Chairman Hill, Ranking Member Lynch, the USDF Consortium appreciates the opportunity to submit this statement for the record for the hearing entitled “Understanding Stablecoins’ Role in Payments and the Need for Legislation.”
The topic of today’s hearing is a timely one; distributed ledger technology holds tremendous promise to improve financial services, offering more efficient products and services that can help promote financial inclusion, drive economic growth, and support the role of the U.S. Dollar as the global reserve currency. We can only realize these benefits when innovation is delivered responsibly and regulatory guidelines are clear, certain, and consistently applied. We believe it is critical that banks and other regulated entities are empowered to deliver safe and responsible blockchain innovation to the market.
To date, most blockchain innovation has occurred outside of the regulated banking sector in novel cryptocurrency markets. These markets have provided testing grounds that have proven the efficiencies that blockchain technology can deliver. However, the volatile nature of these assets and the inconsistent regulation in these markets have limited the real-world impact of this technology and created unacceptable risk and loss.
Today, we see blockchain technology being used by banks of all sizes to improve the delivery of traditional banking services to the real economy. We believe that the best way to leverage the strengths of blockchain as a technology is to use it to support the delivery of safe, responsible, and regulated financial services. In many cases, use of blockchain technology will be transparent to customers, similar to the use of cloud technology today and other infrastructure.
To leverage blockchain for real-world transactions, you first need a trusted and reliable way to make payments natively on blockchain. This need is what led to the rise of stablecoins and has driven the policy discussion around the creation of a “digital dollar” or central bank digital currency (CBDC).
As we debate how best to leverage blockchain to create a “digital dollar,” it is important to remember the critical role that digital dollars play in our economy today. While we tend to think of paper money, the reality is that most money in the U.S. is already digital and exists in the form of bank deposits. Today, bank deposits represent 73% of money in our economy.
Bank deposits are a cornerstone of our monetary and financial systems that support the dominance of the U.S. dollar around the world. They play a critical role in supporting credit availability that drives economic growth and social mobility. As we look to implement blockchain technology to improve payments, we should be careful to maintain the numerous protections and benefits that our banking system provides today.
The USDF Consortium and our member banks are working to build blockchain-based payment infrastructure that ensures banks can continue to play this critical role in a digital economy. USDF allows us to deliver the benefits of blockchain technology from within the established regulatory structure for digital money. USDF operates on a private, permissioned blockchain (the USDF Private Chain). In its initial implementation, bank customers will not engage directly with the blockchain, just as they do not interact directly with wholesale payments rails today.
When innovations are not delivered in a responsible manner, they create risks to consumers and the broader economy. The bank regulatory framework is designed to manage the risks associated with offering digital representations of money. Banks are subject to prudential regulation and supervision and robust consumer protections, which ensure deposits are safe and that consumers receive the appropriate protections.
Unfortunately, there is not currently a clear path for banks to act as the responsible providers of blockchain innovation. As highly regulated institutions, any new offering by banks is subject to scrutiny, but blockchain initiatives are held to a higher standard. Today, any bank wishing to undertake a blockchain project must receive formal regulatory approval, a process that does not exist when utilizing other technologies. Moreover, as the federal banking agencies have moved to address risks emerging from the non-bank crypto ecosystem, they have painted with a broad brush, making it difficult for banks to leverage this promising new technology.
Banks play a critical role in our economy. As more economic activity is supported by blockchain, it is critical that we create a clear and credible path for banks to play this same role on-chain. Failure to do so would push financial services activities outside of regulated markets and risk undermining the United States’ leadership in financial services. Banks are eager to bring responsible innovation to market and look forward to working with Congress and regulators to safely deliver on the promise of blockchain.