Federal Reserve Governor Ferguson Testifies on E Money and Payments

(June 5, 1998)  The House Finance Subcommittee held a hearing Thursday on new methods of making financial purchases.  Roger Ferguson of the Federal Reserve System testified that the Fed does not anticipate that either emerging forms of electronic money or electronic commerce will impact its ability to carry out its responsibilities with respect to the clearing and settlement of payments, or monetary policy.

The hearing was conducted by the  Subcommittee on Finance and Hazardous Materials, of the House Commerce Committee.  It was chaired by Rep. Michael Oxley (R-OH).  The main witness was Roger W. Ferguson, Jr., a member of the Board of Governors of the Federal Reserve System.

Ferguson testified on a range of developments in electronic commerce and payments.   Highlights of his testimony included the following.

• Products and technologies offered to banking customers are likely to change considerably as the market evolves.
• The use of electronic money, such as stored value cards, is "likely to spread only gradually."
• The Federal Reserve does not expect the emergence of electronic money to impair the Fed's "ability to pursue legislated objectives for the performance of the economy."
• It is "unlikely ... that alternative currencies will emerge in the United States along with the introduction of new forms of electronic money."
• Neither electronic commerce nor electronic money will "necessitate significant changes in the nation's payments and settlements systems."  Most Internet credit card payments, and some stored value card transactions, "are routinely cleared and settled through the existing facilities operated by the credit card associations."   "Most Internet bill-payment systems utilize the existing automated clearing house (ACH) system ..."
• The shift to electronic methods of payments by retail customers is beneficial, even though it will reduce the Fed's seignoirage income, and reduce the Fed's role, particularly in check clearing.
• The Fed has no plans to issue electronic money.
• The Fed is opposed any new regulations or legislation to protect consumers or promote the growth of electronic commerce or payments, and instead advocates relying on "competitive market forces" and "industry efforts."
• The Fed advocates continuing to update Federal Reserve Regulation E, regarding authorizations for recurring electronic payments.
• Ferguson made no definitive statements about how the Electronic Funds Transfer Act (EFTA) should apply to stored value cards.
• The FDIC has determined that most stored-value cards are not deposits for the purposes of federal insurance.
• Ferguson made no recommendations regarding protecting privacy.
• The Fed "anticipates minimal impact in the near term from emerging electronic payments, and from electronic commerce, ... on our core central banking responsibilities, including our ability to implement monetary policy, our supervisory responsibilities, and our operational role in the clearing and settlement of payments."

Rep. Thomas Manton (D-NY) questioned Ferguson about FDIC deposit insurance and stored value cards.  Rep. Rick White (R-WA) discussed encryption and security in Internet transactions with Ferguson.

Rep. Billy Tauzin (R-LA) said in his openning remarks that:

"We are now entering a world where Internet currency is as real as the dollar bill, and where financial transactions, both here in America, and globally now, where banks are bypassed, and new forms of payments for services and goods are being devised, pose for us enormous and difficult questions of making sure that consumers and online service providers working in a world where there is some confidence and security and protection for privacy rights."

Tauzin also speculated in his questioning of Governor Ferguson that a "cashless society" would not only advance efficiency, but would also makes illegal activities more difficult.  According to Tauzin, most transactions in illegal drugs, prostitution and gambling are in cash.  If you create an electronic trail, you eliminate the evils, suggested Tauzin.

The Subcommittee also heard from a second panel of witnesses comprised of the following:

• Russel Stevenson, SVP and General Counsel of CyberCash.
• John Naylor, Chairman and CEO of Factorymall.com.
• Charles Kokesh, Managing GP of Technology Funding.
• Kirk LeCompte, Director of Product Marketing of PenOp.

The Congressmen who participated in all or part of the hearing included Subcommittee Chairman Michael Oxley (R-OH), Ranking Minority Member Thomas Manton (D-NY), Billy Tauzin (R-LA), Steve Largent (R-OK), Rick White (R-WA), Barbara Cubin (R-WY), James Rogan (R-CA), Edward Markey (D-MA), Ralph Hall (D-TX), Thomas Sawyer (D-OH), and Diana DeGete (D-CO).