like to 
thank our witnesses and our Members on both sides of the aisle 
for their participation in this hearing. Thank you for your 
testimony today.
    Without objection, I would like to enter the following 
documents into the record: my letter to the Attorney General 
from last Congress and the Department's assessment of whether 
legislative changes would be necessary to issue a CBDC, and the 
follow-up letter that Republicans sent in March of 2023; and 
letters from the American Bankers Association, the Electronic 
Transactions Association, the Independent Community Bankers of 
America, and the Credit Union National Association.
    Without objection, it is so ordered.
    I thank my colleagues on both sides of the aisle.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is adjourned.
    [Whereupon, at 4:30 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           September 14, 2023                         
                                                      
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