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3/19/2020

Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019 Annual Conference | U.S. Department of the Treasury

Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019
Annual Conference
November 21, 2019

November 21, 2019
8:00AM
New York, NY

Good morning. Thank you Greg for the introduction, and for putting together this event. It’s
great to be here, and I’m looking forward to discussing some of Treasury’s priorities.
I would like to break my remarks today into three parts, all of which are relevant to financial
institutions, though from di erent perspectives. The first will address Treasury’s focus on
economic growth through regulatory and tax reform. The second will examine the intersection
of economic policy and national security. And the third will include a discussion of the
emerging landscape of financial services and digital currencies.

1. ECONOMIC

GROWTH

Financial Regulatory Reform
I’ll start with a discussion of regulatory reform, which has been a big part of our growth agenda.
Over the last two and a half years, Treasury released six reports on recommended regulatory
changes. I am o en asked about how much progress has been made on these
recommendations. So let me give you a sense. We proposed about 370 regulatory changes, and
Congress and the regulators have acted or are acting on about 60%. I’ll highlight a few areas.
First, we spent a lot of time on a bipartisan banking reform bill known in Washington as S.2155,
which became law last year. This legislation incorporated a number of our proposals and was
an important step in tailoring regulation based on the size and complexity of an institution.
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Building on this legislation, the banking agencies finalized rules for applying enhanced
prudential standards to U.S. and foreign-owned banks. The rules implemented S. 2155’s
requirement that prudential standards be applied to firms based on risk. They established a
new four-category framework in which firms with the largest size and greatest complexity
(known as Category I and II firms) remain subject to more stringent standards while smaller and
less complex firms (known as Category III and IV firms) are subject to less stringent standards.
In addition, The Volcker Rule has been reformed. S. 2155 generally exempted community banks
with less than $10 billion in assets from the rule. This October, the five Volcker Rule writing
agencies simplified the rule by adjusting the definition of proprietary trading and further
tailoring the compliance regime for larger banks.
Overall, we commend the agencies for their thoughtful approach to these and other rules. We
now have a banking system which supports economic growth and has greater capacity than a
decade ago to function in stressful times.

Tax Reform
In addition to regulatory reform, we have also used tax reform to stimulate growth. In 2017,
with the passage of the Tax Cuts and Jobs Act, we achieved the first major re-write of the U.S.
tax code in three decades. The new tax code is designed to deliver tax relief to all Americans and
especially middle-income households, which we achieved through lower rates and expanded
credits.
However we didn’t only want to decrease the tax burden, we also wanted pretax wages to
increase. Rising wages are key to achieving desirable distributional outcomes, since wages,
rather than earnings from asset ownership, are the main source of income for many Americans.
Unfortunately, over the previous decade wage growth had been very low by historical
standards.
Our diagnosis of a key reason wages weren’t rising was that productivity growth had slowed. As
this group will understand, capital investment is a driver of productivity growth. Unfortunately,
net investment in real capital stock weakened from 2008 to 2016, slowing to 1.1 percent annual
growth from a post-World War II average of 3.2 percent. In other words, low capital investment
was leading to low productivity growth, which, in turn, was leading to low wage growth.
To address these deficiencies, tax reform adopted a number of policies to make the United
States a more attractive place to build businesses, including: lowering the corporate tax rate
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from 35 percent to 21 percent; moving from a worldwide to a territorial tax system; and allowing
for immediate expensing of capital equipment.

Results
These e orts to reform financial regulations and taxes were undertaken to strengthen the U.S.
economy, and, while it is early, we are happy with the results.
We have seen substantial growth in business investment. Since tax reform enactment,
intellectual property investment has grow at an annual rate of 7.8% vs. 4.9% over the previous
four years. Research and development spending has grown at 6.7% vs. 3.5%.
Consequently, productivity has increased, facilitating wage growth without high inflation.
Real hourly wages grew 1.9 percent for the 12 months ending September 2019. This compares
to 0.4 percent for the period 2009 to 2016. Compounding wage growth closer to 2% than half a
percent over time will make a substantial di erence in the lives of Americas.
This success is also seen across a number of metrics beyond the investment, productivity, and
wage growth story. When we came into o ice, the Congressional Budget O ice projected that
we would add about 25,000 new jobs per month in 2019. For the past twelve months, we have
added on average 174,000 jobs per month.
Unemployment remains at 3.6 percent. Unemployment rates for African Americans, Hispanic
Americans, and women are at or near all-time lows.
In addition, more disabled Americans are working than ever before, and over 7 million
Americans have been li ed o food stamps since the election. Economic growth is improving
the lives of some the most vulnerable Americans.

2. ECONOMIC

POLICY AND NATIONAL SECURITY

Let me now turn to another area of Treasury’s responsibilities, the intersection of economic
policy and national security. While Treasury’s role in national security is not always well
understood, it is something the Secretary and I spend enormous amounts of time on. I will
highlight three tools we rely on, given their importance to financial institutions.

Sanctions
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Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019 Annual Conference | U.S. Department of the Treasury

The first is sanctions, which are very much at the forefront of foreign policy today. They are a
key tool in Venezuela, Iran, North Korea, Syria and other places. They are an extremely e ective
means of denying resources to bad actors, and allow us to advance national security without
putting our military at risk. I won’t delve into individual country programs here, but let me just
emphasize that we have an extremely thorough process for identifying and vetting sanctions
targets, and that I have been enormously impressed with the talented career o icials who
administer our sanctions program.
I would also like to emphasize that financial institutions are a very important part of the
sanctions process. As OFAC issues new sanctions, we rely on the private sector to quickly and
e ectively implement them. By blocking funds or rejecting transactions, financial institutions
drain resources from dictators, nuclear proliferators and human rights abusers. When we add a
name to our designation list, and the private sector adds that name to its filters, our country is
safer.

Committee on Foreign Investment in the United States (CFIUS)
The second national security tool I’ll highlight is CFIUS. Foreign direct investment represents a
significant component of our economic landscape, standing at well over $8 trillion in 2018, and
supporting over 7 million jobs. However, some foreign investment may pose national security
risks. Treasury addresses these risks through CFIUS, which is authorized to review foreign
investment for national security purposes. This is a critical tool, especially given the emergence
of new technologies like 5G, quantum computing, and AI, which bring many benefits but can
also be used against us in the wrong hands.
In fact, last year we worked with Congress to pass a new bipartisan law expanding CFIUS’
jurisdiction, allowing us to screen more deals for national security risks.
It is worth noting that along with strengthening CFIUS, we have been running the review
process more e iciently. We want to ensure that safe investments can be made easily and
expeditiously in the United States. The best proof of this is in the data. Treasury does not
routinely release aggregate case data, but the investment community should know that twice as
many cases are clearing during the first stage of review as compared to a year ago. When there
are no national security risks, we are letting the parties know quickly, so that they can proceed
with their transactions. The United States remains very much open to foreign investment.

AML and Beneficial Ownership Reform
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Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019 Annual Conference | U.S. Department of the Treasury

A final national security tool I’ll highlight is our anti-money laundering regime. Although we
have one of the strongest AML regimes in the world, we recognize the need to modernize and
reform. We are taking a hard look at both the Bank Secrecy Act and our broader AML approach.
In particular, we must make sure financial institutions are devoting their resources towards high
value activities and are encouraged to innovate.
As part of our AML e orts, we are also committed to beneficial ownership reforms. The U.S. is
one of only a few countries where it is possible to set up an anonymous shell corporation,
without disclosing the underlying ownership. Treasury believes we must address the current
gap in our system so that the ultimate owners of companies are identified at the time of
company formation. Doing so will discourage the use of shell companies to disguise illicit funds,
preventing terrorist financing and other serious crimes. The key to getting this done will be
finding a solution that protects national security, while not creating a burden for small
businesses, and also allowing for the maintenance of privacy. We continue to work closely with
Congress on e ective bi-partisan legislation.

3. EMERGING

LANDSCAPE OF FINANCIAL
INTERMEDIATION AND DIGITAL CURRENCIES

Finally this morning, I would like to address some of the broader innovation trends that are
shaping our banking and financial system.

While banks today provide a range of financial services through financial holding companies,
banking, as traditionally understood, has typically provided for the o ering of several bundled
core activities: the moving, storing and lending of money; or, in other words, the provision of
payments, deposits, and credit.[1]

Technology is re-shaping each of these activities. For instance, internet business models allow
the acquisition of customers without branch networks, as well as the rapid aggregation of
customer data by new entrants. This has allowed the emergence of competitors that provide
products and services on a standalone “unbundled” basis, as opposed to the more traditional
bundled o ering. Consider payments, deposits and credit in turn.
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Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019 Annual Conference | U.S. Department of the Treasury

Payments are increasingly being facilitated by non-bank front-end products such as Apple Pay
and Venmo. While the underlying payment rails continue to be provided by banks, even the
blockchain is emerging as a theoretical alternative to centralized payment settlement. Activities
resembling deposit-taking are being performed through front-end services o ered by nonbanks, such as Paypal or SoFi, which store value for customers. Finally, credit is now being
extended by a variety of online lenders without a branch network or a iliated deposit base,
such as Ondeck & Lending Club.
Ironically, firms may build a customer base through one product line like payments and rebundle functions like lending over time. This is an interesting parallel to another trend, of
online retailers opening or acquiring physical storefronts due to consumer demand.
Technology-based business models compete with existing businesses, and then may start to
look like traditional businesses in the products they o er.
We welcome responsible innovation from a public policy perspective. It leads to more choices
for Americans, and makes incumbent businesses better too. Banks, for instance, are clearly
embracing new technology solutions themselves. However, this innovation also raises
interesting public policy questions, such as:

1. how regulation should apply to these unbundled activities; and

2. second, how regulation should be modernized to allow banks and non-banks to take
advantage of new trends in technology.

Treasury addressed these sorts of questions in our Fintech report last year. We recognize that
there is no way to fully future-proof our regulatory system and tackling these policy challenges
will require ongoing work. But one area I would like to focus on is payments, and more
specifically cryptocurrencies. Cryptocurrency projects in recent years di er from other trends in
innovation in that they not only have implications for private business, but also for a number of
activities the government is responsible for.
Consider for instance national security. One of the issues at the top of Treasury’s mind is that
digital currencies can potentially be used to evade existing legal frameworks—like those
governing taxation, anti-money laundering, and countering the financing of terrorism. Treasury
has made it clear that the obligation to comply with US laws is the same regardless of whether a
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transaction is denominated in traditional fiat currency or digital currency. Existing laws apply to
digital assets in no uncertain terms. However, if a cryptocurrency allowing anonymous
transactions were to grow to scale, enforcing laws that prevent crime and terrorist financing
could be more di icult.
Even if we could be assured that the private sector is complying with the letter and spirit of AML
laws, there are important remaining concerns that government must consider, such as a digital
currencies potential e ects on the monetary base, financial stability, and user protection and
privacy. In addition there is a longer term concern about what I will governance.
Some historical context is helpful here. In the 1830s, 90% of currency in the U.S. was issued by
various private participants.[2] Such a multi-currency system was ultimately rejected as a way
to organize our domestic financial and monetary system. The U.S. enacted laws to charter
national banks to create a uniform currency; a central bank to provide a flexible and stable
monetary system: and federal deposit insurance. Together these form key foundations of our
financial system.
We settled on our existing structures when o icials, accountable to the democratic process,
made decisions about the right path for the country. If a cryptocurrency checked all the near
term regulatory boxes today and grew to scale, what would be the process for making changes
to rules governing the currency in the future? For instance, if a decade from now there were a
desire for a stablecoin to go from fully reserved to partially reserved, or to shi its underlying
mix of reserve currencies, would that decision be made by a private governing association? Or
by a majority of coinholders? What if foreign actors had acquired a majority of the coins? In any
case, would important decisions about our economic system have been taken out of the hands
of representatives accountable to the people?
We value innovation and welcome e iciency improvements. However, decentralized privatelyissued digital currencies are not simply a means of payment, but, depending on their structure,
can shi some functions traditionally performed by government to the private sector. Digital
currencies at scale raise not only concrete questions about money laundering, monetary policy,
and other topics, but also very abstract questions about self-government. Those engaged in
digital currency markets should therefore expect that policymakers, in pursuing the public
interest, will take a very hard look at these issues.

Conclusion
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Keynote Address by Deputy Secretary Muzinich TCH + BPI 2019 Annual Conference | U.S. Department of the Treasury

To conclude, let me again thank you for having me today. The topics of growth, economic
national security, and technological innovation matter to financial institutions, to the U.S.
Treasury, and to the public as a whole. We look forward to a continued robust dialogue as we
take our country into the future—vigilant of risks, but confident in the power of free markets and
free people to build a better world.
Thank you.

[1]

Banks uniquely provide deposit accounts that are payable on-demand at par, which enables the settlement of payments for the rest of the financial system and

economy. And, while our financial system has evolved, banks remain central to monetary policy and the creation of money in the form of deposits. To provide
such on-demand deposits, a bank must necessarily engage in maturity transformation because it issues a liability that is payable on-demand but invests in assets
with longer maturities. The net result is banks have served three highly interrelated functions (deposit taking, payments, and credit extension). Hence we may refer
to banking as bundled.
[2]

h ps://www.stlouisfed.org/~/media/files/pdfs/bullard/remarks/2019/bullard_cebra_new_york_19_july_2019.pdf?la=en

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