tv Senate Banking Committee Hearing on Digital Currencies Blockchain CSPAN July 31, 2019 2:32am-3:57am EDT
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morning. be sure to watch thursday morning following the second night of the democratic presidential candidates debate of the 2020 race. >> next, the senate banking hearing on regulating digital currency with tech and financial industry officials. this is one hour and 20 minutes. sen. crapo: this hearing will come to order. last congress, this committee held two hearings examining the digital currency ecosystem. in those hearings, we heard about some of the developments that have occurred within the digital currency marketplace since the creation of bitcoin in 2008.
facebook's project has generated renewed interest in digital currencies, including how they react with u.s. and international regulatory frameworks, the potential benefits and challenges they pose, and concerns around issues like anti-money laundering and counterterrorism efforts, including data privacy, consumer protections, commerce, and monetary policy. a few weeks ago, the head of the program joined the committee to provide an update on facebook's proposed digital currency. somearcus emphasized important points and commitments
. there are a number of regulators globally engaged on the facebook project. they will have the highest standards when it comes to data privacy and no financial data or account data that is collected will be shared with facebook. it will be headquartered in geneva switzerland, but will and haveistered oversight from u.s. regulators. though it may have begun this conversation, the block chain and cryptocurrency system is diverse. it seems to me that these technologies and other digital innovations are inevitable. they could be beneficial, and i believe the u.s. should lead in their development. happen without clear
rules of the road. develops regulatory may need to bere a look at gaps that could develop in the framework. treasuries secretary mnuchin said the u.s. welcomes new innovation that could include the financial system stability and expand access to financial services. that said, our overriding goal is to maintain the integrity of our financial system and protect it from abuse. he also noted that treasury had serious concerns regarding the growing misuse of digital currencies by money launderers, terrorist financiers, and other bad players. as digital currency efforts move forward, i'm particularly interested in better understanding how these technologies may impact
individuals' ability to control their data, including the right to receive information about and access their data, correct inaccuracies, and delete their data. during this hearing, i look forward to hearing more about how the market for digital currencies has grown and evolved over the last decade, different types of digital currencies in the marketplace, including their differences with facebook's proposed digital currency, how other countries are approaching the regulation of digital currencies and block chain technology and what we might learn from their successes and failures, potential gaps in existing regulatory frameworks, whether distributive technology can help to facilitate meaningful privacy for individuals' data, and approaches congress should consider in developing a comprehensive regulatory regime for digital currencies, including ensuring individuals have real control over their data. with the appropriate balance of regulation, digital currencies
and their innovations and their innovative underlying technology could provide meaningful benefits. i look forward to learning more about the ecosystem during this hearing. senator brown? sen. brown: thank you, chairman. welcome to our three witnesses. thank you for joining us, some of you more than once. this community -- committee hearing earlier this month, many of us from both parties, voiced concerns about facebook's plan to run its own currency out of a swiss bank account. by and large, we mostly her deflections and dodging, exactly what we mean when we say facebook does not understand accountability. facebook has proven over and over, through scandal after scandal, that it cannot be trusted. but they just don't care. they move fast, they break things. minor things like our political discourse and journalism and relationships and privacy. now they want to break our
currency and payment systems hiding behind the phrase "innovation." they want to innovate americans right out of their paychecks. look around at what happens when big corporations say they want to innovate. before they blew up the economy in 2008, bankers were pitching an innovative new product called subprime mortgages. which claimsebook, its new currency will help the under-banked -- these mortgages are supposed to help people who never had access to credit achieve the american dream of homeownership. in reality, these mortgages ripped off millions of families who ended up losing their homes. they wrecked the economy, they made the staggering inequality in this country even worse. the only innovative thing about the financial crisis was how the banks managed to stick everyone else with the bill. not exactly the kind of innovation most of us were hoping for. so i'm all for innovation,
especially if it delivers on its promises of improving people's lives, but big tech companies, wall street banks are hiding behind innovation as an excuse to take over important public services we all benefit from, and should all have a say in. there are some things, currency, payment system, the protection of our savings accounts, that everyone in the country has a stake in. we should not be handing those kinds of public resources over to wealthy special interests, so they can squeeze more profits out of ordinary americans. think how hard it is to get quality service from comcast. to know how your privacy wasn't basted by facebook or to know how much of your personal data was leaked by equifax, and we just learned in the last 24 hours capital one -- and who is next? we don't know. we should be suspicious when someone tells us that only big corporations can be trusted to provide critical public services. i recently moved into a new office.
it was john glenn's office. when he served -- he served ohio annie senate -- he and are longtime friends -- john glenn spoke at my eagle scout dinner in mansfield ohio, 50 years ago. i moved into that office because he was an innovator. he was the first american to orbit the earth as we know. that will be followed by the gemini and apollo missions that would eventually put american on the moons. many of us joined in the celebrations of the 50th anniversary, some of us on this podium were old enough -- joined in the 50th anniversary -- but remember the day 50 years ago just this month. none of the astronauts did it alone. it took the hard work of thousands of innovative scientists and engineers, most of them unknown. people like catherine johnson or immigrants like miguel fernandez, these immigrants did not do it for profit, they did
it to serve their country and their successes were served -- enjoyed by every american. it is a reminder that some infrastructure works better as a public good and we should not let big banks or big tech get their hands on those public goods. the federal reserve and other watchdogs need to continue to be leaders in banking innovation. if we don't move quickly to improve important infrastructure, not just roads, bridges, highways, sewer systems, but our payment system, too, if we don't move quickly to improve it, we will end up with big corporations who have broken our trust again and again and that does not make any sense. i look forward to hearing from our witnesses about which of these technologies might actually help regular americans. sen. crapo: thank you, senator brown. they's witnesses are co-founder, chairman, ceo of circle on on behalf of the block chain association. specialist nelson,
in international trade and finance at the congressional research service. and a professor of law at the university of california, irvine, school of law. i would like to assure each of you your written testimony has been entered into the record. we assure you to follow our five-minute rule by watching the clock in front of you so we have time to sql questions. with that, let's begin in the order that i introduced you. crapo,k you, chairman ranking member brown, members of the committee. it is my pleasure to a p a before you today to testify about the promise of digital block chain technology. i've spent the past 25 years building internet technology servings in the country hundreds of millions of consumers. i cofounded circle, a global
digital currency company, seeking to make it much easier for businesses and people everywhere to create an exchange value with the same ease as we create and share content on the internet. i would like to touch on some of the challenges i see in the global financial system today. billions of people lack basic access to financial services. those who do have access face a system with exorbitant fees and excessive risk. our banking system is riddled with money laundering and crime, with annual illicit proceeds laundered through the financial system exceeding true -- $2 trillion. 99% of laundering goes undetected. our financial system is overwhelmed with privacy violations and data breaches. several criminals and hostile nations continue to take aim at our financial infrastructure. the costs of this are spiraling and the situation seems to be getting worse. access to capital for small businesses is extremely limited,
with capital markets reserved for only the largest companies and those with access to venture capital. very few people have a chance to even invest in startup companies. -- they'resolutely absolutely can be a better future ahead built on digital assets and block chains. these technologies represent one of the most significant innovations in modern history. i believe block chains will be viewed as the more -- as more impactful then double entry bookkeeping and modern banking. in the coming decade, we will see a series of profound changes. digital currencies will proliferate and become usable by billions of people on mobile devices, payments will become a commodity free service on the internet. of currencies will open up opening up capital markets for businesses and investors everywhere, scaling from thousands of companies to a world where every business and
person can access global capital markets with the global ease that they access e-commerce marketplaces. commerce relationships will increasingly be running on blockchain, providing a commerce environment with greater security, efficiency, transparency, and enforceability. new decentralized forms of digital identity will become available, allowing for much safer use of digital services and which will radically improve our privacy, will more effectively thwarting financial crime. as a new fundamental layer of the internet, blockchains will transform the global system. there are significant issues at stake. in the united states, regulatory uncertainty and the application of laws that do not contemplate digital assets has led to the loss of significant opportunity. the securities and exchange commission is forced to apply federal laws written in the 20th century to technologies created
in the 21st century. this has had a material impact on the competitiveness of u.s. companies. asian-based companies are beginning to dominate the market. it is backward, rather than forward-looking. congress should consider new laws that protect consumers, while not causing companies to fixate on centuries-old definitions. the result of the uncertain and restrictive regulatory environment has led many digital asset projects and companies to domicile outside the united u.s. persons block and businesses from accessing products and technologies. circle has received a license under bermuda's forward-looking act, which provides a comprehensive regulatory framework for countries in the industry, and we are in the process of moving our international-facing products and services out of the united states. it is vital that we allow innovators room to grow in the united states. congress should adopt national policies that define and
establish digital assets as a new asset class, including appropriate rules and exemptions. without a national policy framework for digital assets, i'm concerned the united states will not be the world leader in this crippling technology, that it will continue to fall behind, and it will not fully reap the benefits of economic transformation. thank you for your increased interest and attention to this significant area of opportunity. i look forward to hearing your questions and opinions. sen. crapo: thank you. nelson -- dr. nelson? >> good morning. thank you for inviting the congressional research service to testify. my testimony focuses on the international landscape of digital currencies. i will summarize my statement with these brief remarks. in 2009, bitcoin was launched as the first cryptocurrency. cryptocurrency's art --
cryptocurrency has no status as legal tender. cryptocurrency strives to make payments cheaper and faster. in terms of market size, cryptocurrency is a small market. some central banks and large multinational corporations are looking to take cryptocurrency into the mainstream. if these initiatives move forward, there could be numerous policy implications for the united states, including gross financial stability, the role of the u.s. dollar, consumer protections, money-laundering, privacy considerations. i will make three points today. first, the patchwork of cryptocurrency regulations around the world. second, the growing interest of central banks. third, facebook as a potential game changer for the market. the first point is the patchwork of cryptocurrency regulations around the world. cryptocurrency is international in nature, but it is regulated by governments at the national level. there are more than 190 countries in the world and they
are taking different approaches to the regulatory issues presented. for example, cryptocurrency regulations have focused on permitted uses, consumer protections, security regulations, licensing requirements, money-laundering, and tax treatment. broadly speaking, government approaches fall across the spectrum. at one end, some countries are striving to become cryptocurrency hubs. they view cryptocurrency as a source of growth and they attract cryptocurrency with favorable regulations and tax regimes. at the other end of the spectrum, some countries have banned were strongly restricted cryptocurrency. the concerns focus on government control of the financial sector, financial stability, and consumer protection. in the middle of the spectrum, some governments are allowing the development of cryptocurrency, what developing regulations to minimize risk. most major developed economies,
including the united states and united kingdom, have developed this approach. differences in financial regulations across countries can lead to instability, especially if cryptocurrency is developed on a larger scale. some central banks are exploring the creation of their own cryptocurrency. some countries claim to develop cryptocurrency as a second legal tender. for example, the marshall islands is planning to create one called the sovereign to raise government revenue. venezuela launched one backed by funding way to raise and avoid sanction. is also considering cryptocurrency to avoid sanctions. other countries are considering making digital versions of their fiat currency available to citizens. to reduce itsving reliance on private payment companies. the central banks of most major,
developed countries are refraining from such initiatives at this time. the third point is that facebook has the potential to be a game changer for cryptocurrency. in june, facebook announced its proposal for a new global cryptocurrency comedy libra, to be used by billions of people. it would be backed by reserve funds denominated in a basket of currencies. thelibra association, nonprofit to oversee the company, is headquartered in switzerland. many details remain uncertainty. -- uncertain. the libra has raised a number of questions due to facebook's lack of experience in the banking network, their lack of experience -- protecting consumer information. raises regulatory and systemic concerns and policy issues that we need to be addressed. mr. chairman, this concludes my brief remarks.
thank you for the opportunity to testify and i look forward to committee questions. sen. crapo: thank you, dr. nelson. professor? chairman, ranking member, and members of the committee, thank you for the opportunity to testify. in the aftermath of the 2008 financial crisis, many americans were dissatisfied with the banking industry. they were frustrated by government bailouts that seemed .o save just the perpetrators as the many people lost trust in the system, they enthusiastical ly embraced bitcoin. the financial sector is rigged against average people. i wholeheartedly agree with these concerns. i spent my career trying to bring attention to issues of inequality and exclusion in banking. well i'm glad the cryptocurrency aspires to help the un-banked, i
do not believe that in the united states this is the best solution to the problem. the blockchain ledger is a big step forward. is notblems of exclusion the result of faulty technology, but faulty policy. when stated goal of bitcoin and digital currency is to establish an efficient and public payment system available to all. in fact, congress already established a public payment system, the federal reserve. the fed's exclusive charter is to serve the public interest and increase the integrity and equity of u.s. payments. the federal reserve can and should seek to open its payment system to all americans. currently, it is only open to banks. a host of reasons, banks are not serving low income, low profit customers and communities. as a result, 25% of americans are un-banked or under-banked. these companies -- families still billions -- spend billions
of dollars paying bills in person, seeking the most direct path to financial inclusion. we should open the doors to our already established payment system. it needs to be updated, but the securess -- system is and is widely understood. relies on waiting for new and untested technological platforms, waiting for wholesale adoption and use, and waiting for technological advancements to penetrate banking deserts. even if technological solutions are around the corner and we decide this is the answer to financial inclusion, we would be reserving the public banking system for those with enough means to be banked and relegating un-banked to the private cryptocurrency market. this is undemocratic and unfair. the federal reserve and congress are in the best position to make this possible by offering real-time payments, such as a post office checking account.
as far as regulating cryptocurrency, i ask that congress approach these products with a healthy bit of caution. it is the innovator's job to imagine a bright and better new world that will benefit everyone. it is the regulator's role to imagine what could go wrong that could hurt everyone. when it comes to regulating of preventionnce is much better than a trillion dollar bailout. regulators must make sure we have learned the lessons of recent history. though no one wants to stifle innovation or see the u.s. lose its competitive edge, we should remember that much of the deregulation that led to the financial crisis was justified under the same worries. the derivatives market was deregulated because industry experts promised an innovative and complicated new product. investment banks and regulators relied on sophisticated mathematical risk models for risk management, instead of old rules, not wanting to cycle innovation. derivatives deregulated in 2002, which led to a 600 -- $600
trillion market that no one was watching closely. it had not hedged its risk at all, but placed many of them on books of counterparties. the entire sector was exposed. the innovation, math, and technology were not the problem. the problem was the humans. the same assumptions were made about the money markets in the 1980's that were similarly deregulated. they were packed to the dollar aspegged to the dollar just cryptocurrency is. brokeere fine until they and potentially threatened a catastrophic run. the treasury had to step in and guarantee the markets. cryptocurrency creates new, money like instruments not significantly different from derivative markets, even historic markets in private bank notes. these shadow banking markets were unregulated for too long and created big problems. none of the cryptocurrencies
have reached a level of a systemic threat, but if they get big enough, they will. we have regulators that should look to the safety and health of the financial sector. technology will continue to fundamentally transform finance. there has yet to be a technology that eliminated the risks and crime. despite many promises to the contrary. are eitherncy investments, commodities, payment systems, or all of these things. there is nothing about all of these things being put on the blockchain that makes it any less likely to lead to systemic risk, fraud, panic, bubbles, etc. have become outdated or unnecessary or congress believes they are too cumbersome, they should be repealed or changed for all applicable parties, not just newcomers. technology cannot undermine public policy. thank you. sen. crapo: thank you, professor. i use my first section of time
to talk to you, mr. allaire. it has been 10 years since bitcoin was first issued and the digital currency marketplace has evolved and grown. one of you said 2200 currencies right now, cryptocurrencies right now. it can be difficult to understand the differences between products and their benefits and the challenges that are raised for regulatory climate. how can the u.s. developed a more comprehensive approach to digital currency and blockchain regulation while still at knowledge and the unique aspects of different projects? think your: i comment is very accurate in that we have seen tremendous development over that keyword of time. as noted in my testimony, there are over 2300 different digital assets available publicly in some form. in my
mr. allaire: in my testimony, i outline the different categories of digital assets. it's very easy to assume this is all the same stuff. i think one of the first things regulators -- for regulators and policymakers is to distinguish between the different types of digital assets that are emerging. we see these nonsovereign digital moneys like bitcoin. there are dozens of others like that that have a focus on kind of privacy preserving, you know, transmission of value. they implicitly have a kind of monetary policy associated with them. these kind of new commodity moneys need to be regulated as we have it regulated other commodity moneys with appropriate types of financial , but also there is i think new things that happen in this space.
the firms that store these assets, these are effectively digital bearer instruments, so not like diamonds or gold, but they are digital, which makes them very attractive to people who might want to steal them, hence there has been so aroundtivity on theft these assets. regulations on the custody of need.al assets is a how do we custody these types of digital assets? as i have also talked about, some of the most innovative technology in this field are what i call blockchain platforms. these are general-purpose infrastructures for record-keeping, transaction processing, writing code that executes different types of contracts. this is one of the most important breakthroughs we have seen in the history of modern
computing, and ultimately can lead to things like secure voting, new forms of governance mechanisms within firms, as well as innovations in financial assets. these types of assets i think have the broadest applicability and should be encouraged in their development in the same way we encourage the rapid development of technical standards that made the commercial internet flourish. >> let me interrupt and ask a further question. as i understand, it has been recently, the subsidiary of circle transferred its registration to bermuda and cited in that process -- it was cited that there was regulatory uncertainty in the united states, which was a primary motivating factor. could you explain that better? mr. allaire: absolutely. the really critical issues that many of these digital assets do not easily fit classifications
that we have had in our financial system. we would like to say this is like a currency or this is like a commodity that you would use or utilize in some white, or this has -- some way, or this has some feature that makes it look like an investment contract. many digital assets have features of all three. it's what makes digital assets very innovative, is that you can construct an asset that simultaneously incentivizes capital, incentivizes customer behavior, provides value, and that's a breakthrough in how we can develop corporate forms. it is a breakthrough in how we can incentivize and develop businesses and technologies. unfortunately, in the united states, the guidance that the sec has given is extremely narrow in terms of what they would deem not to be a security. the vast majority of digital assets, if they were in fact ,reated like securities
affectively would mean that --se are not assessable accessible to u.s. persons. there is a fundamental mismatch between the regulatory structure and guidance that we have here and the nature of these digital assets. markets around the world are adopting these. singapore,rmuda, but france introducing taylor purposed fits for digital assets -- tailor purposed fits for digital assets. my time has expired, but to be sure i understand your point here, it would be as a part of our policy approach, you're suggesting we should not regulate this set of innovations as securities? mr. allaire: to the contrary. so, i'm sorry, i misunderstood
the question. yes, we should regulate these. i believe we need new definitions of digital assets as a new asset class and that they are circumstances where there are investor protection considerations, and also circumstances that have to deal with utility, commodity, and end user usage. >> thank you. senator brown? senator brown: welcome and congratulations. >> thank you very much. --ator braun: you seemed senator brown: you seemed like he might be skeptical of facebook's claims in this committee that it is marching ahead with an innovation that will serve that unbaked -- serve banked.nked and under could you cite a situation where someone said this and what
actually happened with those innovative financial services products? >> this is not the first time we have heard this. their fundamental mission is to serve the unbanked and underbanked. i have heard this a lot from the crypto industry in the past decade. we are going to lower underwriting standards and do this on the primer get, and the cdo market -- prime market and the cdo market. this was to provide access to credit, it increased financial increase -- credit, financial inclusion. >> is there any reason to treat crypto currencies and other financial services offered on blockchain, to treat them differently from the products that have existed? i would like to hear your
thoughts on treating them differently from what we have been over the years. >> the blockchain is new technology, absolutely. it's amazing and may be we will all be on it soon, and that's fine, but what we are talking about digital assets. it is sort of a red herring to talk about the blockchain technology. we need to talk about what is going on in these markets. whatever we are going to call it, whether an investment, currency, some product of value, it does not matter what technology undergirds it. what matters is the risks presented by this. there is nothing about the blockchain that diminishes these risks like any of the other sort of models we had previously. that is not something that fundamentally changes the things that regulations are meant to combat. >> discuss your skepticism of the technology alone, like facebook's libra. >> yeah.
i mean, the problems of the unbanked are not technological problems, they are policy problems. we have the technology to provide an atm and debit card to people. the most popular products for unbanked communities is a debit card. they need a safe and secure place to store their money. usually, people want something old and dusty like a bank as opposed to some new startup to invest all of their life savings in. they need somewhere to save their money. they need a way to engage in digital commerce. we have all these banking deserts, especially in rural places. all we need to do is allow some banks some access for that point of contact cash digital. none of these crypto currencies can do that until there is widescale adoption. this currency would be acceptable by every single point . it may happen, but there is many easier ways to do it.
>> you compare crypto currencies in some ways with going back to the gold standard. some at the fed have commented on that. why is that a problem? >> his company is a minority in this field. most of it wants to rewrite monetary policy and go back to relitigate those debates about whether fiat currency is a good idea. our federal reserve has a charter to create elastic currency. that is a debate we have litigated in this congress. if we want to relitigate the merits of gold versus fiat, this would be the place to do it, not at some startup. what is happening in the bitcoin and cryptocurrency market is a lot of these companies just want to create an alternative to the u.s. dollar. i understand their frustrations. i cannot imagine this body would want to delegate that money making authority to the private market. >> thank you. your comments about the federal reserve i think ring true that
they have the authority and ability to modernize their payment system. i'm worried that if they do not move quickly, facebook, wall street, or some tech company will use it to squeeze more profits from working families and community banks and will break that critical public infrastructure. thanks for your comments. >> senator warner? say ir warner: i want to really appreciate the fact that you and ranking member brown have had the second hearing on this issue. i think it is really important. i do think that black chain --blockchain distributed ledger technology has great potential. i am a little intrigued that we are basically 10 years almost into this and even in countries that have not had the kind of regulatory oversight we have had, we have not releasing a full breakout -- we have not really seen a full breakout. one of the things that mr.
marcus from facebook said in the previous hearing that if we are going to go with the libra, it was one-to-one relationship. to me, that sounds a little bit like gold standard. what would be the effect if this were to become an extraordinarily popular currency? how could this association, the libra association, you know, acquire and hold onto enough assets to be able to allow that one to one? >> it does seem like the gold standard or like the money markets. one of the things that differentiates this is every time we in the united states have had a gold standard, it was still back to money created by the government. e golde never had a pur standard. this is what libra would advise. what happens if everyone in greece all invested in the libra? that would sort of destabilize
the u.s. dollar. if we are going to have a basket of currencies and no central issuer, there are potential problems. i am not saying they cannot be solved. >> wouldn't you also have to have enough basket of currencies that would be available on almost an as-needed basis, and again, if you're talking not millions or billions, but hundreds of billions or trillions potentially, do you think that really is what the markets meant? that there would be a literal one-to-one? mr. allaire: yes, thank you, senator. my understanding is yes, it is a 121 based on a mixture of -onerve currencies -- one-to based on a mixture of reserve currencies. the first wave of these private moneys like bitcoin, decentralized private moneys, or very much focused on establishing a global digital currency with a very specific
monetary policy ideology. those will continue to grow and very likely flurries to the degree that people are interested in pursuing that form of store vue. the critical mainstream use cases for the financial services sector bill on blockchains has really required the development of these stable value tokens or stable coins, libra being an example of that. these have been around for a number of years. two years ago with one of the other leading companies in the industry, we created a consortium to develop an open standard for stable value currencies to work on blockchain s. we launched in q4 of last year the u.s. dollar coin, which is not a basket, but u.s. dollar coin. >> i still don't understand how you fully aggregate that one to one backing. if the libra approach has got a basket of currencies, don't you
have currency risk? if you have currency risk, shouldn't there be some additional information in terms of consumer protections? >> absolutely. there is currency risk and the same risk that the shadow banking market created. these were all dollar-denominated currencies. there were not new currencies. there is no money and value creation in a different format -- new money and value creation in a different format. not to say they would not have 100% reserves. what's the point? we have u.s. dollars. if we want more of them, the fed could do that. >> if you have 100% reserves, you know, where is labor going to make money on this if you have that maintenance of that backstop all the time? i have only a few seconds left. i am open to this question around tokens. you said there ought to be a new framework, a new structure.
you know, where would you put the regulatory authority in the united states if you were to be able to waive that magic wand -- wave that magic want? mr. allaire: my solution would be a policy on the definition of digital assets and have a single supervisor over the firms that are regulated. >> that is easy to say that. you did not answer my question. would you create a whole new regulatory system for digital assets? or are you going to pick? i have ran out of time. where would you place this within our existing revelatory structure or would you create something brand-new? it is a very good question -- mr. allaire: it is a very good question. i am certainly not next for on the efficacy's of the different regulatory agencies and how to best organizers. >> i think the question about --
best organize those. >> i think that there has -- the question is something i would like to get an answer to. >> thank you to the tester fires -- testifiers. i want to ask you about the federal law that says only the government can mint acorn -- -- a coin.coin knowing that only the government can what do we do now? >> i want to differentiate that not all crypto's want to establish new alternative iesrencies -- cryptocurrenc want to establish new alternative currencies. we created these laws because we
have problems. we have problems of private issuance of coins. the u.k. has a stamp act before that. we have experienced what it is like to have alternative currencies. >> i want to see if i can find an area of agreement between you and the professor, but i don't have a lot of time. so here is the thing, it sounds like you think this will democratize the use of financial products. i am sort of stuck on what she said and tend to agree with what she said, which is to say that there is a much more straightforward way to do that. there are public policy proposals all the time. there are things that our regulators can do under existing statute to democratize the process and decentralize the process. is, i am trying to get at do you really think that in a society where in which only 81%
of the public currently has a smartphone, that we are anywhere close to democratizing the use of these products? what it sounds like to me is ach people wanting to wave wand and skip a bunch of steps and avoid the tough politics of doing things for people and say we have a new tech that will solve all the stuff. i wonder if you want to speak to the limitations societally of what we are doing? i don't doubt the technology. i think that is a different assertion then, by the way, it will solve all of these societal ills. mr. allaire: first, i think the motivations for bounding this company in particular, circle, and i think a lot of the entrepreneurs, computer scientists and others that work in this field is not focused on financial wizardry and how to get rich with. there is certainly -- quick.
there is certainly a fair share of that. it is focused on building a new global infrastructure for economic activity. start, 19% of the american public does not have access to the device you would use to execute a transaction. what do you do about the fact that adoption is nowhere near universal? supposed tosort of place our bet on this tech as solving a bunch of problems and leaping over all of the existing ones? mr. allaire: i don't think so at all. first of all, these technologies develop over time. 1998, the internet existed, but no one had broadband access. the internet, personal computers were relatively new in terms of their adoption. should we not have focused on innovating and building the cloud infrastructure, higher speed internet connections, come
up with policies that encouraged broadband adoption -- connections -- broadband adoption? >> the important thing here is to understand what this tech does and does not do. if you're going to establish a regulatory framework for this tech, we need to not be so triumph it about all of the problems that it is going to solve, but we have to be clear eyed about the problems it might create, but also the potential for it. when tech executives and their ofders talk as though all societal ills will be solved by a new code, you will forgive us if we are a bit skeptical about all of that. i don't doubt the potential for this tech. i don't think it will bank low income communities and i don't think you have persuaded anyone here that it will do so. mr. allaire: there is no silver bullet from technology, very clearly. these are human issues and they are real policy issues.
i think the risks we have to address in the financial system, whether it is access, criminal abuse, data security, privacy, those exist significantly. this technology provides an avenue to improve upon those but there is no silver bullet here. these are people who have to build and collaborate with policymakers. >> i will take the professor's answer for the record, if you don't mind. >> thank you, chairman, and ranking member brown for this important session. let me follow up on that. let me start with you. i do think that blockchain technology, there is potential for. it is the future. it is a platform that has the potential to transform so many sectors of this country from what we are talking about right now, the financial sector, to the energy sector, health care records, everything. i think there is potential here and it is not going to go away.
it is something we have to address. if we do not lead in this country, china or some other country is going to do so. let me talk to you about this. you talked about defining digital assets. when you are talking about that, are you only talking about it as it pertains to the financial sector? are you looking at other potential areas where blockchain can be used in our economy? mr. allaire: so, thank you, senator. you know, in my written testimony i talk about this category of digital assets which are often called tokens or tokenized digital assets. >> that is just as it refers to cryptocurrencyies? mr. allaire: not necessarily. you may have a token that represents votes. you may have a token that is associated with health care records. the breakthrough here is that we have a public, secure,
tamperproof infrastructure that is evolving and emerging for record-keeping and processing of data that is more resilient and ultimately more private than some of the infrastructures we have today. that can be applied in many industries in many significant ways. a lot of the innovations that are happening with these additional assets that are built chains may have some fundamental utility within a business, industry, product, or service. bet digital asset may also associated with some financial characteristic. the compline of the fertility -- utility and financial -- coupling of the utility and financial characteristic is what makes this -- it needs to be defined more clear in order for businesses who want to innovate to develop new tokens that can be applied in many industries. >> thank you. professor, would you disagree
with that? is your concern more on the financial sector piece of it? >> yes. my concern is on the digital asset side. the blockchain is neutral technology. i do want to point out that blockchain has potential to be more secure and reliable. so far, it has not been. it has been hackable. there have been security issues. again, there is a lot of potential. it has been 10 years and billions of dollars of venture capital and i still don't think it is better than some of the payment systems we currently have, though it could be. >> ok. so when you talk about and let's go back to the unbanked. in nevada, we have the highest rate of under banked adults in our state as opposed to the rest of the country. can you expand on why you think new digital currencies will not meet the banking needs of rural and low-income residents that are not well served by our current braking system?
-- banking system? >> the problem is not that they are unsatisfied with the current technology being offered to them. the problem is that they live in banking deserts where there is no place to take their cash. where do you take your cash to put it into a savings account that would then give you a debit card that you could use in e-commerce? there is no place to do that because of a variety of reasons, but mainly because banks are no longer interested in serving those customers. how does any technology, and digital based currency help when people are operating in cash? do we need to get people off cash? absolutely. this blockchain conversation is four or five steps ahead of where we need to start. how do we get atm's that don't charge eight dollars per person? >> the answer might be looking at why there is a charge for an atm or why you have to have a minimum balance of $1500 or more in a bank account before you can
even open one. >> i am truly grateful for this industry for bringing attention to these things. really, there are problems with our payment system. i am not trying to defend them and say they are perfect. there are huge problems, accessibility issues, they are slow, inefficient. they have a public mission and we should fix them as opposed to outsourcing and to the tech sector. >> thank you. appreciate that. senator van hollen? hollen: thank you, mr. chairman, and ranking member brown. thank you all for your testimony. i want to thank all of you for your testimony. i appreciate the series of hearings we have had on the subject of cryptocurrencies and new technologies. talk listening to you
about the importance of planning for these technologies but also the need right now to move to a real-time payment system. our failure to have moved forward with this technology, as so many countries have already done, is costing millions of americans billions of dollars every day, right? >> absolutely. >> i hate to sound like a broken record on this whenever the fed chairman or other members are here. i urge them to move forward right away on building out that faster payment system. i hope that they will make a decision soon. let me just, if i could, mr. chairman, put in the record on article, and the headline, "a former bank ceo rdraft'nowboat 'ove that the bank is in hot water."
for people living paycheck-to-paycheck, the inability to access their funds in real-time is costing them a huge amount of money in fees and overdrafts. itld you elaborate on what is costing the public right now and how we have it within our power right away to move forward on it on this front? >> yes. if we are worried about the u.s. lagging behind, this is a huge area where we are lagging behind other countries. the bill that you introduced, real-time processing, is essential. if you don't have a buffer of wealth, you need to spend your paycheck as soon as you get. this is why people go to check cashers. they would rather pay 10% of their paycheck to be able to use it. bank, puthey go to a their paycheck in, and 3-5 business days later they have to go back to the bank to get that. that is a main reason a lot of people do not use bank accounts.
what does it cost them? ,ot just the check-cashing fees but the money sucked out of their with these fees allows them to rely on payday loans. more wealth is being sucked out. these are really simple problems. i think part of being poor is that a lot of problems that other people don't realize that you have, and i think we need to have a little more compassion about what it is like to not have that much money and how we can make their lives better. >> you mentioned senator warren and i and others have introduced legislation to move forward in this area. but really, the fed has it within its power and authority to do this right away. can you talk a little bit about how they have that authority and your view that they should move forward in mckinley to catch up with many of our global competitors. prof. baradaran: when they say that they are studying it, i don't know how high on the 30 think it is.ut i
the brookings institute pointed out that low income people are spending billions of dollars in overdraft fees. we could put that money back in their pockets through adopting this very simple technology. i think the fed should definitely do it. sen. van hollen: i appreciate that. mr. chairman, i would also like to put into the record another record article from fintech , gotled "go slow on libra payments." it makes the point some of us have been trying to make which is that the fed could do this now and really provide and relief and put millions of dollars back into the pockets of working people. i hope they will move forward. quickly. in the meantime, we will continue to push for our legislation. thank you. chairman crapo: thank you senator. senator tester. sen. tester: thank you chairman,
thank you, ranking member braun, and thank you folks for testifying. dr. nelson, the first question for you is, do you believe that you agree that cryptocurrencies are leaving the u.s.? dr. nelson: sure. other jurisdictions are out ahead of the united states in trying to become cryptocurrency hubs. sen. tester: do you think they are leaving because they are looking for a safe haven to avoid regulation, or is there another reason? dr. nelson: some of the cryptocurrency hubs are using regulation as a way to attract cryptocurrencies to their borders. sen. tester: so increased regulation. dr. nelson: not necessarily, probably perhaps increased clarity overregulation. they are getting out in front of that and attracting cryptocurrencies to their jurisdictions. sen. tester: one of the things that was brought up and has been
referenced several times with facebook. one of the things that is of concern i think with you and others is, how do you prevent bad actors from laundering money that are financing terrorist activities or whatever? any ideas in that vein? dr. nelson: money-laundering is a huge concern for cryptocurrencies. hundreds around the road are looking at money-laundering regulations and how to address cryptocurrencies. event cryptocurrency hobbs like switzerland have -- cryptocurrency hubs like switzerland have regulations on that. sen. tester: do think those reparations could apply to cryptocurrency and have them work? dr. nelson: i think money-laundering continues to be an issue, but the international task force is trying to update their regulations to get in front of that technology. it is a continuing concern. sen. tester: is there a way to placeregulatory design in
that could discourage money-laundering with cryptocurrencies? dr. nelson: i think some of the licensing and reporting requirements, transparency requirements can help address these concerns. sen. tester: the facebook fella who was here, i asked him a question about what happens if the accounts get breached the same way my credit card -- it has happened on occasion, and it hasn't cost me it in money, the banks have taken care of it, thank god. and i think it happens to everybody at some point in time, through no fault of their own, i might add. so the same could be applied here. his response was that. :1 back up on the dollars. i do know if you watched the hearing on not -- you did?
if in of you can respond to that, that seems to me -- if any of you can respond to that, it seems to me to be incredible to have that 1:1 leverage. do you think that is real? dr. nelson: i think what are the concerns about libraries how the reserve assets would function. they pledged to have state assets today but what is safe, as an asset today may be less safe tomorrow. what happens if there is a run on libra if it is being used as a global currency being used by billions ? sen. tester: is good answer this, professor. go ahead. prof. baradaran: what facebook states what it is going to do, and what they end up doing, and oops, sorry, we were going to do that thing and then we didn't. sen. tester: so would it kill cryptocurrency laws? they will probably be passing,
if we stipulated that there had to be a 1:1? prof. baradaran: cryptocurrencies, there is a variety, if you are just talking about reporter: currencies, they actually are trying to be alternative currencies. so they are not worried about 1:1. sen. tester: let's talk about libra specifically. i am not an expert in the field at all but it appears to me that they are trying to take the dollar, because you can buy them with the dollar, and then make a transaction across country lines. scenario,nd of a which is what i interpret them :1 be offering, what a 1 something we can require without putting them out of business, or would that be good, prudent, fiscal responsibility? prof. baradaran: i think we are still unsure. of what?
it is not just dollars, it is basket currency. sen. tester: 1:1 on labor, they have a dollar a month behind it. . i think what you are saying is that there are ways to game the system if they want to game it got us what we say. prof. baradaran: definitions are tricky. you can define something as a 1:1, but what does that mean, lot? . sen. tester:. icy. i appreciate you all being here. i am glad you all are here, i appreciate that all three of you can be an incredible resource to us as we figure out how we will deal with it. thank you mr. chairman. crapo: we will go to another round of questioning, and i want to start my questions this time with you, dr. nelson. in your report, you described different approaches that different governments have had to cryptocurrency. what are some of the key
attributes of countries whose regulatory frameworks are considered more accommodative? and how do they approach issues relating to money laundering and the other types of issues we are talking about here? dr. nelson: some of the countries trying to bill themselves as cryptocurrency hubs are trying to adopt clear regulations at the outset on how they will operate. this is to give regulatory certainty to consumers and businesses who want to use it to currency regulations. that said, some of the regulations have been described
a higher standard around confidential transactions and data protection. that is one of the core infrastructure focuses of these block chains. i think those needs can be met. there is the flipside which is how law enforcement gets its job done. how do 190 countries get an agreement about that? guidelines specific to virtual assets have come into place which i think could be a roadmap to that as well. >> we will have to ask the professor. if i can get to another round and maybe i can, we will ask that question. i want to have a series of questions for you. whoaid he did not know should regulate digital assets and facebook essentially said that two weeks ago. let me ask you a series of mostly yes and no questions. do we already have rules and regulations for currency? >> yes. >> for security?
. yes. >> and for payday loans? >> yes. >> sort of. rules and regulations for exchange trade? >> yes. >> are there any new financial products that have been invented that we have never seen before? we talk about financial rocks that already exist and we are now on block chain? >> yes. these are not new. new, but they is essence of the product is something we have seen before. >> so if there are not really new products, why would we need new rules and regulations? it is important to have clarity. it is very important for people to understand what it is. we don't have to reinvent the wheel on any of this. we have clarity in each of the jurisdictions to the ascent that
digital assets hit the currency model or the security model, we have already debated those models and we can enforce those rules. >> are you concerned that tech companies seemingly pretty strongly resist rules and regulations? i think there is a lot of's problems some of the we as a society face are solved by tech. i think sometimes that is nine somea tape on the parts of on what tech can accomplish and what is better for public institutions. >> so i think sometimes tech is great and can solve a lot of problems. but nobody is saying to ban block chain. no one is saying and these digital currencies. let's just protect people in the way that regulations are meant to protect them. if we said in the early days of
internet, internet will take over education soon so let's not worry about fixing public schools and the internet will educate the young. it is essentially that. we still have these public institutions and we do not go around them is because of a new potentially revolutionary technology. of big the resistance thecompanies -- does resistance remind you of resistance to big banks? >> there are similarities. >> what does that tell you? >> i mean, i just think we need to be cautious. again, innovators dream big and regulators just need to also imagine bad scenarios. --hink we as regulators congresspeople do not need to swallow it wholesale. it is good we have innovators and entrepreneurs that have really beautiful visions of the
future, and i hope they are right. but it is also good to have a counterpoint to that, where regulators say, what can go wrong and tried to imagine that scenario too. >> i have said a number of times in this committee that many of colleagues have collective amnesia about 10 years ago. what lessons did we learn from weakening regulations in the banking sector a decade plus ago? what lessons do we apply to tech companies here? -- the u.s.e things is going to lose its leadership worldwide if we do not let these companies do whatever they want. we cannot compare the u.s. economic system to malta or bermuda or venezuela or even china. we have the strongest currency worldwide for a reason. we have great technology companies for a reason. we have got a very strong and healthy sector.
not to say it is perfect. oh, we are all going to leave to malta, i do not think that should make regulators think -- >> skeptics of your view say the reason we have such strong innovation is because government gets out of the way and let's big tech or lets wall street invent new products and do what they want. >> we said that until the financial crisis and then with a trillion dollar bailout and the fed is left holding the bag. we say that on the front and let them do it but let's remember what happens when we don't regulate those things that matter. it is not just all technology. is similarhnology risk-inducing. internet and email, all of these things we keep complaining -- comparing block chain to these things but it is very different. specifically digital assets. we are talking about trading in markets and finance.
we are not talking about just mutual tech. >> thanks. >> thank you, centre brown. i have a few more questions. i would like to get into the data privacy issue a little bit. as i'm sure you know, senator brown and i together had jointly expressed serious concerns over the collection of data on individuals and the phenomenal, explosive growth of that collection and in use of data. what happens with that use, without individuals usually knowing that it is happening or when it is happening, or knowing what has been collected on them or how it is being used. will -- and each of you could this newo this -- will technological innovation that we are seeing into digital currencies and block chain abilitygies give us an
to meaningfully enhance individual's privacy rights and protections? and if so, please explain how so. >> i would be happy to start. i have addressed this somewhat in my written testimony as well. momentstep back for a and you look at these public like chain infrastructures that are being built, they are designed in a way to provide a global, open record-keeping system that is highly secure, that is very tamper-resistant, and which can work in an inoperable way all around the world. one of the killer apps, if you will, that is being explored to build on top of these, there are many projects, startups, companies, governments even working on this, is the development of essentially new standards for what is often referred to as self sovereign dig in your -- digital identity.
the ability to have a digital identity where you as an individual have self sovereignty over who can access attributes of your digital identity, how they can access it, the ability to prove louis -- provably demonstrate something to someone without having to disclose to them information. have muchility to more fine-grained, selective attest to who you are without having to transmit all of sensitive personal information. the data breaches that we have today, the massive privacy violations that happened continually on centralized internet services, those are the core issues that block chain infrastructure is being designed to address. it is one of the areas i am most hopeful. digital couple that, a
identity model with global digital terror and sees -- currencies, you can imagine a system that provides mechanisms that are still highly useful to law enforcement to pursue the bad guys, but keeps people in control. so i think those things are very much becoming possible in front of us. there are still needed policies around that, around who can add elements to these digital identities and how they are accessed in reporting and other things. there is absolutely the need for other policies and laws. but it is a technical breakthrough emerging that could solve these issues. >> before i go to dr. nelson, going beyond financial transactions, could this innovation or technology that you are talking about, could that be used outside financial transactions? for example, somebody surfing on the web or looking to buy a
washing machine on the web, and having their identity grabbed or having their search identified and utilized in artificial intelligence, to manipulate it? >> it could be applied. it could be applied in putting people in more control over who is accessing their data and how when they are interacting with any digital service, not just financial services. >> would either of you like to? >> i would just add that facebook has totally changed the debate about privacy in cryptocurrency's. we used to focus on whether they gave users too much privacy and it allowed bad actors to engage in various activities. now with facebook libra the concern over whether cryptocurrency's will have enough privacy and potential for economic transaction data to merge with other data about users on the internet, including other facebook platforms.
this issue then ties into the differences in regulatory approaches taken by countries around the world. countries regulate privacy differently. if you have global currency with related tourchases privacy this might be something regulators want to address. >> there are -- do we want to privately buy drugs, child porn, or send money to terrorists? no. we also want the privacy of facebook not using algorithms and data to target me knowing, oh, she is sad and does not have enough money in her bank account so i will give her a payday loan when i know she will take it up. maybe they don't know me personally, but they know the type of person i am and what kind of mistake i would make. so those of the kinds of things. they are two very different kinds of things. facebook presents a different kind of problem than bitcoin, which is popular for people who
want to buy illicit and extralegal drugs. this is why you see it in venezuela and iran with other countries the sanctions, they want to evade them using these platforms. >> anybody want to add anything else to that? >> there are august 8 tons of questions here. i have it -- there are obviously tons of questions here. i have a lot more myself. we appreciate you all coming today and sharing your information and expertise with us. this is obviously a very critical issue. i want the united states to stay at the forefront of essentially engaging in and posting and managing and regulating this new created technology and innovation that will flow from it. i do agree that and has some incredible potential that can be utilized for good.
and does have incredible risk that can be utilized for bad. we just need to get a handle on that. i appreciate your coming here today to help us out on that. with that, this hearing is adjourned. [captions copyright national cable satellite corp. 2019] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] announcer: if you want more
information on members of congress, order c-span's congressional directory available online at c-span store.org. announcer: now a conversation with arkansas republican senator tom cotton on immigration and national security issues. this event from yesterday was hosted by the center for immigration studies. >> good morning. i'm executive director of the center for immigration studies. of we have done a series interviews with important players in the immigration issue, whether in congress or in the administration. and this morning's guest is senator cotton, the junior senator from arkansas. senator cotton is a harvard law grad,