July 18, 2018—a US congress subcommittee on Monetary Policy and Trade Hearing conducted a hearing entitled The Future of Money: Digital Currency. Present were four witnesses to present written and oral opening statements and to answer the subcommittee's questions. Over the duration, the subcommittee attempted to probe the witnesses to learn more about the threat, if any, that cryptocurrencies pose to the US government's ability to enforce its finance laws as well as to the US dollar's dominance as the world's reserve currency.
Subcommittee's opening statements
Mr. Barr, Chair: "The central question before us today is this: are digital currencies simply a new way to hold and transfer value that will have a limited impact and niche appeal, or will it (or a derivative of it) have a far reaching, transformative affect that will change our economy forever? Cryptocurrency has existed for a decade, since the appearance of Bitcoin in 2009. But has flown under the radar for most of its history...How ought the United States government to approach this new technology is of great importance."
Mr. Foster: "I'm concerned that if a significant central bank could issue a digital currency, that it would have the potential to supplant the United States dollar for many transactions and even as the reserve currency around the world. Despite reports that they're exploring it, countries like Venezuala or Russia are not really credible economies that could issue fiat currencies that would supplant the US dollar. But however, if the ECB were to issue digital Euros, then I think the entire world would very rapidly adopt that for many digital transactions...And if there is really a credible threat that a digital foreign currency would supplant the dollar, we have to be prepared to respond to that threat. I look forward to hearing from witnesses on economic feasibility of another currency supplanting the dollar and whether digitization could be a catalyst in such a transition. I also look forward to any thoughts the witnesses might have on some of the decision points that have to made when you decide to create a fiat currency: the currencies could be traceable or not; they could be traceable only with a court order; whether or not trades could be busted, in the same sense that a credit card purchase can be broken in you convince some entity that the transaction was fraudulent; and who makes that call, under what circumstances. These are the really important decisions that cannot be evaded when we design a digital currency...The issue of anonymity is crucial and really at the heart of this, as well as what sort of authentication a person will have to present to transact anything."
Mr. Sherman: "Blockchain is a good technology, but it can be used to track and transfer sovereign currency. There is nothing that can be done with cryptocurrency that cannot be done with sovereign currency that is meritorious and helpful to society. The role of the US dollar in international financial system is a critical component of US power. It brought Iran to the negotiating table...we would have had nothing were it not for the role of the dollar. We should prohibit US persons from buying or mining cryptocurrencies. Mining alone uses electricity, which takes away from other needs, and/or adds to the carbon footprint. As a medium of exchange, cryptocurrency accomplishes nothing except facilitating narcotics trafficking, terrorism, and tax evasion. Some of its supporters delight in that: if you can disempower the US government from being able to prevent terrorism, narcotics trafficking, and tax evasion, you have somehow struck a blow for liberty. That is reason enough to ban it. But its role as an investment is at least as bad, we have certain animal spirits in our culture—a willingness to take a risk to place a bet—this can be harnessed by gambling casinos which at least pay very high local taxes and created a city of Las Vegas out of a desert. We can better yet harness those animal spirits to get people to invest in risky stocks, startup enterprises, and provide the technologies and jobs of the future. Or we can see those animal spirits spent doing nothing but helping create a market for tax-evaders, narco-terrorists, and others who find that the US dollar is not to their liking...crypto offering memoranda and crypto registrations would be considered outright fraud and reason for incarceration if they were issued by somebody selling stocks, bonds, or any other investment. Finally there is signurage: the money that we make as a country because we're the world reserve currency, because we can issue a greenback that does not yield interest, there are people alive today because the profits the US government makes on that; whether it be to fund defense or medical research. All of that gets diminished with cryptocurrency.
Witnesses' opening statements
After the subcommittee read its opening statements, the four witnesses proceeded to read their written statements. Below is a summary of the main points of interest.
- Cash has declined in use, worldwide, to below 2% of transactions.
- There will come a tipping point where businesses and banks will not want to deal with it anymore.
- "The adoption rate of Bitcoin will depend not only on its performance as money but also on the alternative forms of digital money that the central bank provides."
- If the government doesn't provide adequate alternatives for cash, more people may be pushed towards using Bitcoin.
- "The peer-to-peer qualities of cryptocurrencies could allow central banks to provide a digital money with anonymity properties similar to those of cash. Whether or not the central bank would want to do this is a complicated issue that requires balancing legitimate demands for individual privacy against concerns related to tax evasion and other criminal activities."
- The US government should issue its own digital currency with more of the properties of cash.
- "Cryptocurrencies have rapidly expanded since 2008...this innovation should be fostered not smothered."
- Cash is still a popular, often preferred, method of payment.
- "The federal government should not step in to tilt the playing field. It should treat Cryptocurrency and all other forms of money neutrally...removing capital gains taxes for purchases with alternative currencies, including cryptocurrencies and foreign currencies, would be a major step towards leveling that playing field...To further level the playing field, congress should even consider allowing the US postal service and other government agencies to accept these alternatives."
- Competitive currencies help strengthen the US money system by fostering innovation and exposing weaknesses.
- "Centralizing cryptocurrencies within any government agency makes little sense. The technology promises potential benefits because of its decentralized nature. Centralizing the technology at a central bank offers no particular advantage over a more traditional electronic database."
- "Congress and the administration should do all they possibly can to ensure that our central bank never offers retail bank accounts to the public, whether via a central-bank backed cryptocurrency or via a more traditional form of digital money. Implementing such a policy would give the federal government a complete monopoly of money...Giving the federal government the power to directly take money from its citizens with a few computer key strokes in the name of some vague goal of stabilizing the economy simply amounts to the death of economic freedom. It is a terrible idea, and it is congresses duty to protect Americans from those sorts of tyrannical acts."
- US government could benefit from introducing its own Fedcoin.
- ...other such "blockchain, not Bitcoin," b.s.
- "What preserves the US dollar's role as the ultimate safe haven is not just its role as a medium of exchange, but its ability to serve as a safe haven. And that requires US institutions, which I think are still pretty strong and are going to retain foreign investors' trust. I think that as a store of value the US dollar's role remains secure, for now."
- "I think to have a central bank digital currency is one of the worst financial ideas of recent times...If we look at the money of the future, digitalization will continue, but I don't think the fundamental nature of money will change. It will surely be the monopoly issuance by the central bank. It might be a private currency backed by reliable assets. I don't think it will be a private fiat currency like Bitcoin...[However,] an increase in the monopoly power of central banks, which already have too much, should be avoided."
The subcommittee then proceeded to ask the witnesses more specific questions regarding cryptocurrency.
Mr. Barr: "With greater use of electronic payments and the advent of digital currencies, do you think demand for US federal reserve notes will decrease? And what implications does that have for the US dollar?"
Mr. Michel: "...You have to look beyond just the fact that we have a federal reserve that prints federal reserve notes. We have an economy with strong property rights, especially relative to many other countries in the world. We have an incredibly well developed industrialized infrastructure here. As long as you combine those things and have a dynamic economy, the assets of that economy, including the money that dominantly used in the economy, are going to be sought after. That's what you should focus on if you want people to want our money. And there's also a downside to being the world's reserve currency, and that's that we can continue the fiction that we can print and lend as much as we want. And that's frankly not a good idea. And so that's just not the way that I would think of those things."
Mr. Pollock: "...The US has a competitive advantage...in wealth storage services...which arises out of social infrastructure...and a powerful government...I think that will continue."
Dr. Prasad: "It is difficult to see as asset that has no intrinsic value and no backing by the government maintaining value as a store of value. The initial promise of something like Bitcoin is it might become a medium of exchange. And that promise has not quite panned out. Because it turns out it is very inefficient and very costly to transact using Bitcoin...Many cryptocurrencies gaining more traction as mediums of exchange are ones that are backed by fiat currencies...Tether is beginning to gain traction as a medium of exchange."
Mr. Barr: "...Are cryptocurrencies money?"
Dr. Garratt: "...For regulatory purposes, we may not want it defined it that way. The IRS, CTFC have defined it as a commodity...Conceptually, it is money to some extent, but it's not currently a very good one...because of volatility: if I think the price is going down I don't want to receive it, and if I think it's going up I don't want to spend it."
Mr. Barr: Is adoption rate all that's required to decrease volatility and for it to become money?
Dr. Garratt, Mr. Michel: Pretty much.
Mr. Foster proceeded with some questions regarding his general confusion about payment finality.
Mr. Foster: Who will authorize roll-back of fraudulent transactions? How are Sweden and China handling this with their proposed digital payments and AliPay and WeChat?
Dr. Garratt: These are all centralized accounts, that allow for transaction roll-backs.
Surprisingly, none of the witnesses pointed out the fact that because Bitcoin is decentralized, no roll-backs are possible.
Mr. Williams: "What are the impediments to development of alternative currencies, new applications for blockchain technologies, and what can congress do about them?"
Mr. Michel: "The main one is capital gains tax. The fact that you have to keep track of basis in every single transaction you would make; that's a major impediment to using anything other than the US dollar for your transactions...ensuring that nothing is treated differently. Yes it is true that criminals have used Bitcoin. But criminals have also used airplanes, computers, and automobiles. We shouldn't criminalize any of those instruments simply because criminals use them."
Mr. Williams: What would cause citizens to use Bitcoin instead of traditional digital bank transaction or a Fedcoin?
Dr. Garratt "As cash actually disappears, that starts to create problems in a society. Sweden is currently dealing with this...The central bank has to decide if it wants to withdraw completely from providing a payment device for the general public or whether it wants to offer some sort of digital alternative...One of those digital alternatives could be...cryptocurrency offered by the central bank. The primary reason for doing that, I think, is that if you wanted to allow some kind of privacy component within transactions of this currency. Like is currently possible with cash. Subject to limits, and balanced against the risks of tax evasion and criminal activity."
Mr. Williams: Considering the difficulties in classifying all the cryptocurrencies out there, "what is the appropriate framework for us to use if congress approaches legislation addressing the digital currency?"
Dr. Garratt: "People have the ability to issue these private currencies, and they're going to exist. Just as Mr. Michel said, one can't make something illegal just because it might be used for illegal purposes...The central bank does a good job at providing payment services...I think they should continue to provide the best possible product along those lines...at a future date, that best possible product might involve some of these new technologies, but issued by the central banks to remain competitive with those payment devices. As opposed to some of these private currencies which we're less able to monitor."
Mr. Sherman then proceeded on a tirade to "abolish social security and medicare," to ban crypto trading and mining in the US, and how the only use case for crypto is by "those who would do us harm," sanction dodging nations, terrorists, tax-evaders, criminals, narcotics dealers, tax-evaders, narco-terrorists, ner-do-wells, criminals, criminals, more criminals, illegal gamblers, "people placing bets on the value of a criminal tool," etc. etc.
Refusing to allow any of the witnesses to respond, Mr. Sherman put forth the following ill-conceived metaphor:
Mr. Sherman: "We should allow people to own guns in many circumstances. But if the sole advantage of a particular gun is that is has a special tape on it to prevent fingerprints from adhering...the sole benefit...is to facilitate criminals..."
Mr. Davidson still displayed remarkable confusion over whether or not cryptocurrency is currency. To which, Mr. Garratt attempted to clarify.
Mr. Garratt: "Why does Bitcoin have any value at all? As Mr. Pollock just said, for a currency to have value, and to function as a currency, it simply has to be the case that you accept it from someone on the belief that someone down the road will accept it from you. [Bitcoin's] currency supply rule...is known and fixed. And so you don't have to worry that the issuer of the currency will behave irresponsibly and devalue it. So that's a fundamental aspect that gives Bitcoin value...but it also is problematic because it means you have a fixed rule and you are not able to provide currency in a way that might be beneficial in general for the economy."
Unfortunately, at this point the hearing was cut short by some prolonged house vote; however, there is sure to be many more such meetings, as US law-makers attempt to grasp the strange, new concepts introduced by this ever-evolving technology.
- The US government is worried cryptocurrencies may threaten to undermine their strangle hold over the world.
- At least some in congress appear to be asking the right questions—but likely to the wrong people.
- Much confusion, many misinformation, such b.s.
- To be fair, Garratt and Michel, in particular, did put forth some solid facts—however misguided their agendas.
- Mr. Garratt and Mr. Prasad: "Blockchain, not Bitcoin!"
- Mr. Michel is extremely naive if he thinks the US will allow fair competition to their world reserve currency.
- Brad Sherman is a paid bank shill, FUD-monger; and Mr. Pollock is his whipping boy.
As anyone versed in the ways of cryptocurrency knows, congress (along with some of their "expert witnesses") collectively have a long road ahead of them just to understand the technology, let alone to set about combating its supposed threat to the USD's global financial monopoly.
Hopefully, they do seek to truly understand crypto and its economics before taking any rash actions against Bitcoin that may slow its adoption in the US or that they may come to regret in the future.
Featured image: elevenews.com