people would generally agree that if we can get the right things done for the country, then that is a better place than someone just talking about the right things to get done. >> watch "afterwards" sunday night at 9:00 eastern, on c-span2's book tv. up next, a hearing on the issues, benefits, and security of virtual currencies. we hear about the potential advantages and disadvantages of the broad use of cryptocurrencies and how criminal enterprises might use them. held by a house financial services subcommittee, this is about an hour and ten minutes. the committee will come to order. without objection, the chair is

authorized to declare a recess of the committee at any time and all members will have five legislative days within which to submit extrains materials to the chair for inclusion in the record. this hearing is entitled the future of money. digital currency. and now i recognize myself for five minutes to give an opening statement. today, we will discuss the future of money and how digital currency may feature in it. when discussing the future of money, it is pertinent to have a firm understanding of its definidefine ing characteristics and history. economists define money as anything that acts as a store of value, a unit of account and a medium of exchange. various objects have been used as money, such as seashells, giant stone tablets, and cigarettes in prisoner of war camps. commodities such as fur, rice, whiskey, tobacco and corresponding warehouse receipts circulated as money on the american continent in the colonial period.

prior to america's dependence, americans imported gold and silver coins from european countries to use in trade. and the colonies issued their own species before they and the continental congress began experimenting with paper money. even the u.s. dollar has evolved sin it was declared the standard unit of currency with the passage of the coinage act in 1792. it has undergone changes and dimensions, designed, denominations, issuer and backing. notably with the implementation and subsequent abandonment of the gold start. in recent decades, money has been electronically stored in bank deposits and transferred with credit cards, mobile phones, and the internet. cryptocurrency, however, was designed to be something different. cryptocurrencies allows users to store value unlinked from fiat currency on a decentralized ledger and securely transact directly from person to person

across a peer-to-peer network of computers apart from a commercial or central bank. the central question will ever us today is this, are digital currencies simply a new way to hold and transfer value that will have a limited impact and niche appeal? or will it or a derivative of it have a far-reaching transformative effect that will change our economy forever? cryptocurrency has existed for a decade. since the appearance of bitcoin in 2009 but has flown under the radar for most of its history. for years after its creation, it was worth little, had few users, and garnered sparse mainstream media attention. however, the media and consumers have been taking note with a stark rise in value in 2017, bitcoin grabbed headlines as it reached a valuation of around $20,000 u.s. last december. also reported are controversies such as bitcoin's involvement in purchases on the online black market, the silk road, and

donations funding wikileaks, the theft of hundreds of thousands of bitcoins from the exchange mount gawks and reports that hackers have stolen $1.6 billion from cryptocurrency accounts over the last seven years. congress must pay close attention to the developments in this space. the capital markets securities and investment commission have called cryptocurrencies in initial coin marketing in march of this year and held a hearing to discuss illicit use of virtual currency and the response last year. in the international financial system. we will discuss its use, both in the united states and abroad. thus far, some countries, lake vietnam and china, have banned or restricted it altogether. others such as switzerland and malta have fostered it, with a mostly hands-off approach and regulatory guidance. and others have adopted it,

including tunisia and ecuador, by issuing their own central bank digital currencies. how ought the united states government approach this new technology is of great importance. some believe as former fed chairman bernanke bernanke highlighted in a 2013 letter to congress that digital currency innovations, quote, may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system, unquote. some have suggested that cryptocurrency may be a catalyst for the elimination of physical currency and a foundation for a move to a purely cashless society. others say that cryptocurrencies are not suit about replacements for coins and bank notes, such as european central bank member, benoit coy, and the chair of the bank for international sentiments markets committee, jacqueline lowe, who in a joint article in the "financial times" entitled, bitcoin not the answer

to a cashless society, called cryptocurrencies something of a mirage, unquote. cryptocurrency has attracted advocates, critics, skeptics, entrepreneurs, investors and attention from media, government agencies and law enforcement. today, there are well over a thousand different cryptocurrencies with various characteristics, together come pricing over $250 billion of total market capitalization. will currency be the future of money? are they in a bubble that will burst or even just a passing fad? these are the sorts of questions we will attempt to address today, with our witnesses. the chair now recognizes mr. foster for five minutes for an opening statement. >> thank you, mr. chairman. a and thank you to our witnesses. i will be brief, because i'm actually very interested in this topic and have been for a while. i look forward to the testimony of the witnesses and hope to hear about currencies that are

not only pure crypto, but asset-backed krcrypto, and fiat currencies. i'm concerned if a significant central bank could issue a digital currency, that it would have the potential to supplant the united states dollar for many transactions and even as the reserve currency around the world. and despite the reports that they're exploring it, countries like russia or venezuela are not really credible countries that could issue fiat kushss that would supplant the dollar, but if however theex cb were to issue digital dollars, i think the entire world would very rapidly adapt that for many transactions, which could have benefits to consumers and a number of risks associated with that at all. and if there is really a credible threat that a digital foreign currency would supplant the dollar, we have to be prepared to respond to that

threat. i look forward to hearing from witnesses on the economic feasibility of another currency supplanting the dollar and whether digitization could be a catalyst in such a transition. i would also look forward to any thoughts the witnesses might have on some of the decision points that have to be made when you decide to create, for example, a fiat currency. the currencies could be traceable or not or could be traceable only with a court order. whether or not trades could be busted in the same sense that a credit card purchase can be broken if you convince some entity that the transaction was fraudulent. and who makes that call, under what circumstances. these are what i say the really important decisions that cannot bevaded, when we design a digital currency. and so the issue of anonymity is really crucial and at the heart of this, as well as what sort of

authentication a person will have to present to transact that anything. soy look forward to this hearing very much and yield back. >> the gentlemen yields back and the chair recognizes for the remainder of the time, mr. sherman for an opening statement, 2 1/2 minutes. >> lot chain is a good technology, but it can be used to track anding target sovereign currency. there is nothing that can be done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society. the role of the u.s. dollar in an international financial system is a critical component of u.s. power. it brought iran to the negotiating table and then we argue about whether we got a good enough deal or not to the jcpoa, we would have nothing if it had not been for the role of the dollar. we should prohibit u.s. persons

for buying or mining cryptocurrencies. mining alone uses electricity, which takes away from other needs and adds to the carbon footprint. as a medium of exchange, cryptocurrency accomplishes nothing except facility narcotics trafficking, terrorism, and tax evasion. some of its supporters delight in that. that if you can disempower the u.s. government from being able to prevent terrorism, narcotics trafficking and tax evasion, you have somehow struck a blow to liberty. that is within enough to ban it. but its role as an investment is as least as bad. we have certain animal spirits in our culture, a willingness to take a risk to place a bet. this can be harnessed by gambling casinos, which at least pay very high local taxes and created a city of las vegas out

of a desert. we can better yet harness those animal spirits to get people to invest in risky stocks, start-up enterprises, and provide the technologies and jobs of the future. or we can see those animal spirits spent doing nothing but helping create a market for tax evaders, narco-terrorists, and others who find that the u.s. dollar is not to their liking. at a very minimum, we need investor protection, if we're going to have people invest in cryptocurrencies and crypto offering memorandum and crypto registrations would be considered outright fraud and reason for incarceration, if they were issued by somebody selling stocks, bonds, or any other investment. and finally, there is seniorage, the money that we make as a country, because we're the reserve currency, because we can

issue a green back that does not yield interest, there are people who are alive today because of the profits the u.s. government makes on that, whether it be to fund defense or medical research. all of the that gets diminished with cryptocurrency. i yield back. >> the gentlemen's time expired. today we welcome the testimony of dr. rodney garrett, who holds the chair of economics at the university of california santa barbara. he has served as a technical adviser to the bank of settlements, and as a former vice president of the federal reserve bank of new york. during his time at the federal reserve bank of new york, he co-led the virtual currency working group for the federal reserve system. after leavine ing the federal reserve bank, he consulted for payments canada, a proof of concept for a wholesale interbank payment system.

he received his ph.d from cornell. dr. norbert michelle, the director at the center for data analysis at the heritage foundation, where he studies and writes about financial markets, cryptocurrencies, and monetary policies. before rejoining heritage in 2013, michelle was a tenured professor at nicholas state university's college of business, teaching finance, economics, and statistics. dr. michelle holds a doctoral degree in financial economics from the university of new orleans. dr. aswar is the senior professor of trade policy and professor of economics at cornell university. he is also a senior fellow at the brookings institution, where he holds the new century chair in international trade in economics and a research associate at the national bureau of economic research. he is a former head of the imf's china division. his extensive publication record includes articles of numerous collective volumes as well as top academic journals.

he has co-authored and edited numerous books including on financial regulation and on china in india. finally, dr. alex pollack is distinguished senior fellow with the "r" street institute. welcome back to the industry, mr. pollack. providing thought and policy leadership on financial systems, cycles of booms and busts, financial crises, risk, and uncertainty. central banking and the politics of finance. alex joined "r" street in january of 2018, from the american enterprise institute where he was a resident fellow from 2004 to 2015. previously, he was president and ceo of the federal home loan bank of chicago, from 1991 to 2004. alex received his masters in philosophy from the university of chicago and a masters of public administration degree of international affairs from princeton university. each of you will be recognized for five minutes to give an oral presentation of your testimony. without objection, each of your written statements will be made part of the record. dr. rodney garrett, you are now

recognized for five minutes. if you can just push the button there to turn on your mike. >> thank you, chair bar, ranking member moore and members of the subcommittee. the convenience of electronic transfers has led to a decline worldwide in the use of cash. this is particularly true in countries where systems for transferring commercial bank deposits are more advanced. sweden's system swish has been adopted by 50% of the population and cash use in transactiins ha below 2%. countries around the world are introducing their own faster payment systems, including the recently launched realtime payments platform in the united states. at the same time, paypal, venmo, and other private mobile payment platforms continue to improve vee convenience and speed of person-to-person and retail payments. it seems likely that the use of cash will donate fall and it's worth noting that there is a tipping point at which even if consumers seek to use cash, businesses and banks will no

want to deal with it. what happens then? one possibility is that people will be content to transact primarily in commercial bank deposits and things will be business as usual as a much smaller cash component to the monetary base. another possibility is that people will demand direct access to some form of digital central bank-issued money as a replacement for cash. and a third possibility is that people will turn to privately-issued cryptocurrencies like bitcoin. these options are not mutually exclusive nor are they independent. the adoption rate of bitcoin will depend not only on its performance as a money, but also on the forms of digital money that the central bank provides. if consumers perceive that have an adequate access to cash like medium of exchange, they may be more inclined to turn to alternatives. on the other hand, if the central bank offers a digital form of central bank money to the public with sufficient cash-like properties, then perhaps will appease those who miss cash. central banks are currently evaluating nure ining numerous

digital currencies. also for meeting core objectives and ten handsmenehandsments. they consider cryptocurrencies in wholesale systems only. in w currencies only and have minimal monetary policy implications. in these opening remarks i will focus on the merit of a widely accessible, retail oriented crypto currency. as suggested in fed coin proposal, retail central bank could transact like bitcoin. instead of having a fixed money supply rule, federal reserve would control the destruction of these coins. crucially 1- 1 and enhance crypto currency would not suffer from volatility that undermines the usefulness of bitcoin. the fed could choose to

transaction validation could be performed by vetted actors who are accountable for their actions without costly work. central bank money have been made before. nobel laureate proposed giving access to deposit currency accounts at federal reserve banks over three decades ago. a number of things have changed since tobin's proposal. the use of cash has declined, major financial crisis may have changed some people's attitude toward commercial bank deposits and offering the potential for issuing digital central bank money in a new way with enhanced features. i offer two examples. fir, the peer-to-peer aspect could allow central banks to provide digital money with anonymity property. whether or not the central bank would want to do this, legitimate demands for privacy, concerns related to tax evasion and other criminal activities.

second, there is the potential to improve upon cash. programmable money allows trading partners to hardwire the terms and conditions of trades into their transactions so that they may be executed upon fulfillment of these conditions without relying on third parties. particularly useful for transactions that span multiple legal transactions. balance potential benefits against potential risks, a common objection to expanding access to central bank money is that it could disintermediate banks. it is also plausible it could produce healthy competition. the risk of excessive would be mitigated by making any new form of central bank money more like cash and less like deposits. thank you. i'll be happy to answer any questions. >> thank you. dr. norbert michelle, your now

recognized for five minutes. >> thank you. the views i express today are my own. they should not be construed as representing any official position of the heritage foundation. crypto currency has rapidly expanded since the introduction of bitcoin in 2008 and underlying technology, distributed database that allows digital assets to be transferred without a third party intermediary holds the potential to transform the financial industry. this innovation should be fostered, not smothered. my remarks today will provide four specific points relating to the use of crypto currencies, cash and other alternative forms of money. electronic means of payment has become more widespread as technology has changed. paper currency, cash, is still a widely used form of payment. the demise of cash has been widely and steadily predicted since at least the 1970s, yet

remains a preferred method of payment for many people. federal reserve reports show that it's the most frequently used payment. it also remains the leading payment instrument for expenditure categories such as person-to-person gift transfers, food and personal care supplies and entertainment and transportation expenditures. as the charts in my written testimonies show, both the volume and value of currency in circulation in denominations including one all the way from one to $100 bills have steadily increased since the 1990s. that's increased. retail establishments that prohibit customers from using cash, as was recently reported in a "washington post" story do so at their own peril. this danger, this threat of consumers using an alternative form of payment, possibly at an alternative place of business is exactly as it should be. competitive processes should

take place so that businesses and consumers can discover the best means of payment. the fact that crypto currency is a new option for making pams, though in its infant stages, should be embraced. that brings me to my second point, which is that the federal government should not step in and tilt the playing field but treat crypto currency neutrally. to not bestow any legal advantage on any particular form of money and remove barriers from using alternative forms of money. including crypto currencies and foreign currencies would be a major step toward leveling that playing field between alternative forms of payment. to further level the playing field congress should consider allowing the u.s. postal service and other government agencies to accept these alternatives. my third point is that these competitive forces are the forces that push entrepreneurs to innovate and improve products

specifically to satisfy their customers. it also exposes weaknesses and inefficiencies. the same competitive forces can and should be used to improve money. the federal government's partial monopoly on money limits the extent to which competitive processes can strengthen money and exposes our money to the mistakes of a single government entity. nothing can provide as powerful a check against them as a threat of competition from valuable alternative forms of payment. my final point is that centralizing crypto currencies within any government agency makes little sense. the technology promises potential benefits because of its decentralized nature, centralizing the technology at central bank offers no particular advantage over a more traditional electronic database. furthermore, congress and the administration should do all they possibly can to ensure that our central bank never offers retail bank accounts to the

public, via a central bank backed crypto currency or via a more traditional form of money. it would give the federal government a complete monopoly of money and effectively nationalize all private credit markets. no private entity would be able to compete with the federal government for funds. even a staunch advocate for phasing out cash admits that the biggest threat to currency is often the government itself. that quote is, quite frankly, an understatement. giving the federal government the power to directly take money with a few computer key strokes in the name of some vague goal of stabilizing the economy amounts to the death of economic freedom, a terrible idea and is congress' duty to protect americans from those sorts of tyrannical acts. thank you. >> thank you. dr. prassad, you're recognized for five members. >> chairman, members of the

committee, thank you for the opportunity to testify in front of you on the implications of digital currency, broadly defined for the u.s. economy and financial system. i should note that two years ago i faced an important face one afternoon, whether to spend that afternoon buying bitcoin, or to start working on a paper about bitcoin and digital currencies. for better or worse, i chose the latter. today i have no bitcoin but i do have a paper about the implications of digital currency. it's useful to frame our discussion around three questions. one, should the government or federal reserve provide services that the private sector can provide more efficiently? that is something that crypto currency could provide, for instance. secondly, what are the implications for the fed? low inflation, high employment and, most important ly, financil stability if digital currencies become vitally prevalent. third, what are the implications

for the u.s. in the global financial system? as one looks at the landscape of crypto currencies, it's important to keep one distinction in mind, digital currencies that could use the same and noncrypto currencies with no backing behind them, unlike the u.s. dollar, which does have backing. now there are many proponents of the u.s. and other economies moving their digital forms. i think there are legitimate arguments about how that could reduce elicit activities, improve the tax base and, in some ways, even make monetary policy more efficient, even at the lower bound where the fed may not be able to use policy anymore. if we were to have noninterest bear i bearing accounts with the fed.

and this is what tobin had suggested. this would make a certain aspect of monetary policy and implementation easier. money in a broader sense, created by the central bank but to a much greater extent through commercial banks. this will have a serious implication for money creation in the economy. as new technologies, new financial technologies more broadly eat away at the standard business model of banks and nonbank financial intermediaries start playing a role, the question remains what role will banks play? those are the institutions that the fed has direct control over and are responsible for creating loans and, therefore, creating deposits and a very important part of money. the other aspect in terms of thinking about the federal reserve's digital currency or any central bank's paper currency.

it has a very important role in intermediating in terms of clearing and settlement of the transactions. with noninterest bearing deposit accounts, one could well end up incenarscenario. it is not obvious where this is the solution but it is worth thinking about the alternative. both the retail payment systems and the wholesale payment systems among banks are managed through distributed technology, which might become feasible, then what happens even in the time of crisis of confidence? in normal times, it might lead to significant gains in efficiency. again, the prist sector might do far more efficiently than the government, the management of these payment systems. but the issue of trust in the central bank, especially at a moment of crisis of confidence, becomes severely important. if you look around the world and think about central banks, like sweden that are thinking about introducing a digital version of

the fiat currency, the objective they have in mind is not to include or reduce innovation, but basically to provide a backstop to the payment system to make sure that it's not all in the private sector and subjected to a crisis of confidence. other concerns in terms of capital flows that could be f facilitated, which would improve sufficiency but potentially make underground activities easier to execute. finally on the issue of the u.s. dollar's role as a global currency, i think it's possible if other countries were to issue their own currencies in digital form, you could have a shift. what preserves the u.s. dollar, the ultimate global safe haven is not just the -- it's exchange rate but ability to serve as a

safe haven and that rur requires u.s. institutions which are still pretty strong and will ray retain foreign investors' trust. the u.s. dollar should remain secure for now. >> thank you. mr. pollack, you're recognized for five minutes. >> thank you, mr. chairman, mr. foster, and members of the subcommittee. this hearing poses interesting questions, which leads to guessing and thinking, we hope. bitcoin or another crypto currency could become a successfully privately issued fiat currency, being widely accepted, constantly used in payments and settlements, used to denominate debt and other enforceable contracts. people are going around asking what's the price of this in bitcoin? we're way from that but it's imaginable. the history of money, as the chairman said, demonstrates a

wide variety of monies that have been used. there have been numerous historical examples of private currencies. but to my knowledge there's never been a private fiat currency, reserved for the power of governments. private currencies, circulating notes were common in the 19th century. you might have carried, in those days a dollar bill. but all such notes were banked by the loans and investments and capital of the issuing bank. they were not fiat money. the dominant historic trend in money has been to create ever more central bank monopoly of currency over several centuries of development. computing power of our time reversed this trend and create more competition in krns curre

with dr. michel, i think it might be a good idea but don't think it will happen. bitcoin supportives imagine it will but i think it's easier to imagine to moving in the opposite direction, greater monopoly of the central bank through digital money. mr. foster made the point it's not only our own central bank but other powerful central banks we might think about in this context. and many central banks are, indeed, interested in having their own digital currency. general public, not only banks, could have deposit accounts with the central bank in addition to carrying around its paper currency and the appeal of this idea to central banks is natural. it would greatly increase their size, role and power with current technology, this would clearly be possible. the central bank could have tens of millions of accounts with individuals, businesses, associations, municipal

governments and anybody else. there's not much standing in the way of that in terms of pure financial technique. but would it be a good idea? no, it wouldn't. the federal reserve would be in direct competition with all private banks. it would be a highly advantaged government competitor and it would be regulating its competitors. that's what central bank evolution tried to develop out of. in the american banking system, there are about $12 trillion in domestic deposits. could a federal reserve digital deposit account system grab, say, half of them? why not? that would be $6 trillion, expanding its balance sheet to $10 trillion. if you have deposits on one side of your balance sheet, you have something else on the other side. so, what would the fed do with this mountain of deposits? and, as my friend said, we would

have to make investments in loans. it would become, by this means, overwhelming credit allocator of the american economic and financial system. i think we could safely predict its credit allocation would be unavoidably highly politicized and taxpayers would be on the hook for credit losses. risk would be directly in the central bank as opposed to central banks in support of somebody else. so as norbert said to have a central bank digit currency is one of the worst financial ideas of recent times. still it's quite conceivable to think of as a possibility. and it's good for us to think about it. in conclusion, digitalization will continue. but i don't think the fundament al money will change.

it might be a private can currency backed by reliable assets. i don't think it will be a private fiat currency like bitcoin and, as we consider all this an increase in the monopoly power of central banks, which already have too much, should be avoided and thanks a lot for being able to share these views. >> thank you for your testimony. and the chair now recognizes himself for five minutes for questioning. let me just start with this idea of crypto currency potentially supplanting or displacing u.s. federal reserve notes as the world's u.s. currency. this is for anyone who wants to chime in. with greater use of electronic payments, do you think demand for u.s. federal reserve notes will decrease?

and what implications does it have for the u.s. dollar? >> i think if you look at why the u.s. dollar is as strong as it is and is in as demand as it is, we have a federal reserve that prints demand notes, economy with property rights, we have incredibly well developed industrialized infrastructure here. and as long as you combine those things and have a dynamic economy then the assets of that economy, including the money that's predominantly used in that economy, are going to be sought after. that's what you should focus on if you want people to want our money, if you want people to want to use our money. there's a down side to being the world's reserve currency. that is we can basically continue the fiction that we can print as much as we want and lend as much as we want. frankly that's not a good idea.

that's just not the way i would think of those things. >> anybody else want to comment on that? mr. pollock? >> another way to think about that is that the united states does have, has had and continues to have, as my old friend john macon used to say, competitive advantage in wealth storage services. and that's an advantage that arises out of social infrastructure, all the things that norbert said, rule of law, enforcement of the contracts, strong financial system and, of course, a powerful government enforcing all of that. i think that will continue. but we talk about bank notes and u.s. dollar paper currency does circulate around the world, as we know. nonetheless it will become more dominant despite the advantages in some situations that paper currency has, like privacy.

>> dr. prasad? >> it is difficult to see an asset that has no intrinsic value and no backing by the government maintaining value. the initial promise of something like bitcoin might become an effective medium of exchange and that promise hasn't quite panned out because it is very inefficient and very costly to transact using bitcoin. in fact, many of the nonofficial crypto currencies gaining traction, in fact, once they are backed by fiat currencies or other forms of banking. there is one called tether, for instance, backed 1 for 1 with the u.s. dollar and that is beginning to get traction as a medium of exchange. ultimately, the u.s. dollar, as just pointed out, maintaining its dominant role to u.s. institutions and the trust in the federal reserve. >> let me follow up by basically -- by starting with a more fundamental question. you talked about the volatility

of digital currency. and maybe that is the principle reason why it's not the best exchange right now. at its very core, are crypto currencies money? and if they're not, do they substitute as money? dr. garrett? >> i would point to hyatt who liked currency more than money. it's a property. it's to a different extent. is bitcoin money? well, you know, for regulatory purposes, we may not want it defe defined that way. it's been defined as a commodity because that's necessary for regulatory purposes. in terms of the conceptual idea

of is it money, it is to some extent. it's not currently a very good one for the reasons that have been articulated. it's not very good as a media exchange because the price is so volatile. if the price is -- if we think the price is going to go down, i don't want to receive it. if i think the price going to go up, i don't want to spend it. this volatility undermines its features both as a store of value. >> my time is about to expire. would its properties as money improve, would its quality of money improve? would its volatility decline based on adoption rate? is adoption rate all that is required to improve its qualities to get to money? dr. garratt? >> yeah. people have to start using it for transactions, then volume at this time might start to

decline. >> the way it's set up has part to do with its own volatility. that's just one crypto currency. but adoption has something to do with it. >> i'll now recognize dr. foster for five minutes. >> thank you. i would like to thank our witnesses again. recently there were reports in the press of estimates of about 20% of all bitcoin have been lost, which strikes me as implying that it would be a tremendously profitable industry to be in. that's in addition to the interest expense, if there's no interest paid on these digital instruments. it strikes me that whatever country starts doing this and becomes a de facto standard will have a permanent cash cow. do you see anything wrong with

that analysis? >> for any issuer of currency, you like your currency lost or put away some place. remember american express checks, used to encourage you to put them away in your attic and save them, extremely profitable for american express. >> and somehow a big evil monopoly government taking overall banking functions. if there were no interest paid on these things, average person would maintain a convenience level amount of this and not have all of their net worth in something that paid no interest. so it seems like you just have a reasonable fraction of everyone's network useable for short-term transactions and then they would separately, in a very competitive banking and investment environment, allocate the main bulk of their investments elsewhere. do you see anything wrong with that analysis? >> yes, i do. i think the fed would pay interest. just as they do -- i'm sorry.

>> as they don't on cash. >> just to be clear, the notion that is being floated right now is of noninterest bearing deposit accounts. right now that is not a clear proposal. there are different ways of thinking about how to set up a central bank digital currency. the notion for deposit accounts is for noninterest bearing accounts. the concerns that you could have this asset superseding other assets is highly unlikely because it would be a zero nominal interest rate yield like cash currently is. to your concern about potential technical malfeasance, it goes back to the 7th century when counterfeit was a concern. i could argue that digital forms of fiat currency could reduce concerns about paper krnsy. the flip side here is that certainly they will make them very vulnerable to technological hacks. i think that's why most central banks are very concerned about

moving forward very aggressively with this because of potential threats out there. >> the promise of block chain is that it provides a nonfalsifiable ledger that would prevent a lot of malfeasance. i think the kind you will forever be worried about is authentic atie i authenticating the person who has access to move these currencies around. and that remains a problem, how do you authenticate yourself for different levels of transactions? dr. garratt, how does sweden handle this? do swipe fees just disappear in that you can pay -- how do you deal -- how does sweden deal with the problem if someone steals your cell phone or identity somehow and proceeds to spend a bunch of money? is there a mechanism to get your money back when a fraudulent transaction has taken it away

from you? >> the current swiss system is run in cooperation with central banks. these are still centralized accounts. in the event your cell phone was lost you would still have access to go to the bank, reveal your identity and get your account reinstated. or you could probably just do that online. so sweden has issued something called an e-croner report where they're considering alternative technologies to deal with the replacement of cash. those are still just proposals. >> and in china, which has just massively, apparently, adopted digital transactions for consumers at least, that -- is that essentially an account balance with the two big players, whose name i forget? ali pay and whatever the one is? essentially everyone has a balance on there and i pay you

by transferring some of my balance in ali pay to you, or is there some government operation behind it or central bank operation behind it? >> it is essentially based on using the recheck platform and ali pay platform. you can link it to your bank account. sweden is considering two opgs, register base system where you have these electronic deposit accounts like i mentioned or value based system where sshlly you download digital cash on to your trompg wallet, like a credit card. those are the two options being considered. >> vice chairman of the sub committee mr. williams from texas is recognized. >> thank you, mr. chairman. thank all of you for today's hearing. we're in the exciting first stages of the digital currency adaptation and it's become apparent to me that block chain and other technologies is the digital currency space that offers solutions and have the

potential to alter the financial sector that does business. as congress and regulators determine how best to treat these emerging products, we must be mindful of our impacts on free enterprise. however, keep in mind the legitimate governmental interest in use of digital currency to those who wish to do us harm. my first question, dr. michel, you state that congress should work diligently to eliminate tax and legal impediments as well as new applications for block chain technologies. what are the impediments to development of alternative currencies and new applications for block chain technologies and what can congress do about them? >> the main one, honestly, i believe is capital gains tax. the fact that you have to keep track of basis in every transaction you would make, that's a major impediment to

using anything other than the u.s. dollar for your transactions. that's the biggest one. otherwise on a regulatory side, if we look at bank secrecy act, ensuring that nothing is treated differently -- yes, it is true that criminals have used bitcoin. criminals also have used airplanes, computers and automobiles. we shouldn't criminalize any of those instrumentsicism because criminals use them. those components, i believe, are the main barriers to a more widespread adoptance of these things in the u.s. >> thank you. dr. farratt, three options for consumers in the event that cash is no longer available to them. number one, use commercial bank deposits for everyday transactions. number two, demand direct access to digital central bank issued money and thirdly, turn to privately issued crypto currencies.

what would cause consumers to choose option two and three when option number one is a convenient payment method? >> i agree with what you said at the end there. there's nothing wrong with our current banking system. and people have been very -- and as i mentioned in my testimony, new means for transferring commercial bank deposits is constantly arising, increasing the ease with which we make person to business payments but peer-to-peer, person-to-person payments. as cash actually disappears, that starts to create problems in society. sweden is dealing with this currently. and the governor wrote an opinion piece where he talked about the pain points when physical cash really starts to disappear and when businesses stop receiving it. what i'm really talking about is that future scenario. and at that point, the central bank has to decide if it wants

to withdraw completely from providing a payment device for the general public or whether it wants to offer some sort of digital alternative. one of those digital alternatives could be possibly down the road, some form of crypto currency offered by the central bank and the primary reasons for doing that, i think, one would be if you wanted to allow some type of privacy component within transactions of this currency. like is currently possible with cash. subject to limits, as i said, balanced against the risks of tax evasion and criminal activity. these are the options that the central bank will ultimately face. and my argument is that these are something that we should be prepared for. >> okay. let me stay with you, dr. garratt. all the different attributes that make classifications difficult, what is the appropriate framework for us to use if congress approaches

legislation addressing the digital currency? >> that's a very difficult question. >> that's why i ask it to you. >> people have the ability to issue these private currencies and one can't make something illegal because it might be used for illegal purposes. what i'm arguing is that i believe that the central bank does a good job at providing payment services and not only just at the interbank level but also for small payments by the public. and i think the central bank should continue to provide the best possible product along those lines and i'm arguing at a future date that best possible product might involve some of these new technologies but issued by the central banks to remain competitive as opposed to

these private currencies, which, you know, are less able -- we're less able to monitor and less able to -- >> gentleman's time has expired and the chair recognizes the gentleman from california, mr. sherma sherman. >> it seems like some think tanks demand at every turn that we do things that make the federal government less able to meet its financial obligations and then demand we have an extensive foreign policy that costs well over $1 trillion. there's no way to square that, unless we abolish social security and medicare. we have moved from gold from 2,000 years ago to drafts and paper currency.

symbolizing gold to the point that paper currency itself has value. and now for many decades, what happens value is paper that represents the paper. i pay my rent with a check, which represents paper dollars which, as recently as the 1930s, could be converted into gold but can no longer be. we now have an opportunity to disempower the federal government and move that power to those hostile to it. we need a median exchange. witnesses have demonstrated that the dollar is much better at that for honest citizens, but

cry crypto currencies offer to tax evaders and criminals. mr. pollock, what is the -- it seems to be a solution looking for a problem. what can an honest citizen not do to store value, to effect waiteffectuate a transaction -- i never had a problem paying somebody, unless i didn't have the money. so we have pretty efficient transfer of mostly dollars every day. what's the problem we're trying to solve except the problem that the narcotics dealers have?

>> i think the proposal being made for private fiat currencies, which strikes me as an unlikely outcome, private fiat currency as opposed to a convertible currency, is to give optional ways of settlement for anybody -- >> i've got a means of settlement called the dollar. >> you do. >> what is the great failure? >> you have another one called the euro. >> i have many, many choices. >> you used to have ounces of gold as you point out. >> so what problem do i have that they're trying to solve, unless i'm a tax evader or narco terrorist? >> first of all, i'm not pushing, as you know, this solution. >> i'm trying to illustrate that it is a solution only to the problems of tax evaders, criminals and terrorists.

>> excuse me, you might -- >> it offers an opportunity for profit by speculators, speculating on a currency whose sole value is to help the aforementioned ne'er do wells. go ahead. >> we should allow people to own guns in many circumstances. but if the sole advantage of a particular gun is that it has a special tape on it to prevent fingerprints from adhering, then you would say the honest citizen who wants to hunt wants to make sure that the deer cannot identify the fingerprints of the hunter, i would say the sole benefit of that particular tape on that particular gun is to facilitate criminals. what, other than facilitating

criminals placing bets on the value of a criminal tool? we could speculate the value of burglars' tools. what does this do? what problem does it solve? can you identify one? because i can't. >> i don't know in what criminal way crypto currency is used. i speculate there are some, but so are cash. >> rifles are chiefly used for hunting. rifles designed not to have fingerprints on them are predominantly used for crime. >> the gentleman's time has expired and the bell signals that votes have been called on the house floor. we will recess for votes in a moment. but we will go to mr. hill for five minutes of questioning, then we will recess and return. and for members who have not had an opportunity, we will

reconvene with the remainder of the hearing for your questions after votes. at this time we'll ask mr. hill for his five minutes of questioning. >> thank you very much, chairman. i appreciate the time today. very interesting panel. i was talking about thin tack and the advantages of exploring how block chain can change business economics and accounting and logistics. very interesting topic. today we're talking about something that is -- the headline which is constantly chatter about crypto currencies. and when i listen ed to your testimony i just have flashbacks -- not personally, of course -- to the 1830s. i'm thinking about wildcat banking when we had no central bank, thanks to president jackson's insistence that we didn't need that. and every state and every business and every town issued d

script or currency. i have a book at my house on obsolete script and currency that's a collector's guide and it's very thick. so, help me, mr. pollock, understand that. why is this any different? i can't imagine that any one privately issued crypto currency could be more accepted than the other. why is it not like wildcat banking of the 1830s? >> congressman, i think it's exactly the same, as i tried to suggest in my testimony. i said in my written testimony i have in my collection, maybe my book isn't as fat as yours, a nice copy of a $3 bill issued by the wisconsin marine fire and insurance company which acted as a bank in the 1830s, in this period you're talking about. i think it's exactly the same except those currencies did have a claim on the assets of the bank if the bank had good

assets. >> thank you for that. dr. michel, if i remember article i right, coining money is the enumerated power of the congress not the fed. where is all of this -- this would still be pursuant, obviously, to congress directing that we do this. tell me your views on that legally. >> legally, i mean, i hate to venture a guess because they seem to be able to do quite a bit without legislation. >> this isn't a surprise based on your testimony. dr. pasad, because of block chain, you would make some forms of money or credit, i would say,

obsolete. account payable/receivables, for example, people wouldn't necessarily have as big a line of credit. so you're concerned about future credit creation and open market operations. i assume that's where you're coming from in your testimony? >> if you think about the previous congressman's question about what is the point of crypto currencies, there are many inefficiencies that lurk in the financial system. you think about payments, using your visa or think about settlement of transactions, those are painful slow sometimes, quite expensive and this technologies and principle provide a way of getting around those issues. i emphasize that, could make transactions much easier to verify, to follow through the settlement of transactions and bring down the cost. we're not quite there yet. but that's the prospect and that could affect traditional model of banking, especially as nonbank financial

intermediateias, ali pay in china. that could affect how the fed thinks about federal instability. >> thank you very much. in my time remaining, mr. chairman, since this is the monetary policy committee i have to commend to our viewing audience and my colleagues, mr. pollo pollock's recent writings on the 40th anniversary of the humphrey hawkins' act, one of my personal favorite laws. we celebrated quietly today as we had chairman powell testifying. i always find the goals of humphrey hawkins odd. you have full employment and price stability. i didn't get to ask my question. i'll let you have the last word, mr. pollock. how is price stability consistent with perpetual inflation? >> it is not. that is one of the great mysteries of the federal reserve, how stable price is,

the term in the act is consistent with their announced strategy of perpetual inflation. >> thank you. that's one of the great mysteries of finance. i yield back. >> gentleman yields back from those good questions and i am informed because this is going to be an extraordinarily long vote series on the house floor, we may be losing members. and so i'll reverse course and call on our colleague from ohio for the last set of questions for the hearing, and that is warren dafbdsvidson who is now recognized for five minutes for the final question of the hearing. >> thanks for the bonus time, chairman. thank you all for being here. i assume you're relieved so you won't be waiting for us for an hour and a half or two to get back over here. thank you for your expertise in this. and just beginning with the nature of currency, what is our currency, part of the stability

of the u.s. dollar lies not just in the resources of the united states, but the resources of the world, petro dollar. everyone has to settle their current account at some level in u.s. dollars because everyone uses crude oil. and so we have an effective monopoly on settlement there. and it dealt somewhat effectively with the problem of mercantilism in gold. it prevented hoarding because the oil isn't hoarded. of course, if congress continues to tap the strategic petroleum reserves, i assume eventually we can find an end. but in the background of that, what creates the stability of money? i guess i want to get at in crypto currency, we use the word for everything. we use it for crypto securities that are really nothing more

than nonvoting shares. we've established that numerous of these crypto commodities are effectively commodities but we're not quite sure that they're currencies. mr. pollock, you suppled it up well saying there's a big gap between how much is this in bitcoin. and so i guess that's the question that the panel to explore. dr. michel? >> the question being? >> nature of money in crypto. what would make a crypto currency a currency not just an asset? bitcoin, michel coin. >> i like the sound of that one. that's good. if we're talking about a medium of exchange, then what we have is either a currency or substitute for currency or

substitute for money. it's all digital, maybe we shouldn't call it currency. the idea is what is the medium of exchange? and my whole point is that people should be allowed to use whatever medium of exchange that they want to use. the fact that many people think that the fed is great and the fed is fine and we should just stick to the central bank that we have, that's wonderful. if nobody else ever believes that way and no one else develops any other form of money, no problem. but if somebody comes up with something better, we should allow that to take place. >> you highlighted earlier that the government shouldn't favor one or the other. we clearly do. we coin the money. and we have the official money, the legal ternd in the united states. mr. pollock, how do you see migrating that path for something to really become currency? >> to be a currency, you have to

be readily accepted in settlement of payments and to be a unit which is used to denominate contracts. that means people in general believe that that will be accepted by other people and they have to believe that other people accept that. and everybody else has to believe that other people will accept that as well. it's a strange social creation, money that comes out of belief backed up. it's curious to think about. >> what you're really getting at with your question is why does bitcoin have any value at all? as mr. policy alcohol julock ju accept it from someone on the

belief that someone down the road will accept it from you. one of the interesting things that make that work, apparently, with something like bitcoin is the currency supply role. there's a fixed rule on how the money is fixed over time. you don't have to worry that the issuer of the currency will behave irresponsibly and devalue it. it's a fundamental aspect that gives bitcoin value. once that process is started or people have started to believe in it. but it also can be problematic because it means that you have a fixed rule and you are not able to provide currency in a way that might be beneficial in general for the economy. >> thank you so much. i'm sorry i couldn't get to everyone and to nearly all my questions. but nearly universal liquidity, i think, is the defining characteristic. and we can't get to the value related to petro. thank you so much for your time and thank you for your indulgence, chairman. >> thank you for your questions and for yielding back your time.

i would like to thank all of our witnesses for their testimony today. again, i apologize for the brevity of the hearing. i think we had a lot of members with a lot of interest but because of the interruption of votes we'll have to end this hearing early. given the fact that digital currencies and crypto currencies will continue to have a greater and greater impact on our financial system and the broader economy i'm sure we'll be revisit this topic. all members will have five legislative days to submit questions for the witnesses to the chair which will be forwarded to the witnesses and please respond as promptly as you are able. this hearing is adjourned.

join washington journal friday, live from baltimore, maryland, as we spotlight the opioid epidemic. during the program we look at how city and state agencies work with city residents who are addicted to opioid. baltimore commissioner of health leana wen. and then director clay stamp on

efforts that the state is making to counter opioid abuse. elijah cummings walg senator elizabeth warren and baltimore's acting police commissioner and fire chief ford discuss the opioid crisis from the perspective of first responders. washington journal's spotlight on the opioid crisis live friday morning starting at 7:00 a.m. eastern on c-span. sunday night on "after words," former white house press secretary sean spicer discusses his book "the briefing: politics, the press and the president," interviewed by former republican national committee chairman michael steele. >> about 180 degrees apart from each other yet here we are in this space. how did you navigate that?

we're both reagan conservatives in that regard. >> that's right. >> was it a little bit of a, you know, dance every once in a while or how did you do it? >> with respect to the president himself, look, there's no question that he is not traditional in terms of how he speaks. he has his own vernacular but also connects in a way with people that most presidents never have. he talks bluntly in his own style. i don't think he would have won the presidency or the nomination if it wasn't for that style. there's always this balance with elected officials, right? they say all the right things but don't necessarily get anything done. in the case of trump there's a lot of he's getting all these things and people are saying, i didn't like this tweet or i didn't like how he interacted. i'm a results-oriented person. are people doing better? are they making more money? is the country safer? net/net, i think most people would generally agree that if we

can get the right things done for the country, then that is a better place than someone just talking about the right things to get done. >> watch "after words," sunday night at 9:00 eastern on c-span2's "book tv." sunday night on q & a, david stewart on his book "impeached: the trial of president andrew johnson and the fight for lincoln's legacy." >> it's a scandal. it's a terrible -- the chapter on johnson i won't speak beyond that. the chapter on johnson should be expunged from every library in the country, edmond ross credited with casting the single vote that saved johnson's tale and calls ross' vote the most heroic moment in american history. i actually think it was bought, that his vote was