TESTIMONY OF MORGAN RICKS Professor of Law Vanderbilt University Law School before the United States House of Representatives Committee on Financial Services Task Force on Financial Technology June 11 2020 Chairman Lynch Ranking Member Emmer and members of the Task Force thank you for the opportunity to testify today on the topic of “Inclusive Banking During a Pandemic Using FedAccounts and Digital Tools to Improve Delivery of Stimulus Payments ” The coronavirus crisis has highlighted critical shortcomings in the U S system of money and payments Economic Impact Payments EIPs authorized by the CARES Act have been central to the federal government’s policy response to the pandemic and its economic fallout EIPs can provide critical help to individuals and families struggling to make ends meet during an economic disruption and they can soften the blow of macroeconomic crises by boosting aggregate spending But to be maximally effective in providing relief to individuals and families and stimulating economic activity EIPs must arrive quickly Unfortunately in the wake of the CARES Act millions of EIPs have not been distributed as rapidly as one might have hoped Even taxpayers with direct deposit information on file with the I R S —the first to receive their relief payments—often had to wait several days for their payments to clear through automated clearinghouse ACH systems This is a meaningful delay in the context of an unfolding economic disaster On top of that tens of millions of Americans 1 have received or will receive their EIPs as paper checks which must be printed and physically delivered—a time- and labor-consuming task When time is of the essence paper check distribution is far from ideal Why has the federal government resorted to distributing millions of paper checks rather than paying everyone electronically Part of the problem is that many Americans do not fully participate in the mainstream system of money and payments Whereas bank account penetration in other advanced economies like Canada France Germany Japan and the United Kingdom exceeds ninety-nine percent 1 6 5 percent of U S households made up of 14 1 million adults and 6 4 million children are unbanked meaning that no individual in the household has a bank account 2 Another 18 7 percent of U S households made up of 48 9 million adults and 15 4 million children are underbanked meaning that despite having a bank account they rely to some extent on expensive nonbank services—such as nonbank money orders check cashing and payday loans—for payments and other financial needs 3 Un- and under-banked households are primarily low-income and disproportionately minority Banks have little incentive to service low-balance accounts because it is typically unprofitable to do so Consequently bank branch locations are less prevalent in low-income communities and their hours of operation are inconvenient for many prospective users Minimum balance requirements account fees and delays in check clearing deter low- and moderateincome households from opening or retaining accounts Bank of America announced in 2018 that it would begin imposing a $12 monthly maintenance fee on all accounts not meeting certain 1 See World Bank Global Findex Database 2014 Measuring Financial Inclusion around the World at 84 2 See 2017 FDIC NATIONAL SURVEY OF UNBANKED AND UNDERBANKED HOUSEHOLDS 1 3 See id 2 criteria including minimum balance criteria 4 Other factors also come into play For example the second most cited reason for lacking a bank account is “don’t trust banks ” 5 There can be little doubt that this distrust is attributable in part to previous bad experiences with banks such as unexpected costly overdraft charges Congress has at least two policy levers at its disposal to bring un- and under-banked households into the financial mainstream One approach would be to impose universal service requirements on U S banks an approach that has been used in countries such as Canada 6 An alternative approach would be direct public provisioning the federal government could supply digital money-and-payment services directly to the general public In the remainder of my testimony I will focus on one such public option expanding access to the bank accounts the Federal Reserve already offers to a small favored set of clients These accounts consist of digital dollars—they are dollar balances maintained as ledger entries on the Fed’s electronic books The Fed’s digital dollar accounts are highly attractive offering instant payments higher interest than ordinary bank accounts and full government backing no matter how large the balance with no need for deposit insurance These accounts are currently restricted to an exclusive clientele consisting of banks certain other large financial institutions and certain governmental entities 7 Privileged access to these accounts creates a striking 4 See Rachel Louise Ensign Bank of America No More Free Checking for Customers With Low Balances WALL ST J Jan 22 2018 5 See 2017 FDIC NATIONAL SURVEY OF UNBANKED AND UNDERBANKED HOUSEHOLDS 24 6 Bank Act Canada § 448 1 Access to Basic Banking Services Regulations § 3 7 In addition to U S depository institutions see 12 U S C § 342 the Federal Reserve is authorized to maintain accounts for the U S Treasury see 12 U S C § 391 certain government-sponsored enterprises in the residential mortgage area see 12 U S C §§ 1435 1452 d 1723a g foreign governments banks and central banks see 12 U S C §§ 347d 358 certain international organizations such as the International Monetary Fund and the World Bank see 22 U S C § 286d and certain designated financial market utilities see 12 U S C § 5465 as well as assorted other governmental and government-sponsored entities that I omit here 3 asymmetry at the core of our monetary framework government-issued physical currency is an open-access resource available to all but government-issued digital currency in the form of central bank accounts is not Under the FedAccount proposal Congress would direct the Federal Reserve to give the general public—individuals businesses and institutions—the option to hold accounts at the central bank The FedAccount program would put government-issued digital or “account” money on par with government-issued physical currency transforming digital dollars into a resource that anyone can use Digital dollars would be an open-access resource a form of public infrastructure just like the paper dollars that the Fed issues Under the version of the FedAccount proposal that I and my coauthors have described 8 FedAccounts would offer all the functionality of ordinary bank transaction accounts except for overdraft coverage They would come with debit cards for point-of-sale payments and ATM access They would support direct deposit and online bill pay Account holders could access their accounts on the internet or through a mobile phone application Monthly statements would be supplied by email preferably or in hard copy There would be a customer service number But the Fed would charge no fees and would not impose any minimum balance requirements FedAccounts would also have all the special features that banks currently enjoy on their central bank accounts real-time payments high interest compared with ordinary bank accounts and full government backing with no need for deposit insurance Moreover the Fed could partner with the U S Postal Service to serve as a ubiquitous physical branch network for these accounts Thus FedAccounts could be merged with postal 8 See Morgan Ricks John Crawford Lev Menand Central Banking for All A Public Option for Bank Accounts THE GREAT DEMOCRACY INITIATIVE June 2018 Morgan Ricks John Crawford Lev Menand FedAccounts Digital Dollars GEO WASH L REV forthcoming 2020 4 banking proposals to create a robust public system for money and payments 9 The U S moneyand-payments system would in effect become fully public infrastructure akin to roads sidewalks public libraries and the judicial system Viewed from this infrastructural perspective exclusion from the mainstream money-and-payments system is another dimension of the “digital divide” that has been exacerbated by the COVID-19 crisis 10 Opening up access to FedAccounts would offer a range of substantial public policy benefits • Financial inclusion Properly structured the FedAccount program could bring millions of households into the mainstream system of money and payments This would not only lubricate future EIPs as noted above but also improve economic well-being 11 • Consumer protection FedAccounts would lessen consumers’ need for expensive nonbank credit products such as payday loans to cover cash shortfalls and emergency expenses both because it would speed up payments see below and because it would help individuals qualify for credit cards and other forms of bank credit which are cheaper and safer • Financial stability FedAccounts would likely reduce the probability of future financial crises by “crowding out” unstable deposit substitutes such repurchase agreements or “repo ” Eurodollars and money market mutual fund shares which are a major source of financial instability 9 Regarding postal banking see Mehrsa Baradaran Postal Banking’s Public Benefits AMERICAN AFFAIRS Fall 2018 Mehrsa Baradaran It’s Time for Postal Banking 127 HARV L REV F 165 2014 10 See Klint Finley When School is Online the Digital Divide Grows Greater WIRED April 9 2020 11 FedAccounts Would Provide Economic Relief—and Inclusion—in the Short and Long Term ROOSEVELT INSTITUTE Apr 22 2020 5 • Payment speed and efficiency Payment delays are costly for the economy as a whole and are especially so for households living paycheck to paycheck 12 While the Fed uses real-time gross settlement RTGS for interbank transfers retail payment networks in the United States are far slower—another respect in which our payment system lags behind much of the rest of the world FedAccounts would make the U S system faster and more efficient because all payments between FedAccounts would clear in real time on the Fed’s books just like interbank transfers have for decades • Monetary policy transmission Since late 2008 the Federal Reserve has implemented interest rate changes by adjusting the interest rate it pays to banks on their central bank accounts But the Fed has struggled at times to achieve efficient “pass-through” of these interest payments to broader market interest rates FedAccounts would improve the transmission of monetary policy because the Fed’s interest-rate adjustments would be transmitted directly to a wide swath of the public rather than just to banks Congress could also authorize the Fed to conduct direct “helicopter drops” of money into FedAccounts for emergency stimulus if necessary 13 • Payment system tolls interchange fees The FedAccount program could greatly reduce payment system tolls because the Fed presumably would not charge interchange fees to merchants accepting its debit cards Reducing aggregate interchange fees would be a boon to businesses large and small Ultimately the benefits would be passed along to consumers in the form of lower prices for goods 12 See Federal Reserve System Strategies for Improving the U S Payment System Jan 26 2015 at 38–39 Aaron Klein How the Fed Can Help Families Living Paycheck to Paycheck Brookings Institution Nov 22 2017 13 See e g Julia Coronado Simon Potter Securing Macroeconomic and Monetary Stability with a Federal Reserve-backed Digital Currency PIIE Policy Brief 20-4 2020 6 and services In addition the Fed could process peer-to-peer payments between FedAccounts for free creating a frictionless system Far from straining fiscal resources FedAccounts would likely generate revenue for the government provided the program attracted profitable large accounts and not just small accounts Central banks’ asset portfolio returns typically exceed their interest payments and other expenses by a wide margin These earnings are called “seigniorage” fiscal revenue from money creation The amounts are large The Fed remitted $81 billion $65 billion and $55 billion in earnings to the U S Treasury Department in 2017 2018 and 2019 respectively 14 The FedAccount program might very well augment these remittances because the Fed’s incremental account liabilities would be matched by incremental interest-earning assets In effect largebalance FedAccounts would generate substantial earnings for the Fed which could cover the cost of servicing smaller accounts To be sure the FedAccount program would present implementation challenges It would require the Federal Reserve to build the capacity to service retail accounts which would be a major operational undertaking In addition cybersecurity and fraud prevention for FedAccounts would place a significant new burden on the Fed While the Fed already runs a highly secure information technology system with expert cyber-defense capabilities at the system level 15 even the most robust perimeter security would not stop customers from compromising their individual 14 See Board of Governors of the Federal Reserve System Press Release Federal Reserve Board Announces Reserve Bank Income and Expense Data and Transfers to the Treasury for 2019 Jan 10 2020 15 See Shane Harris Exclusive Meet the Fed’s First Line of Defense Against Cyber Attacks FOREIGN POL’Y Apr 29 2014 describing the National Incident Response Team the Fed’s “crack cyber security unit” Furthermore the Treasury auction process now includes hundreds of bidders and transacts trillions of dollars per year See Treasury Auctions Federal Reserve Bank of New York available at www newyorkfed org 7 accounts—misdirecting funds losing their passwords or falling prey to malicious actors 16 But the Fed could turn to the Department of Homeland Security or third-party contractors to ensure that its account security system is state of the art Congress and the Fed would also need to establish privacy protections to ensure that governmental actors do not misuse customer information or inadvertently or deliberately share it with third parties Of course the degree to which existing bank accounts are “private” should not be overstated Information contained in bank records is not protected by the Fourth Amendment 17 Congress has chosen over time to strike a balance between privacy concerns and other priorities especially crime prevention and national security Bank Secrecy Act compliance by banks requires extensive reporting to the government of qualifying financial transactions FinCEN’s database of currency transaction reports and suspicious activity reports contains hundreds of millions of entries the database is searched tens of thousands of times daily by law enforcement agencies and government investigative bodies 18 In addition the Federal Reserve is already subject to privacy laws but new legislation might adopt more stringent privacy protections akin to those used for taxpayer information The IRS has adopted comprehensive policies and procedures to protect private data 19 and invests heavily in compliance 20 Data access 16 See e g Stacy Cowley Zelle the Banks’ Answer to Venmo Proves Vulnerable to Fraud N Y TIMES April 22 2018 17 This is the “third-party doctrine ” See United States v Miller 425 U S 435 1976 holding that financial records given to a third-party financial institution receive no Fourth Amendment protection Also bank accounts can be garnished or levied by creditors including federal government agencies acting in their creditor capacities FedAccounts would be no more readily garnishable than commercial bank accounts 18 See Brian Monroe After Upbeat Congressional Hearing FinCEN Could Get Help in Information Sharing Hiring GTOs Assoc of Cert’d Fin Crime Specialists May 5 2017 19 Internal Revenue Manuals Part 10 Security Privacy and Assurance 20 See e g 2017 Annual Privacy Data Mining and Section 803 Reports passim Dep’t of the Treasury describing measures implemented by the IRS among other departments in privacy protection and compliance 8 is carefully limited and tracked within the agency 21 and unauthorized disclosure and even inspection are criminal offenses punishable by imprisonment 22 in addition to civil damages including punitive damages 23 In creating a legal and logistical framework for privacy protection the IRS could serve as a useful model for FedAccount The Fed’s unmatched level of administrative independence supplies an extra layer of protection in this regard unlike the IRS the Federal Reserve Banks are not part of the executive branch Let me conclude by comparing FedAccounts to other approaches to implementing a digital dollar Over the past few years central bankers around the world have become increasingly worried that privately controlled digital currencies like Facebook’s Libra will relegate them to the sidelines of monetary affairs To avoid this fate central banks have been studying and in some cases actively pursuing issuing digital currencies of their own so-called central bank digital currency CBDC China’s digital yuan is reportedly in pilot runs 24 The FedAccount system is a CBDC—it is a digital dollar—but it differs from most CBDC proposals Those proposals typically envision a closed system of digital wallets that is segregated from the existing system of money and payments further balkanizing dollar-based payments Oftentimes CBDC proposals foresee a digital dollar based on distributed ledger technology like the blockchain technology that undergirds Bitcoin and prospectively Libra 25 21 See Alan Rappeport Will a Leak Reveal Trump’s Tax Returns Don’t Hold Your Breath N Y TIMES Mar 9 2017 22 See 26 U S C § 7213 a 1 disclosure 26 U S C § 7213A inspection 23 See 26 U S C § 7431 24 Aditi Kumar Eric Rosenbach Could China’s Digital Currency Unseat the Dollar FOREIGN AFFAIRS May 20 2020 25 See e g Tommaso Mancini-Griffoli et al Casting Light on Central Bank Digital Currency IMF STAFF DISCUSSION NOTE Nov 2018 at 29 describing a CBDC design involving “preloading tokens onto a wallet” Benoit Cœuré The Future of Central Bank Money speech at the International Center for Monetary and Banking Studies Geneva May 14 2018 “ C entral banks today could make use of new technologies that would enable the 9 By contrast FedAccounts like existing reserve accounts that banks maintain at the Fed would be fully integrated and seamlessly interoperable with the mainstream payment system—a significant advantage FedAccounts would also rely on low-cost reliable systems and technologies that the Federal Reserve has used successfully for decades To conclude FedAccounts have the potential to deliver an array of transformative public policy benefits both within and outside of times of crisis The proposal deserves serious consideration from Congress Thank you again for the opportunity to testify today at this important hearing I look forward to answering your questions introduction of what is widely referred to as a ‘token-based’ currency—one based on a distributed ledger technology DLT or comparable cryptographic technology ” 10