By Pam Martens and Russ Martens: June 11, 2021 ~
Senator Elizabeth Warren of Massachusetts chairs the Senate Banking Committee’s Subcommittee on Economic Policy. On Wednesday the Subcommittee held a hearing on a topic that is becoming ever more timely with each new Bitcoin extortion attack on an essential U.S. business. The hearing was titled: “Building A Stronger Financial System: Opportunities of a Central Bank Digital Currency.”
To set the stage for the need for a regulated alternative to the crime network now trafficking in cryptocurrencies, Warren explained all the ways that cryptocurrencies are simply “lousy” for any socially-redeeming purpose. Warren stated:
“Cryptocurrencies have turned out to be a fourth-rate alternative to real currency. First, cryptocurrencies are a lousy way to buy and sell things. Unlike the dollar, their value fluctuates wildly depending on the whims of speculative day traders. You know, in just the last two months, the value of Dogecoin increased by more than ten-fold and then declined by nearly 60 percent. Now that may work for speculators and fly-by-night investors, but not for regular people who are looking for a stable source of value to get paid in and to use for day-to-day spending.
“Second, crypto is a lousy investment. Unlike, say, the stock market, the crypto world currently has no consumer protection — none. As a result, honest investors and people trying to put aside some savings are at the mercy of fraudsters. Pump and dump schemes are outlawed in the case of ordinary stock, but they have become routine in crypto trading. One study found that the level of price manipulation in cryptocurrency is — and I quote — ‘unprecedented in modern markets.’
“And third, crypto has become a haven for illegal activity. Online theft, drug trafficking, ransom attacks, and other illegal activity have all been made easier with crypto. Experts estimate that last year more than $412 million was paid to criminals in ransom through cryptocurrencies. And unlike other payment systems that make it tougher to move money illegally, a key feature of crypto is its secrecy. So just in the past few weeks, cryptocurrencies made it possible for hackers to collect a ransom to release the Colonial pipeline hack and to free JBS, the world’s largest meat producer, from paralyzing cyberattacks. And every hack that is successfully paid off with a cryptocurrency becomes an advertisement for more hackers to try more cyberattacks.
“Finally, there are the environmental costs of crypto. Many cryptocurrencies are created through ‘proof-of-work’ mining. It involves using computers to solve useless mathematical puzzles in exchange for newly minted cryptocurrency tokens. Such mining has devastating consequences for the climate. Some crypto mining is set up near coal plants, spewing out filth in return for a chance to harvest a few crypto coins. Total energy consumption is staggering, driving up demand for energy. If, for example, Bitcoin — just one of the cryptocurrencies — were a country, it would already be the 33rd largest energy user in the world — using more energy yearly than all of the Netherlands.
“And all those promised benefits – the currency that would be available at no cost to millions of unbanked families and that would provide a haven from the tricks and traps of big banks – well, those benefits haven’t materialized.”
Senator Sherrod Brown, Chair of the Senate Banking Committee, added a few choice words of his own, stating:
“As millions of working families in this country know, it’s expensive to be poor – check cashing fees, transfer fees, late fees, overdraft fees. We hear all kinds of promises about how crypto and digital currencies would be more inclusive alternatives to the current banking system.
“But the approaches offered by crypto companies aren’t solutions. They are just another volatile, risky asset for Wall Street speculation that puts people’s hard-earned money and, potentially, our entire financial system at risk.
“One way we can give Americans more control over their own money is through my plan for No-Fee Accounts, available to every American at a post office or a small bank or credit union, backed by the Federal Reserve.
“Americans should not have to pay exorbitant fees just to use the money they already earned. People could receive money, take out cash, and pay their bills online – all without any fees.
“And a Central Bank Digital Currency can work with these no-fee accounts to make sure working families have access to the payment system and full participation in our economy.
“It’s time for our banking system to work as well for everyone as it does for Wall Street.”
There was wide agreement at the hearing that the average American is getting ripped off by the banks and their dodgy transaction systems.
Darrell Duffie, Professor of Management and Professor of Finance at the Graduate School of Business at Stanford University, told the Senators: “Many Americans are wondering, ‘If China has such an advanced low-cost retail payment system, then why can’t we?’ ” Duffie elaborated as follows:
“It takes too long for U.S. merchants to receive their payments, often more than a day. Based on McKinsey data, moreover, Americans pay about 2.3 percent of GDP for payment services, far more than Europeans, particularly because of extremely high fees for credit cards…This is not because Americans are getting better quality service. Further, the primary payment instrument of Americans, their bank deposits, is compensated with extremely low interest rates. When wholesale market interest rates rise, consumer bank deposit interest rates remain much lower, typically near zero…
“Ultimately, consumers bear some of the burden of merchants’ payment fees through higher prices for goods and services. In order to make their payments, moreover, many consumers borrow money at high interest rates on their card accounts or store the cash that they will use to make payments in bank accounts that offer woefully low interest rates. It’s not easy for many Americans to shop aggressively for deposit and payment services…
“For this reason and for the other reasons that I have outlined, I believe that it is time for Congress to give the Fed the legal power to introduce a digital dollar and to encourage or direct the Fed to develop and field-test an effective digital-dollar technology to the point at which it could be deployed on reasonably short notice. There is no need to decide now to deploy the digital dollar. We will learn a lot more about the associated costs and benefits before digital-dollar technology is ready to use. Moreover, common knowledge that a digital dollar could be deployed might encourage banks to offer Americans a better payment system. Under current regulations and market structure, banks simply do not have sufficient incentives for this.”
It appeared that part of the push for a Central Bank Digital Currency in the U.S. is the fact that approximately 55 foreign central banks are already engaged in pursuing such a vehicle. Neha Narula, Director of the Digital Currency Initiative at the Massachusetts Institute of Technology told the Senate panel that the Bank for International Settlements (BIS) conducted a survey of 65 central banks and found that 86 percent (55.9) “are actively engaging in some sort of work on Central Bank Digital Currency (CBDC), for reasons including improving payment efficiency and robustness, facilitating financial inclusion, and maintaining financial stability.”
Naturally, those entities reaping windfalls from cryptocurrencies and obscene banking and credit card fees have their own agenda in this debate. Those interests appeared to be represented by Chris Giancarlo, Senior Counsel at Willkie Farr & Gallagher, a law firm whose primary practice areas include mergers and acquisitions, private equity, initial public offerings and debt financings.
Giancarlo said he was present at the Subcommittee hearing “on behalf of the Digital Dollar Project.” The Advisory Group for the Digital Dollar Project includes Michael Piwowar, whom we profiled in March for his failure to disclose his conflict of interest in prior testimony to the Senate Banking and House Financial Services Committees. The Advisory Group also includes numerous Silicon Valley investors and people involved in existing Wall Street trading infrastructure.
Also testifying at the hearing was Lev Menand, Academic Fellow and Lecturer at Columbia Law School. Menand told the Senators the following:
“In June of 2018, along with Morgan Ricks and John Crawford, I proposed that Congress authorize the Federal Reserve to offer a retail ‘central bank digital currency’ or CBDC through a program we called ‘FedAccounts.’ FedAccounts would be available to any U.S. resident or business in digital wallets operated by the Fed, the Post Office, or one of the country’s several thousand community banks. These wallets would charge no fees and have no minimum balances. They would come with debit cards, direct deposit, and bill pay. Their balances would be non-defaultable no matter how large — just like physical cash. They could be exchanged in real time, 24x7x365. They would have customer service, privacy safeguards, and fraud protection — if you lost your password, there would be someone you could call. And they would earn interest at the same rate that the Fed pays to banks.”
To summarize the hearing, it’s clear that the starting pistol has been fired and the race is on to create a Central Bank Digital Currency in the U.S. before cryptocurrencies do further damage to the integrity of the U.S. financial system and a foreign country gains first-mover advantage in creating a Central Bank Digital Currency.