Welcome welcome,
This past week, the House Financial Services Committee held a hearing around Rep. Lynch’s e-cash bill. I talked about this proposal a few weeks back but decided that this hearing highlighted some points I wanted to bring attention to. The following is a list of witnesses at the hearing:
Raúl Carrillo, Associate Research Scholar, Yale Law School; Deputy Director, Law and Political Economy Project
Mishi Choudhary, Legal Director, Software Freedom Law Center
Renita Marcellin, Senior Policy Analyst, Americans for Financial Reform
Kia McAllister-Young, Director, America Saves, Consumer Federation of America
Scott Talbott, Senior Vice President of Government Affairs, Electronic Transactions Association
I hope you enjoy and see you next Sunday.
-Katja
House hearing on e-cash
Rep. Lynch (D-MA) began the hearing by setting the stage for e-cash. He discussed how digital assets offer many benefits, one of which is providing an alternative to the financial system for the unbanked. However, they also pose risks and raise concerns around consumer protections. Despite his wary attitude towards traditional crypto (and stablecoins), he also warned against swinging to the other side of the spectrum to CBDCs, which he regarded as surveillance tools.
As Rep. Lynch (D-MA) sees it, he wants to create a system of hardware wallets (think of your wallet, just make it digital) that serves as an alternative to cash. These wallets would be distributed to the public and would provide several key functions that crypto and paper money allows for: peer-to-peer transactions, no bank account required, and no transaction tracking.
Because e-cash replicates the functions of paper money, it inherits paper money’s advantages and disadvantages like losing the device means losing money stored on it. In addition to this, the device does not use the internet (to avoid the blockchain), meaning similar devices need to be in close physical proximity to be used.
A large portion of the hearing focused on dissecting the issue surrounding digital wallets. One of the witnesses, Talbott, discussed what a mobile wallet is …
“Digital wallets can be defined broadly to include mobile and other online applications that allow users to process payments, access account information, and pay for services.”
Under this definition, there are many digital wallets like PayPal, Venmo, and Apple Wallet that people use daily. In the crypto world, there also exist wallets, which can be grouped into “hot” or “cold.” A hot wallet is one that is actively connected to the internet and could be more prone to malicious attacks (like MetaMask), while cold wallets take your assets and store them off-line which makes it safer but less convenient to transact (like Ledger). Lynch’s e-cash would utilize a similar concept to cold crypto wallets.
Talbott went further and broke down the three central tenets of a digital wallet:
Convenience - Digital wallets allow transactions to happen any time and anywhere (whether sending money P2P, paying at a store, shopping online). In addition to this, contactless wallets have allowed a new type of convenience, as proved especially true during the pandemic.
Access - Technology allows cash-based consumers to access the internet or use payment systems. Individuals can load cash or paper checks to a digital wallet with (some wallets) not requiring a bank account.
Trust - Some people (the unbanked included) do not trust the federal government or institutions, and digital wallets offer an alternative to traditional systems. Trust also comes from reliable and secure processes, especially when dealing with money. The digital wallet space ensures safety of payments by implementing authentication (two factor, face recognition, etc), point-to-point encryption (P2PE), and tokenization of data (referring to the bundling of transaction information into a token, which only the issuing bank can convert back into the relevant payment information).
Rep. Lynch (D-MA) is proposing developing a new wallet, outside of the crypto sphere. Although an interesting concept, it seems like it will have a rocky path ahead. As Rep. Bill Foster (D-IL) told The Block …
“I have to understand the technology that actually makes that work. Offline transactions are very tough … Trying to deal with the double-spend problem requires trusted hardware rather than trusted collaboration on the internet so it’s a very different set of security challenges. Things like that, I would guess, would work well for transactions of limited value.”
What the witnesses seemed to agree on was that different payment systems serve different needs. For example, P2P systems are typically used by friends and family. They’re similar to cash in that they’re free, immediate, and irreversible. As Rep. Davidson (R-OH) pushed, the digital systems in place (like crypto) are used because they fill a specific need for people (especially the unbanked), so the government should not try to eliminate them.
Any financial system poses its own risks. What’s needed most now is to understand the needs of the people, promote education on these new digital tools, and increase access among the populations that need it most.