Deep Dive Episode 265 – A Discussion on Central Bank Digital Currencies and the Future of Financial Privacy

Experts explore central bank digital currencies (CBDCs) and the ongoing debates over financial privacy, especially in relation to use of cryptocurrencies and other software privacy tools.

The webinar begins with a discussion between Rep. Tom Emmer, the Majority Whip of the U.S. House of Representatives, and Prof. J.W. Verret of the Antonin Scalia Law School regarding legislation introduced by Rep. Emmer and a coalition of members to prevent the Federal Reserve from introducing a CBDC. They also discuss the Treasury Department’s sanctioning of the Tornado Cash privacy protocol and the legal authority of that action. This discussion is followed by an expert panel that further explores these issues, as well as legislation proposed by Sen. Elizabeth Warren to ban crypto and other software privacy tools.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

[Music and Narration]


Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.


On May 8, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled, “A Discussion on Central Bank Digital Currencies and the Future of Financial Privacy. The following is the audio from the event.


Steven D. Schaefer:  Hello, and welcome to today’s Regulatory Transparency Project’s webinar: “A Discussion on Central Bank Digital Currencies and the Future of Financial Privacy.” My name is Steven Schaefer, and I am the Director of The Federalist Society’s Regulatory Transparency Project.


We are pleased to host a stellar panel to discuss today’s topic. Note, as always, The Federalist Society takes no position on particular legal or public policy issues. All expressions of opinion are those of the speakers. In order to get right to our discussion, I will keep introductions brief.


First, we are pleased to have with us Congressman Tom Emmer, who represents Minnesota’s Sixth District and is serving his fifth term. Congressman Emmer is House Majority Whip and sits on the House Financial Services Community.


Our moderator today is J.W. Verret, who is an Associate Professor of Law at the Antonin Scalia Law School at George Mason University. He has previously served as Chief Economist and Senior Counsel for the U.S. Committee on Financial Services. J.W., over to you.


Prof. J.W. Verret:  Thanks, Steve. It’s a real privilege to have with us Congressman Tom Emmer, the House Majority Whip. It’s an incredible, I think, combination that Congressman Emmer was early to crypto—not just for members of Congress, but among people in crypto. He joined the blockchain caucus in the House in 2015—back in 2015. 


He’s been focused on crypto policy. He’s been a leader in crypto policy. And now, he’s a number three ranking member of the House of Representatives. So it’s a real privilege to take time to talk with you today about your leadership in crypto policy. You’ve led a lot of different issues, and a lot of the attention goes to the securities and commodities stuff, where you’ve also been a leader.


Less attention has been paid, but I think more should be paid to the privacy issues in crypto, the CBDC issues, and you’ve really been focused there. So we have a chance to talk about that this morning. So thank you for your leadership on these issues. Let’s just jump into your bill. Tell me about the CBDC Anti-Surveillance State Act? What made you decide to introduce this bill? Why is it so important?


Rep. Tom Emmer:  Well, first off, I introduced it last Congress. J.W., great to be with you by the way and The Federalist Society this morning. And this is a very timely topic. In the last Congress, I introduced the first version of this central bank digital currency bill. It was the first one ever offered or filed in the U.S. And it simply stated that the Federal Reserve cannot issue a central bank digital currency directly to individuals.


It was interesting because shortly after introducing that bill and gaining broad support around it, the Fed finally publicly said that they will not pursue research on a Fed account. And we’ve just been having a debate in the office, which just came up this morning, J.W., but it’s one that I think we should be having going forward—this word “soup” that the Fed and the Treasury and all these bureaucrats put out.


They call it a “retail CBDC.” I mean, people should start questioning, “What are they talking about? Retail? Wholesale?” I mean, I know what they tell you they’re talking about, but you got to start to dissect these terms.

Anyway, they came out publicly after that last bill, and they said that they’re not — that they need congressional action. They said that, but I’ve seen actual presentations now given to staff by the Fed in which they list, among their authorities, a central bank digital currency.


Look, it’s incredibly important because this is technology that can shift economic power away from centralized institutions and back into the hands of people, into the individuals that, by the way, our government was created to serve. The individuals were not created to serve our government. So it’s transformational, and I think it can be extremely threatening to unelected bureaucrats in these executive branch institutions.


I believe it’s a surveillance tool, J.W. I’ll just stop right here, and I’ll give the people participating this morning a little food for thought. These are not the same things, but I believe it’s some of the same arguments.


If you go back to the 70s when the FISA courts were created, I’m sure those people who opposed a special court that does not afford due process for foreign nationals, I’m sure that there were arguments that this could be abused. This court could someday be abused, and it could actually be weaponized against American citizens. And oh no. I’m sure the government said, “That would never happen. We would never do that.”


Well, in fact, many decades later, that’s exactly what happened with the FISA court. Today, we have these bureaucrats, unelected bureaucrats at the Treasury, the Federal Reserve, within the administration, telling us that a central bank digital currency is necessary so that we can keep us with the likes of the Communist Party of China. 

Ladies and gentlemen, the digital yuan is an example of a government surveillance tool where they can track everything. “He or she who controls the money and the water controls the people.” So I’m an advocate for making sure that this develops in the private sector, J.W., and stopping our government from building another surveillance tool when it comes to money.


Prof. J.W. Verret:  Well, thank you for that. And yeah. The digital yuan is very scary stuff. Why would we want to mirror that architecture? There are some supporters of a CBDC that say, “Let’s just do it the right way,” and I think we’ll hear from some on our panel to get a little balance in the discussion.


“Why don’t we do it the right way? Let’s just make sure we protect privacy. Do a CBDC, but protect privacy.” Personally, I’m not an unbiased moderator. I have my own view of it. I don’t think the Fed will ever go for that. Or even if they go for it initially, they’ll change because if a centralized party controls the validators, they can control the whole chain and change the whole — the rules of the game of the chain. But I want to hear your view on that. Is there any way to do it in a way that protects privacy? 


Rep. Tom Emmer:  Not right now. But I think to be thoughtful and to be honest in the debate, you could certainly pick one side of it and say, “Never. This is never going to be possible.” And I’ve said this even before we introduced the bill last Congress. 


We’ve been saying this since we started advocating for this. If you can legitimately create an open, permissionless, and private version that does emulate cash, well then, I think we should be open to looking at that and understanding it.


I don’t think you jump in feet first and say, “I’m all in,” but you should keep an open mind for that. At this point, J.W., no. I don’t see any way that they can create an open, permissionless — and by the way, they came out shortly after we started talking about this a couple years ago and said, “Well, MIT has done it.” 


Well, yeah, but that’s a centralized digital currency. That is just the opposite of what we’re talking about. We’re talking about decentralized. Decentralized is the key, and perhaps that’s why it is a little bit disturbing to those that enjoy the control of the central authority.


Prof, J.W. Verret:  Yeah. It’s interesting that the Federal Reserve — I used to do some cybersecurity work on Fed Oversight for InsurLink. And one thing that struck me about the Fed is they won’t even use open-source tech in their IT stuff. So they’ll never go for open-source decentralized in a CBDC. So yeah. I think you’ve described the gulf pretty well.


You’ve got a broad coalition among Republicans supporting this bill. It’s not just the crypto-friendly Republicans. It struck me as a fairly broad coalition. Do you think that coalition is going to keep growing? What do you see for the future of the bill?


Rep. Tom Emmer:  I do. I do. The more people learn — you can talk about the digital yuan, which my — some of my colleagues start out saying, “They’re buying into this. We got to catch up. China is way ahead.” No, no. China is not way ahead.


The U.S. is still where it’s happening. We need to create more private opportunities. We need to allow stablecoins to start to blossom and create reserves. We as the policymakers should create a basket of reserves that doesn’t just include dollars. But it is including dollars because everybody wants it.


You want to defend the reserve currency of the globe. That’s the way you do it. You don’t do it by driving crypto opportunities off our shores. But again, the coalition grew, I think, because a lot of these folks that I deal with — and by the way, I believe we have significant support on the other side of the aisle as well, even though they right now cannot be public with that support because the administration is not necessarily favorable.


They want to have this control. But people who understand the story that after the outbreak in Wuhan, literally, the digital yuan was used to control the population. You could not, unless your government opened up your card, you couldn’t get a ride out of Wuhan. You couldn’t get a hotel room anywhere.


By the way, by some reports, the government told you when you can actually go to the grocery store and purchase food that you needed to survive. So I think that, J.W., has created a lot of suspicion, and it’s growing because again, you turn this kind of power over to the central authority, it’s really hard to see how you could limit it.


Prof. J.W. Verret:  And people who say the Fed should do this are talking about a Fed that is working in concert with other banking regulators to abuse access to the banking system today, right now, to deny crypto and other businesses that are kind of haram access to the banking system in a way that is illegal and probably will eventually be deemed so by the D.C. Circuit in the way Operation Choke Point 1.0 was. But it’s going to last for years.


Trust in the Fed is at an all-time low and in banking regulators generally at an all-time low. What do you think about the argument that, “Look, anybody who says we should match this technology with the dollar, maintain dollar dominance, well, one way to do that is just to give Circle the bank charter that they’re asking for and let USDC thrive and other competitors—Paxos, others—thrive with their own stablecoins that are U.S. dollar denominated and get a bank charter and then move on into the crypto system. 


Does that give any benefit that proponents of this USDC — of this CBDC are arguing for anyway?


Rep. Tom Emmer:  I actually support that, but I wouldn’t limit it, right? I think the OCC should’ve been very — should have had a vision towards the future already and should’ve been granting some of these requests that have been held up: the SEC, the FDIC.


All of these different institutions have created incredible friction for these innovators to try and grow in this country. And I think the biggest problem really goes back to people like the senator from Massachusetts who advocates, or at least claims to advocate, for the little guy and gal on Main Street all across this country but is not interested in the least in seeing this innovation blossom here on U.S. shores.


The sad part, J.W., is this is the answer to the growth for the 21st century, the economic growth here in this country. This is the next iteration. We’re not just talking about crypto. We’re talking about the next iteration of the web. And if people will just think back a couple decades ago, the 90s, when the interest took off, one of the reasons it took off was we allowed the innovation to take place here. And we led the world when it came to the world wide — the development of the World Wide Web.


This is the next iteration of that. And the central government top-down control folks, who are desperately trying to control their market share by making this a centralized — using the existing two-tier banking system and the rails that it sits on, to just change that into a digital, that’s not innovative. That’s not taking us into the 21st century. This would.


And I believe both can coexist, J.W. This is the problem that I’m having with the policymakers—both the bureaucrats and some of our colleagues in the administration, those in elected office here in Washington, D.C. It’s not an “either or” proposition. 


You’ve got the existing — and, yes. It can be very destructive to the existing system if the policymakers do not create a playing field where you can literally transition into this great opportunity. The existing two-tier banking system needs to evolve.


The decentralized system needs to — well, whether the folks here in Washington D.C. agree with it or not, it’s going to evolve with or without us. If the Chinese can’t kill it, the greatest free society that’s ever existed on the face of this planet is not going to be able to kill this type of innovation.


Prof. J.W. Verret:  That’s a great line.


Rep. Tom Emmer:  The question is, “Well, does it happen here, or does it happen somewhere else?” This is the biggest warning shot I can give you. It has to happen here. We got $32 trillion dollars of debt. We’re trying to get our budget under control right now.


You want an opportunity to grow ourselves out and exist for another 250 years? This is it sitting right in front of you. And this battle between the big central government and the decentralized liberty-minded Americans, they can both coexist. But we really got to start getting our act together quick.


Prof. J.W. Verret:  This discussion seems pretty closely related to the stablecoin debate and discussion. That’s a tough one because there are different types of stablecoins. There’s USDC. It’s backed by a central party. It’s fully collateralized. 


There’s decentralized stablecoins that are also fully collateralized and have done well over the last couple of years through some stress: Dai, MakerDAI, the new GHO token on Aave. 


And then there’s Terra Luna that was a disaster, an algorithmic stablecoin. The third one was a disaster. The other two, doing very well, have been doing very well for years. The third, absolute disaster. I don’t think ALGO coins will ever really work, but the other two are probably the future of money.


But it’s hard to turn that into policy talking points in the Washington [inaudible 15:41] back and forth. Do you see hope for the stablecoin side of things? If we stop a CBDC, do we need a bill to help foster growth there, or can it grow on its own? Will the Fed stop it, or do we need a bill to make a path for charters for the centralized parties? How do you see that kind of playing out?


Rep. Tom Emmer:  Well, again, J.W., the one I’m going to grab on quickly is, “Will the Fed stop it?” They can’t. All they can do is create a situation where Americans — I raised seven kids. And my wife wanted me to tell our youngest child that you’re barred from the internet, except for two hours a week.


And I remember sitting down with them and saying, “Look, if I do that to you, I already know what’s going to happen. This isn’t my first rodeo. You will lie to me. You will find ways to get around the rules that I’m putting out.” So we created an incentive-based situation that I actually should write — that’s the biggest success I’ve had is with number seven because it worked.


And it’s the same thing here. If the Fed actually think they’re going to kill it, well, guess what? You’re going to create those who are within the law and those who are outside of the law. You’re going to create those who are here in the United States on our shores or those that go find that the Bahamas is where they’re going to go.


You talk about Terra Luna. It’s a great example. Are there things that we can do from a policy standpoint? Sure, sure. I think the CBDC, outlawing that is a different kind of approach because we’re trying to prevent a future abuse that I see people in Washington taking advantage of—people who do not maybe feel the same way we do about —


Let’s put it this way. They have a good heart, but they believe they need this tool to keep you and I safe when you and I would prefer to make our own decisions on how we’re going to keep ourselves safe than having the long arm of the government constantly having its hand over our shoulder.


But this type of thing that you’re talking about with stablecoins, there are little things that we can do, little tweaks, right? For instance, here’s why I don’t want to get trapped because even though I’m 62 years old and I think in two dimension and people who are creating this stuff think in three dimension and beyond—I mean, they process differently than I do—what this has caused me to do for the last 8 years is to think well beyond the bounds of what I’m used to.


So we’re calling them stablecoins today, J.W. What are they going to be called in three months? We might have some totally different thing. To believe that today’s version is the same tomorrow, I think we limit ourselves because these young people that are out there—these creative innovators—are coming up with new things as we speak.


We need to have a system that’s nimble enough and maybe tweak a couple of things if you’re creating — and here’s the biggest issue. What is a currency? What is a commodity? What is a security? We need to have better definitions for those. And then, I believe, the existing regulatory structure we have can work much better with this evolution that’s coming forward—maybe, depending on if something qualifies as one of those three.


You could put reserve requirements out there, right? And the reserve, like I said, is a basket of reserves. You don’t necessarily have to have one dollar for — if it is still called a stablecoin, one stablecoin. Maybe it’s a percentage of dollars. Maybe that’s the majority of the basket, and then you have some other highly liquid valuable collateral that you can back it up with.


But I’m rambling on because I’ve been thinking about this a lot. You can’t limit yourself to what it looks like today. You got to understand the forest is going to continue to grow and develop, and you’re going to find new growth that you don’t recognize from yesterday. And we’ve just got to be nimble enough here in the U.S.


And by the way, we better get moving because you see what they’re doing on the other side of the Atlantic. You see now that China—which if I’m a developer, I’m staying as far away from Hong Kong as I can get—but they’re welcoming everybody back into Hong Kong. “Come on over here. We’re going to give you the opportunity to develop here in Hong Kong.”


This is a battle that is well under way. Who is going to be the focus of the next iteration of the internet because it’s going to have a huge economic impact, especially if it’s here in the United States of America.


Prof. J.W. Verret:  I want to ask you about the Fed and incentives, why the Fed wants to do a CBDC, why so many proponents are within the Fed. The Fed operates a payment system: Fedwire. So when I worked for InsurLink, we did some oversight of this and tried to figure out how well does the Fed do with this incredible web of conflicts.


Think about it. The Fed regulates banks. The Fed operates a payment system and the banks that use it. So you regulate your customers, and you regulate a thing that they use. And the Fed regulates a competing payment system: the ACH system.


So they regulate the customers. They regulate their own thing that they provide. They regulate the competitor to their thing. It’s a web of conflicts no one can really get around. We did some oversight. We did some subpoenas. We had some fun. Congressional oversight is always fun, but it’s hard to make it stick with that central bank because they know how to ignore it very well. 


I spent two years knocking my head against the wall trying to figure out how to oversee this. I don’t think it can be done, though you should not quit trying. I wonder if one of the reasons why the Fed wants a CBDC is to just maintain the prominence of their new FedNow system and maintain a kind of monopoly on payments. It might be a little conspiratorial, but do you think there’s some meat to that?


Rep. Tom Emmer:  Well, remember, J.W., we all believe in black helicopters. We just think different people are flying them.


Prof. J.W. Verret:  Yeah.


Rep. Tom Emmer:  On this one, I’ll give you another step to your conspiracy theory. We’ve been discussing in the office ever since Signature Bank was shut down or locked down, I guess, by our friends at the Federal Reserve.


First off, I have yet to see the balance sheet. And forgive me for being a little suspicious. But when Barney Frank, who’s not exactly my perspective, is saying, “I don’t know how my government can shut down a bank that’s not insolvent,” when he says that within the first 24 hours, when the folks that are locking it down are trying to tell us that because 30 percent of the deposits are crypto that that somehow had something to do with locking down Signature.


Oh, and then we find out within 48 hours, they weren’t leveraging any of the crypto. It’s like it was completely — it was just being held. It wasn’t part of their leveraged balance sheet. So wait a second. 


It didn’t have anything to do with locking it down. I still don’t know—and I’m looking forward to finding out exactly why this bank that has a lot of proponents—if you go up to New York, they talk about the guys who ran it as “hard scrabble.” They did it right. So how did they get in trouble?


And I’m not here to defend them because we don’t know yet. But I will throw — this is the log I’m going to throw on your conspiracy fire, J.W. Very interesting to me. I want to know who at the Fed has developed the software for their new FedNow project. These are people who are so archaic.


They talk about creating a post office-like bank for all Americans, and they are now going to roll out a 24/7 real-time payment settlement software. By the way, you know when that announcement came? It came the week after they locked down Signature Bank.


And I’ve asked Marty Gruenberg, “What happened to Signet?” Signet was Signature Bank’s 24/7 real-time payment settlement software that Marty Gruenberg told me he thought they sold it. They haven’t sold it. Kind of funny how FedNow was announced a week later. I don’t know if the two are related.


But I tend to think the same way. I want to know more. And why do they want a CBDC? Well, I think my conspiratorial speculation and yours, J.W., probably tells us everything we need to know. Are there good people in the Fed and the Treasury? Yes, lots of them—really good people, freedom-loving Americans who are doing a job that they believe is the right thing to do for the United States.


But are there people also that think their authority requires them to protect J.W. and Tom from our own potential risks? Oh yes. That’s what they’re supposed to do. You and I aren’t bright enough to do that for ourselves, so we must have a central banking authority to lock all this stuff down.


That’s where I push against it, and I do think they want a CBDC because then you can see. Imagine the day they can — in Minnesota, they want to do a pilot program where they tracked everywhere I drove. Boy, that sounds like freedom in America.


You just talked about Choke Point 2.0 for crypto that the courts likely will someday find, once it’s established, this is exactly what they’re doing. It’s illegal. Well, what happens if they don’t like your habits, J.W., and they see that your habits are, “My goodness. You eat too much red meat. You drink too much beer. You’re driving too many distant places. And by the way, you’re renting hotel rooms in places that are known for conservatives to hang out.”


Guess what? They can control that money. They can see where people are going. That’s way too much information to trust with any human being.


Prof. J.W. Verret:  And you’re saying things that have been written not by our Fed, but in European Central Bank missives, in IMF missives on what they could do with a CBDC. So you’re not a tinfoil hat, man. You’re just quoting from what Europe is already thinking about doing.


I absolutely agree with you. The Fed and the banking regulators and the FDIC definitely hated Signet, even though it was an incredible innovation. Let’s close with one thing we didn’t get a chance to talk about, but I want to talk about it briefly—your work on privacy. 


I think it’s commendable that you’re willing to have a difficult conversation—what is sometimes a difficult conversation with what I’ll call — and this is a generalization, national security-focused Republicans. You’re willing to have a conversation about privacy with them that we’ve been trying to have for a long time, and it’s hard. 


But I think people are starting to get that, in one way, they’re not in competition. Privacy is national security. If I can protect myself from hackers in North Korea by using crypto privacy tools, that’s pro-national security, not anti-national security. Can you tell me about your work on that, the conversation — the hard conversations you’re having? 


And this all has implications for the Warren Marshall bill but also just generally for trying to get people to understand in Congress, the members of Congress, especially the national security-focused Republicans that, “Look. It’s not just about KYCing everything. You don’t get to KYC my private wallet in the same way you don’t get to KYC my crypto wallet for peer-to-peer transactions.” Can you tell me about your work on that, and I — because I admire what you’re doing there, especially in the leadership?


Rep. Tom Emmer:  Well, it’s interesting. And this is where — and it doesn’t matter: Republican, Democrat, other. We should all be allowed to have disagreements—honest disagreements. And to your point, J.W., I think a lot of times, when you don’t follow the traditional bent of the people that you run with most of the time, first off, they’re offended. 


Then they push back. And this is going to over exaggerate, but then they just — they express their frustration with your foolishness. And then they start to come around with, “Oh. Well, wait a second. There might be something to that. I don’t agree with it completely,” but you got to go through these stages, right?


And when I started this six, seven, eight years ago, I’m just one of the crazy people, which if you talk about the tinfoil hat, we all have one, right? Mine just must be bigger. This is really for me, and this is where you can disagree with me.


I do not agree. I’m more of a libertarian when it comes to protecting myself. I do not believe I need my county, my city, my county, my state, my federal government here in my domestic United States telling me, “Oh, I’ve got to know everything about who you’re associating with and what you’re doing because I’m just here to keep you safe. Tom, I got to know everything you’re doing with your money because God knows there are really bad people out there, and they want to steal from you, and they want to take advantage of you because you just aren’t that sharp. So I’m here as big brother—or big mother—to take care of you.”


I love when you’re talking about the private wallet because this isn’t a Republican/Democrat thing. We had a Republican administration trying to outlaw private wallets, right? We were going to do that out of the Treasury because why? Why? Do I have to pull my wallet out right now in my pocket and show the Treasury secretary what I’m carrying around?


This is where it gets a little outrageous. Now, where the two can coexist, like you talked about, there’s a lot of hawks, defense hawks—whatever you call them—that are, “We got to be able to sanction. The economic sanctions are incredibly important.”


And they take it as an either or. “Well, if you allow this decentralization, we’re never going to be able to protect, not just the reserve status of the U.S. currency, but the tools that we have that are short of blood treasure that we send into battle.” And I disagree with that.


Again, I think there are tweaks. Once we define — which this has been something I’ve been after for a long time. If we continue to delay defining what is a definition of currency of a commodity and a security, well, then you’re going to continue to have this confusion.


And by the way, the cool part about what we’re working with is it can be a commodity at one point, or it can be, more importantly, a security but evolve into something else or vice versa. So that’s where policymakers need to get a hold of this. 


And you can have this discussion about protecting privacy while, at the same time, allowing this amazing innovation to go on. And I’m just going to continue to be on the side of the individual, J.W. I think the reason this thing has excited me from day one is our government was created. It was created to empower individuals to self-determine, to be the best they could possibly be without having government put rails on that or limitations on that. 


We all believed in the free hand that Adam Smith wrote about, and it’s like, “This is how you do it with your talent, with your hard work. You too can succeed.” This technology, as long as it is not hijacked by central authorities who have a top-down control mindset, as long as it’s decentralized and put into the hands of the individual, transformational is an understatement.


It will literally restore the very foundation, I believe, on which our country was created. And it can coexist. People got to stop being so afraid and understand that Washington has been a place that has developed to protect the status quo. If this is what we’re meant to be forever, well then, so be it. We might as well not be here. It’s not.


This is about allowing this next great century of humankind to actually take off, and it should happen right here in this country, and we can. Again, we’ll go back to where we started. If you could do an open, permissionless, private cash simulation, we should all be willing to hear what our central government is talking about. But as long as you can’t do that, then you should not be in the business of creating a central bank digital currency.


Prof. J.W. Verret:  Well, people say, “People in Washington don’t get it on crypto,” but, man, here you go. The number three guy in the House has been all the way down the rabbit hole, gets it, understands the tech, is working to build a regulatory system that is smart and streamlined. Congressman Emmer, thank you for being with us today. Thank you for the work that you’re doing.


Rep. Tom Emmer:  Thank you, J.W. And Steven, thanks to The Federalist Society. Great to be with you.


Prof. J.W. Verret:  Be well.


Steven D. Schaefer:  Thank you for joining us. Next, we are happy to have with us an excellent panel of experts. First, Paul Brigner is the Head of U.S. Policy and Strategic Advocacy of the Electric Coin Company. He has served in senior technology policy and government relations roles.


Jim Harper is a Nonresident Senior Fellow at the American Enterprise Institute, where he focuses on privacy issues and select legal and constitutional law issues. Jim was a founding member of the Department of Homeland Securities Data Privacy and Integrity Advisory Committee.


William Bill Hughes is a Senior Counsel and Director of Global Regulatory Matter at ConsenSys Software. ConsenSys Software is the leading Ethereum blockchain software company.


And Michael Mosier is General Counsel at Espresso Systems, which is developing configurable privacy for digital assets with decentralized private computation. He served as Acting Director, Deputy Director, and the first Digital Innovation Officer at the U.S. Treasury’s Financial Crimes Enforcement Network. J.W., over to you.


Prof. J.W. Verret:  Okay, thanks. Let me start with Mike. And if you all haven’t seen it, Bill and I and Mike and Paul did a discussion previously specifically to the TornadoCash sanctioned in another webinar, so we’re getting the band back together on this one.


Mike, I like talking with you because you’re a crypto native guy. You’re the former head of FinCEN at the same time, which is a unique combo. I don’t think we’ve got anything like that in crypto. So you’re our guy from the inside. And you’re willing to be critical of the tornado cash sanctions, in particular, technical issues with the sanction.


As we get into this discussion about CBDCs, what are the — do you think the people inside the Treasury have a position on this—not the macro people, but the FinCEN folks and the OFAC folks. Do they care about CBDCs? Do they want to see it as a way they can more easily sanction? Are they weighing into this discussion yet?


Michael Mosier:  Yeah, thanks, J.W., and great to be back with you all. Yeah. I think they’re actually — FinCEN and OFAC take a more sort of technical approach and neutral—not so much from a policy perspective so much as thinking how does this work, if it’s going to be something that actually works.


And I think it goes back to — Representative Emmer mentioned in the Trump administration, Secretary Mnuchin pushing the wallets rule. There were many people within actually the law enforcement the intelligence community—and certainly within FinCEN—who felt like that was a bad idea very much because it was going to push everything dark.


And I think there are many folks — and it’s in — it’s actually in Project Hamilton. The Federal Reserve’s report itself mentions privacy 53 times. There are a lot of people in this space that absolutely recognize that this not going to work if it’s — if there isn’t privacy to it, and there absolutely has to be privacy to payments.


So I think my conversations when I was at FinCEN talking with the Boston Fed that was working on this was — actually, literally, the first conversation was, “Is there going to be privacy built in because, if there isn’t, we don’t see this as even starting? And so let’s not spend time on it.”


And some of that is reflected in the final report where they even say — they note that there was a Euro poll that the highest ranked issue for any CBDC in the Euro community was that privacy had to be part of it. And I take that as a good sign that the folks within the Fed even that were writing this report said, “You have to have privacy, or it’s not going to work.”


And I think that’s the same thing if you’re at FinCEN or OFAC. You’ll hear at the political level there’s reasons why they might want this. But from a technical level, there’s nothing positive about the eYuan or shoving everything out dark. If there’s not going to be privacy when your job is preventing exploitation, then it’s not going to work.


And the last point on that is, the director of National Intelligence herself has said in the latest report that privacy and data protection is critical because from a national security standpoint, there are so many adversaries right now that are focused on acquiring personally identifiable information on U.S. citizens for espionage-influenced cyberattack and strategic advantage.


So I think there’s not a monolithic approach on this, and there are lots of folks whose job is predicated on preventing exploitation that would say, “If you’re not going to have privacy, this is a non-starter.”


Prof. J.W. Verret:  Well, I appreciate the thoughtfulness of folks at Project Hamilton and that they’re different from the Fed board, who is different from some members of Congress or different from Klaus at the WEF, who has a much more, I think, scary view of things, but — or even other international regulators that have pretty scary views of this.


How do we define privacy in this context first? How do you define it? How do you think it should be defined, or maybe how do others define it? 


In other words, there’s some people who say, “If the way that you define privacy for a CBDC is zero-knowledge proofs that cut my transaction history from my counterparty but that require me to share my private viewing key with the Federal Reserve Central Repository and they can look at it whenever they want to—some authorized person”—there are some people who would say, “That’s not privacy,” and there are probably some people who would say, “No, that’s enough privacy.” So how do you view that, and how do you think people inside the Fed are viewing that?  


Michael Mosier:  Yeah, that’s a great question. I mean, I think there’s a couple aspects to it. One is certainly the constitutional and policy approach to privacy, and there’s better thinkers about that than me on here with Paul and Bill and Jim.


But I think the — from a really technical level, this is something we discuss quite a lot with the Boston Fed, and I think it is reflected in the final report, which is, really, from a data protection standpoint, if you’re looking at, “We need to protect U.S. persons from what the director of National Intelligence said is data exploitation, personally identifiable information in the hands of adversaries, then you have to be protecting it in a way that cannot be compromised.”


And it says in the report itself. I want to quote this because it’s amazing. “Note that the safest way to secure data is to not collect it in the first place.” So absolutely. We need cryptography that is even quantum resistant, and there’s a lot of incredible cryptographic work out there. 


But I think it’s really important that — I mean, we’ve seen this over and over with systems that have been compromised. And I spent some time at Treasury as counselor to the deputy secretary working on the solar/winds compromise.


Once it’s collected, yes. There are amazing ways of securing data. But having it, as the report itself says, is a vulnerability. And I think there has to be, at each layer—and this is also in the report—privacy requires making explicit architectural choices at every layer of the system because you can’t retrofit it.


And once all of my information from the office of personnel and management is in the hands of the Chinese government. We know that. I’ve gotten the email. And at the time, it was very robustly protected, and I appreciate that, but it’s gone.


And so I think you have — there has to be thresholds at which it’s not just zero knowledge, and I’m a proponent of zero-knowledge proofs for certain counterparty risk management. But there has to be points that it’s just not collected to begin with, and that’s the only way, if you’re approaching it from a data protection standpoint, that that’s going to function.


Anything else is a policy choice, and policy choices, as we know, can change not just from across administrations but from within administrations. And that’s, I think, it’s just too — that’s just too fragile.


Prof. J.W. Verret:  Well, thanks for that perspective, Mike. I can imagine one of the first places a central bank would want to use, censurability. We hear a lot about Chokepoint, and that’s a bank safety issue, and that’s not the Fed as much as the FDIC. It was very FDIC focused and DOJ to some extent.


But I think where the Fed would go along first would be something about bank panic: Stop withdrawals from the deposits. Stop deposit withdrawals and use their control of the CBDC to do it. That would be the first temptation like, “Oh. We see a macro potential issue, so let’s just freeze it.” But maybe privacy can protect from some of that.


I want to move to Jim. Jim has been very patient. I am not a non-biased moderator. Full disclosure, I’m very much a critic of CBDCs. Jim, I want to give you a chance to talk about your perspective, your view. You’ve been working with Chris Giancarlo on the Digital Dollar Project. 


He’s someone I agree about with on 99 percent of everything else in the world, so sometimes, it hurts me that I disagree with Chris so much on this.


Jim Harper:  The other one percent is a big one percent, ain’t it?


Prof. J.W. Verret:  Right, it’s a big one for me. But you and your group, you and Chris and your group in the Digital Dollar Project are very thoughtful and have taken the position that we should explore it. We should develop ideas around it, but we shouldn’t do it until we can protect privacy, so I respect you for that position and that commitment to privacy.


I want to give you a chance to just talk about your perspective, your view, and thank you for coming here to share that with us.


Jim Harper:  Well, thanks, J.W., and thanks for having me on. I appreciate Mike’s comments, which are very valuable. I’m attracted to some of the designs in the Project Hamilton paper because what it basically does is lodge a hash of a transaction showing that a transaction has happened—not a lot of transaction data. That’s a pretty dumbed-down summary. I hope I’ve gotten it relatively right.


It moves power out to a thing that they call a sentinel, which isn’t very well defined right now, so there might be a concerning dimension to Project Hamilton there. But that idea of having a very low bandwidth, low information transaction housed with the Fed—or whoever it delegates to—that’s privacy protected. With assuming successful encryption, you don’t have any personal information in the transaction log.


Privacy is control of information about oneself and exercise of control consistent with one’s values. So any digital dollar that passes muster with me—I can certainly speak for myself—would not rend control of information about people’s transactions from them.


Sure, you can share information with your financial services provider. I don’t see much reason why people would want to share with the Fed. So a system that uses no identifiers in the transaction ledger is sort of one of the make-or-breaks for me. And this is something I’m actually pressing within the Digital Dollar Project right now is some semi quasi-technical requirements.


Look, the first thing I wrote publicly about bitcoin, I said, “This thing is private” because I didn’t know at the time—it was early days—that, “Oh, the public key. Duh.” That ends up acting as an identifier.


So we’ve got this sort of huge tracking system inadvertently created around the public key. Well, any CBDC can’t do anything like that. I also don’t think that power to lodge transactions can be conditioned on identification, right?


So whether it’s regulatorily—which I don’t necessarily trust—making it so that it’s illegal to refuse a transaction on the part of whatever institution has that authority or dispersing power to lodge transactions as widely as is done in open cryptocurrency, which is, if you have the private key or some equivalent, you have the power. 


You have the power to prove, if you can prove, that you control this particular instance of the currency, then you have power to lodge the next transaction. Beyond that, if we’re going to have something that is —


Prof. J.W. Verret:  I just want to understand what you’re saying. So what you support would be something where the validator or the minor set would be fully decentralized? The Fed wouldn’t control them, have the ability to stop them?


Jim Harper:  Well, what I’ve said is there can be no conditioning of lodging transactions on identification. I think what that implies is almost entirely decentralized. There might be some intuitional design that means it’s not entirely decentralized but at least could still have competence that we all can use it and all can use it without having to identify ourselves lodge transactions.


But I think we’re pretty much in the same zone. I think all the logic of getting a private CBDC pushes it out to the edges — decentralizes it. I heard a long time ago that the Fed put out a paper.


I think they’re much more so than the wise tinfoil hat folks. It seems like the policymakers and leaders are really, really feeling their way along, right? So a Fed paper came out sometime back that seemed to presume account-based stuff. And I wrote a blogpost saying, “Think in terms of token based because you will never ever get an account-based system through our political process,” and that’s for the good.


I mean, I think the opening bid on CBDCs is, “No. It’s damn no. Hell no.” But if something comes along, if we can produce something that actually provably protects privacy, then it can do a whole lot of good that, frankly, I haven’t seen coming out of crypto that I don’t think I see coming from stablecoins, which are — sorry to say it because I wanted it so badly with bitcoin.


They’re small potatoes relative to a national currency at the scale of the U.S. dollar. The amount of good you can get from a digitized currency that has scale is much more than we’ve been able to get out of crypto so far.


God bless all the people working to make it happen in crypto, but I was deeply disappointed with bitcoin. I was with the Bitcoin Foundation in 2014. And at the time, we really thought we were going to have a global goer, a global payment system that was going to rival these national currencies.


And it’s a decade later, and we’re still waiting. I hope Lightning gets going—all the other entrants. God bless them. But we could benefit greatly from the change that comes from a digitized currency that really scales.


Prof. J.W. Verret:  To solve the scalability issue, doesn’t that run up against the decentralization that protects privacy, though? At some point, doesn’t the Fed solve scalability by saying, “Oh, we’re going to host a lot of transactions in a centralized repository. We’re just going to be kind of digitized.” Isn’t that a conflict—kind of an inherent conflict?


I mean, if scalability were that easy, why is the Fed going to be able to do it in a way that bitcoin is not?




Prof. J.W. Verret:  – to a decentralized system.  


Jim Harper:  I don’t know for sure how these things would all play out. But if you have a transaction design that doesn’t include identifiers, I don’t think it really matters much what the database design is. That’s my preliminary thought. 


Does it have to be blockchain? I don’t actually see why. You might be able to have a central institution that hosts all the data. Certainly, you’d probably want it dispersed for just data security reasons just for uptime.


But if you don’t have any identifiers in the data, it doesn’t really matter how it’s hosted. I have to say it again. That’s preliminary because this is complicated, and I’m still thinking it through myself.


Prof. J.W. Verret:  My fear is that even if you start with a — if you find something that’s a perfect privacy-protecting CBDC, you start with it. You maintain that for a while. You gain universal adoption. And then I, as an individual, am dependent on it.


And then one day, the Fed changes hands, and they say, “Okay, everything’s frozen until you come give your KYC and information to the Fed system. Don’t worry. We’ll protect the data” and then they reinstitute censurability and surveillance.


Jim Harper:  Yeah.


Prof. J.W. Verret: And some people in Congress yell about it, but nobody really passes anything, and then you have to hope for a judicial review, which is always very hard to do of the Fed because they have a marked talent for in cases either saying, “We get sovereign immunity” when it helps them or saying, “No, we’re not a government entity. We’re not subject to FOIA” when that helps them.


They’re not sure what they are or their very inconsistent positions in litigation. So that’s my fear.


Jim Harper:  Legit concern. I was going to say “obviously,” but it’s not necessarily obvious. This is why I think transaction validation should be pushed to the edges—if not entirely decentralized, right?


So transaction validation in the Project Hamilton model, the sentinel concerns me if the sentinel is just a bunch of banks, right? Or even internal to the Fed, if the sentinel is at the Fed or just a bunch of Fed-approved banks, that’s not very protective if the sentinel process — the transaction validation, let’s call it, is out at the edges, is in people’s smartphones, then to change the way the system works, you have to get everybody to swap out their software. And I think you have a successful — you can successfully resist that.


Secondarily, I would have — so I don’t think the Fed has authority now. I think it does require congressional authorization, but I haven’t studied it deeply. Authorizing language should include the technical requirements, right?


The delegation of authority that just says, “Go figure out how to do it,” no, no, no. It should be illegal to have a software that includes identifiers in the transaction data, right? It wouldn’t not be authorized by Congress.


In addition, obviously, open source. And an idea I’ve had—which somebody can probably build—is being able to prove that the entities running it are running the software versions that are publicly available: so sort of provable open source and a provable operation of open source.


And finally, in authorizing legislation as a — well, I got a couple of further backstops. One, I would have Congress say that identifiable transaction data in the system, if there is any, is held in trust as the property of the data subject. 


The reason why is because, hopefully, the Supreme Court will move to a more felicitous interpretation of the Fourth Amendment that recognizes digital documents as people’s papers in effect. And if transaction data that’s identifiable in the system is the property of the individual data subject, then it is protected by constitutional law where Fourth Amendment law is headed, and it’s not subject to reversal on the part of even a congress—certainly not any Fed policymakers, but not even reversible on the part of Congress.


And the final backstop is a bunch of criminal penalties for anybody who operates software that doesn’t do what is publicly said it does. Anybody who designs a system that secretly creates identifiers, whatever the case may be, I think some IRS-like criminal penalties are another backstop that could do something.


Prof. J.W. Verret:  Well, I like that you’re trying to think about criminal penalties for Fed violation of law. I like that your headspace is there.


Jim Harper:  You seem like you’re not a Fed fan. I’m picking that up from the conversation.


Prof. J.W. Verret:  No, I’m not. I mean, I’ve just seen a lot of their sins and subpoena responses that, sometimes, I had to look at in camera that I couldn’t copy—some things I wish I could talk more about.


Just in 2008, the Fed looked at statutory constraints on their liquidity authorities, and they said, “Well, to hell with that, man. We’re just going to throw the money out there.” Not only throw money in legal ways, but in clearly illegal ways—particularly with the AIG bailout.


So unless you have some bite to that statute, just saying it’s not illegal to — it’s not legal to do this is insufficient. It’s just insufficient when it comes to the Federal Reserve. There are ways to constrain other bureaucracies, but not the Fed, I feel like.




Jim Harper:  I think of penalties as sort of a tertiary protection, right? The real protection is in decentralizing the authority to lodge transactions, getting the software out into the hands of users so that you got to change the whole — you’re going to have to convince everybody to swap out their software if you’re going to change how it operates. So the more decentralized, the better. 


The lodging of transaction hashes in an authoritative place isn’t too scary for me, provided there are no identifiers. And then the authority-lodged transactions, I think you get it as decentral as possible. I don’t have it all designed. I’m not even a coder.


Prof. J.W. Verret:  Well, for privacy protecting, already designed blockchains that have been working for a while now, let’s move to Paul. In some ways, you’re kind of talking about Zcash. I wonder if maybe the Fed should just buy up a lot of Zcash and hold it on a balance sheet.


Jim Harper:  [Laughter]


Prof. J.W. Verret:  And no, I’m not kidding. And recognize Zcash for collateral and reserve requirements for banks. I don’t know. Maybe that’s the way to go. Paul, do you want to weigh on it? We’ve been going about an hour on CBDCs. 


We both are affiliated with the Zcash community: you from Electric Coin Company and me from a foundation that supports cryptography research and zero-knowledge proofs. What’s your perspective on CBDCs? Are they a threat to the early development nascent stage we are at in the development in widespread adoption of privacy protecting digital assets, like Zcash? I want to give you a chance to weigh in on the discussion so far.


Paul Brigner:  Thanks, J.W., and thanks for the opportunity to be here. Thanks for getting the group back together again.


I absolutely do believe that CBDCs are a threat to a new financial ecosystem that we’re in the very early stages of developing. I’ve been in technology and technology policy for a few decades now. And what is very clear is that we are in an early stage of innovation, and a lot more work is needed to help these products evolve so that they can truly become digital cash.


And whenever we’re talking about CBDCs, it feels to me like we’re taking this innovation that is early on, and we’re locking it in. We’re basically freezing it into a digital currency that, as we know, currencies over the course of history have changed very, very slowly. I’m sorry, money is technology.


So far, it hasn’t moved that fast. But now, we’re in a phase of history where we actually are able to make money evolve and meet the needs of our digital ecosystem. So I’m very excited about that.


I wanted to emphasize that the reason why we do it is for economic freedom. At Electric Coin Company, we developed the Zcash cryptocurrency for economic freedom—to empower economic freedom. It’s not just about privacy. It’s that privacy is required. 


“Privacy is normal.” That’s a little slogan that we have at Electric Coin Company, and that in order to have that economic freedom, you have to build privacy into your financial ecosystem. You need to be able to have something that is a digital bare instrument, and that’s what we’re trying to do with Zcash.


Prof. J.W. Verret:  Do you think that privacy can be embedded in something run by a central bank? It seems like part of the frustration is that when you make really hard-hitting privacy arguments, the thing you’re arguing against gets redefined into something decentralized, decentralized validation, censorless sort of defined away from being a CBDC into some other kind of thing that looks more like crypto that actually works but that I know the Fed will never go for.


I guess that’s a complicated question. Do you think privacy can ever be embedded in CBDCs, and why not? Even if they use — say, if the Fed uses ZK proofs all over the place in the design of a CBDC.


Paul Brigner:  I would love to think that it could, to be honest. But I think that the political realities of that are very, very difficult. And that kind of power to be able to manipulate a currency directly through CBDCs, like China is trying to do with the digital yuan, is something that I don’t feel comfortable having in a centralized entity. 


I feel that we have alternatives. We have stablecoins that can evolve with technology. We have other cryptocurrencies that are evolving rapidly with technology. And I feel much more comfortable having those to be the kind of instruments that we use in a digital world going forward.


Prof. J.W. Verret:  I’ve been thinking about the role of interoperability in stablecoins and what that means for this discussion. And part of me says, “We don’t need a CBDC because you can just wrap USDC, and you can put it anywhere at this point, or put it into a vault to create a new stablecoin.” That already happens with MakerDAI as part of the collateral behind MakerDAI. 


You can do a totally USDC-based stablecoin that was decentralized—somewhat decentralized. There’s always the risk that Circle is going to freeze the minting. But they’re not going to want to do that unless they’re forced to do it. But then the counter to me is kind of like, “Well, maybe could you do that with a CBDC? You could just wrap it or move it around.”


But I don’t think the Fed would ever go for that. They would stop the wrapping and the minting in its tracks, even if it wasn’t associated with something negative. Is interoperability the key to scaling stablecoins in a way that we don’t need a CBDC? And will CBDCs ever be interoperable with decentralized stablecoins? I guess that’s my two-parter for you, and I’ll throw it out to the rest of the group.


Paul Brigner:  I think you’re right. I think that there’s no way that the Fed is going to allow a CBDC to be fully interoperable and to be shielded, for example, if it were possible to put it on Zcash cryptocurrency chain, for example. I don’t think that’s going to happen.


So I again come back to the importance of being able to allow the market to evolve and allow market forces and innovators to be able to contribute and help this move forward. So I think that, yes. I’m very much hopeful that stablecoins could be a vibrant financial ecosystem for us and help us transition eventually to a cryptocurrency ecosystem. I think that’s the path we should be on, so I think you’re right about that.


Prof. J.W. Verret:  And we’ve been having a very dollar-focused discussion, but there are a lot of critics of CBDCs and proponents of crypto—particular crypto tokens—especially the bitcoin Maxi crowd who say — who would probably say our thinking is totally wrong, that we need to totally get away from fiat, and that’s the goal.


It’s hard to generate that thinking into a nuanced debate because you sort of end the debate pretty quickly. But I just want to recognize that that view is out there in the bitcoin community and probably in the Zcash and Monero communities as well.


Bill, you’ve been waiting patiently. I always appreciate your perspective because you’ve been inside DOJ. You’ve worked inside DOJ, but you’re a very crypto-native guy. So just like Mike, you’ve got that unique perspective.


You understand how a group that maybe as sometimes our opponent—especially in the privacy issues—thinks. You can help us understand how they’re thinking, but you appreciate what we’re building and what you’re building—a consensus. 


CBDCs. What’s your view there? Are they toxic to the growth of crypto? Are they useful in some countries but not necessarily for the dollar? Do you want to talk about — I think consensus has worked on some CBD projects in the past, though I think that was a long time ago. Do you want to talk about all that and just kind of throw in your two cents here?


William Hughes:  I don’t think CBDCs are inherently toxic to crypto more generally, but that depends on the nature of the CBDC that is put out to the market. My objections to CBDCs are, one, to the extent all the functionality that you can add to restrict or mandate its use, that would need to be heavily controlled through actual legislation as opposed to letting just some administrative agency determine those parameters. And it shouldn’t, under any circumstances, come at the expense of private — public market money—Stablecoins or native cryptocurrencies.


I think one of the things that’s very important to the CBDC debate is actual market structure construct with crypto generally, especially stablecoins. There are not enough controls and safeguards and the like for regulators’ tastes around stablecoins and other crypto that allows them to look at them at that space as a suitable way to expand them to the digital world that excludes the reason for a CBDC.


The reason you have a CBDC is to have a system you control. And the degree with which you control it, that’s where the debate is. Should it be a centralized ledger? Should we let other people validate? How much about actual transactions should the government or anybody be able to view? That conversation is directly impacted by the lack of controls in the private space where stablecoins and where other crypto transactions take place.


So I think, right now, the focus — the conversation that we’re having here is about CBDCs. The talk in Washington on Capitol Hill is really about stablecoins and market structure. That’s where it needs to be because if you do it like you do in Europe and you get more or less your regime structure, you can have a better conversation about CBDCs and what they’re good for and what controls should be — what they should be issued with in terms of controls.


I cannot foresee a world where a CBDC is issued where the government voluntarily turns off its ability to scrutinize transactions where they believe that there is a — either a national security need to scrutinize the transaction or a law enforcement need.


When I was at DOJ, one of the big — and this is — and Mike knows this very well. One of the big strategic policy problems was cryptography and having systems which are outside of law enforcement’s ability to scrutinize communications or transactions. That’s a big problem for law enforcement being able to go after bad guys, investigate them, disrupt their networks, investigate particular illicit transactions.


I can’t imagine a CBDC being created where it excludes — where it prevents law enforcement and national security interests from being able to go after bad guys. I would also at least now given Congress’ pension for just writing a — defining a very broad swim lane and saying, “You, a particular agency, you come up with the rules that will define the activity within these very wide guardrails.”


I can’t foresee a CBDC being issued under the auspices of Congress that would not permit agencies, either immediately or overtime, institute prohibitions on use or requirements on use that, if not immediately, at some point in the future, some administration would feel duty bound, would feel required—perhaps morally required—to implement.


We’ve seen akin to COVID-related restrictions on personal freedom, not because people wanted to do that, but because they felt like it was life and death. You had to do it. And so there needs to be a lot of, I think, crypto itself, and the non-CBDC space of crypto needs to evolve, and more protections and more regulation in that space, at least in the United States, I think, would meaningful change the CBDC debate.


And I also think we should be very skeptical about a CBDC being a positive — net-positive policy for the United States. If we do not institute strong congressional oversight and strong congressionally designed controls of the capabilities of a CBD—and also just embed privacy, like you’ve all been talking about—I don’t think if we had to write a CBDC bill tomorrow any of that would be included. That’s why I think it would be a very dangerous game in the near future.


Prof. J.W. Verret:  Well, luckily, I think the Fed has recognized they can’t do without statutory authority—at least for now in the Hamilton Project. And the number three ranking member of Congress, as we just learned, very anti-CBDC, so it’s not going to pass the House anytime soon.


It doesn’t seem like there’s much appetite for it, even among crypto critics. They don’t really know what to do with this tool, so at least we’ve got some time. 


Let me ask just a follow-up question. Isn’t it unfortunate, and why do you think it’s the case—maybe it’s just risk aversion—that — Circle’s USDC is, man, it’s been a great onboarding tool for crypto, and it’s been a tremendous tool. I’d love to see them get their charter. But they’re not exactly cypher punk, right?


It’s centralized. It’s pretty censorable. They have not, I think, abused so far their censurability powers, but it is censorable; it is centralized. It’s very much not-cypher punk—very fiat backed.


Why does it seem like they’re not going to get the limited purpose charter that they’re asking for? That’s a net positive for government control of this space.


William Hughes:  There’s a lot of politics with the traditional banking system, and getting an upstart and giving it this new preeminent special status that arguably is — puts it in a better spot than incumbents that have been playing by the rules and agree to be pushed around by the government when they need to be. 


There’s a general right now in D.C., anybody who’s sort of sending the atmosphere is that tech generally is bad. And just like there are a number of voices and people in and around D.C. who view the ability of companies like Google and Facebook and the like to grow into such — they have such dramatic influence and be pervasive in all aspects of our lives that that was a huge mistake.


I think a lot of that is revision—thinking that things could have been done earlier on to prevent that or change that or make it meaningfully better. I think that’s sort of the bias of centralized planners being like, “If only we had more information available to us, we would have done the right thing or taken the opportunity to exercise more of our power. Things would be better.”


I think that some of that thinking — a lot of that thinking is folly. But they look at a company like Circle or any of these others, and there’s this reluctance to be burned again by anointing the next major financial power by giving them some special treatment allowing them to do something new.


But, I mean, the simple fact is other parts of the world are moving forward with this. Once MiCA goes active, like June July, there’s 12 months until those stablecoin provisions become effective as a matter of law. So Europe is off and running. They have market structure figured out. Have they done it perfectly? No.


Are there invariably going to be problems with it? Yes. But they are not sitting at the starting line arguing about who gets to take the first step. They’re off and running.


It’s not preferable, but the U.S., in many respects, is going to be taking cues from other countries, both about what issues need — what questions need to be called and how to answer them. And the U.K and the EU are very happy setting standards here, and perhaps the United States can learn about some of their mistakes. And we’re invariably going to make some of our own.


The irony here in terms of the U.S., we’re the great financial power or the great positioned incumbent—the same old story is playing again. Upstarts people who are not — don’t have a monopoly are trying new things and more willing and more excited about experimenting in new spaces.


And if crypto is a thing, the U.S. is going to be playing catch up. Maybe that’s not too our meaningful detriment over the long term. But the initial rules, we’re certainly not in a position to write them in a way that has global reach. 


I’d prefer the United States having a more central role in dictating the terms of discussion because Europe and the U.K. do not have as robust affinity to something like a Bill of Rights like we do here. And I think if we’re rulemaking, we would be well positioned to imbue a lot of the regulatory framework with some of those controls on government. But maybe we’ll have our shot whenever we get around to it.


Jim Harper:  Bill is segueing right into the elephant in the room that I want to bring forward, if it’s all right. I don’t want to jump on further questions you have. But in the background here for me anyway is present day U.S. financial surveillance policy, right?


All of these discussions seem to be premised on what are we doing about this thing as if it’s a fixed star in the sky that can’t be changed. With some embarrassment, I’ll tell you that 20 — it’s about 20 years ago. As a young privacy advocate, I was asked to speak to the Bank Secrecy Act advisory group in the beautiful cash room in Treasury. 


And I gave a nice talk about my perspective on what privacy is and why it’s important and all the other things. And at the conclusion, I said, “Oh, and by the way, everything you do is unconstitutional,” and I haven’t been asked back.


But it is. The Bank Secrecy Act regime has the presumption of innocence upside down. It’s the equivalent of a general warrant. It dragoons the financial services sector into surveillance of people who are suspected of no crime. It makes no sense. It doesn’t fit with our constitutional structure and our laws, but there’s this exception that comes out of a couple of cases in the early 70s.


We’re standing on a boat talking about which fishing reel we’re going to use to bring in the fish, and this huge shark—called the financial surveillance regime—the size of our boat is swimming around underneath us. And I think it would be worthwhile for people in crypto and in financial services generally to reopen that discussion.


I think it’s unconstitutional. I also think it’s cost ineffective, that is, PSA compliance. You can find numbers all over the place, but it’s easily upwards of 10 billion, maybe 20 or 30 billion dollars a year globally. And what are we getting back for that? SARS are usually the thing that law enforcement go and get after they already have their suspect and after they already have plenty of evidence. They go and get a little bit more from SARS.


We hear about SARS having the potential to break up criminality and terrorism after the fact. What that tells us is that the other layers of security are doing the work. And this financial surveillance regime we keep around because of its great potential. But that potential is never realized. It’s usually costly in dollar terms, also in privacy, and as we’re seeing in this conversation, in innovation terms.


We’re all frozen because of the financial surveillance regime and how to move forward as crypto or CBDC in light of the financial surveillance regime. So that’s kind of a call to not just crypto but the broader financial services world. Let’s do a real reassessment.


And that’s something that Chris Giancarlo has talked about a lot in terms of CBDC is that CBDC comes with a reassessment of financial surveillance.


William Hughes:  And let me just tack onto that. One of the real — I think crypto-native folks are — have a bias towards raising those issues, and I think it’s been to an overall detriment to the policy discussion in D.C. about how to regulate crypto only because there is not a lot of patience and engagement on rethinking fundamentals that underlie our Bank Secrecy Act AML compliance regime, that is, that defines our traditional markets.


If a cypher punk company comes in and says, “AML is garbage. It’s a waste of money. It’s unconstitutional. And therefore, we’re going to do something else,” the conversation never proceeds past that point.


And so there’s a real stumbling block about dealing with market structure issues. I was in Brussels a couple weeks ago talking with AML policy people at the EU commission. They don’t want to budge one inch on their fundamentals about what an AML regime means in the financial context. 


And they don’t want to hear about any of the promises or capabilities of crypto. They go like, “No, this is how it’s done. This is what an AML regime requires.” And therefore, when we’re coming up with a system that’s going to be complementary to MiCA and going to be imposed by member states, you better believe that a lot of the stuff that traditional finance is required to do, players in the crypto space are going to require to do.


And this is going to be — undermine more the efficiencies and the benefits of crypto than anything MiCA would do. So AML is going to be a major, major stumbling block. I don’t know how the industry can have an evolving and a more forward-leaning conversation with regulators when there is such a gap as to whether we can rethink fundamentals about AML regimes because right now when you bring it up, both parties just diverge, and nothing productive is even talked about anymore. So it’s a very important issue, and it’s a very hard one to solve.


Prof. J.W. Verret:  Well, I wonder whether it’s worth the conversation with regulators in this area. I’ve come to view that I think it’s great to try to litigate and try to build on Justice Gorsuch’s skepticism of the third-party doctrine itself, or if you maintain the third-party doctrine, then make sure it includes recognition that noncustodial DeFi intermediaries are not under the third-party doctrine and just go ahead and build.


And as long as the government can stop the Apple Store from hosting — or can stop Google Service from hosting Samurai Wallet, as long as I can get Samurai Wallet, as long as I can get my Zcash wallets, Monero wallet, then that community can build outside of that regime in a way that is untraceable by chain analysis, and maybe that’s the only future that’s possible, right?


Maybe that’s a little bit cypher punk — too Cypherpunk for D.C.




William Hughes:  But the question is — yeah. The question is really, “Where is the public going to go,” right? Are they going to go to the app that’s provided on the app store and then Google Chrome — the Google Play store, or are they going to go to some website to download the wallet that is purposefully excluded from those venues because explicit regulation prohibits them from offering it, or they just decide — Google and Apple just decide, “It’s better that we just don’t. Well, we’re just not going to be a platform where you can find those things.”


Unless people vote with their feet and care much more vocally about privacy and about their freedom to transact without surveillance, then my fear is that the major players will just choose risk aversion as opposed to embracing innovation.


Prof. J.W. Verret:  That’s a danger, but, I mean, Cake Wallet is still there, and there’s a lot of Monero on the dark markets. I’m sure Apple has gotten pressure already, and they’ve resisted. Maybe they won’t always, though. Maybe they won’t always.


Michael Mosier:  If I can make one quick point because then I have to run to a meeting. But I think Bill is bringing up an important point that, on some level, we should see as an opportunity in the crypto and Web3 space. And this probably gets us into the Warren Marshall bill as I leave. I’m sorry about that. 


But I think it’s a critical point that, one, KYC is not — first of all, is not even a thing in the regulations. And I think there’s aspects of the Warren Marshall bill that presumes that there’s such a thing as KYC that’s required for everything.


And I think there are even folks at FinCEN that would say, “Not in my name.” There’s no requirement for everything, and we don’t want data dumps from people. But I think it’s also where the crypto and Web3 space, rather than necessarily being in your face, we’re just not playing by rules is sort of, “Hey, this is a different paradigm. There’s a lot of data processing here.”


And bringing in folks from Web2, like Google Cloud, AWS, key management, like 1Password and Keeper and some of those folks that are doing key management and showing folks like, “It’s not just us against burning down the financial system and having Jamie Diamon calling the secretary of the Treasury and the head of the Federal Reserve trying to maintain a mote, but rather pulling them in a little bit more and saying, “Hey, wait a minute. This is data processing at a fundamental level. These are DNS resolvers.”


Validators existed in DNS resolution and other places well before we started calling them that here. You’re all implicated in this. And once we start creating these data collection requirements at infrastructure level, that could easily implicate a lot of you.


And I think bringing people into that conversation is helpful and also can help at a macro level, I think, what, J.W., you’ve been quite a champion of is like, “Let’s think about this. What is the data protection piece of this that we need to be protecting?” and also that when a politician that might be putting a bill up for electoral reasons noting that this is a slippery slope that, I think, puts us into the data world in a way that is not good for people and that we need to be protecting, including as Bill said, if we’re going to be competitive in a global world.


There just has to be much more modularity and inoperability than what’s envisioned in something like this. So with that, I apologize. I have to run, but I will —


Prof. J.W. Verret:  I would just emphasize your point as you’re leaving that the Warren Marshall bill is an assault on password protectors, on basic data privacy, and uses of encryption outside of finance, which makes it so anti-security. That’s one of the problems of the bill. Maybe [inaudible 01:25:40]. Anybody else want to weigh on this legislation? 


Basically, the idea is Senator Warren’s bill, she’s gotten Senator Marshall on board. She had tried to recruit more Republican senators. She has failed in that effort thus far, and thank goodness she has failed in that effort. She has not exactly built up the capital to try to reach across the aisle in her career in Washington.


But basically speaking, among the things it does, it outlaws uses of privacy tools in crypto and finance, which is very, very scary stuff. Anybody want to weigh on it?


Paul Brigner:  I would like to weigh in on that if you don’t mind, J.W.


Prof. J.W. Verret:  Yeah, go ahead.


Paul Brigner:  I think that some of the points that were talked about earlier, I think Bill brought up the concerns with national security. And that relates directly, I think, to the angles that Senator Warren is headed down with the Digital Asset Anti-Money Laundering Act trying to suggest that we have to shut down all of this activity in crypto—basically, bringing it all under the AML regime and making it part of the financial surveillance ecosystem that has been growing over time because of the national security concerns.


And as you just said, this is talking about not just cryptocurrency, but it relates to the broader ecosystem of all technology—of using encryption in all of our technologies. And that’s what’s at risk here.


So I want to make that very clear. And my colleague, I would just like to say that he wrote an excellent article that was in Forbes Digital just this last weekend, and it talks about this issue specifically. The title is Encryption: The Necessary Tool for a U.S. National Security and the Intelligence Community.


I would recommend everyone take a look at that. He does a great job of outlining all the reasons why encryption is absolutely necessary for our national security. So we really shouldn’t be viewing these issues as antagonistic to each other. We need to the encryption. This is an important tool for our national security, not against it.


Jim Harper:  Bill also mentioned the crypto wars in his stuff, and it caused me to think. I don’t think it’s easy or quick. But ultimately, encryption one, and it would be very nice to see crypto win and our freedoms win. 


I’m for all comers, right? So I’m working with the Digital Dollar Project to try to map out a CBDC that can be acceptable in the United States, whether that happens or not—allcomers. I’m a big fan of Zcash and Zooko. I hope success for everybody, right? 


And in the meantime, I’ve grown a little disheartened with the cypherpunk side of things because there are billions of dollars on the table if we can get to the more efficient payment system, a U.S. CBDC that is truly privacy protective all the way, will actually help export U.S. values and maybe put us back on top of that hill that Ronald Reagan spoke about. That’s corny enough that I’m going to go on mute again right now. Thanks for hearing me out.


Prof. J.W. Verret:  Well, that’s definitely a hill to climb. We’re at 10:30. But I just want to give — does anybody on our panel, you feel like you have something you really want to say — weigh in? Go ahead to close it out.


William Hughes:  All I’ll say is you see encryption one, right? The government can’t make Apple unlock a phone for them. You’re allowed to use WhatsApp and its end-to-end encryption communications, even though it makes the FBI’s life very hard in many instances.


And crypto is going to be the same way. If it’s useful, if people love it, if they want it, the great thing about living in a democratic republic, like the United States, is that the policy will move to where — to serve what the people want to do. 


Tornado Cash wasn’t used broadly enough to stop it from being able to be — it would be politically impalpable to sanction Tornado Cash if everybody used it—just like it’s politically unpopular to block TikTok in the country.


So crypto is going to live and die on its own merits, and a CBDC should be considered in a similar methodology if it’s actually going to be useful both for the Fed’s purposes and the country’s purposes. Let’s do it right. If we don’t need it, let’s not try to convince ourselves we do just because some autocratic governments elsewhere in the world are particularly interested in relying on one to support its surveillance state.


Prof. J.W. Verret:  Anybody else? All right. Steve, do you want to close us out?


Steven D. Schaefer:  Thank you to all of our panelists and to you, the audience, for joining us today. For more content on the regulatory state, please visit That’s Thank you.




Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at




This has been a FedSoc audio production.

Tom Emmer


U.S. House of Representatives

J.W. Verret

Associate Professor of Law

Antonin Scalia Law School

Paul Brigner

Head of U.S. Policy and Strategic Advocacy

Electric Coin Company

Jim Harper

Nonresident Senior Fellow

American Enterprise Institute

William Hughes

Senior Counsel and Director of Global Regulatory Matters

ConsenSys Software

Michael Mosier

General Counsel

Espresso Systems

J.W. Verret

Associate Professor of Law

Antonin Scalia Law School

Cyber & Privacy
Emerging Technology
Financial Services & Corporate Governance

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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