[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
DIGITIZING THE DOLLAR: INVESTIGATING
THE TECHNOLOGICAL INFRASTRUCTURE,
PRIVACY, AND FINANCIAL INCLUSION
IMPLICATIONS OF CENTRAL BANK
DIGITAL CURRENCIES
=======================================================================
VIRTUAL HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JUNE 15, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-30
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-254 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York PETE SESSIONS, Texas
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
JIM A. HIMES, Connecticut WARREN DAVIDSON, Ohio, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida PETE SESSIONS, Texas
MICHAEL SAN NICOLAS, Guam BLAINE LUETKEMEYER, Missouri
RITCHIE TORRES, New York TOM EMMER, Minnesota
NIKEMA WILLIAMS, Georgia BRYAN STEIL, Wisconsin
C O N T E N T S
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Page
Hearing held on:
June 15, 2021................................................ 1
Appendix:
June 15, 2021................................................ 29
WITNESSES
Tuesday, June 15, 2021
Cadet, Carmelle, Founder and CEO, EMTECH......................... 6
Dharmapalan, Jonathan, Founder and CEO, eCurrency................ 7
Gesley, Jenny, Foreign Law Specialist, Law Library of Congress... 12
Grey, Rohan, Assistant Professor of Law, Willamette University... 9
Narula, Neha, Director, Digital Currency Initiative, MIT Media
Lab............................................................ 11
APPENDIX
Prepared statements:
Cadet, Carmelle.............................................. 30
Dharmapalan, Jonathan........................................ 36
Gesley, Jenny................................................ 46
Grey, Rohan.................................................. 54
Narula, Neha................................................. 68
Additional Material Submitted for the Record
Lynch, Hon. Stephen F.:
Written statement of the American Bankers Association........ 78
Written statement of the Electronic Transactions Association. 92
Williams, Hon. Nikema:
Written responses to questions for the record from Carmelle
Cadet...................................................... 94
DIGITIZING THE DOLLAR: INVESTIGATING
THE TECHNOLOGICAL INFRASTRUCTURE,
PRIVACY, AND FINANCIAL INCLUSION
IMPLICATIONS OF CENTRAL BANK
DIGITAL CURRENCIES
----------
Tuesday, June 15, 2021
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 10:07 a.m., via
Webex, Hon. Stephen F. Lynch [chairman of the task force]
presiding.
Members present: Representatives Lynch, Gottheimer, Lawson;
Davidson, Luetkemeyer, Emmer, and Steil.
Ex officio present: Representatives Waters and McHenry.
Also present: Representatives Sherman, Hill, and Gonzalez
of Ohio.
Chairman Lynch. The Task Force on Financial Technology will
come to order. Without objection, the Chair is authorized to
call a recess of the task force at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of the task force are authorized to participate
in this hearing.
I am asked to remind all Members to keep themselves muted
when they are not being recognized by the Chair. The staff has
been instructed not to mute Members, except when the Member is
not being recognized by the Chair, and there is inadvertent
background noise. Members are also reminded that they may only
participate in one remote hearing at a time.
I would particularly like to welcome Mr. Davidson. We are
happy to have him on board as our new ranking member.
And I am looking forward to working with all of our
colleagues to address the challenging times that we have and
the challenges that this task force and the Financial Services
Committee face on a financial technology basis.
Today's hearing is entitled, ``Digitizing the Dollar:
Investigating the Technological Infrastructure, Privacy, and
Financial Inclusion Implications of Central Bank Digital
Currencies.''
I now recognize myself for 4 minutes to give an opening
statement.
The way that we pay one another for goods and services has
changed dramatically over the last few decades. And driven by
consumer demands, payments and technology has evolved at an
even more rapid pace in recent years. Today, when we can pay
for groceries with a tap of our phones, or buy cars with
cryptocurrency, it is easy to overlook the low-tech dollar bill
as a means of payment. The use of cash has been declining for
years, a trend rapidly accelerated as many businesses opted
into contactless payment during the pandemic. However, cash
still plays a critical role in the financial ecosystem. While
cash is used for less [inaudible]
Mr. Davidson. Franklin, I hate to interrupt, but I might be
the only person not hearing or hearing intermittently the
chairman. And it is easier to discuss his comments if we can
actually hear them.
Mr. Thornton. Yes. Mr. Lynch, can we please pause the
hearing really quickly until we figure out how to get you a
more stable connection?
Chairman Lynch. Okay. I can hear you very clearly. So, it
must be on my end.
Mr. Thornton. We are having someone reach out to you to
make sure that we are good to go. But it does seem to be
clearing up a little bit. We just want to make sure that we
don't run into any other technical difficulties.
Chairman Lynch. Okay.
Mr. Thornton. Just give us one moment. Sorry, everyone.
Chairman Lynch. It is my hope that this will be the last
remote hearing that we will have of this task force. That is my
goal for this very reason. So, I appreciate your patience.
Mr. Gonzalez of Ohio. Amen. We support you in that
endeavor.
Chairman Lynch. How are we doing, Franklin?
Mr. Thornton. We are good to go. We should have some
technical help reaching out to you momentarily to just make
sure that you have a stable connection.
Chairman Lynch. I am going to proceed. Okay?
Mr. Thornton. Actually, can you start from the beginning?
You were cutting in and out, and we have to make sure that the
court reporters heard when you gaveled in the hearing.
Chairman Lynch. Members understand the rules, so I will not
repeat them.
Today, we will be examining one potential next step in
addressing many of our financial services and FinTech issues,
which is essential to bank digital currency. Central Bank
Digital Currencies (CBDCs) are being researched, piloted, and
implemented by central banks around the globe. In October of
2020, the Bahamas launched the sand dollar, the first CBDC to
receive an official launch.
China has entered the pilot phase of the central bank
digital currency (CBDC). And here in the U.S., the Federal
Reserve has partnered with MIT to research the technological
architecture of a digitalized U.S. dollar.
As the U.S. and the rest of the world moves toward central
bank digital currencies, the U.S. must consider its effects on
financial inclusion, consumer privacy, illicit finance, and
business operations, among many other issues. The question is,
will a digitalized dollar enable those outside of the
traditional finance system to gain more access? Or will
existing barriers remain prohibitive? And where will consumers
deposit their digitalized dollars? Can the CBDC operate with
the same level of privacy as cash? Or will requirements of the
technology mean that transactions can't be private? And what
are the implications for illicit finance schemes?
Another question is, do businesses have the technology to
implement a CBDC today, or will there need to be a significant
lead-in time to reach actual operation?
Today, we have a distinguished panel of witnesses who will
be able to discuss the pressing issues before us in the central
bank digital currency space. These technologists, and privacy
and financial inclusion experts, will help us better understand
this technology and its potential impact on our financial
system. And I look forward to this discussion.
The Chair now recognizes the ranking member of the task
force, Mr. Davidson of Ohio, for 4 minutes for an opening
statement.
Mr. Davidson. Thank you, Mr. Chairman. I appreciate the
recognition. And I would just like to express my excitement
about being the new ranking member of this task force. It is an
honor to take on the role to address this important policy
area. And as we all know, all of us on this task force have a
strong interest in seeing America's future include a better
regulatory environment for financial technology.
Regarding today's hearing, the topic of the central bank
digital currency touches on many of the complicated issues
presented by the emergence of Fintech. It is safe to say that
we are still in the learning phase when it comes to central
bank digital currencies. With that in mind, I want to emphasize
that it is imperative that we use these hearings to effectively
gather information on the subject and to communicate what we do
know.
As some of you may have noticed, CBDCs have constantly
grabbed headlines since China announced that they would pursue
one. I acknowledge that there is incredible potential for a
CBDC to enhance our financial infrastructure. However, I also
want to emphasize that we must pursue CBDCs for the right
reason, and not simply to pressure ourselves in a pursuit for
the sake of trying to keep up with China.
Adopting a central bank digital currency that embraces the
ineffective financial and monetary rules of the past would be
redundant, or even detrimental. It is important for us to be
objective in our approach, and also receptive to new ideas as
we have this conversation.
It has been almost a month since Fed Chairman Powell
outlined how the Federal Reserve would approach the issue. In
his announcement, he discussed that the key focus would be on
whether and how CBDC could improve on our already safe,
effective, dynamic, and efficient U.S. domestic payment system
in its ability to serve the needs of households and businesses.
He rightly explained that a CBDC would raise important monetary
and financial stability, consumer protection, legal, and
privacy considerations.
As policymakers, we too must keep these considerations in
mind as we determine principles that would underpin a potential
central bank digital currency. It is my belief that if the
United States were to pursue such a tool, we must do everything
that we can to preserve the principles of sound money and
privacy. I like that the chairman referenced cash. It is truly
permissionless. And we should preserve cash and its
characteristics in our payment system.
This month, we have seen the report that consumer prices
have jumped 5 percent. People are realizing that the U.S.
dollar is venturing further and further away from being
sustainable, sound money. For those unfamiliar with the term,
``sound money'' refers to a form of currency that is exempt
from radical fluctuations and purchasing power over the long
term.
A 5-percent jump in consumer prices lacked any resemblance
of sound money, and we have seen it distort our stock exchange,
where it is now over 200 percent of GDP. While this topic may
seem tangential to the structural development of a central bank
digital currency, we must use the digitization of the U.S.
dollar as an opportunity to also discuss the current
devaluation in the monetary system that we have seen.
Remaining competitive on a global stage and remaining the
world's reserve currency requires sound money. We must also use
this moment to protect individual liberties, namely, privacy.
Should the United States pursue a central bank digital
currency, government must refrain from becoming a centralized
clearinghouse that doubles as a consumer data collection
center.
Too often, we see governments slowly chip away at the
Fourth Amendment under the guise of security, but I urge my
colleagues to resist this temptation to use the monetary system
as a tool for control instead of as a store of value and a
means of exchange.
A central bank digital currency that is token-based would
help avoid this pitfall. And I look forward to discussing this
concept today.
I understand that there are CBDC skeptics. I, myself, am
skeptical of any central bank digital currency if it fails to
uphold the two principles I just mentioned: sound money; and
privacy. There is a right and a wrong way to go about it, and
we must properly flesh out problems as we look into it. This
requires us to look at the architecture, the infrastructure,
and the access that the chairman so importantly recognized is
completely accessible with cash.
To the few skeptics who claim that there are no current
problems that necessitate a central bank digital currency, I
would caution against complacency. We cannot sit back, simply
because we have the strongest economy, the most robust
financial system, and the world's reserve currency. Despite all
of this, we still have many Americans who are unbanked or
underbanked, and a central bank digital currency may help
alleviate these issues. And they also help enhance our
financial infrastructure if implemented correctly.
Would it solve every issue? Almost certainly not, but it
may offer an improvement over our current system. I ask those
who are anti-central bank digital currency to keep these
considerations in mind.
Lastly, I know that some people prefer to use the central
bank digital currency conversation as a vehicle to voice their
opinions on other Fintech issues more broadly. We certainly saw
that in the Senate hearing last week. And while I would not shy
away from conversations on any of those topics, I hope that we
can keep today's conversation focused on central bank digital
currencies, since there is true value in that conversation, and
it is the topic of the hearing. I yield back.
Chairman Lynch. I thank the gentleman.
The Chair now recognizes the Chair of the full Financial
Services Committee, the gentlewoman from California, Chairwoman
Waters, for 1 minute. Welcome.
Chairwoman Waters. Thank you very much, Chairman Lynch.
Today's hearing begins a series of hearings for the committee
on an especially important topic: cryptocurrencies and other
digital assets. As cryptocurrencies grow exponentially, I have
organized a working group of Democratic Members to engage with
regulators and experts to do a deep dive on this poorly-
understood and minimally-regulated industry.
Today, we continue this discussion by considering central
bank digital currencies, or CBDCs, which are being created by
governments around the world, and which the Federal Reserve is
actually reviewing. If properly designed, CBDCs have the
potential to harness the positive innovations arising from
cryptocurrencies, and to digitize our dollar. So, I look
forward to this discussion, and I yield back the balance of my
time. Thank you.
Chairman Lynch. Thank you, Chairwoman Waters.
The Chair now recognizes the ranking member of the Full
Committee, the gentleman from North Carolina, Ranking Member
McHenry, for 1 minute.
Mr. McHenry. Thank you, Chairman Lynch, and thanks for your
leadership on the FinTech Task Force. I also want to commend
the new ranking member of the task force, Mr. Davidson, for his
engagement in these issues, and I look forward to a productive
conversation here.
As the United States considers a central bank digital
currency, I think it is important that lawmakers be informed. I
think that is a very important thing for us to be apprised of
both the advantages and the risks of a U.S. central bank
digital currency.
On the advantages side, it makes for a more efficient,
effective payment system. It could drive financial inclusion.
On the risk side, it can limit growth, and it could destabilize
our financial markets in ways that we may not have fully
considered.
But I think it is important that we are versed deeply in
both the advantages, but also the risks and the challenges. And
I will concur with the Chairman of the Federal Reserve, Mr.
Powell, when he says it is more important for the U.S.
Government to get this right than to be first. And I think we
all should agree that is the appropriate thing. I look forward
to the hearing. Thanks so much, Chairman Lynch.
Chairman Lynch. Thank you, Mr. McHenry. Today, we welcome
the testimony of our distinguished witnesses. First, we have
Mrs. Carmelle Cadet, the founder and CEO of EMTECH, which
provides software solutions for central banks around the world.
Mrs. Cadet is an expert in how technology can be used to
increase financial inclusion.
Second, we have Mr. Jonathan Dharmapalan, the founder and
CEO of eCurrency, which is a technology company dedicated to
making central bank digital currencies a reality, and is the
partner of Jamaica Central Bank in bringing their CBDC to
launch.
Third, we have Mr. Rohan Grey, assistant professor of law
at Willamette University, and a privacy and finance expert. Mr.
Grey is also the vice chair of privacy at the Digital Currency
Global Initiative at Stanford University.
Fourth, we have Dr. Neha Narula, the director of the
Digital Currency Initiative at the MIT media lab. Dr. Narula
has done significant research on digital currency, and leads
MIT's partnership with the Federal Reserve Bank of Boston
researching central bank digital currencies.
And, lastly, we have Dr. Jenny Gesley, a Foreign Law
Specialist with the Law Library of Congress. Dr. Gesley is an
expert on financial supervision, and has also done work for the
World Bank and the Institute for Monetary and Financial
Stability.
I want to thank all of our witnesses for your willingness
to participate and to help inform the committee. Witnesses are
reminded that their oral testimony will be limited to 5
minutes. You should be able to see a timer on your screen that
will indicate how much time you have left, and a chime will go
off at the end of your time. I would ask that you be mindful of
your timer, and quickly wrap up your testimony if you hear the
chime, so that we can be respectful of both the witnesses' and
the task force members' time. And without objection, you
written statements will be made a part of the record.
Mrs. Cadet, you are now recognized for 5 minutes to give an
oral presentation of your testimony. Thank you.
STATEMENT OF CARMELLE CADET, FOUNDER AND CEO, EMTECH
Mrs. Cadet. Chairman Lynch, Chairwoman Waters, Ranking
Member McHenry, Ranking Member Davidson, and esteemed members
of the task force, thank you for the opportunity to testify and
respond to your questions on how digitizing the dollar can
address financial inclusion.
My name is Carmelle Cadet. I am the founder and CEO of
EMTECH, a U.S.-based financial technology company helping
central banks modernize with technologies like blockchain,
cloud computing, and data analytics, in order to close
inclusion gaps. It is my pleasure to talk to you today about
how a central bank digital currency, specifically, a digital
version of the paper cash that we know today, can be used for
financial inclusion by design, make peer-to-peer payments
resilient, lower the cost of payment, and enhance user privacy.
This conversation is very important to me personally, given
my experience as a once-unbanked minority person in the U.S.,
and as a Haitian immigrant supported by a single mom--hi, mom--
who was paid below minimum wage, I learned firsthand the
importance of accessing the financial sector.
I am now in a position to create jobs, give something back,
and promote innovative and actionable CBDC strategies in order
to close economic and financial exclusion gaps.
As you investigate the technological infrastructure for a
CBDC to achieve financial inclusion, it is important to
highlight that technologies, such as distributed ledger
technology, blockchain, and cryptography are tools that can be
used to drive various outcomes. Some use them for good, and
some use for them for bad. Therefore, there is a risk that as
we think about the design for a central bank digital currency,
that it will be designed in the image of the status quo.
It is also an opportunity to build and design a truly
inclusive and resilient payment infrastructure for every person
in this country. I hope this testimony will foster the latter.
Issuing a central bank digital currency should not be about
disruption of the current financial sector, nor about emulating
bitcoin or other crypto assets. Instead, CBDC in this context
represents a once-in-a-lifetime opportunity for the U.S. to
revolutionalize its payment infrastructure. This should be
considered to complement paper cash, and to give everyone a
means to participate in a digital economy, with or without a
phone, and with or without a bank account.
Moreover, it is important to realize that a retail digital
cash solution, in order for it to be trusted by citizens, can't
be used to collect data at will. Protecting, and even enhancing
user privacy is a key requirement to deploying a CBDC that
every American can trust.
Blockchain cryptography and robust regulations are indeed
important to achieving the balance between privacy and fighting
money laundering. Achieving those outcomes is not going to be
easy. In our written testimony, we mentioned the concepts of
FED wallets and a green CBDC as potential design requirements
worth testing for.
As a technologist, technology and service provider for
central banks, we are, right now, seeing around the world the
role of digital and regulatory sandboxes as a tool to innovate,
to research, and to understand the desired outcomes, and how
they can be best achieved.
To achieve financial inclusion, a central bank should look
to collaborate with a broad set of stakeholders such as banks,
Fintechs, and other regulators to ensure that the desired
outcomes are safely achieved. A digital sandbox is a strategic
tool to do so.
To conclude, although many countries are exploring CBDCs
today, for various reasons, the U.S. should lead in this
innovation to solve real and acute problems here domestically,
which include financial exclusion for millions, the need for a
modern financial infrastructure in the U.S.--this will lower
cost for payments for every American, and for the U.S.
Government--and help combat money laundering, and improve the
American family's P&L. I welcome your questions. Thank you.
[The prepared statement of Mrs. Cadet can be found on page
30 of the appendix.]
Chairman Lynch. Thank you, Mrs. Cadet.
Dr. Dharmapalan, you are now recognized for 5 minutes to
give an oral presentation of your testimony.
STATEMENT OF JONATHAN DHARMAPALAN, FOUNDER AND CEO, ECURRENCY
Mr. Dharmapalan. Thank you, Chairwoman Waters, Ranking
Member McHenry, Chairman Lynch, Ranking Member Davidson, and
members of the task force. I would like to thank you for
holding this hearing and inviting me to testify. It is
critically important for Congress to investigate the
foundational aspects of a central bank digital currency (CBDC)
and to understand how a CBDC should be designed in order to
maximize its benefits. I am honored to have the opportunity to
discuss this important topic. And I am here to urge Congress to
give the U.S. Treasury and the Federal Reserve the rules and
the legal authority they need to create a digital U.S. dollar.
The good news is that the rules for how a digital currency
should look are largely an extension of the rules for physical
currency as they exist today. In other words, central bank-
issued cash is the model for central bank-issued digital
currency.
My name is Jonathan Dharmapalan, and I am the founder and
CEO of eCurrency, a digital security technology company founded
solely to create the technology to allow central banks to issue
CBDC. We are not a cryptocurrency company. We do not issue any
coin, stable coin, or currency of our own. We believe that only
the United States Government can issue a digital U.S. dollar,
and that the Treasury alone should create it, and the Federal
Reserve should have the authority to put it into circulation.
Issuing a CBDC will require many policy and technological
considerations. For example, it has to be financially
inclusive. To ensure financial inclusion, a CBDC must be easily
accessible and fully interoperable. Any CBDC must be able to
operate within the existing payment rails of our financial
system, including banks and payment cuts, while extending to
new apps, smartphones, QR codes, smartcards, and other
innovative ways to store and transact digitally.
Privacy is also an important consideration for a CBDC.
Digitalization of currency has many benefits, and can be an
immensely powerful utility. However, if it is not implemented
properly, it has the potential to invade individual and
societal privacy.
Any CBDC implementation must protect individual privacy in
accordance with the law. It is possible, using a model based on
the functionality of cash, to ensure that privacy is protected.
The Fed would not need to collect user information. Private
sector participants, including banks and digital wallet
providers can manage the Know Your Customer (KYC) standards
just as they do today.
In order to have a well-developed, well-functioning CBDC
that addresses these policy goals, we must first start with the
law. A strong legal framework for the creation and the issuance
of U.S. dollar currency is already clearly codified. Today,
currency comes in the form of notes and coins, and is protected
under a clear, legal framework. This framework should be
extended to include digital currency. The responsibility to
securely produce notes and coins is currently placed on the
Treasury. And the production of a digital currency would be a
natural extension of the Treasury's role. The Federal Reserve
can then fulfill its subsequent role as the issuer and
distributor of that U.S. digital currency.
We believe that the technological solution to create a CBDC
should follow the laws laid out by Congress, and not the
reverse, where laws are formulated to suit technology. In other
words, our government should enumerate what standard the CBDC
should meet and require that technology enables compliance with
those laws and standards.
To advance our understanding of CBDC and to encourage the
study of the U.S. digital dollar, Congress should take the
following steps. First, address the definition of ``legal
tender'' in the U.S. Code, to add digital currency to the
current standard of notes and coins.
Second, clarify the role of the Treasury and the Federal
Reserve in the creation and issuance of digital currency. And,
finally, encourage the Treasury and the Federal Reserve to
initiate a digital dollar pilot program.
Enabling a central bank digital currency in the United
States is a once-in-a-generation opportunity for this Congress.
The time is now for Congress to amend existing currency laws
and set the rules of the road for a safe, secure, and inclusive
digital currency.
Fortunately for us, the model for a safe and secure
currency that meets all of these requirements is already in
place. It is the model we use for cash. We do not have to
invent a new model. If we can demand the security technology is
appropriately leveraged to support this model, we can enable a
digital dollar CBDC in the United States. Thank you. I yield
back.
[The prepared statement of Dr. Dharmapalan can be found on
page 36 of the appendix.]
Chairman Lynch. Thank you, Dr. Dharmapalan.
Mr. Grey, you are now recognized 5 minutes to give an oral
presentation of your testimony. Thank you.
STATEMENT OF ROHAN GREY, ASSISTANT PROFESSOR OF LAW, WILLAMETTE
UNIVERSITY
Mr. Grey. Thank you, Chairman Lynch, Ranking Member
Davidson, and members of the task force. In the interest of
brevity, I will focus my remarks on three key points.
First, when it comes to designing digital dollar
infrastructure, Congress should resist falling into the trap of
thinking that there can only be one. Instead, the United States
should pursue and coordinate multiple concurrent avenues of
experimentation and innovation through different agencies and
institutional arrangements.
Contrary to popular misconception, the Federal Reserve is
not, and has never been the only entity responsible for issuing
currency or providing public payment services. Throughout
American history, the United States Mint, the Bureau of
Engraving and Printing, the Bureau of the Fiscal Service, and
the U.S. Postal Service have all designed, issued, and operated
various forms of public monetary technologies. It is thus a
mistake to equate and reduce the wide spectrum of digital
currency architectures and arrangements to the more limited
category of central bank digital currency, which refers only to
those models in which central banks are the exclusive issuers
and administrators.
The universe of possibilities that we should be exploring
at this stage extends beyond what the lens of CBDCs allow us to
consider.
To be clear, I believe the Federal Reserve should and will
play a central role in any future digital dollar regime. At the
same time, however, I also believe postal banking
infrastructure should be a top priority, a nonnegotiable
component of any legislation to establish a digital dollar.
Equally importantly, into my second point, Congress should
direct the Treasury to establish its own system of token-based
e-cash cards and virtual wallets as a complement to the
account-based banking services provided by the Fed and the
Postal Service. Contrary to certain narratives, account and
token-based moneys are not competing substitutes, but
complements. They provide different functions and safeguards,
and should be developed in a parallel, coordinated manner.
As the Federal agency currently responsible for coins,
paper notes, and prepaid debit card services, the Treasury is
the most appropriate actor to lead the development of a token-
based, e-cash system. Interestingly, I am not the first to make
this suggestion to Congress.
The Electronic Money Task Force of the Treasury Department
first posed a commission to look into developing a Mint-issued,
stored-value e-cash card over 25 years ago.
In an October 1995 hearing on the future of money before
the House Banking Subcommittee on Domestic and International
Monetary Policy, then-director of the U.S. Mint, Philip Diehl,
testified that, ``the Mint's main interest in cash cards at the
time was as a potential substitute for coins and currency.''
Rather than promoting financial inclusion within the
banking system, e-cash would preserve and maintain the same
transactional freedoms and capabilities in the digital economy
as physical cash has historically provided in the traditional
economy.
Which brings me to my third and final point. It is not
uncommon to hear policymakers claim that designing a digital
dollar system to allow for anonymous, peer-to-peer transactions
would be radical or extreme. I profoundly disagree.
Transactional anonymity, like anonymity more broadly, is a
public good and core bedrock of political freedom in an
academic society. It is difficult to imagine what America would
be today if the Federalist Papers had not been published under
a pseudonym, or if the U.S. Supreme Court in 1958 had ruled in
NAACP v. Alabama that the NAACP turn over its records and
membership dues to the Governor of Alabama as part of his
harassment campaign against their desegregation efforts.
Preserving the right to make peer-to-peer payments without
third party approval is, in fact, a small ``c'' conservative
defense against the socially disruptive effects of digital
technology on the internet. It reflects a first-do-no-harm
approach that ensures we carry the same freedoms into the
future as we have enjoyed and fought for in the past.
When it comes to digital transactions, we have a right to
what Professor Joel Reidenberg calls, ``privacy in public.'' If
there was no compelling reason for public authorities or
private platforms to know when I would buy a meatball sub from
a street vendor, then they shouldn't know. It is that simple.
The way to limit the risks of data abuses is to not collect
unnecessary data in the first place.
Above all, Congress should adopt the principle of currency
neutrality, similar to net neutrality, whereby digital fiat
currency platforms and technologies are treated as common
utilities available to all of the public good.
If the digital dollar is to stand for more than
surveillance, data-mining, and political censorship, like
China's digital e-Yuan or Facebook's Diem, American
policymakers must be willing to articulate and defend a
different set of principles and commitments, even when doing so
entails difficult choices. Thank you, and I look forward to
your questions.
[The prepared statement of Mr. Grey can be found on page 54
of the appendix.]
Chairman Lynch. Thank you very much, Mr. Grey.
Dr. Narula, you are now recognized for 5 minutes to give an
oral presentation of your testimony. Thank you.
STATEMENT OF NEHA NARULA, DIRECTOR, DIGITAL CURRENCY
INITIATIVE, MIT MEDIA LAB
Ms. Narula. Thank you, Chairman Lynch, Ranking Member
Davidson, Chairwoman Waters, Ranking Member McHenry, and
members of the task force for the opportunity to testify today.
I am the director of the Digital Currency Initiative at
MIT. We focus on cryptocurrency, including bitcoin open for
software development and digital currency design. I would like
to note that my views are my own, and not the views of MIT or
the Federal Reserve Bank of Boston, with whom we are engaged in
a multi-year research collaboration called Project Hamilton. We
will be releasing a paper and open source software later this
summer.
Today, I am going to define a CBDC and its benefits, pose
questions that should be answered before launching a U.S. CBDC,
a digital dollar, and suggest ways to answer those questions. A
general purpose, or retail CBDC, is defined as a digital
liability of a nation's central bank that is broadly accessible
to the general public. That it is a central liability
distinguishes it from commercial bank money, credit cards, and
cryptocurrency, that its digital nature sets it apart from
cash, and it is different from central bank reserves in that
users can hold it directly.
The promise of a CBDC goes beyond efficiency and financial
inclusion. We have seen tremendous innovation in
cryptocurrencies. And it is time to bring some of that
innovation into our nation's currency. Digital currency offers
an opportunity for ground-up redesign of our payment systems.
Together, a well-built digital dollar and other financial
technologies could empower users and create a platform for
innovation and payments, much as the internet created a
platform for innovation by facilitating the transfer of
information.
Though promising, the way forward is not entirely clear.
There are many open questions regarding how a U.S. CBDC should
operate, how users might access it, how consumer privacy would
be protected, and even if a CBDC is the best way to achieve
goals, such as increasing financial inclusion. For example, 36
percent of those in the U.S. who lack bank accounts also do not
have smartphones. Many Americans do not have reliable internet
connectivity. Such people could not use a digital currency that
requires a mobile app or constant connection to the internet.
At MIT, we are investigating designs that would enable forms of
secure, offline transactions.
Financial transactions reveal sensitive data about our
lives, and protecting privacy is essential for human dignity in
a democratic society. Consumer privacy is a requirement for a
U.S. CBDC as well as a potential competitive advantage. Yet,
much work remains to determine how to do this efficiently and
effectively.
More research is needed to determine how a CBDC might
address these challenges. It would be a mistake to move to
using a CBDC without understanding the implications for
financial inclusion and privacy.
Extensive collaboration between academic researchers and
the public and private sectors, as well as research funding, is
needed to make progress on these key questions. The first step
is to obtain agreement on goals. In parallel, the Treasury
Department and the Federal Reserve should be investing more in
research and development, not to build the digital dollar, but
to understand its possibilities and implications, as well as
spur technology development.
To build consensus across varied stakeholders and to create
a neutral environment where the best ideas can flourish, we
should rely on the principles of open-sourced software
development that have been so successful in the cryptocurrency
space.
The government's typical way of building systems,
outsourcing to a third-party vendor, will not, in my opinion,
work here. What is possible in terms of policy is inextricably
linked to the technical implementation, and the U.S. cannot
outsource monetary policy to a vendor. As a first step, I
recommend expanding the type of work that MIT is currently
doing with the Boston Fed, and other new collaborations between
academia and the public sector.
In conclusion, we have a once-in-a-century opportunity to
redesign the foundations of the U.S. financial system. Central
bank digital currency might have the potential to increase
financial inclusion, reduce transaction costs, and become a
platform for innovation and payments, but only if designed and
implemented well.
I commend this task force for raising this important issue
and encouraging this critical dialogue. Thank you, and I look
forward to your questions.
[The prepared statement of Dr. Narula can be found on page
68 of the appendix.]
Chairman Lynch. Thank you, Dr. Narula.
Dr. Gesley, you are now recognized for 5 minutes to give a
summation of your testimony.
STATEMENT OF JENNY GESLEY, FOREIGN LAW SPECIALIST, LAW LIBRARY
OF CONGRESS
Ms. Gesley. Thank you, Chairman Lynch, Ranking Member
Davidson, Chairwoman Waters, Ranking Member McHenry, and the
distinguished members of the task force. It is an honor for me
to appear before you today to testify regarding digitizing the
dollar. My name is Jenny Gesley, and I am a Foreign Law
Specialist at the Law Library of Congress. I also previously
worked as the Chair for Money, Currency, and Central Bank Law
at the University of Frankfurt, Germany, and I hold a Ph.D. in
law in the area of financial market supervision.
In my testimony today, I will provide an overview of
different design choices for CBDCs, reasons in favor of
adopting a CBDC, and some legal, economic, and technical
considerations. And I will use examples from other
jurisdictions to illustrate these points.
In October 2020, the central bank of the Bahamas launched
the first worldwide retail CBDC, the Electronic Bahamian
Dollar, also called the Sand Dollar. And one of its critical
goals is financial inclusion. The People's Bank of China
recently became the first major bank of a major economy to
launch a digital currency in several major cities. Sweden's
central bank recently announced that it will start the second
phase of its e-krona project. And the U.K. and the European
Union are doing exploratory work on a potential retail CBDC,
although they have not made a decision yet on whether to issue
a CBDC.
One of the main functions of central banks is to ensure
monetary and financial stability in their respective
jurisdictions, and to ensure broad access to safe and efficient
payments. One of the core instruments by which central banks
perform this function is by providing central bank money.
Traditionally, a central bank has limited digital account-
based money to banks and other financial institutions, whereas
physical central bank money, meaning cash, is rightly
accessible. However, in some jurisdictions, the use of cash is
declining, with the possibility of its complete disappearance,
indicating that the public would no longer have broad access to
central bank money.
This is one of the points where a central bank's digital
currencies come into play. But the reasons for adopting a CBDC
and the different design choices depend on many different
factors, and they are different for each individual
jurisdiction.
Among other decisions, central banks need to consider the
question of access. Should it be a retail CBDC or a wholesale
CBDC? The degree of anonymity, operation availability,
interest-bearing characteristics, then limits or caps on
individual holdings, and for technical solutions.
And the reasons for adopting the CBDC also vary. One of the
reasons is the declining cash usage in Sweden. Then, also,
improved financial inclusion for unbanked and underbanked
communities, which is particularly true for emerging markets
and developing economies, such as the Bahamas and other
Caribbean jurisdictions.
General [inaudible] Interest technological [inaudible]
Innovation, and making the [inaudible] For the fear that
central bank money and transactions will be displaced by
private digital tokens, such as cryptocurrency, in general, or
stablecoin issues by corporations such as Facebook Diem. This
is also one of the reasons that Sweden [inaudible] Cited. And
there is also the risk of the so-called digital dollarization
with regard to cross-border CBDCs, meaning the use of a
[inaudible] Domestic currency, which as an impact on the
domestic bank's ability to conduct monetary policy and
[inaudible] Ensure monetary stability.
So, if the central bank decides to move forward with a
CBDC, they must make several considerations. In particular,
they must consider whether the domestic central bank has the
authority to issue digital currency and make a [inaudible]
Legal tender, if so desired. In compliance with anti-money
laundering--I think my connection--
Chairman Lynch. Can our tech people try to get Dr. Gesley
back again? Is that possible?
Dr. Gesley, we see you again. Would you like to conclude
the last portion of your testimony?
Okay.
[The prepared statement of Dr. Gesley can be found on page
46 of the appendix.]
Chairman Lynch. I am reclaiming my time. First of all, I
want to thank all of the witnesses, all of the panelists for
your contributions. I had a chance last night to read through
almost all of the testimony, and there is certainly a richness
of perspective here that I did not anticipate, but which is
really delightful. So, I am glad that is the case.
Ms. Gesley. I apologize for the connectivity problems.
Chairman Lynch. You were fine up until the last minute, Dr.
Gesley, and if you would like to conclude that, I would
certainly yield you the time. Okay. I don't think that is going
to happen.
So, Dr. Narula, I know that you are doing great work over
at MIT. Thank you so much for being with us today.
Listening to all of the testimony, reading through the
testimony as well, there is the question of, should not the
policy inform the architecture? In other words, we have to
provide direction, I think, to you to be helpful to decide what
will be the priorities, and what are the essential elements,
and what is the functionality of CBDC consistent with the role
of the Federal Reserve? And as you say, with this once-in-a-
generation opportunity to really redesign our currency.
I wonder if you could just take some time and talk about
the hurdles, the difficulties that you have encountered in
trying to accommodate the different priorities, from anonymity
to privacy, to the way this CBDC might unfold, and who would be
responsible for administering this.
Mr. Grey suggests that should be one of several, if not
many. But that would obviously drastically change the role of
the Fed in our monetary policy, and some of the tools that the
Fed currently uses to fight inflation, and in control of the
money supply. So, I wonder if you could just talk about some of
the challenges that you are facing in designing this?
Ms. Narula. Thank you for that excellent question, Chairman
Lynch. It is, indeed, the fact that we have not yet, as a
country, had a very deep discussion on exactly how we might
want something like a CBDC to be administered, if at all. And I
am really happy that we are beginning to have that conversation
today. This is just the beginning.
I am not an economist, so I will stay in my lane and not
give too many comments about monetary policy. What I will say
is that it is absolutely the case that we need to have a lot of
research done in terms of policy and how we might want that
policy to unfold, whether that is who would administer such a
thing, how it is enforced, who would gain access, or what
exactly we want it to look like. That does not mean that we
wait on the technology until we have had all of those
discussions.
What we found, and I think one of the most important things
we found, is that in implementing, in doing the technology
research, we are surfacing critical nuanced questions that
policymakers might not have even known to ask to begin with,
and we are very happy to be doing that work.
Chairman Lynch. That is great.
Dr. Dharmapalan, you have also touched on this idea that
policy should inform the architecture. Can you talk about that
a little bit more and how we might balance some of the
competing interests? I know that the idea of inclusion is
universal. I think that is a main, a central tenet of this
effort, but that has not necessarily been the case in some of
the Fintech world where we have gone to mobile platforms or a
digital iteration of cash. And we have actually seen some
pushback from certain communities that feel that the move away
from physical cash has disenfranchised some elements of
society. So, could you take a swipe at that, please?
Mr. Dharmapalan. I am happy to, and thank you, Chairman
Lynch. One could argue that cash currency is the most inclusive
financial instrument we have today. Anyone can access it, and
its power is exactly the same--in your hands, in my hands, or
in my children's hands, a $5 bill does exactly the same thing.
So when we look at a digital currency, the model is cash.
We have to be able to give the digital currency at least the
power physical cash has, if not more, which is why we emphasize
the fact that policy then drives the technology. Start with the
fact that a physical currency instrument exists because of the
law. Congress, many, many years ago defined the law to enable
legal tender in the form of U.S. dollar notes and coins. They
then gave the responsibility to create it without involvement
with anyone else to the Treasury. The Treasury creates an
incredibly secure instrument that they then put into
circulation, using existing infrastructure, starting with the
Fed.
The Fed then sends it to commercial banks. Commercial banks
get it into their ATMs, and through merchants and what have you
gets it into the hands of the public. And we have this
incredibly financially inclusive instrument in cash.
So, we think that a digital currency should also start with
those same principles in mind. Start with Congress, make the
rules, give the responsibility to the Treasury to create a,
what we think of as a digital bearer instrument just like cash,
move it to the Fed, allow the Fed to distribute it using
existing infrastructure without banks and others having to
completely overhaul their current systems, and ultimately get
it to the public so that they can use it online or offline,
with connections, without connections, just as they would a
physical bearer instrument. This is what will allow for
ultimate inclusion in the digital world for people who don't
have smartphones, who may not have internet access at all
points, but will always have access to a digital form of cash.
Chairman Lynch. Thank you. The Chair now recognizes the
ranking member of the task force, the gentleman from Ohio, Mr.
Davidson, for 5 minutes for questions.
Mr. Davidson. I thank the chairman. And thanks to our
witnesses. I am so excited that we are going to meet in person.
We have seen a lot of technical glitches in virtual hearings,
including at the start of this one. So, we are excited to see
the light at the end of the tunnel here.
Mr. Grey, I am very encouraged by this dialogue about cash,
and, frankly, by your passion for privacy. And, athough you
don't call it out explicitly, the third-party doctrine that
leaves privacy in the hands of businesses, highlights one of
the big gaping holes in the Fourth Amendment. And if we get
this structure right, we could really move past that sad part
of America's history, where Americans essentially surrendered
their privacy in the late 1960s, early 1970s, with respect to
financial matters. And we have seen it eroded massively over
these years.
When you talk about the permissionless nature of cash, as
our chairman and several others have, it is very encouraging
because the rest of the financial system doesn't really have
that characteristic right now. So, if we get a central bank
digital currency right, in my opinion, it will certainly have
the essential feature of privacy, and, hopefully, it will also
develop something we have been lacking, also at least since the
1970s, which is sound money. So, the architecture and structure
are really, really important.
Dr. Narula, when you submitted your testimony and spoke,
you do a great job of discussing the importance of protecting
consumer privacy when developing central bank digital
currencies. Specifically, you note that it is essential for
human dignity and democratic society. I can't agree more. And
you then state that legitimate public policy goals relating to
combating criminal activity can be fulfilled while preserving
the privacy of the public.
With that in mind, can you discuss other CBDC pilot
programs and the privacy standards other countries implement?
What can the United States learn from these case studies, good
and bad?
Ms. Narula. Thank you, Ranking Member Davidson. That is an
excellent question about privacy, and also, what we can learn
from other countries. Part of the benefit of the work that we
are doing at MIT is that we are able to speak to many central
banks and gather that input to learn about what is common
amongst different central banks.
I will say that there are very few central banks that have
really gone far enough to begin to ask some of the more nuanced
questions. There is just a handful, really. However, some of
them have begun to ask very, very important questions about
privacy. And I think what is really important to note is that
it should be possible to catch criminals without the government
having a record of every date, time, amount, and location
whenever I buy a cup of coffee. That is just not something that
is going to be practical.
So, there is an inherent tradeoff here. Sometimes, it is
very fundamentally hard to get two different things at once.
The ability to track bad actors implies a design that is less
than completely fully private. I think the key is to find the
right balance between these tensions, which is why extensive
research and design is so critical. One very promising
direction my team is exploring is the application of
cryptography to this question and tension.
Using cryptography, we can hide the specifics of data,
while at the same time, proving more general facts about that
data. This will be challenging, and it is still an open area of
research in which we are engaging, but I am optimistic.
Mr. Davidson. Thank you for that. And I am encouraged by
your work. And one of the important innovations has been
cryptography linked to blockchain technology.
Mrs. Cadet, in your testimony, you discussed the benefits
of blockchain technology. And you say that blockchain
technology can securely embed trust, compliance, privacy, and
transparency. Can you outline why you think that blockchain is
a more appropriate infrastructure model for CBDC, as compared
to a centrally-controlled database?
Mrs. Cadet. No. Thank you for that, Ranking Member. When we
started our work in central bank digital currency, blockchain
technology is a key differentiator to any other type of
technology, and approaches to creating digital currencies,
especially when we talk about cash. A cash-like model for CBDC
will find many benefits from blockchain technology. The cash
today, you don't need an intermediary to use it. If you have
cash in your pocket, you don't need to ask permission or wait
for the internet to come back up for you to buy a scoop of ice
cream.
So when we think about blockchain and the decentralization
component of it, it really can reflect cash and bring some
benefits that cash provides today.
Cryptography is a big component, combined with blockchain,
which can not only provide the privacy, enhance the privacy
compared to what we have today, but also the embedded trust,
the governance that can be enabled can run. So if we think
about the Fed not particularly wanting to manage digital cash
directly, blockchain technology enables self-governance,
embedded governance with smart contracts and other capabilities
that make it much more cost-effective and scalable as well.
Mr. Davidson. Thank you so much. My time has expired. I
appreciate your solid answers. I yield back.
Chairman Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Florida, Mr. Lawson, for 5
minutes of questions.
Mr. Lawson. Mr. Chairman, can you hear me?
Chairman Lynch. I can, yes. Mr. Lawson, please proceed.
Thank you.
Mr. Lawson. Okay. Thank you very much, Mr. Chairman, and
Mr. Ranking Member, for having this meeting. I would like to
welcome the witnesses here today. And this is quite
interesting. According to the FCC Broadband Progress Report, 19
million Americans, or 6 percent of the U.S. population, lack
access to broadband. The report goes on to detail that even in
areas where broadband is available, 100 million Americans opt
to not use it. This disparity is concerning to me, and the CBDC
is packaged as being a more accessible option to America than
the traditional banking.
So my question would be to the panel: How do we reassure
Americans, especially people who are not really versed on this
issue, especially in rural areas, that they are not going to be
left behind? How do we get this information to them? And how do
we deal with elderly citizens who have basically been the
backbone of the American economy in the middle class to the
point where they are right now?
And this is to the whole panel. With this change, how is it
going to work, when we talk about ATMs and everything else and
not the use of cash, we really need some guidance. What can we
tell our constituents?
Mrs. Cadet. If it is okay, gentlemen, I will jump in here,
because this is something that we think about a lot, inclusion
for the unbanked, inclusion for low-infrastructure
environments. I travel around the world. I am originally from
Haiti. And among the problems that we see when it comes to
inclusion is the access and the understanding of a new
financial asset. Financial literacy and education is the key
component of the delivery and the introduction of a CBDC to the
American economy.
But while doing that, I think there is great value and
great benefit. And if you are looking at the Post Office and
local stakeholders and local physical institutions that, by the
way, have experience in delivering and facilitating financial
services in those communities. Community Development Financial
Institutions (CDFIs) can also play a role in being interfaced
providers in on-boarding and off-boarding stakeholders as part
of this new digital network.
I tell people that my mom is very attached to her $100 bill
that she keeps in her purse. She is not going to give that away
any time soon. She will still want paper cash in her wallet.
And for her to have access to paper cash and digital cash is
something that I look at as a model for a lot of Americans, and
older Americans who want access, but giving them options, and
giving them a better way and a more efficient way to receive
the benefits, for example, we think can be great ways of
integration for them.
Mr. Grey. May I jump in?
Mr. Lawson. Go ahead. Yes, please.
Mr. Grey. Thank you.
I think when it comes to actually successful implementation
as well as design of a digital fiat currency, it is critical to
take the average person's trust and access to that as a core
design constraint. One of the reasons why we are proposing that
the Treasury issue its own trusted hardware-based token system
that can be used off-line alongside account- or ledger-based
systems is precisely to ensure that people can use it outside
of the ways in which people use banks today.
When we designed the Automatic Boost to Communities Act
with Congresswomen Tlaib and Jayapal, we created the emergency
responder call that would actually deliver prepaid pandemic
relief cards and perform a wellness check in the process to
people's doors. And it is that kind of critical human
infrastructure, like the Postal Service, that is going to be
really important, not only to ensure that people can use a
digital currency, but that they are educated and that they are
involved in the deliberation process for its design.
Mr. Dharmapalan. I will add a couple of thoughts,
Congressman, to what Mr. Grey just said.
If designed properly, you don't need broadband access to
use a CBDC. It should be able to exist in your wallet on a
smart card, just like a card exists today, except now it is the
United States dollar existing in your wallet in digital form.
Mr. Lawson. Okay. Thank you, Mr. Chairman. We have a long
ways to go, and I yield back.
Chairman Lynch. That was great, Al, great questions, and
excellent answers as well.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes of questions.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and thank you for
the hearing today. This is really interesting stuff here.
In listening to the witnesses today, there are a number of
things that, I think, concerns that they brought up. Almost all
of them talked about the privacy of the consumer information
with regards to those people who own the digital currency, how
we can make it difficult to launder money or use it for illicit
financing. We have to be able to protect against those things.
We need to protect the value of the transaction at the moment
that it is done from the wild swings of valuation, for
instance, when we have something like bitcoin. And then I think
another one that we haven't really gotten to very much here is
to protect the reserve currency status of the United States
dollar.
And so, Ms. Gesley, I would like to start with you with
regards to, China is in the middle of getting ready to issue
their own currency here, their own digital currency. They are a
major player in the world. Their economy is second only to the
United States. Do you see their ability to get out front on
this as a threat to our reserve currency status or do you think
that this is not something that--this is just going to be a
supplement to the kind of money that they use right now to
transact business with?
Ms. Gesley. Thank you for this question. It is a little bit
out of my expertise, but I will try to talk about it.
First of all, China said that they would first use it as a
domestic CBDC, but they did mention that it could also
potentially be used for cross-border purposes, so there is
definitely a risk of the digital dollarization in this case.
That would also mean that there needs to be a huge uptake off
China's CBDC by other countries. So if other countries, instead
of now the U.S. currency--yes, the U.S. dollar, its reserve
currency, the countries would then decide to take the Chinese
CBDC and replace the U.S. dollar with that.
I don't see that actually happening, because reportedly,
the way the Chinese CBDC will be designed has also left us with
privacy implications, so the Chinese central bank will have
lots of insight into people's information. So, I don't see this
as a very good alternative, even though they said they will try
to use this also for cross-border purposes.
Mr. Luetkemeyer. Thank you for that.
Mr. Dharmapalan, do you see a problem with these digital
currencies around the world as a threat to our reserve purchase
status, or do you think that this is, again, just a
supplemental way of transacting business to help people
facilitate their daily transactions?
Mr. Dharmapalan. I think, Congressman, it is a slippery
slope. Initially, it will look very much like people
transacting their daily business, but if you go into a
southeast Asian country, you will notice that at the local 7-
Eleven, there is direct access to Alipay. If Alipay is now
empowered and is a Chinese yuan, and the public is buying
materials from the local 7-Eleven using the Chinese yuan, it
doesn't prevent the 7-Eleven from buying their supplies using
the Chinese yuan, directly from their Chinese supplies.
So little by little, this could creep into other countries
besides China and succeed in achieving what China really wants,
which is for mercantile payments to take place, merchant
payments to take place using the Chinese yuan. So it goes first
from a retail payment to ultimately creeping into wholesale
payments and payments like sports directly from China. So, that
risk does exist.
Mr. Luetkemeyer. Thank you for that.
Dr. Grey, quickly, it would appear to me that there is
going to have to be some congressional authorization to be able
to implement any sort of CBDC modeling or even the authority to
issue this additional currency.
What your thoughts on that?
Mr. Grey. Yes. Thank you. I think we should adopt a
comprehensive approach rather than starting with one
institutional perspective. And by that, I mean that we should
have Fed Accounts of the kind proposed by Professor Menand and
others, alongside of Treasury eCash, alongside postal banking,
and we should design that legislation as a comprehensive
package that combines retail account and token options.
At the same time, it is going to be very important to get
the perspective of stakeholders that are currently not in this
process, privacy advocates, groups who are involved with people
who conduct remittances--
Mr. Luetkemeyer. Thank you. Thank you for that, Dr. Grey.
Anybody who thinks the Postal Service is a way to deliver
money has been asleep at the wheel for the last 30 years, in
how they actually perform when they are broke themselves.
But with that, Mr. Chairman, I yield back.
Chairman Lynch. The gentleman yields back.
Next on my list is the gentlewoman from Georgia, Ms.
Williams. I don't see you on the screen, but I know you might
be on your phone. I am not quite sure.
Okay. We are going to go to the gentleman from Texas, Mr.
Green. I see you there, sir. You are welcome to ask your
questions for 5 minutes.
Mr. Green, are you muted?
We are going to go to Mr. Sherman, the next Democrat on the
list. Mr. Sherman, the gentleman from California?
We are going to go to Mr. Emmer, the gentleman from
Minnesota. You are recognized for 5 minutes.
Mr. Emmer. Thank you, Chairman Lynch, and new Ranking
Member Davidson. Like Representative Luetkemeyer before me, I
am very happy that you are hosting this timely hearing to
discuss the potential of United States digital dollars, because
we probably now are all beginning to realize this discussion is
incredibly important from a national security standpoint and
from a global competitiveness standpoint.
Through Chinese testing and rollout of the digital yuan, it
is more important than ever to submit the U.S. dollar
dominance. The benefit of having a digital dollar would only
come to fruition if it were open, permissionless, and private.
We should not lose sight of these values, and we should not
craft a CBDC that enables the Fed to provide retail banking
accounts for Americans that, in fact, would convert the Fed
into a consumer bank. And if it were such, it would be able to
collect all sorts of private information on Americans. That is
not what we want.
Our banks and Fintechs are doing a great job serving their
customers and expanding access to financial services, and the
competitive marketplace of the private sector can facilitate
that goal. The private sector has led the charge on innovating
in the digital currency space already. The private sector
developed our record infrastructure, our telecommunications
infrastructure, and the internet.
If we are talking about programmable money and building off
of the dominance of the U.S. dollar, we have to involve the
private sector. Whatever future innovation we discover from the
CBDC will not come from the government, and I tend to agree
with Representative Luetkemeyer, certainly not from the post
office, but rather, from people and individuals building off
it, just like there were underlying protocols for the internet.
The bottom line is that U.S. lawmakers need to stop being
so skeptical of crypto and recognize that it is not going to go
away. We need to support this technology. Anything to the
contrary will push our innovators and our entrepreneurs
overseas, where compliance is more streamlined.
As China and other nations push ahead in this field,
promoting transactions on blockchains through digital dollars
and stablecoins, it is becoming clear that the United States
needs to craft a token-based digital dollar that is open,
permissionless, and private.
And with that, Ms. Gesley, I want to ask you--I guess I
would put it this way: Like the Colonial Pipeline, the
centralization of data and information is a target for bad
actors. The Fed isn't immune to this; their Fedwire system went
down earlier this year. In wake of all of these ransomware
acts, I think it is important to ask if the cybersecurity
standards of the Fed are able to withstand being such a target.
If the Fed's CBDC goes down, many people would have problems
accessing an app or other financial instruments if they are all
linked to the CBDC.
Could you please speak to the threat of the single point of
failure, and why we should explore stablecoins and other means
of financial transactions to circumvent or prevent the threat
of crippling the entire financial system?
Ms. Gesley. Certainly. So as you are saying, there is
obviously always the risk of cybersecurity hacker attacks. But
I think normally, and it is also what we have seen with other
countries, that the central banks normally uses intermediaries,
such as the commercial banks, to issue their CBDC. And those
banks normally have a very robust infrastructure in place. And
then they should also--for example, in the Bahamas, when they
register so-called wallet providers, they make them go through
an independent third party that looks at their cybersecurity
infrastructure to ensure that all of these wallet providers
will be able to provide the necessary security and, therefore,
only those intermediaries that pass this test will be able to.
So I don't think--and, normally, central banks, this would
be if it was all located at the central bank, a huge,
additional cap for the central bank, which they are not
equipped to do at the moment. So having this with
intermediaries, and then having independent third parties do
the testing off the cybersecurity infrastructure, is probably
the way to go.
Mr. Emmer. I appreciate that.
I see my time has expired. Thank you, Mr. Chairman.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. Steil. I will start off by saying that I look forward
to our next hearing being in person, where the mute will be a
little bit easier to do. But I appreciate you holding today's
hearing, Mr. Chairman.
I appreciate Mr. Luetkemeyer's comments in particular on
the importance of the United States dollar being the world's
reserve currency, and Mr. Davidson's comments and Mr. Emmer's
comments on the importance of maintaining privacy.
I would like to dive in as to the problem that we are
trying to solve and, if I can, direct the question towards you,
Ms. Gesley. Over the course of today's hearing, I think we have
heard some disagreement about the structure of CBDC stems from
different views as to what problems the CBDCs are supposed to
solve.
So, I look at the Sand Dollar and see that the problem was,
how do we get funds from point A to point B in an island
nation, not a challenge in the United States, but a challenge
for some island nations.
I see what I think are some countries who are actually on
the other side of the privacy issue, who are actually trying to
remove privacy and trying to gain insights as to what their
citizens are doing as being a problem that they are trying to
solve. I don't want to solve that problem here in the United
States. I think privacy of individuals is important.
If I look at the FDIC's survey of American banks, in
particular looking at the unbanked--36.3 percent of households
that are unbanked replied that they didn't have a bank because
they simply don't trust banks. So, I don't know that putting
this in the hands of the Federal Government is going to get
those people on board, that they would trust the Federal
Government more than they trust banks. Nineteen percent said
that banks didn't offer the products or services that they
needed.
So, what I am looking for is, what problem would the CBDC
necessarily solve? And what problems in particular have you
seen other countries trying to address through CBDC
implementation, Ms. Gesley?
Ms. Gesley. Thank you for that question. If I could go back
to the Bahamas, where they are trying to solve the financial
inclusion problem, they did several things. For example,
especially with regard to not trusting commercial banks, they
said, in addition to commercial banks, there could be several
wallet providers, so the wallet providers do the digital
wallets where the CBDCs will be. And they also said cooperative
credit unions, but then also just money transmission
businesses, payment service providers, so it is a wide range of
providers. So, if you don't trust the traditional commercial
bank, you have the option, for example, you may be more likely
to go to a payment service provider with which you are already
familiar.
Also, what they did there, they said that--so all the
wallet providers need to provide a financial inclusion
strategy, so they can say, well, in this remote area, we are
going to do it XYZ so the central bank can look at this
problem. They are supposed to provide financial--
Mr. Steil. Ms. Gesley, if I can follow up on that, because
I think it is an interesting point. We want financial
inclusion. We want to make sure that people who are unbanked
have access to that. I think it is a very worthy cause.
Do you think that goal was accomplished, or is that a goal
that they set out to achieve and this was not a successful
path?
Ms. Gesley. I think they are on the way to achieving this,
especially after the launch--for example, they added prepaid
cards in collaboration with Mastercard so that people who don't
necessarily have access to a smartphone are able to use the
Sand Dollar. So, this is another way. And I think the Bahamas
is a good example, especially now that it is already in use.
Following along and seeing what improvements they are making
along the way I think is very helpful, so that is something
they added--
Mr. Steil. So would an analogy be a similarity as to how we
are using food stamps in the United States, where there would
now be a card? Is that almost what is occurring as you are
looking at the Sand Dollar?
Ms. Gesley. Just a prepaid amount, yes, that is loaded onto
the card, so that everywhere Mastercard is accepted, you can
use this card, and it just has the Sand Dollars loaded on it.
Or sometimes they also have, with the problem when there is no
internet connection, you can already preload something on your
digital wallet, so you don't necessarily need to be online all
the time.
Mr. Steil. It sounds almost in many ways like they are
using financial technology as much as they are actually using
the digital currency to get inclusion into the financial system
for many of their people.
Ms. Gesley. Exactly.
Mrs. Cadet. Representative Steil, is it okay for me to--
Mr. Steil. Looking at the time, I am going to--I am hearing
some feedback here, but--
Mrs. Cadet. Yes, I wanted to jump in to give you some color
around this--
Chairman Lynch. Go ahead.
Mrs. Cadet. I just wanted to say, as someone who
participated in the pilot in the Central Bank of the Bahamas, I
wanted to give some color around the implementation. The
financial inclusion was a big driver, but the access and making
sure that the transactions could be done in real time was
something that was executed successfully. That is what I wanted
to say.
Mr. Steil. Thank you very much.
Cognizant of the time, Mr. Chairman, I will yield back.
Chairman Lynch. Okay. The Chair will try again to recognize
Mr. Green of Texas for 5 minutes. I am not sure he can hear us.
Mr. Green of Texas?
Okay. Then I am going to go with Mr. Gonzalez of Texas for
5 minutes.
Okay. The Chair will recognize the gentleman from Indiana,
Mr. Gonzalez, for 5 minutes.
Mr. Gonzalez of Ohio. Do you mean the one from Ohio?
Chairman Lynch. Okay. I'm sorry.
Mr. Gonzalez of Ohio. That is all right.
Chairman Lynch. I was thinking of Indiana, I'm sorry.
Mr. Gonzalez of Ohio. I spent some time in Indiana. But, in
any event, thank you, Chairman Lynch and Ranking Member
Davidson, for holding today's hearing. And thank you to our
witnesses for participating.
I want to sort of stay on some of the topics that Mr. Steil
was just referencing with respect to expanding access and
whether that is the problem we are trying to solve. I think it
is. It is sort of what is the best way for us to expand
inclusion in the banking system or the financial system writ
large.
And so, Dr. Narula, I want to start with you, if I could,
specifically on the design component of this. You focused on
what you are calling digital cash in your testimony, and in the
MIT study, and it sounds like that is true. Can you compare and
contrast that to the two-tier and Fed wallet system and why you
sort of trended in the direction of the digital cash model?
Ms. Narula. Certainly. Thank you, Congressman. And I am
from the Midwest. Ohio is a great State.
Mr. Gonzalez of Ohio. Wonderful State. Thank you very much.
Ms. Narula. So, yes, there has been a lot of conversation
about the direct versus two-tier CBDC models. And what I would
like to say is that it is not exactly either/or. There are
actually a lot of very fine grain choices about exactly how a
digital currency might be distributed and how users might be
allowed to access it. A key question, as you point out, is who
will have access. It should be, I think, a wider swath of
players than just commercial banks. Additional players could
provide digital wallets for users in more interesting
applications, for example, Fintechs. But people should also be
able to hold it directly, much as they hold cash directly
today, not because the CBDC is supposed to replace cash, but
simply because cash is a great example of how we can provide
the most access to the most people.
We want to encourage innovation, wherever it may come from,
and if a CBDC were only limited to a small set of financial
institutions, then it might not be able to serve as that
platform for innovation in the future, nor would it help people
who weren't interested in using a commercial bank.
Mr. Gonzalez of Ohio. Thank you.
And then sort of building on that, comparing ether bitcoin,
which has sort of an open architecture and allows for a ton of
innovation and, I think, in many ways, part of the excitement
around this technology, at least for me, is in the
decentralized finance (DeFi) movement and in the ability to
really create products that historically just haven't existed
or we haven't been able to unlock.
How do you see a digital dollar working either in
competition with those products or alongside of--do you see the
architecture being similar such that we could innovate in
similar ways via digital dollars?
Ms. Narula. Thank you for that question. I think it is
really important.
I want to be very clear. I think that cryptocurrency and
any CBDC are not in competition. They will coexist, and each
will probably help further the other. Quite frankly, we
wouldn't be here today having this hearing if it weren't for
cryptocurrencies like bitcoin. There was a lot of innovation
there. There were a lot of really interesting applications. You
point out the DeFi space. There is a tremendous amount of
experimentation happening there, and we want to continue to
encourage that experimentation and innovation. We want to make
sure that the United States is at the forefront of that. I
think CBDC is a natural thing to consider seeing that
innovation happening and thinking about how we might want to
upgrade our financial systems broadly.
So, to me, these two things will coexist. They are both
very important, and I don't see them as being in competition.
Mr. Gonzalez of Ohio. Thank you.
One criticism is that the digital dollar forces the Fed to
replace retail banks and takes assets off of bank balance
sheets and moves them directly to the Fed. Is that necessarily
true with the digital dollar or CBDC? And how would you solve
that if that was an objective you did not want to see happen?
Ms. Narula. Thank you. I think that this is a really
important question. I am not an economist, so I am just going
to speak from the perspective of a technologist. I think that
there are ways to perhaps keep that from happening. It really
depends on exactly how the system is designed and how much, for
example, of the digital dollar is in circulation.
So, I think that this is something that could potentially
be mediated. I know a lot of economists are looking at this
problem, and I look forward to seeing more of the research that
comes out, but I don't think it is a deal breaker.
Mr. Gonzalez of Ohio. Thanks. I do think it is an important
concern. I don't think we want to fully take over the banking
system and have every American with a bank account, or at least
I don't want that for me personally, but I am encouraged by
your work and your testimony.
And I yield back. Thank you.
Chairman Lynch. The gentleman from the great State of Ohio
yields back.
The Chair recognizes the gentleman from Texas, Mr. Green,
once again. Can you hear us?
Okay. I am going to go to the gentleman from California,
Mr. Sherman, for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman. Thanks for an
opportunity to participate in this task force hearing.
Mr. Dharmapalan, the American Families Plan Tax Compliance
Agenda released just last month says that cryptocurrency poses
a significant detection problem by facilitating illegal
activity broadly, including tax evasion.
IRS Commissioner Rettig, from my town of Los Angeles, has
testified that the annual tax gap in terms of what the IRS
fails to collect chiefly from the top 1 percent may be as now
high as $1 trillion, which means that we are seeing several
trillion dollars of income concealed, which means over the
year, we are seeing tens of trillions of dollars of assets
concealed.
How could the Fed make sure that a digital dollar is not a
tool for tax evasion? And how will you apply the Know Your
Customer (KYC) and Anti-Money Laundering (AML) rules?
Mr. Dharmapalan. Thank you. I am also from the great State
of California. Thank you, Congressman.
This is a very important question about transparency and
the existence of a United States digital dollar that is visible
to the Federal Reserve and the Treasury.
It is important to recognize that cryptocurrencies were set
up to actually bypass the central bank and maybe even bypass
existing financial infrastructure. We think that the
architecture for a central bank digital currency, a United
States legal tender, should be based on something other than
cryptocurrencies. Cryptocurrencies is a bad model.
We have a much better model. It is called the United States
dollar, and the United States dollar is a transparent
instrument that protects our privacy, but also allows us to
enforce KYC, AML, and CFD regulations, which, by the way, are
placed upon the private sector intermediaries to manage. When
legal doctrine allows for that veil to be pierced and
information collected using whatever necessary court orders, we
are actually able to pursue bad actors through those AML, CFD,
KYC regulations.
So moving away from the cryptocurrency model, I think is
important, and taking a step towards the transfer into a U.S.
digital dollar is the right way to go.
So, thank you for that question.
Mr. Sherman. You want your digital currency to be
successful. You are going to be competing against others, and
one of the ways to compete is to go after the tax evasion
market. Making life better for tax evaders and making sure the
top 1 percent both evade law and evade jail is something that
will be well-paid for in our society, as it has been for many
years. And I hope that as you--as we work to develop a more
popular digital dollar, that we don't get pulled into, oh, we
could be more successful if we just allowed people to have
anonymous accounts. And this segment of the market wants
anonymous accounts. And shouldn't Americans have everything
they want? They want anonymous accounts.
So I am hoping that, as we move forward with this, that the
Know Your Customer rules, and the Anti-Money Laundering rules
are there.
And I don't really have enough time to ask and hear the
answer to a second question, so I yield back.
Chairman Lynch. I thank the gentleman.
The Chair now recognizes the distinguished gentleman from
Arkansas, Mr. French Hill, for 5 minutes.
Mr. Hill. Thank you, Mr. Chairman. Thanks for letting me
participate in the hearing today. It has just been outstanding.
What a great panel of witnesses who can comprehensively talk
about this.
I congratulate my friend from Ohio as the ranking member of
the task force. Both of you, keep up the good work.
The issue of a central bank digital currency is something
that I have worked on now for 2 years. And I want to thank my
friend from Illinois, Bill Foster; Congressman Bill Foster and
I have been focused on talking to the Treasury and the Fed
about this since 2019, during our Full Committee hearings when
we heard about Libra for the first time, Facebook's previous
cryptocurrency idea.
And we introduced legislation this spring that would ask
the Fed to formally do a study on just what laws and regulatory
changes would be necessary for the Treasury and the Fed to
collaborate on a central bank digital dollar. So, this hearing
is very timely, and I congratulate the work being done by the
Federal Reserve Bank of Boston and MIT.
Last year, we had a similar hearing on the task force with
former CFTC Chairman Chris Giancarlo testifying. And there, I
agreed with his testimony that the Fed should not have direct
accounts with individuals. I found that concerning. I
understand the rationale for it, but as we look for ways to
increase financial inclusion--obviously, we heard testimony
today about the lack of mobile phones and other issues, it is
an all-of-the-above strategy. We need our Community Development
Financial Institutions, our nonprofits, our credit unions, and
our banks all working to break down barriers to help the
underbanked and unbanked have access to the American financial
system so that they can save, invest, and better manage their
money, and grow in their capabilities for their families, work.
So, I don't think it is a one-size-fits-all solution. I
don't think a digital account at the Fed directly with
individual households is some panacea towards that. I
appreciated all the comments made on that so far today.
Dr. Narula, can you talk about--you didn't really do this
in your testimony--some of the negative effects, where we could
have individual household accounts actually at the government-
owned and operated central bank?
Ms. Narula. Thank you, Congressman Hill, and thank you for
the work that you have been doing over the last 2 years to move
this discussion forward.
I think that, unfortunately, we have suffered from this
binary choice that does not really need to be binary. It is not
a question of only accounts at the Federal Reserve versus no
accounts--no information at the Federal Reserve whatsoever. I
think there is a lot of fine grain choices around exactly how a
digital currency could be distributed and how to access it, and
we need to find the right balance.
A key question is, who will have access? And Fed accounts
are not the only way to do a direct currency. There could be
benefits of something like a minimal direct model to act as a
platform for innovation for the private sector, for example.
Mr. Hill. Right.
Ms. Narula. So, I think we still have a lot of work to do
to figure out exactly where that line should be drawn. It is
clear we want to bring the benefits of the private sector to
bear on this and we want to have that innovation available to a
central bank digital currency.
Mr. Hill. Thank you. I have concerns--and they have been
expressed very eloquently by other Members--about that direct
access really at the retail level. I can envision it, I
understand it, but I just don't think it is the right way to
approach it.
I appreciate Mr. Luetkemeyer talking about how the dollar
is a primary centerpiece of the international monetary system
and how a competitive digital dollar plays into that. Again, my
friend on the other side of the aisle, Jim Himes, and I have
introduced a bill on this, the 21st Century Dollar Act. I
encourage all of my friends to co-sponsor that, again, where
because of what China has been doing that we have talked about
today, that this is another reason, another rationale for
carefully assessing how to have a digital dollar. Because China
is well-known for what they are doing in WeChat and at the
retail level, but their surveillance system and their strategy
to extend the R&B to beat out the dollar over the next few
years is operating on real time, not just retail but across
their Belt and Road Initiative around the world.
I want to thank the panel. I appreciate you, Mr. Chairman,
and I yield back.
Mr. Lynch. I thank the gentleman. The gentleman yields
back.
We are going to try one last time for the gentleman from
Texas, Mr. Green. If he would like to ask questions, he is
recognized for 5 minutes.
He seems to be nonresponsive. I am not sure if that is a
glitch or if he is just not here.
First of all, I would like to thank the Members who have
participated this morning. Thank you for your thoughtful
questions. But I especially would like to thank our witnesses.
This has been a great group and very, very, very helpful [audio
malfunction] Express yourselves extremely well and have been
enormously helpful.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Mr. Davidson. I apologize, but it looks like our chairman
has dropped off, and if you are like me, we missed the closing
portion of his comments. It does highlight the importance of
being able to meet in person. It has been a rough year, year-
and-a-half for really Planet Earth, but especially, work like
this on our committee highlights both the amazing part of
technology and the limitations of it. So, it will be great to
be in person. As science has wafted over into the House
Chambers, we are now able to gather safely, and it is a feat in
its own right.
We had great testimony today. It is an honor to be joined
by colleagues who raised important concerns and highlighted
important considerations in this. And I thank our witnesses for
all of your expertise in this hearing, and also in your written
testimony. Thanks for that, and thanks for the work that you
are doing day in and day out to bring attention and the right
considerations to this.
As for one objection, I will say the tax policy of the
United States is outside the scope of this committee, but it
highlights that a shift to consumption taxes would be another
way to solve this, and it would be more private. So, there are
ways to solve all sorts of problems and address privacy
concerns.
Thanks a lot. And without objection, I will ask that we
adjourn.
[Whereupon, at 11:47 a.m., the hearing was adjourned.]
A P P E N D I X
June 15, 2021
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