WHAT'S IN YOUR DIGITAL WALLET? A REVIEW OF RECENT TRENDS IN MOBILE BANKING AND PAYMENTS
Summary
The printed record of a hybrid hearing titled "What's in Your Digital Wallet? A Review of Recent Trends in Mobile Banking and Payments" before the Task Force on Financial Technology of the Committee on Financial Services on April 28, 2022. Chairman Stephen F. Lynch presided. The witnesses are Carrillo of Yale Law School, Choudhary of the Software Freedom Law Center, Marcellin of Americans for Financial Reform, McAllister-Young of America Saves, Consumer Federation of America, and Talbott of the Electronic Transactions Association. Lynch's opening statement says the digital wallet space reached a value of $120 billion in 2021, and members questioned the witnesses on digital wallets and crypto transactions. The record, Serial No. 117-82, adds written statements from the American Bankers Association and PayPal Inc.
Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used
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“WHAT'S IN YOUR DIGITAL WALLET? A REVIEW OF RECENT TRENDS IN MOBILE BANKING AND PAYMENTS.”
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[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
WHAT'S IN YOUR DIGITAL WALLET?
A REVIEW OF RECENT TRENDS IN
MOBILE BANKING AND PAYMENTS
=======================================================================
HYBRID HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
APRIL 28, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-82
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-132 PDF WASHINGTON : 2022
-----------------------------------------------------------------------------------
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
JIM A. HIMES, Connecticut WARREN DAVIDSON, Ohio, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida PETE SESSIONS, Texas
MICHAEL SAN NICOLAS, Guam BLAINE LUETKEMEYER, Missouri
RITCHIE TORRES, New York TOM EMMER, Minnesota
NIKEMA WILLIAMS, Georgia BRYAN STEIL, Wisconsin
C O N T E N T S
----------
Page
Hearing held on:
April 28, 2022............................................... 1
Appendix:
April 28, 2022............................................... 25
WITNESSES
Thursday, April 28, 2022
Carrillo, Raul, Associate Research Scholar, Yale Law School, and
Deputy Director, Law and Political Economy Project............. 5
Choudhary, Mishi, Legal Director, Software Freedom Law Center.... 7
Marcellin, Renita, Senior Policy Analyst, Americans for Financial
Reform......................................................... 8
McAllister-Young, Kia, Director, America Saves, Consumer
Federation of America (CFA).................................... 10
Talbott, Scott, Senior Vice President, Government Affairs,
Electronic Transactions Association (ETA)...................... 11
APPENDIX
Prepared statements:
Carrillo, Raul............................................... 26
Choudhary, Mishi............................................. 37
Marcellin, Renita............................................ 41
McAllister-Young, Kia........................................ 48
Talbott, Scott............................................... 51
Additional Material Submitted for the Record
Lynch, Hon. Stephen F.:
Written statement of the American Bankers Association........ 57
Joint written statement of the Consumer Federation of
America, the National Consumer Law Center on behalf of its
low-income clients, the National Consumers League, and U.S.
PIRG....................................................... 73
Written statement of PayPal Inc.............................. 89
WHAT'S IN YOUR DIGITAL WALLET?
A REVIEW OF RECENT TRENDS IN
MOBILE BANKING AND PAYMENTS
----------
Thursday, April 28, 2022
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 2:42 p.m., in
room 2128, Rayburn House Office Building, Hon. Stephen F. Lynch
[chairman of the task force] presiding.
Members present: Representatives Lynch, Himes, Lawson,
Torres, Williams of Georgia; Davidson, Sessions, Luetkemeyer,
and Steil.
Chairman Lynch. Good afternoon. The Task Force on Financial
Technology will now come to order.
Without objection, the Chair is authorized to declare a
recess of the task force at any time. Also, without objection,
members of the full Financial Services Committee who are not
members of the task force are authorized to participate in
today's hearing.
Today's hearing is entitled, ``What's in Your Digital
Wallet? A Review of Recent Trends in Mobile Banking and
Payments.''
I will now recognize myself for 5 minutes for an opening
statement.
Digital wallets are software applications used to
facilitate electronic payments and transactions and are rapidly
becoming a larger part of our financial ecosystem. They are
offered by a variety of players. Digital wallet providers range
from large technology companies such as Google and Apple, to
fintech companies such as PayPal and Block, and a consortium of
banks which offer Zelle.
The digital wallet space has grown dramatically in recent
years and reached a value of $120 billion in 2021. In addition
to payment-focused digital wallets, we have seen the emergence
of digital asset wallets which can hold cryptocurrencies and
stablecoins. Digital wallets have grown in popularity, in part
because of the ease and convenience that they offer, allowing
individuals to send and receive money quickly with just the use
of their phone. The use of digital wallets has also raised
several key policy questions around consumer data privacy,
security, and vulnerability to fraud.
Notably, according to a recent report, 18 million consumers
were defrauded through scams involving digital wallets in 2020,
and with the rate of adoption, that number is expected to
increase. So, it is fair to ask whether consumers are
unknowingly trading the short-term ease and convenience of
digital payments for the long-term loss of personal financial
data and a latent vulnerability that could undermine their
financial security. And as large technology companies enter the
financial services space, how do we ensure that acquisition of
personal data is limited and appropriate, and that both
personal data and financial data are separate and secure?
From a consumer protection standpoint, the law remains
unsettled as to how consumer protection laws apply to digital
wallets, particularly in cases of fraud. The New York Times
recently published an article that highlighted the major fraud
issues involved with Zelle, which is a payment app created by
America's largest banks and other payment platforms. The New
York Times reported that Zelle had become a, ``favorite of
fraudsters,'' and that apparently, the major banks were
reluctant to protect consumers who were unwittingly scammed
using the platform application that the banks themselves had
created. So, we are faced with the question, who should be on
the hook when a consumer has been tricked into transferring
their hard-earned savings by fraudulent online activity while
transacting through digital wallets on an online banking
platform?
To settle the regulatory ambiguities and to incentivize
resiliency in digital commerce, the Protecting Consumers from
Payment Scams Act, which is noticed with this hearing, would
amend the Electronic Fund Transfer Act to protect consumers
when they are defrauded into sending money by a scam, or even
when the consumer was induced to make that payment under false
pretenses. While proponents of digital wallets point to high
adoption rates as evidence that digital wallets can promote
financial inclusion, we should not ignore the fact that most
financial products, including digital wallets, again, require a
customer to have a bank account, which in the past has been
shown to exclude a significant segment of consumers who will
likely remain unbanked.
And lastly, as financial services move into the digital
area, the war on cash continues to spread. As we shift towards
digital commerce and away from physical cash, we leave behind a
segment of consumers who rely on physical cash because they do
not have access to digital products. These gaps continue to
highlight the need for a public sector digital payment offering
that allows for instant peer-to-peer (P2P) payments, and also
protects consumer privacy. Consumers should not be required to
surrender their personal data every time they make a simple
financial transaction. That is the Chinese model, and it
facilitates full-spectrum surveillance of the entire
population, which is the reality toward which we are moving in
this country.
To avoid that looming threat, I recently introduced the
ECASH Act, which would direct Treasury to design and pilot a
digital version of cash also known as ECASH. That bill
progresses the conversation around digital dollar design and
would work in parallel with other public sector digital
offerings, such as the Fed-issued central bank digital currency
(CBDC). ECASH would be distributed directly to and held by the
public on a hardware secure device. It would allow individuals
to make instant peer-to-peer payments with no consumer data or
transaction tracking, and without the use of a bank account. I
hope that bill will work to address many of the challenges I
described with digital wallets, and will have a strong
financial inclusion implication. I look forward to discussing
the policy questions associated with digital wallets and the
potential benefits of a public sector offering with our
witnesses.
I now recognize the ranking member of the task force, the
gentleman from Ohio, Mr. Davidson, for an opening statement.
Mr. Davidson. Thank you, Mr. Chairman, and I especially
appreciate your emphasis on cash and how it is so vital for so
many people in our economy. I always say the legal tender in
the U.S. is the U.S. dollar, not Visa and MasterCard, and it is
great because it is permissionless and the features include
privacy. So, thanks again for your emphasis on privacy. I think
it highlights that a lot of the topics that this FinTech Task
Force have tackled are truly bipartisan. The growth in payment
applications continues to drive the development of our digital
economy, while fostering further innovation. I am glad this
task force will again serve as a venue to gather the
appropriate information needed to ensure that future policies
in this space will not inappropriately hinder innovation.
As Congress contemplates a Federal standard for data
privacy, we need to ensure that any future proposals in this
space: one, will promote data minimization; two, are technology
neutral; three, will prioritize informed choice and
transparency amongst consumers; and four, will preempt State
laws so that we have a national uniform standard for privacy.
Abiding by these principles will protect liberties that have
been in place long before these new payment systems were
developed. And when I speak of this, I am alluding to the
privacy protections that were embodied within cash transactions
that existed long before we were even using electricity. The
privacy concerns cannot be understated as we consider how to
embrace these new payment tools.
I understand that some people here today will likely
discuss the positive impact that digital payments will have on
financial inclusion. However, I would emphasize that promoting
convenience to the consumer does not always equate to promoting
financial inclusion. For example, we already know that distrust
in traditional financial institutions is one of the main
reasons why some people remain unbanked or underbanked. This is
largely because these entities serve as an arm of the
government via third-party doctrine. They have essentially been
deputized to serve as agents of the government. In 2019, the
FDIC reported that 36 percent of unbanked individuals cited
lack of trust in financial institutions as a reason that they
remain disconnected from the banking system.
Therefore, if new digital payment systems look to promote
financial inclusion, we must recognize that it will only happen
if we are able to promote trust by protecting consumers from
having their personal data exploited without their consent, or,
in some circumstances, beyond their consent.
Now, as someone who talks regularly about cryptocurrency
and blockchain applications, blockchain technology, when given
the chance, I would be remiss, and everyone would surely be
disappointed if I didn't mention the permissionless nature of
the distributed ledger technology that alleviates privacy
concerns because it establishes trust in a different way. As I
am sure many are aware, blockchain technology offers privacy
protection and guarantees that traditional financial tools may
not offer, even though they can serve a common or identical
purpose.
Since the title of this hearing was published, I have had
questions from many people. Does the term, ``digital wallet,''
mean that this hearing will primarily focus on crypto? Well, I
wish that it did focus more directly on crypto. But I mentioned
this not to shift the focus of the hearing, which is a good
topic as well, but to point out that the conversation today
will inevitably lead to further discussion on true peer-to-peer
permissionless transactions carried out through hardware
wallets, self-custody on a permissionless distributed ledger
technology architecture. And that is a conversation that I very
much look forward to having with my colleagues in a
comprehensive way, and on an adjacent bill, the Keep Your Coins
Act, which protects self-custody.
But back to the focus of today's hearing, I think we will
hear some repetition from our prior task force hearing back in
the fall to discuss the CFPB's rulemaking under Section 1033 of
the Dodd-Frank Act. Like many, I am curious as to how that
rulemaking will look because it is important to adequately
address data-sharing issues on the front end and back end of
digital payments systems. It won't be until the Consumer
Financial Protection Bureau (CFPB) moves forward with that
final rule that we can actually see the digital payment space
progress forward and provide further financial convenience to
consumers in a responsible manner. Should the CFPB leave any
open-ended questions with their final rulemaking, I would then
welcome the opportunity to work with my colleagues on this
committee to responsibly write legislation that puts consumers
truly in control of their own data, while allowing the digital
economy to flourish here in the United States.
I look forward to the hearing and the discussion with our
witnesses. Thank you all for being here today, and I yield
back.
Chairman Lynch. The gentleman yields back. I do not see Mr.
McHenry, but we will reserve time for him.
Today, we are fortunate to welcome the testimony of a panel
of distinguished witnesses. First of all, we have Raul
Carrillo, who is joining us remotely. Mr. Carrillo is an
associate research scholar at Yale Law School, and the deputy
director of the Law and Political Economy Project. He has also
been enormously helpful to the committee, and to the task
force, in drafting legislation, and we are grateful for his
attendance here today.
Second, we have Mishi Choudhary, who is the legal director
of the Software Freedom Law Center.
Third, we have Renita Marcellin, who is a senior policy
analyst for Americans for Financial Reform.
Fourth, we have Kia McAllister-Young, who is the director
of America Saves at the Consumer Federation of America.
And lastly, we have Scott Talbott, who is the senior vice
president of government affairs for the Electronic Transactions
Association.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You should be able to see a timer in
front of you on your screen that will indicate how much time
you have left, and there will also be a chime which will go off
at the end of your time. I would ask that you be mindful of the
timer, and quickly wrap up your testimony if you hear that
chime, so that we can respect the time of our witnesses and
task force members.
And without objection, your written statements will be made
a part of the record.
Mr. Carrillo, you are now recognized for 5 minutes to give
an oral presentation of your testimony. Welcome.
STATEMENT OF RAUL CARRILLO, ASSOCIATE RESEARCH SCHOLAR, YALE
LAW SCHOOL, AND DEPUTY DIRECTOR, LAW AND POLITICAL ECONOMY
PROJECT
Mr. Carrillo. Thank you, Chairman Lynch, Ranking Member
Davidson, and members of the task force. I echo my previous
remarks before this task force and the committee, urging
policymakers to demand public accountability, but also public
innovation. I will tab in my initial remarks to two sets of
problems in the digital wallet space that must be overcome in
order for us to have a safe and inclusive financial system. For
simplicity's sake, I will call these two problems the banking
problem and the data problem.
First, the banking problem. Many wallets are holding
balances that are not insured by the FDIC. In cases where a
pass-through insurance is provided, customers are protected
against the collapse of a bank, but not necessarily a wallet
provider or coin issuer. This can become an unstable situation.
Deposits that are not regulated as such often form the base
layer of financial crises. This is in part due to a nod in
banking law. For instance, Section 21 of the Glass-Steagall Act
makes it illegal for an entity to accept deposits without being
regulated by a banking regulator.
Unfortunately, the Act has not defined, ``deposit,''
meaning that regulators cannot easily invoke Section 21 or any
other provision of Federal law to prevent nonbanks from
engaging in general banking activities. I believe the recent
White House memo on stablecoins makes strides in this
direction, but that the Stablecoin Tethering and Bank Licensing
Enforcement (STABLE) Act, co-sponsored by Chairman Lynch,
Representative Rashida Tlaib, and Representative Chuy Garcia,
achieves these goals more comprehensively, including by
reaching non-stablecoin wallets.
Second, the data problem. Fintech increasingly relies on
data maximization, as both Chairman Lynch and Ranking Member
Davidson indicated. Data maximization is a constant expansive
accumulation of consumer data. New fintech products, like
digital wallets, may generate helpful information, serving as
gateways to saving credit and investment. However, they also
operate within massive information networks, including consumer
reporting agencies, specialty screening agencies, data brokers,
and government agencies, which amplifies systemic security and
privacy risks by compounding data, potentially creating a data
ecosystem that is also too-big-to-fail. The risk of thefts,
hacks, and surveillance are especially pronounced for low-
income communities of color that already suffer
disproportionately from financial injustices and privacy
violations.
Unfortunately, no overarching Federal law structurally
limits the collection, use, and sale of personal data among
corporations. Moreover, there are few rules governing
information sharing between these institutions and the
government. Case in point, it was recently revealed that for a
period of over 2 years, the Department of Homeland Security
collected records from Western Union for any money transfer
over $500 to or from California, Texas, New Mexico, Arizona,
and Mexico. I grew up on the border and find the fact that my
community is not protected by the principles of the Fourth
Amendment to be entirely unacceptable.
The nature of public-private surveillance should inform the
way that we talk and think about financial inclusion. At this
point, leading scholars of data governance, security, and
privacy agree that laws on the books do not sufficiently
protect consumers. Definitionally, our notice and consent laws
cannot empower people to protect their privacy, because when
people consent to share data, we don't know how it will be used
or how it may help or harm others. A comprehensive CFPB in that
rulemaking may offer one way forward.
Ultimately, however, Congress should pass legislation
instantiating data minimization, including by limiting the
collecting, processing, and usage of data to only that which is
required to carry out an explicit, narrow, permissible purpose;
otherwise, it is not allowed. For example, signing up for a
credit card online should not lead to targeted advertising or
new accounts regardless of whether one clicks, ``I agree,'' to
data usage policies that consumers do not understand and firms
cannot and do not uphold.
Most importantly, I support legislation creating a digital
dollar and digital public options for a wide array of products,
including bank accounts for all. However, the new public system
must also be attuned to data minimization. Accordingly, I
strongly support the ECASH Act proposed by Chairman Lynch,
which would aim to replicate the privacy, security, and
financial inclusion functions of physical cash. ECASH would
work on stored value devices, storing the money offline on
hardware rather than online on software. This has distinct
security, privacy, and financial inclusion advantages. The way
it would work is, I would simply tap a card against another
person's card, or a phone against another person's phone, or a
phone or a card against a retail kiosk. The payment would
initiate regardless of whether I have an internet connection,
so long as the device has judged that there was no
counterfeiting or other foul play.
Just like physical cash, ECASH would include its own
security features and would not be used for every financial
transaction. But it would: one, reach the 1 in 3 adults in the
U.S. who lack high-speed internet access in their homes and
often in their neighborhoods who are not reachable by private
fintech; and two, preserve a space for financial privacy in the
future.
In my humble opinion, we are now having a comprehensive
national policy discussion about financial privacy for the
first time since the Patriot Act. Now is the time for public
accountability and public innovation rather than false promises
and fear. Thank you.
[The prepared statement of Mr. Carrillo can be found on
page 26 of the appendix.]
Chairman Lynch. Thank you, Mr. Carrillo.
Ms. Choudhary, you are recognized for 5 minutes. Thank you.
STATEMENT OF MISHI CHOUDHARY, LEGAL DIRECTOR, SOFTWARE FREEDOM
LAW CENTER
Ms. Choudhary. Thank you, Chairman Lynch, Ranking Member
Davidson, and distinguished members of the task force and the
committee. I am pleased to appear before you today. I am the
legal director of the New York-based Software Freedom Law
Center.
One could not send or receive email, surf the World Wide
Web, perform a Google search, or take advantage of many of the
other benefits offered by the internet without free and open-
source (FOSS) software. FOSS developers create and advance
solutions to complex problems that are decentralized, open, and
accessible to everyone. My last point today will concentrate on
getting regulatory clarity, having an open source of the
underlying tech interoperability, and the importance of
comprehensive Federal privacy legislation.
What we need is a currency or an electronic token that is
equivalent in functionality to cash, and offers all of its
benefits, including anonymity, privacy, autonomy, no
transaction fees, and addresses all of the flaws of cash. In a
rapidly-evolving technological environment, you must seek
payment methods that are convenient, inexpensive, and secure.
Our legacy transaction systems have suffered from high fees,
limited access, and modest innovation that has beset many
financial inclusion efforts. Most of the current solutions
available in the market cater to the bank customer and don't
address those who primarily work in the informal economy or are
paid in cash. That part of the American population also desires
the modern conveniences that technology offers without losing
their privacy.
The transition to digital payments was already underway,
but the pandemic accelerated adoption to a new level. Despite a
massive rate of adoption of these forms of payment, unlike the
Chinese or the Indian market that are mobile first, the U.S.
market still relies heavily on credit cards. A U.S. customer
does not necessarily have the same motivation as their Indian
or Chinese counterparts, especially because credit card systems
are backed up by various laws like the Fair Credit Billing Act
(FCBA), the Electronic Fund Transfer Act (EFTA), and the Credit
Card Accountability Responsibility and Disclosure Act (Credit
CARD Act). Non-traditional players in the market have attempted
to address some of these issues through the use of mobile
devices to improve access to financial products and services.
Digital wallets are one such example. In general, they are
linked to a bank account, a credit or debit card, or a prepaid
card, but they don't have to be.
Cryptocurrencies, which are right now stored in hot and
cold wallets--``hot'' means that they are connected to the
internet, and cold storage wallets do not require online
servers and can store the assets in the wallet--offer an
additional security layer. As we think about money in the age
of the internet, we must design for a future that is in the
public's interest, incorporates privacy by design, and
facilitates financial inclusion.
The super apps that are popular in countries like China,
and are gaining popularity around the world, underscore the
fact that concerns about data protection and privacy have not
been adequately addressed, and that the current market options
lack privacy-oriented messaging systems integrated with
payments. We need a currency or electronic token that is
equivalent in functionality to cash. Such a design finds
support in the streets, as resonated by David Chaum in the
1990s, and recently-introduced electronic currency and secure
hardware cash by Representative Lynch that directs Treasury to
commence two stage pilot programs to test a variety of ECASH
technologies.
The risks of hard money for working-class people have
always been lost in convenience or inflation. Working people
back to the Jacksonian era in the United States have much
experience with various payment systems chosen by employers
that have hurt them, so they favor hard money, government coins
that are deep in the fabric of democratic finance in the United
States. In the 21st Century, it should not matter whether what
you are waving at the cash register is a card issued to you by
a bank, or a credit union, or a hardware object that the United
States Treasury has certified as the way that ECASH is carried
around.
The structure of ECASH does not have the quality of
traceability and it preserves privacy. The software underlying
any of this technology must be free and open-source to enable
public review and audit of the source for potential security
issues. If used correctly, with adequate guardrails, digital
money presents an opportunity for financial inclusion. Any such
efforts must provide consumer protection and data privacy
aspects, often found to be woefully lacking in several such
offerings around the globe. What we need is to have
multidisciplinary research in the development of technologies
that work for those who are most disadvantaged by the current
system, those who don't have bank accounts and have to pay high
fees to access their own money, built with privacy by design.
Thank you for the opportunity to appear before you today,
and I look forward to your questions.
[The prepared statement of Ms. Choudhary can be found on
page 37 of the appendix.]
Chairman Lynch. Thank you, Ms. Choudhary.
Ms. Marcellin, you are now recognized for 5 minutes to give
an oral presentation of your testimony. Thank you.
STATEMENT OF RENITA MARCELLIN, SENIOR POLICY ANALYST, AMERICANS
FOR FINANCIAL REFORM
Ms. Marcellin. Thank you, and good afternoon, Chairman
Lynch, Ranking Member Davidson, and members of the task force.
As a daughter of immigrants who had limited access to the
traditional banking system when they first entered the U.S. and
supported their family abroad using remittances, I am
supportive of technology and financial firms that truly seek to
expand financial inclusion. However, the question is still open
on whether these products actually expand financial access. And
if we assume they do, their failure will disproportionately
harm the very communities they aim to serve, hence why they
need to be properly regulated. Policymakers should also ensure
there are sufficient safeguards to protect consumers from fraud
and erroneous transactions, abusive data collection, and
companies flexing their increased market power as more large
technology firms enter the financial services industry.
It is hard to see how digital wallets promote financial
inclusion when they are usually account- and app-based. They
usually require the consumer to link the wallets to a bank
account or credit card and a smartphone. Unbanked consumers
tend to have lower household incomes than those with bank
accounts, are often paid with paper checks, and spend about 10
percent of their income on services just to access their own
money. Additionally, unbanked households are more likely to
cancel or suspend their cellphone service for cost reasons,
hence limiting their ability to use mobile payments.
The Federal Reserve Bank of Atlanta suggested a better way
to increase financial inclusion, by giving people who depend on
cash, access to digital payment methods that do not depend on
traditional bank accounts. This is one of the goals of the
newly-introduced ECASH bill sponsored by Chairman Lynch. While
policymakers should continue pushing policies that would expand
banking access, such as postal banking, they should still
prioritize ensuring that those who rely on cash and remittances
are able to transact in our modern economy, many of whom are
lower-income communities of color.
Digital wallets do not adequately protect consumers. Many
banks fail to provide their customer any recourse when they are
victims of fraud schemes using Zelle or other peer-to-peer
apps. The same quality instantaneousness that makes digital
wallets a favorite among consumers, including myself, also
makes it a favorite among scammers. The Consumer Financial
Protection Bureau (CFPB) received over 9,000 complaints about
digital wallets between 2017 and 2021. In April 2021 alone,
there were almost 1,000 digital wallet complaints. PayPal,
which owns Venmo, and Square, which owns Cash App and Coinbase,
accounted for more than two-thirds of all digital wallet
complaints through April 2021.
Customers frequently lack recourse when problems arise with
their digital wallet. Many apps do not have a customer service
number and lack any human touch points. This results in
customers delaying reporting scams and can lead to consumers
losing the right to be reimbursed. I go into much more detail
in my written testimony on the current legal framework that
governs digital wallets. But the basic point is that the myriad
of existing laws do not adequately protect consumers when fraud
or erroneous transactions occur. The definition of an,
``unauthorized transaction,'' does not cover scams that induce
the customer to send money or cases where the device was
stolen. If this fraudulent transaction was linked to a debit
card or claim, they are not required to reimburse the consumer.
In regards to privacy concerns, the main law governing
privacy for financial institutions has gaps when we try to
apply it to digital wallets. It is not currently interpreted to
cover tech companies and only covers non-public personal
information. Technology firms are able to combine consumers'
transactional data with their browsing history. They can
combine public and private information to reveal sensitive data
about the consumer, all out of the consumer's control. Lastly,
the emergence of digital wallets as a tool for payments,
particularly when those wallets are hosted by major technology
firms, also raises questions about economic concentration and
anti-competitive practices, which I urge the committee to
further explore.
In my written testimony, I outlined numerous steps the CFPB
can take to address erroneous and fraudulent transactions. We
also urge Congress to pass the Protecting Consumers From
Payments Scams Act, which will give the CFPB unquestioned legal
authority to take the recommended measures.
Thank you for your time, and for the opportunity to speak
before you today.
[The prepared statement of Ms. Marcellin can be found on
page 41 of the appendix.]
Chairman Lynch. Thank you, Ms. Marcellin.
Ms. McAllister-Young, you are recognized for 5 minutes for
an oral presentation of your testimony. Thank you.
STATEMENT OF KIA MCALLISTER-YOUNG, DIRECTOR, AMERICA SAVES,
CONSUMER FEDERATION OF AMERICA (CFA)
Ms. McAllister-Young. Chairman Lynch, Ranking Member
Davidson, and members of the task force, it is an honor to be
invited to testify and contribute to the ongoing conversation
of digital wallets and mobile payment. My name is Kia
McAllister-Young, and I am the director of America Saves, a
national campaign that focuses on building financial stability,
resilience, and confidence, particularly with low- to moderate-
income earners, and supporting them in their quest to save
successfully, reduce debt, and get on a path toward building
wealth. America Saves is an initiative of the Consumer
Federation of America (CFA).
My goal today is to highlight the consumer voice and
experience that will hopefully add reverence and additional
context for you while working toward policy and regulation.
Experts agree, including my colleagues and advocates at CFA,
that concerns about this topic include the high prevalence of
fraud and scams, a lack of accountability, very few consumer
protections beyond disclosures and warnings, ineffective
consumer privacy, specifically around financial data privacy,
and an overall need to strengthen Federal and State oversight.
My work at America Saves allows me to interface and engage
on a continual basis with everyday consumers from all racial
and socioeconomic backgrounds, many of whom are oblivious to
the risks they are taking when using digital payment options
like PayPal, Cash App, and Zelle, as opposed to cash, credit,
and debit cards. Their choice to use these platforms is largely
due to the convenience and honestly strategic marketing and
placement. During the checkout process, consumers are presented
with several different payment options, but are rarely as
enthusiastically presented with the risks associated with those
options. Consumers naturally trust these fintech platforms
because a clear delineation between financial institutions and
mobile payment applications does not exist. The result of that
intentional opaqueness is consumers believing that mobile
payment options are regulated with the same scrutiny as banks
and credit unions.
Consumers' misguided trust of the fintech platform leaves
them vulnerable to fraud, scams, and payments being held by the
platforms with very limited and, at times, no recourse at all.
In my written testimony, I shared my own experience of how
PayPal held my funds for over 30 days back in 2018, and I have
heard numerous similar stories through my work, like that of
Lauren, who was a victim of fraud using PayPal that took over 8
months to find restitution, and Samira, a Muslim woman, an
immigrant from Trinidad and Tobago, and a small business owner
with several instances of her funds being held without clear
cause.
The lack of clarity, consumer protections, and transparency
is not evident to consumers until it is too late. Still, the
use of fintech products has dramatically increased for two
apparent reasons: public health; and inflation. Since the
pandemic, these payment options have been heavily embraced as
quick, available, and even safer ways to make transactions, and
inflation is driving low- to moderate-income earners toward
fintech credit products in order to access their pay early.
Other gaps that remain without more oversight and
regulation include immigrant citizens who often send money back
to their families and their native countries that are
disproportionately subject to alarmingly high remittance fees,
and the current trend of fintech platforms offering
cryptocurrency rather than encouraging users to work toward
achieving financial stability through saving for an emergency.
Because the foundational motivations for use of mobile payment
applications are not likely to change, the onus to protect
consumers through education, transparency, policy, oversight,
and regulation simply must be prioritized.
The good news is that these products can play a role in
helping consumers manage their finances. But again, Federal and
State oversight is needed to ensure consumers are protected
from harmful practices and violations of data privacy. And as
we work to rebuild our economy and increase financial
resilience for every American, we must recognize and highlight
what threatens our nation's ability to save, reduce debt, and
build wealth. That work is an intersectional joint effort of
financial education, along with policies and regulations that
protect consumers from practices that make it hard to be fully
informed.
Thank you for your time, and for the opportunity to share
today.
[The prepared statement of Ms. McAllister-Young can be
found on page 48 of the appendix.]
Chairman Lynch. Thank you, Ms. McAllister-Young.
Mr. Talbott, you are now recognized for 5 minutes. Welcome.
STATEMENT OF SCOTT TALBOTT, SENIOR VICE PRESIDENT, GOVERNMENT
AFFAIRS, ELECTRONIC TRANSACTIONS ASSOCIATION (ETA)
Mr. Talbott. Thank you. Good afternoon, Chairman Lynch,
Ranking Member Davidson, and members of the Task Force on
Financial Technology. I am Scott Talbott, and it is my
privilege, as senior vice president of the Electronic
Transactions Association (ETA), to speak with you today on how
the modern payments industry is using the latest technology to
provide secure, fast, and convenient payment services to
consumers.
ETA is a trade association that represents the broad group
of companies that provide electronic products and services,
including mobile wallets, peer-to-peer (P2P) products, credit
and debit cards, and other forms of digital payments. Ours is
an industry that, in North America, moves over $8.5 trillion in
card and P2P payments securely, reliably, and quickly. In the 5
minutes that I an testifying today, over 1.5 million consumer
transactions will be processed. It is heavily regulated at both
the Federal and State levels and highly competitive. We are
constantly investing, innovating, and leveraging new
technologies to create new products and services to serve the
ever-changing needs of consumers.
Of all the developments in payments, I want to focus on two
today, mobile wallets and P2P, which are two different products
with different use cases, but many similarities. Mobile
wallets, as has already been noted, is simply a platform to
store payment credentials on your phone. Instead of reaching
for a traditional plastic card or checkbook, consumers can
contactlessly use cards stored in their wallets or in the
mobile wallets in their phones to make purchases at stores and
shop online. Mobile wallets make buying goods and services very
convenient. Tourists can shop anytime, anywhere, with just a
few clicks on their phone. Mobile wallets also benefit
merchants by enhancing loyalty programs and, because of the
speed of a sale, reducing transaction times.
Another innovation I would like to highlight is peer-to-
peer apps, or P2P. P2P is largely a free and fast service
designed primarily for the transfer of funds between family and
friends in order to split the check at a restaurant, or send
your grandkids some birthday money. P2P payments work by
linking an individual's bank account and debit, credit, or
prepaid card with a platform. For those consumers who do not
have a bank account, we have solutions available as well. There
are many options to allow cash-based consumers to load cash or
paper checks onto their P2P wallets on their P2P services. Many
retailers partner with P2P services to allow this to happen in
locations across the country. P2P apps are very popular, used
by tens of millions of consumers, and total transaction volumes
are forecasted to reach close to $350 billion by the end of
this year. And P2P offers similar ease of use and conveniences
as digital wallets.
The two products, while different on the surface, are
similar in many ways versus security. For the payments
industry, security is a top priority. For all payment products,
including mobile wallets and P2P apps, the payments industry
employs a robust, holistic, and multi-level approach to
security. A simple example of this is that the mobile phone
itself requires a unique authentication to unlock, whether a
PIN, a facial scan, or a fingerprint. Inside the phone, account
numbers are not actually stored on the phone but rather use a
token representing the account number, and the transactions are
all encrypted, which means it can only be read by participants
in the payments industry. By demonetizing the payment info, it
is less attractive to see these.
Both products advance another top priority for the payments
industry, namely financial inclusion. The digital wallets and
P2P services can be used by cash-based consumers and accessed
anytime. They help to advance this goal.
Lastly, both mobile wallets and P2P were instrumental
during the pandemic. By partnering with the payments industry,
the U.S. Treasury was able to electronically distribute
billions of dollars in economic impact payments directly to
millions of consumers' wallets and P2P accounts. Additionally,
during the pandemic, contactless payments were helpful to
eliminate the need for touching common services during
checkouts.
This discussion just highlights some of the many
innovations that are happening in the electronic payments
industry. As I said, our members are investing billions of
dollars annually to develop and deploy technologies that make
it easier for individuals to accept, hold, and send or spend
money securely, and we continue to integrate these ideas in
technologies to make the current payment system safer and
stronger.
One idea of what is next and what is new is crypto assets.
As payments experts, ETA member companies are closely examining
crypto space solutions to consider using payments space. While
cryptocurrencies are predominantly used for investments at this
point, once the policy framework is in place, ETA members will
be able to widely deploy crypto for payments use cases. ETA has
published guiding principles along these lines, and I look
forward to working with the task force and Congress in general
to advance good public policy in the crypto space.
On behalf of ETA member companies, I want to thank you
again for the opportunity to participate and support this
discussion, and I look forward to any questions you may have.
[The prepared statement of Mr. Talbott can be found on page
51 of the appendix.]
Chairman Lynch. Thank you, Mr. Talbott. I will now
recognize myself for 5 minutes for questions.
Mr. Carrillo, in your testimony, you describe how fintech
business models often rely on data maximization, which is a
term to describe the constant and expansive accumulation of
consumer data, which leaves consumers vulnerable to fraud and
exploitation. I have seen this in my own experience. You go
online, and you are trying to buy something simple, like a pair
of socks from a retailer, and you have to surrender your
financial history and basically get naked with the retailer
from a data standpoint in order to make a simple purchase, and
it is infuriating sometimes, and there is no difference. They
all seem to be trying to suck as much data out of the consumer
as they possibly can.
I was wondering if you could discuss some of the issues
that come with this level of data exposure and how public
sector options--you could refer to the ECASH bill that you were
so helpful on--provide the same convenience and ease of digital
wallets without data exposure?
Mr. Carrillo. Thank you very much, Chairman Lynch. I
appreciate the question and also the invitation to speak about
the bill. First, I would note that data maximization is the
business model of many of these companies. And, in fact, they
charge low fees or claim to charge low fees and have better
conditions precisely because they collect data with virtually
no limits, and this is not necessary for a simple payment, as
you indicated. There are many cases in which I would prefer
that the information from a payment not be shared, and it is
not because I am doing anything illegal, and that is the case
for most people. It is simply that you do not need to surrender
all of your information every time that you swipe or tap a
card.
Now, ECASH brings us into the digital realm. But it reaches
people who do not have an internet connection, first of all,
but it also is usable by people who would prefer to have some
space for privacy. The fact is that most of us use cash in some
form. We also use debit cards. We use credit cards. We use
Venmo. We use PayPal. And we know that each of those payment
instruments entails different privacy and security features and
accomplishes different functions. With the ECASH Act, we don't
imagine that people are going to put their life savings on an
ECASH wallet. But if we want to preserve a space for the
financial privacy that has existed for thousands of years in
the next financial upgrade, we need something like ECASH.
It may be the case one day that there are applications for
something like a blockchain-based token, but the fact is when
you put money on a ledger, it is, by definition, seeable by the
people who operate that ledger. And when we talk about the
blockchain, encryption may be involved, but we are also talking
about data maximization in that sense as well. So, really to
preserve this space, this inclusive private space within our
payment system, we need to go offline. We need to go low-tech
and provide this option, at the very least, for everyone. Thank
you.
Chairman Lynch. Thank you. Ms. Marcellin, you mentioned in
your testimony about financial inclusion, and you raised the
question of whether or not digital wallets are actually in fact
achieving that financial inclusion.
Could you talk about some of the barriers that you see? It
is a noble cause to obtain financial inclusion, but we are not
there yet, and I am not sure if these digital wallets, as
currently designed, offer that opportunity. But I would like to
hear your perspective on that.
Ms. Marcellin. Yes, absolutely. Thank you for the question,
Chairman Lynch. The FDIC, in a bank survey from 2019, I
believe, estimated that about 5.4 percent of households in the
United States are unbanked. And I believe the amount of
Americans who use digital wallets or mobile payments is around
80 percent. It is very likely that most of those people--I am
not going to say all--who are using these mobile apps are
people who are banked, and I think some of the solutions are
public banking options, so postal banking, the ECASH bill that
has been raised. Also, even if we discuss remittances, the
United States Postal Service (USPS) can expand the amount of
countries to whom they offer remittances.
So, I still believe that there are a lot of digital wallets
to go further on. People under $60,000, who make $60,000
annually, people who do not have college degrees, and, again,
people who are unbanked, the data shows that they are not using
it at the rates that people like myself are.
Chairman Lynch. Thank you very much.
The Chair now recognizes the ranking member of the task
force, the gentleman from Ohio, Mr. Davidson, for 5 minutes.
Mr. Davidson. Thanks, again, Mr. Chairman, and, look, thank
God that the American people aren't waiting for Congress to
move forward with digital technology, right? They are way ahead
of this hearing. People are doing this. It is not illegal to be
doing it. There are people within the government who, frankly,
want to try to make it illegal.
They are talking about essentially needing to get
permission from the government. They even have self-custody for
crypto, adding reporting requirements, including to IRS forms,
and without real authorization to do it, frankly, with the IRS.
And people operate and live their day-to-day lives in a digital
world and they want to be able to move money digitally, and the
technology is there to do it; we just don't have the legal
clarity to help them.
And then, frankly, the consumer protections around privacy
and data security likely do as was highlighted around payments
with the safe credit cards. And people in the crypto space will
recognize the basic default safety valve, not your keys, not
your tokens, not your coins. But that has a huge hazard because
people forget their passwords all day, every day, and if you
forget your passwords to cold storage, well, they are gone,
right? Those are high stakes.
So, I like that we are talking about something that for
maybe less sophisticated customers, you have some of those
protections, but we ought not try to eliminate the things that
other people are already doing. We should put a good framework
around those.
Mr. Talbott, let me start with you. As Congress
contemplates a Federal standard for protecting consumer data
privacy, it is important that any law can stand the test of
time. And given the rate we are moving, how do we pull that
off?
Mr. Talbott. Thank you, Ranking Member Davidson. In terms
of privacy, a couple of ideas come to mind. First of all, we
need a uniform national standard. It is very difficult for
companies that operate across the country, with anyone with an
internet connection, to comply with a patchwork of State
privacy laws. We see this in other areas as well. So, first and
foremost, would be a uniform national standard. Second, we want
it to be principles-driven. Technology changes rapidly. The
products and services that exist today didn't exist a couple of
years ago, and there will be new products and services soon, so
having a principles-based approach is key.
I think other areas or other concepts to think about within
the space are control and transparency. This ties into a little
bit of Section 1033 on open banking, gives them the ability to
understand what is happening with the data, and to have control
over it, which is key to any uniform national standard.
And then, one last point, is within the payment space, we
largely do not see the SKU level data. We don't know that you
are buying socks. We see the transaction, but we need to keep
that data and then have a permissible right to use it to fight
fraud. It is an important part of our fraud fighting efforts,
and privacy laws should consider that along with other public
policy goals like law enforcement going forward.
Mr. Davidson. Yes, thank you. I think you touch on it, but
don't really quite go there. And kind of in a separate bill
that would be multi-jurisdictional, and I hope to call it H.R.
4, would restore the Fourth Amendment, which has been
substantially eroded. We should recognize a property right for
people's data. Your personal identifiable information, your
data, the content you create is really your property. It is
your data, and we should be protecting that. I would say that
would be the one principle that I would add, and without you
verbalizing it, I think you get there. That is kind of where
you are at. And as I highlighted, the market is way ahead of
us; 69 percent of retailers now accept some form of contactless
payment. Could you speak to how those innovations actually help
small businesses and entrepreneurs?
Mr. Talbott. Sure. That's a great question. I think for
small businesses, the ability to accept payments is crucial.
Whether you just accept cash, you have to also accept payment
cards, digital payments, and there is lots of competition and
lots of options in the space. The fact that they can be loaded
to your mobile wallet makes it easier for small businesses to
accept payments, knowing that is one of the main form factors
for customers walking in the door. It allows them to have the
retailer speak for themselves about what they do with the data.
It allows them to collect data, and then the speed of the
transaction helps reduce times. And then finally, the ability
to be online. All it takes is a website and to accept payments
is crucial for many small businesses, especially during the
pandemic. And we saw all of these technologies play out to help
many small businesses continue to thrive during the pandemic.
Mr. Davidson. Yes. Thanks for that. I wish I had time to
highlight how many of these technologies that aren't subject to
the Durbin Amendment could help small businesses in that way.
And Ms. Choudhary, I wish I could have gotten to cold storage.
Thanks for referencing it in your written comments.
My time has expired, and I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. Steil. Thank you very much, Mr. Chairman. Mr. Talbott,
my colleagues have attached a bill to today's hearing that they
are calling the Protecting Consumers From Payments Scams Act.
Scam prevention is a huge priority. In fact, I hosted a scam
prevention workshop in my home community of Janesville just
last week. But one of my concerns for this bill is that it may
not have the desired results. It is looking to have and may
have some very significant unintended consequences. Can you
talk about how this proposal would impact the electronic
transactions ecosystem and the consumers who rely on the
services?
Mr. Talbott. Yes, sir. Thank you for the question. I think
when you think about payments, and these themes have been
brought out in the hearing today, there are lots of different
payments systems and lots of different use cases for them, and
it is important to sort of break them down and understand what
they are there for. P2P is largely for sending money between
family and friends. It's very different than other forms of
payment cards. There are some similarities, but there are
differences. So generally, you should think of P2P like cash.
It is electronic cash. If you lose money on the sidewalk, it is
gone. P2P is not quite the same, but you should think of it
largely as cash, and since it is free, and immediate, and
generally irreversible, there is the connection to cash.
Unfortunately, risk is part of our life. Fraudsters are
always going to be there. To the extent that we build a 10-foot
wall, they are going to build an 11-foot ladder. The key is to
build that 12-foot wall, but it is an ongoing thing that we,
the payments industry, take very seriously. And the best way to
think about focusing on the risks associated with P2P is around
consumer education and prompts that have been built into the
system. PayPal, for example, has on its webpage a number of
disclosures, and Venmo requires a verification of the last four
digits of the recipient's phone number for a first-time sale,
for example. I think the challenge, though, if you think about
the bill, which would expand Reg E, is it might alter the
nature of the speed or the cost related to P2P platforms. And
that might be an important unintended consequence to consider.
Mr. Steil. Thank you very much. Let's shift gears a little
bit if we can. One of the main focuses of this committee, and
of the Select Committee on the Economy, of which I am the
ranking member, is financial inclusion. And even though we have
made a lot of progress, far too many Americans still don't have
access or don't have a bank account or an account with a credit
union. And when asked, a significant percentage of unbanked
respondents are pointing to two key things, a lack of trust in
financial institutions, and inconvenience, as factors that keep
them out of the system. How can mobile payments and digital
wallets foster greater participation in our formal financial
system?
Mr. Talbott. That is a great question. Obviously, that is
another goal. The major priority for the payments industry is
financial inclusion, if I could answer your questions in
reverse. In terms of convenience, I think it is obvious the
value of the convenience factor that mobile wallets and P2P
services provide, just being able to conduct your transactions
anytime, anywhere, versus the old days where you have to wait
for the bank to open or the credit union to open. Now, you can
do it 24/7 at any location.
In terms of accessing a bank account, there are many
solutions that exist which allow cash-based taxpayers to access
the modern payments world. A simple one is, you can go online.
If you want to buy the stocks that the Chair mentioned earlier,
you print out a code, you take that code to a retailer, you
give them the cash, the retailer scans the code, and the online
merchant now knows that the stocks been paid for and releases
them to the consumer. So, it is a wonderful way. It is a
wonderful technique, technologies that allow cash-based
consumers to access the internet and use the payment systems.
Additionally, you can load cash and paper checks directly
on to your wallet or your P2P account. Many employers are
offering payroll downloaded to your wallet, and none of these
require a bank account necessarily. So in terms of convenience
and trust, those solutions are working to address that. Lastly,
on trust, that is a difficult one that is in the mind of the
beholder. I would just say that people don't always trust a
bank. They may not always trust the Federal Government, and
they may choose not to be part of the system.
Mr. Steil. I completely agree that they don't trust the
Federal Government. I was really concerned that some of my
Democratic colleagues put forward proposals to allow the IRS to
track inflows and outflows of bank accounts over a certain
amount. In a time when we are seeing a large number of people
unbanked, we actually go and look at the data, and it says they
don't trust banks, financial institutions, and the government.
And one of the proposals by my Democratic colleagues is to
increase the government's intrusion and review, and breaking
the privacy between individuals and their financial
institutions moves us in the wrong direction.
I think we have some amazing opportunities with these
mobile payments to make sure they are in the hands of every
individual, and I would suggest to my colleagues, if we look at
some of the Pew Research as to what percentage of folks have
access to a smartphone--we dug into that on the other
committee--and, in particular, how that travels with age more
than it does with race.
With that, I will yield back.
Chairman Lynch. The gentleman yields back.
The gentleman from Florida, Mr. Lawson, is now recognized
for 5 minutes. Welcome.
Mr. Lawson. Thank you, Mr. Chairman, and Mr. Ranking
Member, for having this hearing. I would like to, again,
welcome everyone to the committee today.
Mr. Raul Carrillo, funds stored on a wallet are not
deposited, and, therefore, are usually not eligible for deposit
insurance. Some digital wallets provide something called pass-
through insurance, which covers consumer transfer from a direct
deposit account to allow it. In this scenario, the Digital
Wallet Provider Act acts as a protective agent and deposits the
money into the FDIC-insured bank account. Should additional
protection be created to ensure that digital wallet users are
not under the false impression that their wallets balance are
insured? For example, should a wallet provider be required to
provide user's disclosure of the details, the type of insurance
that covers the transaction, and the difference between that
insurance and FDIC insurance? What other protections should we
consider to protect users against fraud or loss of funds?
Mr. Carrillo. Thank you very much for the question,
Representative Lawson. I will just first note that I think that
this issue speaks to a comment that my co-panelist, Renita
Marcellin, highlighted, which is that we often talk about the
provision of these wallets as if it supplies somebody with a
bank account. However, the very existence and necessity of
pass-through insurance indicates otherwise. We have PayPal, et
cetera, establishing relationships with banks for the purpose
that they aren't providing direct banking services, or they are
providing partial banking services but need the rest from a
depository institution.
Now, I do not think that pass-through insurance is
sufficient to solve this problem. In many cases, what is
actually happening is that the wallet provider or a coin issuer
is commingling funds and putting those in an FDIC account. This
is not a direct relationship between a consumer and a bank, and
it does not protect against the failure of the wallet provider
or the coin issuer. It just protects against the bank failure,
so it is insufficient. Disclosures may or may not be helpful. I
think, certainly, we should err in the direction of providing
more notice and disclosure. But ultimately, we have to fix the
structural problem here, which is that some wallets are holding
funds in long-term custody or custody of any significant
duration, and those are not insured. And there is a fundamental
problem here in the sense that that should not be allowed, not
merely that it shouldn't be disclosed. Thank you.
Mr. Lawson. Okay. Thank you. And, Ms. McAllister-Young, as
more of the country begin to rely on the internet for essential
activities, such as banking and financial services, what can be
done to ensure that consumers in rural areas, which I represent
a lot of, areas which have little to no broadband access, can
connect with consumers in heavily-served areas? And what are
some other factors that we should keep in mind in terms of
community, access to broadband, and the payment system?
Ms. McAllister-Young. Thank you so much for that question.
I tend to work with savers and consumers on a day-to-day basis,
and access is always top of mind and centered when we think
about how we can reach everyone in any corner of America. From
our standpoint, at America Saves, it is about education, so
also working with people on the ground. We have local campaigns
and are working with organizations who have direct interface
with people in the rural parts of America, providing them with
education, resources, and content that they can disseminate.
And there is kind of like a trickledown effect.
As far as the internet and broadband, I am unsure of the
answer to that. To be honest with you, that is not really the
work that I do. But what I can say is that from the consumer
standpoint, it is a huge issue, something that we continue to
try to resolve and make sure that we are reaching everyone when
it comes to all types of financial education and access to
internet and being able to use the mobile wallet.
Chairman Lynch. The gentleman yields back. I thank the
gentleman.
The Chair now recognizes the gentleman from Texas, Mr.
Sessions, for 5 minutes. Welcome.
Mr. Sessions. Mr. Chairman, thank you very much, and thank
you for having this hearing today. I appreciate it very much. I
find that our witnesses that we have are up-to-date with it and
speaking about a lot of things which I view as interesting, and
that is about the education that people bring to the table so
that consumers understand what they are getting, what those
limitations may be, and they are willing to move forward as
they choose.
Ms. McAllister-Young, you spoke clearly about education
just a minute ago. Would you mind speaking about if you have
knowledge otherwise? And Mr. Talbott, perhaps you might lend
some credibility or a hand to it. Talk to me about the
education of what might be cryptocurrency users, the kind of
people they are, the kind of needs that they have, because I
believe, in looking at this for some period of time, that they
are highly-educated. They are very smart. They have a fine tune
about their dollar, what is theirs, what should be theirs, and
how they want to transact, and what they are after, and I find
them highly engaged in this process. Could you give me just
your overview of ideas, because you were talking about
education?
Ms. McAllister-Young. Absolutely. At America Saves, we work
primarily with low- to moderate-income earners. And from a
perspective of being highly-educated and using cryptocurrency,
from my perspective--I can only speak for myself and my peers--
everyone, no matter what their income is, has some level of
interest in cryptocurrency in their own perspective about if
they are ready to jump in the game or not. But because of the
work that we do, we are very focused on making sure that prior
to jumping into something that could be as risky as
cryptocurrency, that they have financial stability in place,
meaning they have emergency savings, they know how to save
successfully. We say that saving is a habit, not a destination,
so building that habit of saving before they jump into
something like cryptocurrency.
We also like to say that an informed consumer is an
empowered consumer. So. the more information that they can
get--unfortunately, even with those who are highly-educated
around cryptocurrency, it is changing so quickly and so much
that there is always more education to get. And so, the more
education and the more informed that we can keep them as things
change around cryptocurrency, the better for all. So, while we
don't work with a lot of people who are in the cryptocurrency
game just yet, our goal is to make sure that regardless of if
they are interested in that or not, they have that very
foundation of savings first [inaudible].
Mr. Sessions. Thank you. That is very thoughtful. Mr.
Talbott?
Mr. Talbott. Sure. Thank you, Congressman. It is good to
see you back.
Mr. Sessions. Yes, sir. Thank you. Thank you very much.
Mr. Talbott. I think in terms of--
Mr. Sessions. Even Chairman Lynch sometimes agrees with
that.
Mr. Talbott. Looking at the crypto, I think at this point,
cryptocurrencies is largely an investment use case which has a
different focus: investor protection, and consumer protection.
They have not yet moved into the mainstream. We will get there,
and stablecoins could serve as a bridge between the investment
and the payments use case. But I think your assessment of the
investors who are focused on crypto or invest in crypto is
correct. I also agree with Ms. McAllister-Young that everybody
is talking about this. And that is why the payments industry is
spending a lot of time and effort using our current expertise
with payments to think about how we incorporate crypto into the
broader payment space, so it is more widely available.
There are a lot of questions, a lot of policy issues that
have to be discussed and debated. But at this point, it is
still on the investment side rather than the payment side.
Mr. Sessions. I want to thank both of you for your insight.
I will tell you that I enjoy this important task force that is
looking at this because I believe that, as the gentlewoman
stated here, education is the key to knowledge, understanding,
and expectations. And I find, in particular, the blockchain
provides a custody similar to what might be back at the old
county courthouse, a title that you have to go to. And this is
your own title, this is your own authority, this is a thing
that you own, and increasingly, as we also develop a discussion
today about privacy, knowledge, what is yours, and even Ranking
Member Davidson and Chairman Lynch spoke about the need to
understand how you get to your account, and how you keep it,
what is your own. And I think that is important.
I want to thank both of you for your thoughtfulness of
having this, and, Chairman Lynch, I will do my best to make you
love the words. It is good to be back. Thank you.
Chairman Lynch. Okay. It's good to have you back.
Mr. Sessions. Thank you.
Chairman Lynch. The Chair now recognizes the distinguished
gentleman from Illinois, Mr. Foster, who is also the Chair of
our Task Force on Artificial Intelligence. You are now
recognized for 5 minutes. Welcome.
Mr. Foster. Thank you, Mr. Chairman, and I also thank our
witnesses. We will just start with a basic question about the
concept of ECASH. Is this viewed as similar to cash in that if
you lose your device, you are out of luck? If you are subject
to fraud, you are out of luck? If someone puts a gun to your
head, and drags you into an alley, and says, transfer all of
your ECASH to my device, that there is no recourse at that
point? It is like they have stolen your cash? Is that the
concept, or is there an asterisk on that in anyone's mind?
Chairman Lynch. Where is the question directed to, Mr.
Foster?
Mr. Foster. Anyone who is advocating towards the proposal.
Chairman Lynch. Mr. Carrillo?
Mr. Carrillo. I am happy to take that question. Thank you,
Representative Foster, and thank you, Chairman Lynch. We are
trying to replicate the functions of paper cash, and that
includes the advantages and disadvantages. In the bill, you
will notice that there are error resolution rights or rules
around disclosure of error resolution rights similar to EFTA,
but those apply to the device rather than to the ECASH itself.
So, it is the case that if you lose the device, you are out of
luck, and in some instances, this will be unfortunate. However,
it is also a mitigating factor against the claims that ECASH
will swamp the financial system, and it will cause deposit
flight, that it will fundamentally change the nature of what we
are doing. We do not expect people to keep their life savings
in ECASH, on an ECASH wallet in the same way they don't
otherwise.
Mr. Foster. Okay. Yes. I understand. So, it will be subject
to all the same. Now, is there any concept to prevent it from
being used for ransomware?
Mr. Carrillo. Well, certainly. The use of cash for any
illegal activity is illegal, and that is going to exist with us
for a while. It is not online, though, and most ransomware
involves all of this software that we are talking about, and I
would certainly defer to any insight that you, yourself, might
have as well.
Mr. Foster. So, the ECASH that you envisage cannot be
operated online from remote locations? You have to sit there
and touch your cards together or something like that?
Mr. Carrillo. It is not online since it does not use the
internet. Now, a different sort of signal can be used, for
instance, Bluetooth, the near field communication (NFC) fields
that we use for credit card payments, et cetera. On their end,
there is a question of attenuation and distance, but, no, it is
not for long-distance internet payments.
Mr. Foster. Okay. That is interesting. Mr. Talbott, when
you start looking at crypto transactions, it seems to me there
are two classes then: one, they were just straight payments
where you want a dollar in and a dollar out; and two, there is
a second class where the crypto may change value. And it seems
to me you have to have market regulation. And so, people say
how do you prevent wash trades, for example? Say, someone buys
an asset from themselves under two different fake names and
then establishes a fake market price, sort of a classic abuse
to the market. Is there any way to prevent that without having
some regulators seeing the true beneficial owner behind every
crypto transaction so that they can identify wash trades? Or
are there other concepts that might work?
Mr. Talbott. Yes. I would have to give that some thought,
Congressman, in terms of on the wash. That is more on the
investment side rather than on the payment side. But I think
your comment about the fluctuation in currencies is one of the
hindrances for crypto becoming more mainstream, and a
stablecoin could serve to bridge the gap between the two. In
terms of wash sales and crypto sales, I would have to look into
that and get back to you.
Mr. Foster. Yes. It seems to me it is a fundamental
problem. Does anyone else have any thoughts on that, that we
really have a very separate regulation on identity?
Chairman Lynch. Ms. Choudhary, would you like to address
that?
Ms. Choudhary. Thank you, Mr. Chairman. The identity issue,
I would say, has been handled very differently by various
jurisdictions, and we do not have a clear answer right now,
although some of it is emerging. The European Union has adopted
a very different approach for crypto transactions to include
information on the parties involved and outlined anonymous
crypto transactions for now. But that has obviously raised a
concern about how much innovation will come out of the European
Union if the same kind of Know Your Customer (KYC) issues are
superimposed on that. Major crypto companies have now at least
unveiled initiatives that are improving the industry's KYC and
anti-money laundering practices. So far, at least, where we
have seen cryptocurrencies are involved--
Mr. Foster. Yes. Do these innovations allow any single
regulator to see the beneficial owner on either side of every
crypto transaction, or is that--
Ms. Choudhary. Right now, there is--
Mr. Foster. Yes, that seems to be what you have to have
here, and I was just wondering if there are identity schemes
that actually provide that?
Ms. Choudhary. The digital protocol, which has at least now
been introduced by companies like Coinbase and Circle, enables
the companies to verify the identities of customers while
allowing customers to retain control over their personal
information. But in terms of regulators, the regulation right
now is not very clear out here other than the travel protocol,
which has been laid out.
Mr. Foster. Okay. My time is up.
Chairman Lynch. The gentleman yields back. Thank you very
much. The ranking member and I would have liked to go on to
another round of questions, but there are votes pending on the
Floor, so I am afraid we will have to leave it here.
I would like to thank our witnesses. Thank you so much for
your willingness to come here and help the task force and the
committee. And thank you for your testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned. Thank you
[Whereupon, at 3:55 p.m., the hearing was adjourned.]
A P P E N D I X
April 28, 2022
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