Washington, D.C. - Today, U.S. Senator Elizabeth Warren(D-Mass.), chair of the Senate Banking, Housing, and Urban Affairs Committee'sSubcommittee on Economic Policy, held a hearing with experts on theopportunities and risks that digital currencies present.
Senator Warren: As our witnesses have described, digitalcurrencies offer a lot of potential advantages over cash in your wallet or eventhe electronic balance on your debit card. You don't have to worry aboutcarrying cash around and losing it or having it stolen, if you want to sendmoney to someone else, digital currency can be easier and faster.
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Your local grocery store is only gonna accept digital currency if it knowsthe digital version of the $100 that you used to pay for your groceries isactually worth $100. Your babysitter is only gonna keep showing up if she knowsthat the digital $20 you sent her is really worth $20.
Dr. Narula: Thanks for the question Senator Warren. No itis not, unfortunately. We just witnessed the value of the entire cryptocurrencyecosystem dropping by about 40% over the course of the last two months.
Senator Warren: About a trillion dollars that this thingdropped. Think about what it means for an individual seller. It means thegrocery store could take $100 in bitcoin to pay for groceries, but by the endof the day, the bitcoin could be worth only $60 in which case the store losesout. So these wild swings in value mean that bitcoin is a terriblecurrency.
In fact, that's why, except for criminals, most people are holding bitcoinas a speculative investment - a way to make money - rather than as a substitutefor money as a way to buy this week's groceries or to pay their babysitter.
Now the crypto industry knows about this problem. So they came up withso-called "stablecoins,". And I think we've heard a couple ofreferences to that already today. This is a kind of cryptocurrency that claimsto be pegged to the value of a fixed asset, like the dollar.
Professor Menand: No. No, Senator. Certainly not. They'remuch riskier. They are dangerous to both their users and, as they grow, to thebroader financial system. So, where as bitcoin is something we really haven'tseen before, "stablecoins" are - they're the devil we know, justwearing new clothes. They're teched up versions of money market mutual funds incertain respects. They're a type of deposit substitutes and deposit substitutesare very unstable because the people who issue them don't have bank charters,they don't have deposit insurance, they don't have access to the Fed's discountwindow and if people lose confidence in "stablecoins," there's a goodchance they'll dump them on masse in sort of a classic run dynamic and thepeople who are slow to get out could be left with significant losses.
Senator Warren: Okay - As you rightly point out, this isnot the first time that we've had private-sector alternatives to the dollar. Infact I'm going to go back further than you did. In the 19th century,"wildcat notes" were issued by banks without any underlying assets.And eventually, the banks that issued these notes failed and public confidencein the banking system was undermined. The federal government stepped in, taxedthese notes out of existence and developed a national currency instead. Andthat's why we've had the stability of a national currency.
So, in theory, a digital currency issued and backed by a central bank couldprovide the advantages of cryptocurrency without those risks. The FederalReserve, a trusted institution, could provide a digital version of cash to thepublic that is secure, stable, and accepted everywhere.
Professor Menand: So a well designed CBDC couldserve as a public alternative to these cryptocurrencies and potentially crowdout their usage. In contrast to private digital currencies, CBDC's would besovereign non-defaultable money, they'd be cheaper to use, and they would notbe subject to bankrupt dynamics.
Senator Warren: Right, so - so that's very helpful. So, thankyou. You know, there are reasons why cryptocurrencies are popping up likeweeds: our current banking system offers bad service or no service to millionsof people and businesses, and swindlers have figured out how to skim profitsoff investors by buying and selling in a marketplace that has no cop on thebeat.
The risks of replaying the experience of the 19th century are real: theseprivate actors issue their own dollar substitutes that they convince everyoneare just as safe as the dollar itself. Until, of course, a crisis hits, theirdollar substitutes fail, they threaten the financial system and drag down thewhole economy.
So, I think what this hearing is about is exploring how central bank digitalcurrency could serve the American people. But it's clear, we need to improveour banking and payment systems, but the testimony and the facts discussed heremake it clear also that we need to address the threats that cryptocurrenciespose. So let me stop -
Senator Warren: You know, we've been talking about thisafternoon how our banking system has cut out too many Americans for too long.Nearly 33 million households - disproportionately Black and Hispanic - who areunderbanked or unbanked all together. And they pay steep fees to cashpaychecks, pay bills and borrow a little money until payday.
But, as we were talking about it earlier, even when people have access tobank accounts, some of those banks use a whole array of abusive practices thatharm struggling families - like overdraft fees, and fake accounts openedwithout customers' permission, egregious data breaches, just to name a few ofthese.
So I understand why Americans can be dissatisfied with the banking industry,and the crypto industry has stepped in with the promise of a better and moreinclusive financial system for all Americans. The idea is that digital assetsand blockchain technology are gonna drastically reduce the cost of financialservices and improve their quality - by eliminating fees, boosting access tocapital, and providing greater financial privacy and protection.
So, Professor Menand, I know you agree that our banking system is failing tolive up to its responsibilities to the American people. But I wanna make surewe get this clearly stated, do cryptocurrencies offer a safer alternative tothe traditional banking system for consumers?
Professor Manand: No, Senator, absolutely not, the cryptomarket is rife with consumer abuses. You know in the traditional financialspace we have regulations and consumer protections in place. Both don't applyin the crypto markets so there are companies that offer crypto custody servicesthat have lost customers' money. There's a lot of players that manipulateprices which lead ordinary users stuck paying high fees. It's not a safe placeto keep your money or to invest.
Senator Warren: And I understand the FTC has now said thatcryptocurrency scams have skyrocketed. And they say that in five months betweenOctober 2020 and March 2021, just in that five month period, nearly 7,000people lost more than $80 million - and that is nearly a 1,000 percent increasefrom the same period a year earlier - and this just happens in brazen cryptocons.
Professor Menand: Yes, I think so. So, we urgently needmore regulation, more funding for regulation, so Congress should increaseappropriations for the SEC and for Chairman Giancarlo's former agency the CFTCso that you know, they can keep up with all the new coin schemes that are beinglaunched. You know, Chairman Giancarlo spoke about the race between youknow, cops and robbers as it were. We need to fully fund the cops or they'regonna lose the race. Congress should also give these agencies additionalauthority over crypto exchanges, and banking agencies should not allowgovernment backed banks to warehouse these instruments for their customers.
Senator Warren: Ok, that's very helpful. Thank you. Youknow, It's clear that Congress and financial regulators need to take action toprotect consumers, to protect markets, and to protect our financial system.
Dr. Narula: Thanks for the question, Senator. I think thatreally depends on how it's designed. So if it's designed in such a way that yourequire for example a commercial bank account in order to transact in thecentral bank digital currency, it's not really going to provide much help beyondthe system that we have today. So I think it's really important to think aboutaccessibility, making sure that it's open, and that we remove friction in theway of people getting access to central digital currency.
Senator Warren: Thank you. Big banks are too focused onboosting the multimillion dollar pay of their CEOs instead of serving theircustomers. But cryptocurrencies aren't the solution that their promoters claimthat they are. With no cop on the beat, this unregulated market draws in ripoffartists promising massive returns.
Americans need trustworthy and affordable ways to store and use their money- not a way to get scammed more efficiently. A well-designed and carefullyimplemented central bank digital currency could bring more households into thebanking system and ensure that everyone has access to the financial servicesthey need if the design is right. So thank you all.
Senator Warren: We've talked a lot today about the dangersthat cryptocurrencies pose to our economy. We've talked about the ripoffs, theinstability, the extent to which they are used to help criminals withcyberattacks like the attack on the Colonial Pipeline and JBS. But there'sanother piece too: the adverse environmental impacts of the computing activityused to mint many of these digital currencies in the first place.
Bitcoin consumes more energy than entire countries and it is projected toconsume as much energy as all the data centers in the whole world this year.One bitcoin transaction - a single purchase, sale, or transfer - uses the sameamount of electricity as the typical U.S. household uses in more than amonth. 152ee80cbc
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