House Financial Services Subcommittee Hearing on Alternative Payment Systems and the National Security Impacts of Their Growth
House Financial Services Subcommittee on National Security,
International Development and Monetary Policy
Under the Radar: Alternative Payment Systems and the National Security Impacts of Their Growth Tuesday, September 20, 2022
- The need to regulate stablecoins and examining how the U.S could compete with a Chinese Central Bank Digital Currency (CBDC) was a focal point for Democrats.
- Republicans pressed panelist on how the U.S. can better address evasions of sanctions and the flow of illicit funds.
- Scott Dueweke, Global Fellow, Science and Technology Innovation, the Wilson Center
- Emily Jin, Research Assistant for the Energy, Economics and Security Program, the Center for a New American Security
- Carla Norrlöf, Nonresident Senior Fellow, Economic Statecraft Initiative, GeoEconomics Center, the Atlantic Council
- Ari Redbord, Head of Legal and Government Affairs, TRM Labs
- Jonathan Levin, Co-founder and Chief Strategy Officer, Chainalysis
Chairman Jim A. Himes (D-Conn.)
In his opening statement, Himes said payment systems are the lifeblood of the financial sector, making sure that banks, businesses, and individuals around the globe can send and receive money without delay. He discussed the U.S dollar as it relates to global trading and Russia sanctions as it relates to the War in Ukraine. Himes also discussed new methods to facilitate cross-boarded money transfers and control global finance. He concluded by saying in order for the U.S to retain its status as a leader in the international payments arena, the nation must be ready to overcome the obstacles that await in the near term and in the future.
Ranking Member Andy Barr (R-Ky.)
In his opening statement, Barr discussed how the rise in alternative payments in China has increased Congress’s focus on this issue. He concluded by offering suggestions on how Congress can meet the rise in new payment technologies promoted by U.S. rivals. He said the the U.S. must foster innovation and continue upgrading the U.S. payment capabilities, stop politicizing federal institutions that have made the U.S. financial system the envy of the world, and implement measures to keep the U.S. dollar strong.
Representative Maxine Waters (D-Calif.)
In her opening statement, Waters discussed how alternative payment systems can undermine the strength of the dollar.
Scott Dueweke, Global Fellow, Science and Technology Innovation, the Wilson Center
In his testimony, Dueweke provided a report on exploring the threat and opportunity of the alternative payments ecosystem to the West. He said the alternative payments ecosystem provides an easy path for criminals and other adversaries of liberal democracies to bypass the checks and balances we have installed into the western financial system.
Emily Jin, Research Assistant for the Energy, Economics and Security Program, the Center for a New American Security
In her testimony, Jin addressed China’s progress in building out alternative payment systems, the strategic implications of growth in China’s alternative payment systems, and recommendations for U.S. policymakers. She concluded in her testimony that China’s alternative payment systems are not threats to the mainstream financial system, but the alternative payment systems are growing in technical sophistication and domestic adoption, which could eventually erode the effectiveness of U.S. and allied sanctions.
Dr. Carla Norrlöf, Nonresident Senior Fellow, Economic Statecraft Initiative, GeoEconomics Center, the Atlantic Council
In her testimony, Norrlöf highlighted that alternative payments systems are growing, with potential national security risks for the United States. She said even though alternative payments systems do not threaten the dollar’s absolute dominance for the foreseeable future, they challenge the extent of the dollar’s dominance. She concluded by suggesting, whenever possible to mitigate the growth in alternative payments, the United States should avoid sanctions considered to be unfair or overly harsh.
Ari Redbord, Head of Legal and Government Affairs, TRM Labs
In her testimony, Redbord discussed several important issues that lie at the core of the global financial system. Those issues include (1) the U.S. dollar’s role as the world reserve currency amidst the creation of new forms of value transfer such as blockchain technology; (2) the ability of U.S. and allied governments, now and in the future, to use economic sanctions as an effective coercive measure; and (3) the ability of
global regulators, law enforcement, and national security officials to track financial crime and other illicit activity.
Jonathan Levin, Co-founder and Chief Strategy Officer, Chainalysis
In his testimony, Levin said alternative payment systems are a geopolitical threat to the United States when state-controlled digital currencies grow large enough to compete with the U.S. dollar. He said the transparent, accessible, frictionless and borderless characteristics of cryptocurrency and web3 technology are the antidote to the goals of countries like China and their adoption of digital currencies, but it only happens if the U.S. embraces the technology. He also said the recent Biden Administration Executive Order on Ensuring Responsible Development of Digital Assets is an important start to U.S.
leadership in this space. He concluded by discussing the global trends in cryptocurrency, providing background on Chainalysis, outlining how blockchain analysis can be leveraged in investigations, and providing an overview of some of the national security threats we see related to cryptocurrency. He also provided recommendations for improving the government’s national security position in relation to cryptocurrency.
Question & Answer
Waters asked Redbord to address the need for the U.S. to develop a regulatory framework to regulate stablecoins. Redbord said it is important that any legislation regulating stablecoins is comprehensive, and the time is now to get something passed. He added that getting legislation passed allows the U.S. to assert its leadership in this space. Rep. Pete Sessions (R-Texas) asked how secure stablecoin systems and other alternative payment systems are. Dueweke said the underlining technology of cryptocurrency is the blockchain, adding that stablcoins are a part of the cryptocurrency ecosysytem. He said better Know Your Customer (KYC) requirements are important for safer cryptocurrency transactions. Rep. Anthony Gonzalez (R-Ohio) asked how the U.S. could place sanctions as it relates to the use of stablcoins on foreign adversaries. Redbord said the U.S. could place punitive sanction measures, just like those taken by Office of Foreign Assets Control (OFAC) in the private blockchain world. Barr asked what the better approach is to protect and maintain the dollar’s dominance. Redbord said there is continued work in the CBDC space, adding that stablcoins are proliferating today globally and are backed by the U.S. dollar which gives the U.S. an opportunity to export U.S. principles abroad.
Himes asked how Congress should think about countering China’s alternative payment system in a way that does not bring an economic catastrophe to the U.S. Levin said the U.S. must think about asymmetric defense, adding that the symmetric defense the U.S. has against Russia is the exclusion of them from the financial systems, but when it comes to China, there must be a more long-term game. He also said the U.S. must foster a place where there are strong property rights and individuals’ privacy is guaranteed. Dueweke agreed with Levin and stated that China only wants to collect information on people, but they do not care about privacy.
Central Bank Digital Currency (CBDC)
Rep. Michael San Nicolas (D-Guam) asked who should take the lead on creating a CBDC for digital currency, the Federal Reserve or the Treasury. Norrlöf said the leadership should come from the Federal Reserve, adding that if China goes forward with creating a CBDC, their product will be attractive for international investors. Rep. Jake Auchincloss (D-Mass.) asked about how the U.S. could compete with a Chinese CBDC. Emily Jin said the Chinese idea of a CBDC is to collect as much data on individuals as possible, adding that a U.S. CBDC will be more productive if the regulations are clear, and the government is not limiting innovation. Norrlöf said at this point, the U.S. is not competing with China in this space and does not need a CBDC. She said it is critical for China to have a CBDC in order to get anywhere close to where the U.S. is currently.
Waters asked what role blockchains can play in alternative payments systems that may not be in the best interest of the U.S. Redbord said blockchains allow for unprecedented visibility on financial flows and allows the U.S. to track and identify instances that affect market integrity. Gonzalez asked if it is possible to conduct law enforcement oversight sanctions once funds become tornado cash. Levin said it is possible to follow funds through mixing services.
Rep. French Hill (R-Ark.) asked how the suspension of Visa and MasterCard services in Russia has affected the domestic issuance of Russian payment Mir cards. Dueweke said Mir cards have taken the place and presence that Visa and Mastercard had in the country. Hill followed up by asking if China has complied with secondary sanctions to prevent union pay from being a global interchange for Mir cards. Dueweke said it does not appear so.
Illicit Money Transactions/Ransomware Attacks
Rep. Roger Williams (R-Texas) asked how the U.S. can implement better technology to track illicit money flows. Levin said cryptocurrency works the same across borders, adding that when it comes to criminal activity and moving money, criminal networks tend to rely heavily on cash dependent networks. Williams asked about what methods Iran is using to commit ransomware attacks. Levin said the Islamic Revolutionary Guard Corps (IRGC) is caring out cyber-attacks through known vulnerabilities in computer systems.
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