>> who is the best to deal with it to make sure we hold these people accountable and get the message out to let people know these bad actors are out there, and they shouldn't go down that road. >> >> thank you, senator ayotte. we have been joined by senator -- [inaudible] >> thank you, mr. chairman, very much, and thank you for holding this very important hearing, you know, because people who serve us in the military, are heros, but heros need help. they make us secure, but they actually live with insecurity in terms of their own personal financial circumstance, and so we have a responsibility to put them in kinds of programs that help to ensure that that security is there, and we have to make sure there's a safety net ready so that they don't have to run to predatory payday

lenders. i think that's something that i'd like to talk a little bit about here today because members of our military have to resort to financing from these predatory lenders all too often. we know military service members are three times more likely than civilians to use predatory payday loans that charge exorbitant rates. that's three times the civilians use. the military families carry $10,000 or more in credit card debt compared to 16% for civilian frames. 10% of military families carry more than $20,000 in debt compared to just 7% of the civilian families, and more than half of military service members are not saving for the future and have trouble paying their monthly bills. that's why this morning, i reintroduced my military savings act which is legislation i previously introduced in the house of representatives, and

the bill would promote savings rates among military service members and decrease their need to turn to predatory payday lenders in times of financial crisis. the bill establishes a pilot program in which financial institutions operating on military bases offer innovative financial products to help troops and families to improve their financial situations and can have a new savings account that automatically deposits a portion of their additional income that the service member earns while on deployment into a savings account rather than going entirely into a checking account, and that bill has been endorsed by the consumer federation of america. this is -- i'd like to ask you, what is your feeling about a program like that that could be put in place in order to give additional protections for service members? >> well, senator, thank you for your concern for military and

their families and the financial challenges that they do face. i think anything that promotes innovative products that will help them save is a good thing, and we did hold a financial fitness forum about six months after i started at the cfpb to get best practices from some of the financial institutions that serve the military, and i was certainly very interested in the ones that combine both, you know, a fair deal with the potential savings component because the truth is if you need to borrow it today, and you're not savings anything for the next time, you're going to be out there borrowing it again, and we have to work on anything we can to help break that cycle of repeated and never setting anything aside. i look forward to seeing that of the results of pilots like this. >> thanks.

your views? >> i find it very intrigues, the idea, you know, through legislation, encourage broader range of financial products and services on these installlations. i'm, obviously, the ftc is a antitrust agency. we love competition. we'd love to see options available for consumers, see consumers have the choices, and this would do that. >> thank you. >> any other comments from other of the panelists in terms of creating that kind of a program for service members? mrs. nelson? >> i think a variety of products is a fabulous idea, and i think that's a really great step, senator, and i think that transparency of the products too that is lacking in a lot of financial products that soldiers are looking at is going to be a key component to the success of something like this so that the soldiers can easily compare, make wise consumer decisions so they don't get themselves into

problems down the road. i think it's an excellent idea in creating diversity. >> thank you. anyone else? yes. >> senator, no, i think i would just add my voice to the -- that anything we can do as discussed before in terms ofpromoting financial literacy in education among the troop members will be of great benefit to them and to morale and effectiveness of the troops so i think this is a good idea. >> thank you very much. i thank you, mr. chairman, i think this is a very important subject area. we know there's a real problem out there, and we know that there's 3 million people who served in the iraq wars and afghanistan, which is unbelievable. the number's huge. we know a high percentage of them come back with issues and traumatic brain issues, and we have a responsibility in the

totality of the financial situation to put together programs that help them and their families, and i thank you for the hearing. >> thank you, senator markey. i'm still conflicted, okay? you have to help set me straight. you work with the guard. you talk with the folks, and they hear you, they believe you, but does it prepare them for these creeps that will descend on them? i mean, one is a generalize warning, and you hope they're listening and the rest of it, but see, i'm torn between that approach and between getting all

the attorney generals in the united states at one of their semiannual -- i mean, how many meetings do you have? >> probably have one -- we have one every late february early march in washington, d.c. perfect for that discussion. >> well, i mean, i'm torn between -- as i say that, i'm rude because you're working so hard, all of you, to get the word out and to educate people and to create stress so that they're alert and avoid some of these problems. i keep coming back to what you said. that is, they are kids. you used the word "22, 23, 24, 24,25", that's a kid. in terms of this stuff, they have not settled back out of the military, and, therefore, into a neighborhood where they in the course of being in that neighborhood are warned by other

people, and that neighborhood is taken advantage of in certain ways so that they're alert then because they are solid, rooted, at home, and there are a different kinds of recenter with a different kind of reaction, but you're trying to get to them and to reach out to them and to educate them. on the other side is if the attorney general -- attorneys general -- took me a long time to learn that -- all get together, and you just pick out, you know, there's a whole bunch of smart guys in some of this testimony, and you know they are out there. again, we ran into the same thing with health insurance. they took advantage of anybody in any way they could like the moving company. anybody they could get they took advantage of. they are out there. they are not a secret. now, you indicated that you

followed them around the country, everywhere you went, they were there. now, that's smart. that sounds like something that attorneys general could get together and say, let's, you know, we have ample evidence of what they've done and troubles caused, clamp down on them, sue them, take them to court, do an injenics on them because that will ring loud and clear, and i think it will. i mean, there -- there's such small scum bag operations that they don't read the newspapers. they don't solve the legal times or whatever it is, and they don't know what they're running into, but i'm just torn by it. i mean, each of them, seems to me, important, and i have this need to come down on one side or the other, and i think i'm probably wrong on that. you have to do it both, but a lot of this is about outreach education, and i want to see some of it, and regime cooper,

you're already there. assistant attorney general nelson, you're already there. you take people to court. you know who they are. you know what their track records are. if you don't, you have your people do research to find out who these little companies arian semibig companies or whatever they are, what they do, and you save all that time in the mess hall when people are sort of at peace and listening, but they still don't know what they are beginning to run into until they run into it, and then the outreach didn't work, or if you're lucky, the outreach did work, and they are really bright, picked up, and took notes, and, you know, held their own, so i just don't think there's anything like setting examples when people are taken to court and get sued, and these

companies lose. now, in that case, the soldiers, sailors, men and women don't necessarily know that, but you cut off the perpetrator. you helped them or at least reduce the power of the perpetrator, and they become less aggressive, and i want to know -- i want you to help me understand those two philosophies and why it is i'm sort of prejudice towards the more aggressive one, but in so saying, i'm putting down one that absolutely has to happen which is the outreach and the education, but i'm, you know, i'm assuming you know who the smart buys are, and you can go after them, or am i wrong? >> mr. chairman -- [inaudible] i think you have to have both. if you educate the service member, they may still fall prey, but they can identify the issue maybe after the fact.

when, in the military, we train, and we train, and then we do an engagement. for consumer law, there is no training except for life. you go out there, you live it, and you pick up this was bad, you don't do it again, hopefully. we educate them. they may fall prey, but after that, they say, i know it was wrong here, they call someone and tell them, and they are the witnesses to bring the case that you want to bring. i think thaw have to make an example, also, and i think the businesses do a cost-benefit analysis. they look at something and say, i'm making money, it's not costing me much risk. if you increase the risk in that business balance sheet, then they are going to stop doing it or find a less harmful way of doing it, and that's something we need for the enforcement side. >> please. >> if i may, chairman, i think there's a third part of the solution that maybe needs to be mentioned here, and that is an

additional tool. the attorneys general bringing lawsuits is something we enjoy doing, one of the exciting things you crack down on the bad guys and have some good effect. one of the things in that area, though, is that there are some latches. we need additional tools in the arsenal to bring those cases to be able to track those bad guys, because, frankly, the lenders, all you need to be an unlicensed lender is a copy machine to copy off the forms. they are difficult to get a hold of. a technical phrase we use is whack-a-mole, and it's as soon as you crack down on one of these operators, you got another one. when we shut down smart buy in new york state, a competitor in oklahoma actually went and elbowed smart buy out of the mall there with these news articles and set up shop in that void. i think that an additional tool in that equation that you

formulate, education enforcement tracks unlicensed lenders to have recommendation industries to we can locate them quickly so we know who we deal with. many times soldiers do not know they have. ripped off. >> say smart buy is pushed aside, as you say in whatever state, and somebody comes in and takes their place, now, is that somebody who's completely off your radar screen? >> that's an excellent example, sir, and in that particular case, it was a business by the name of tech smart who came in, a california corporation, who has locations throughout the country also set up in georgia. my office contacted the georgia consumer protection bureau at the governor's office, and they took enforcement action against tech smart in georgia forcing them out. they are not in new york state at this point in time, so one of the challenges of the state attorneys general to define is jurisdictional.

we have states that were responsible for, and sometimes you're able to get a national hit on a case. for example, in smart buy, integrity financial of north carolina, one of the unlicensed lenders, as part of the negotiated settlement, we were able to cancel contracts nationally. that does not always happen. >> how did you do that? >> it was a bargaining -- it was by negotiating. >> a settlement? >> yes. >> well, now, have you heard of this military financial have you heard of military financial? those are all the ads i held up. >> i'd like to say, if you google the term "military loans," that i did this afternoon shortly before i came over here, i got 72 million responses, and many of them are lenders on the internet who use military or flag waiving, you know, in their advertisements,

and a great many of them are outrageously expensive, but they are like the ads you held up, and i will not speak to the particular company, but i will say there's an incredible number of them on the internet, and it's easy to put up a website, and it's easy to change your name of your company so we have to educate people not to use them. some of them are outright scams, advanced fee scams where you put down a deposit to get the loan because your credit's not good, and once you send off the money, of course, you never hear from them again, so we have to teach folks a red flag is always somebody you don't know requires you to pay vns. it's persuasive. if they are enforced from somewhere, they do it in another

state under another name. >> are they companies of more than 10 to 12 people? >> you know, it's hard to say. i remember a scam that was run out of kentucky when i was at the better business bureau offering to sell military ribbon racks, you put your decorations on on your uniform, and that was just a guy and girlfriend in a broken down old house in kentucky, but they set up a nice website and made a lot of money, so it doesn't take much. >> mr. chairman, if i could -- >> please. >> address your quandary. i would say that you do have to look at both elements of that equation, education and enforcement. i would throw communication in there also, but enforcement needs to be dill gent. there's a great effect, not only shuts down the particular company you're going after. it sends a signal to others in that business, but there are some drawbacks here. keep in mind our litigation with

britley took three years to get to judgment, longer than that to actually collect on the judgment. by that point, particularly with regard to the military personnel, accomplishing restitution was a challenge because the number of the people who perhaps had made purchases between 2005 and prior had moved onment some of them were still in the military service; some of them were retired. it was a real challenge to track down those names. we found a lot of them with the help of the dod and fort campbell and got check out, but that took a lot of effort, so, you know, it's not ideal just to focus on enforcement. you know, for those people, they would have been much better off had they been educated up front and known to stay away from something like this. when we say "education needs to start well before the soldier enlists with the army, navy,"

whatever branch of the service, in tennessee, we're one of the few states where financial literacy training is a required part of the high school curriculum. frankly, that's something that i'd like to see a greater number of states do. you have to get that training early so that, you know, when they find themselves moving into their career, you've got a base to build on, is that's a point i make on that, and then finally, communication. the ag's work well together in all 50 states in sharing information. we have multistate efforts in various consumer matters. we have recently created a working group specifically on military matters that will facilitate not just learning about what is going on in new york or tennessee, but also where it crosses state lines to combine our efforts to go after that, and that is something that i think the ag's have a good track record on. >> well, that's -- that's helpful. the, you know, there's another

way that occurs to me which is simply to embarrass. frankly, that's one of the things we'll do from time to time on this committee because we have investigations unit, we have subpoena power, and let's say smart buy, whatever 20 states their in, ect., it's, obviously, not small, and you can send a u.s. marshall to deliver a subpoena; right? i'm not a lawyer. so you have to say yes, i'm right, if i'm right. [laughter] >> yes, we can get subpoenas served. >> okay. then -- or you get a couple of them. we have a hearing asking them to explain themselves. you try really hard to get good press attendance, and you embarrass them. you take them out of the closet, and then go after them. now, let me ask you this

question. if one were to do that to say smart buy, to ask them to come to a hearing, they would say no. you issue a subpoena. it's delivered. they could say no. they couldn't. they could be in contempt; right? >> yes. >> i'm trying to find some way to get them to be seen as the scum bags that i think they are. particularly when they, you know, they have one name one day and another name the next day to stay ahead of whatever pursuit. >> mr. chairman, that's a great case study to investigate not just that operation, but particularly how the operations

work. >> yes, yes, exactly. i don't know. it's hard. you all work at it so hard. you know what i mean? i mean, it's -- it's something that really makes the american citizen angry that this is happening. those young men and women or anybody for that matter. you know, just -- i mean, as they're receiverring us, they are getting shafted under our watch in this country, or some of them get shafted overseas; right? that can happen too. there's got to be a way somehow to combine forces. you can't do more outreach. you only have a certain number of people, education, and that is going to work, and there's going to be some smarter people

that sort of fit into that, accept that, and therefore are alerted to it, and they can stand up against it and ask the right questions, refuse to sign, or whatever, but there's just nothing like -- nothing like the law. the power of the attorney general -- i mean, in west virginia when i called senator thune coming from an urban state, i tend to do that, but i think he's rather tired of it because west virginia is more rural than south dakota, but an attorney general in west virginia has vast power, and we have a lot of companies including a lot of coal companies who are doing this and doing that, and attorneys general can do amazing things. well, i mean, i'm hearing what you're saying, and i'm hearing

it has to be all of the above. maybe we better not draw this out, but simply let me thank you for what you're doing and please feel my frustration because i was not as familiar with this as i should have been until id for this hearing, and i'm just -- i'm just absolutely outraged by it, and it would seem to be something that one could stop ftc, for heaven's sake, your organization, ms. petraeus, you know, attorneys general's office here in washington, all the attorneys general gatheredded, plot strategies, i don't know. i don't know. anyway, it's a terrible thing to do to our men and women who serve us, and i regret it greatly, but what i do not

regret at all is the five of you coming here today and giving your time to help educate us while this brain trust behind me will go to work and try to see what we can come up with. is that okay? >> the ftc would be happy to work with you on ideas in this area and hopefully we can come up with something that would be effective. >> do you know that this has nothing to do with anything, but do you know that in the dodd-frank bill, their intention was to get rid of the ftc? >> i hear that, yeah. >> yes. [laughter] >> i chose not to believe it, but i did hear it. >> no, it was. i had several conversations with chris dodd, and he didn't want to do it, but then he became convinced that because they were talking about putting your organization at that time down on the federal reserve building, and as i drive by it, i just see

a lawn, and i don't know what they were going to do, so you fight to keep the ftc, and chris dodd agreed it's better to have two sets of eyes rather than one set of eyes, especially if one set is not up and running yet, so we have to do something about this. you are. i'm just sitting here moaning that it happens at all, but sitis life, such is the free enterprise system at the edges, and we will persist. this hearing is adjourned. [inaudible conversations]

>> i thought it was fun to have a little view of history of a time in america that was not instructional. first and foremost, that was a little bit more antedotal and more archaeological meaning random so you sort of look at them and see bunches of weird photos and them the captions

explain them, so i had a vision of actually high school students flipping through them and loving history if they flippedded through it. >> amc network head from the world of cable with "the big picture" sunday night at eight on c-span's "q&a." now, a look at the role of the government may have in regulating digital currency. the joint hearing of the senate banking subcommittees on national security, international trade, finance, and economic policy is a little more than an hour and a half. [inaudible conversations] >> i'm pleased to cochair this joint subcommittee hearing on the present and future impact of

virtual currency. my friend, senator, and i also appreciate the work that senator heller has done, and senator corker is going to be joining us as well. we'll do this is ability different because it's a joint subcommittee hearing. i will chair the first panel, and senator merckly will chair the second panel. the use of digital currency proliferated in current years. i hope to educate the senate members and others and start the education of the public about virtual currency including the potential and drawbacks. i also hope to explore how regulators keep up with the technological inin vaition to protect consumers. i've got a full statement here, but i actually have to acknowledge that, you know, i've been following this kind of development of bitcoins for the

last few months, and i think i'm only starting to wrap my head around the potential upside, downside, regulatory issues, monetary policy issues, taxation issues, consumer protection issues that this innovation represents, and rather than going through my whole proceeding, i'll point out to the witnesses and those that -- back in 1982, i had the opportunity to get engaged in a new industry at that point on the cutting edge of innovation called cider telephones, and all experts at that point thought it would take the world 30 years to develop out a wireless network, and at the end of that 30 years, about 5% of americans would use

them. luckily, for me, the experts were wrong, and now these devices transform our lives. getting it right from all of the regulatory, financial consumer points around virtual currencies, bitcoin in particular, could pose as great, if not greater challenge and opportunity, and what my hope is is that this will be the beginnings of an effort to come in with open minds, sort of hear about the potential, but to also hear about the important ramifications around monetary policy, around taxation. think about the notion with this 21 million bitcoins that could be created, and as we see,

accepted. as i see, the fcc has not allowed political contributions to be made in bitcoin. this is a development that's already in process, but if this becomes a standard currency or tool, it could radically and dramatically transform the role of central banks, monetary policy. it could transform -- has enormous security concerns, so i am very, very interested about this hearing as a member of the intelligence committee. i'm concerned as well about the potential abuse of this development, but i think, as we see now, somewhere between 10 to 12 million bitcoins that have been mined and just the reactions yesterday from senator carper's hearings where i believe bill clinton --

bitcopys spiked over $700 per unit, it's a currency already been monetized, and we as policymakers in ways have to catch up. i'm looking forward to this, appreciate my colleagues, the senator's interests in this, and for that, turning to senator heller, back and forth, a couple quick opening statements, and then i want to get to enter deucing the witnesses. >> thank you, mr. chairman. i thank you for holding this subcommittee. i want to thank ranking america kirk, and i'm happy we're having this joint committee. i think we need to have more of these, and with that, i'll keep my statement relatively brief. today, we're hear to learn about virtual currencies and crypto currencies, the most popular, of course, which is bitcoin. populations in nevada mine for gold, silver, copper, today they mine for virtual currency on the computer. while these virtual currencies

are not yet widely accepted, the number of users continue to grow, and these decentralize digital payment systems. today, i look forward to learning about the long term viability and practicality of virtual currencies and learn how regulators interact with virtual currencies, which by their design, are meant to be independent, of course, of any government. i end with this note. the internet is a new frontier of innovation, and with internet-based technology, members of congress have to recognize we don't know what the new advancements develop into. while we must endure proper safeguards, it's my hope in hearings like this, we can help maintain an environment that continues to promote new financial technologies and innovative growth so thank you, again, to my colleagues, and i look forward to hearing all testimony from our witnesses. thank you. >> thank you. >> thank you, and it's a pleasure to cochair this

gathering, the full room, there's a level of interest and enthusiasm in this topic. certainly, this is a new technological strategy with a tremendous number of implications. the wave of innovation is reaching in money transmission. we heard about exciting developments like mobile payments and things like classic banking system payments. this latest generation of technology, which we're talking about today, takes things to a 234u level with creation of bitcoin and more recently ripple, we are actually seeing payments transacted entirely with pure-to-pure trust driving the stores of value. with a source code and public transaction ledger listing every transaction, virtual currencies are truly a different animal. similar to the ways the last decade's innovations in the silicon valley improved people's lives -- i had to throw that

force in this because that's in oregon -- [laughter] developments in virtual currency have potential to provide value to american consumers and businesses. more transaction costs, secure money transmission, significant qualities. at the same time, leaving this space unregulated will all but ensure pitfalls for users and law enforcement alike. we've had recent news about illicit activities, narcotics money laundering, rapid changes in the value of the market for the bitcoin. we have questions about consumer protections. there's certainly, therefore, a lot of issues about whether virtual currencies are ready for prime time. today's hearing will explore the current and future state of virtual currency in affecting core financial services family and businesses rely on to move money and make payments whereas peecial for innovation opportunity and where are the gaps and weaknesses along the way? i want to note that we have a recent article here called "portland businesses enter the

world of digital currency." back in 2009, greg abbot, the owner of whippies fried pies, was hanging with enthusiast, and he was talking about bitcoin, and one of the folks hanging out, an early investor offered 1,000 bitcoins for one of the pies. he says, quote, i didn't say no. i just got distracted, and the individual wandered off. he said, that was the $250,000 mistake. silly me. based on yesterday's value, that's a $700,000 mistake. that's the most expensive pie in the history of human kind. this is absolutely fascinating. by the way, he proceeded to accept bitcoins as a number of portland facilities have done using a mobile app that converts

bitcoin to dollar and back and forth based on the current exchange rate. it's a functional, viable technology at this very moment, so with that, senator kirk. >> okay. thank you. mr. chairman, thank you for gathering us together on bitcoin efforts. i would say i've been worried about the bitcoins some that because it's so complicated, it could be facilitating illegal activities or terrorist activities. thank you, and that's one of the focuses we'll work in the first panel. let's get to the witnesses, the real experts. first pam, as i mentioned, focuses the governmental site, the second panel focuses more from the add have cats, and i think it's an interesting afternoon. we have ms. jennifer calgary,

the bureau of the treasury department. prior to joining treasury, she was chief of the asset forfeiture money laundering section at the u.s. department of justice. as chief, she managed a justice department program responsible for the annual forfeiture of more than $1.5 billion in criminal assets and remitted programs to ensure those assets were returned to victims and reinvested in law enforcement. she's testified before congress on a wide range of issues including transnational organized crime, financial crime, state, business, and corporation practices, and this one will probably break new boundaries as well. welcome. mr. david -- correct? commissioner of banks for the terminal of massachusetts, serving in that position since november of 2010 overseeing the supervision of over 200 banks and credit unions with assets in access of 325 billion. he's the active contributor to

consumer protection efforts both in massachusetts and nationally. in 20 # 13, he was elect as vice chairman of the board of directers of the conference of state bank supervisors on whose behalf he testifies here today. welcome. >> chairman warner, ranking members kirk and heller, and members of the subcommittee, i'm jennifer, the director of treasuries financial crimes enforcement network. i'm pleased to be here today to discuss the important regulatory enforcement and analytical work we're doing to prevent illicit actors from exploiting the u.s. financial system from technological advances create new ways to move money. recognizing the potential for abuse of emerging new payment methods and understanding that anti-money laundering protections must keep pace with these advancements, we began working with partners years ago

to study the issue. this is what we learned. illicit actors might decide to use virtual currency for many of the same reasons of legitimate users, but also more nefarious ones. they could use virtual currencies for the anonymity, easy to navigate, low fees, accessible globally with a simple internet connection, does not have transaction limits, is generally secure, and provides a loophole from the amlcft regulatory safeguards in most countries around the world. indeed, the idea that illicit actors might exploit loppedderring money is not theoretical. liberty reserve engaged in a $6 billion money laundering operation, and recently, the department of justice alleged customers of silk road, the larningest contraband place on the interpret paid in bitcoins to evade detection.

that being said, it's also important to put virtual currency in perspective. it's been publicly reported that bitcoin process' transaction is worth $8 billion over the last year, but by way of comparison, in 2012, bank of america alone made $245 trillion in wire transfers. thus, while growing concern to date, virtual currencies have yet to overtake more traditional methods to move funds whether for legitimate or criminal purposes. nonetheless, to address growing concerns, in july of 2011 after a public comment period, we released two regulations updating several definitions providing flexibility to accommodate payment system innovation including virtual currencies under our preexisting regulatory frame work. then, last march, we issued additional guidance that further clarified the compliance obligations for virtual currency

actors covered by regulation. in short, they are required to register, put aml controls in place, and provide certain reports. it's in the best interest of virtual currency providers to comply with the regulations. any financial institution could be exploited for money laundering purposes. what's important is for institutions to put controls in place to deal with those money laundering threats. at the same time, being a good corporate citizen complying with regulatory responsibilities is good for a company's bottom line. every financial institution needs to be concerned about its reputation and show that it is operating with transparency and integrity within the bounds of the law. legitimate customers have a currency, administrator, or exchanger where the money is safe and the company has a reputation for integrity, and banks will want to provide services to administrators or exchangers that show not only great inin vaition, but also great integrity and

transparency. the decision to bring virtual currency within the scope of our regulatory frame work should be viewed as a positive development in the sector recognizing innovation virtual currencies provide and benefits brought to society. several payment meths prove capacity to empower customers and expand ax seases to financial services. we want this to continue; however, institutions that choose to agent outside the law will be held accountable. we'll do everything in its regulatory power to stop abuses of the u.s. financial system. we have proven willingness to do just that with the targeting measures in 33 # 11 patriot act as money laundering as a primary concern and take steps to access the u.s. financial system. we stand ready to take action as necessary to stop other abuses. as the financial intelligence unit for the united states, we must stay current on how money is loppedderred in the united states so that we can share this

expertise with our domestic and foreign partners and serve as the corner stone of the regime. we are meeting the obligation in the virtual currency space as we continue to deliver cutting edge, analytical products to inform actions of our many partners. the administration has made appropriate oversight of the virtual currency industry a priority and we are encouraged by the progress made thus far. thank you for inviting me to testify before you today. i'd be happy to answer any questions you may have. >> thank you so much. >> thank you. good afternoon, ranking members, members of the subcommittees, my dame is david, and i serve as the commissioner of banks for the commonwealth of massachusetts. it is my pleasure to testify before you today on behalf of the conference of state bank supervisors. i thank you for holding this hearing today to address the risks and benefits of virtual

currency. the risks of virtual currency include consumer protection, payment systems, national security, money laundering, and other illicit activities. the potential benefits are also diverse. speed and efficiency, lower transaction costs, and providing an outlet for the unbanked and underbanked. with these evolving payment technologies, states are exploring the connection between existing money transmitter regulation and virtual currency. state regulators long supervised money transmitters to protect consumers and preserve national security and law enforcement interests. state regulators are talking with industry and other regulators about evolving methods of moving funds. this includes virtual currencies, prepaid cards, mobile services, and peer-to-peer transactions. state regulators believe an open

dialogue among regular tear, industry, and other stake holders are key to accomplishing the goal of determining the appropriate level of oversight and supervision. emerging payment technologies and alternative currencies are at their core about the electronic movement of other people's money. this is not unlike the activities of money transmitters for which the states have an established structure for regulation and oversight. licensing is the foundation of supervision, ensuring that businesses in a position of trust are legitimate and accountable. entities seeking a state license must submit information to verify their credentials, typeically including criminal background and credit checks, business plans, financial statements, and insurance bonds. state regulators examine money transmitters on an ongoing basis ensuring a company does not lose its customer's money and

complies with consumer protection laws. further, states actively examine for bank secrecy agent, an anti-money loppedderring requirements coordinating with the irs. in addition to licensing and examination, enforcement is key to supervision. after working with the brazilian central bank and two private banks in brazil, my division, earlier this year, found evidence of forgery and illegal conduct by a licensed money transmitter. relying on existing state-to-state coordination processes, 37 states were able to ensure that all customers were made whole after we shut down the company. cooperation has been a hallmark of state supervision manifested in a uniform licensing system for all states. originally developed by the states as a mortgage licensing plats form and codified into federal law by the safe act of

2008, the nationwide multistate licensing system has become an integral part of state supervision for a variety of nonbank financial services providers. massachusetts and 14 other states currently use this as the licensing platform for money transmitters and 14 more will start using the system in the next year. to improve the state's ability to use this for other licenses like money transmitters, i want to note csbf's support for 947 enhancing the safe act protection for confidential or privileged information. to address the rapidly changing technology in payments land scape, we continue to explore policy options for digital issues facing regulators. we look forward to working with congress and policymakers to continue a collaborative approach to all innovative financial products and services ensuring individuals and

economies are well served. thank you, and i look forward to answering any questions you may have. >> thank you, boast, for your testimony. five minutes on the clock, and go back and fort. i am wrapping my head around this, we have to strike the right balance since we're talking about here, you know, no government talentty -- we're talking bout here the anonymity that is allowed to take place, the ability to set up these exchanges with very little oversight if we lay too much regulatory burden, we can chase exchanges offshore and still leave americans unprotected, so i guess my first question for both of the witnesses is, you know, we're talking about this as the currency, but have we really determined even that? i mean, there are some who say

it's an interpret protocol, or is this a security? have we thought through the corp sigh? as we've -- also, david, if you have a comment as well, you know, have they consulted at all with the fcc or cftc as you started to give up your guidance, and then, david, answer the question as well, you know, is there any kind of beginnings of an international regime as you talked about with the brazilians how they categorize this development? >> sir, thank you, senator. i'll tend to take the questions in turn. first on the issue of is it a currency, we are the regulator for anti-money laundering and counterterrorism finance purpose, and so we never opined and still are not opining as to

whether virtual currency is a real currency, a commodity. those questions are really outside our purview. what we recognize is that it exists, and that it's operating and value transferred through the u.s. financial system, and as is such, we have to protect that system from illicit actors sores so we cover it under our preexisting definitions and regulations which include the concept of other values that substitute for currency, so we did not need to take a position, but in terms of have we consulted with other regulatory bodies here federally, and the answer is we have. again, as a part of our rule making and our guidance on our narrow lane and issue, we spoke with the fbi, secret service, dea, i.c.e., fdic, occ, irs, the federal reserve, ncua --

>> they all have sophisticated opinions? >> yeah. [laughter] that, i'll let them answer, but we consulted with, and cftb from the consumer fraud perspective, but we've consulted with all of them as we can. it's a developing, innovative arena, and, again, lucky to cover it under preexisting regulations. talking to counterparts abroad, the last portion of the question, there is great interest by fellow regulators abroad, and they are trying to get their heads around what is this, what does it mean, and our german counterparts like us have flexible regulations in place to fit this within preexisting regulations, and so they've done so, and other countries thus far ask to see what we're doing and why, and the financial task force, the aml standard setting

body for the international community plans to take up the topic. >> in answer to your first question about the level of regulation, that's what the states are trying to do by working with our colleagues, state and federal regulators, industry, to ensure we have the appropriate level of oversight in supervision and that we have the tools to desect and prevent illegal activity. in terms of the second question on international regimes, it's important to note that many evolving alternative payment systems are in response to consumer demand, and as we have seen in europe and canada and elsewhere, there are -- there is a big demand for more realtime payments at lower transaction costs including the transmission of money from one country to the

next. there are many members of europe and canada that have embarked on efforts to speed payment systems. ours has not evolved substantially in the last 30 # years. now is the time to talk about this subject. >> senator kirk, pressing on the the potential for abuse, but i, you know, i may want to get back to the folks from treasury at some point because i do think there could at least be the potential for serious implications for monetary policy. you know, we have taken, even though with congress' recent absence, we seem to jeopardize america's status at the reserve currency with some of the mistakes we've made, but if you think a little broadly, this could, again, have huge, huge implications, so i'm looking forward to further pursuing. senator kirk. >> thank you, mr. chairman. i have to ask jennifer a quick

question. have question seen any recognized terrorist group express interest and actually use bitcoin for its operation? >> so is certainly recognized the possibility and as a rule nermt there. there's nothing in terms of information in the public domain about a terrorist organization expressing the interest or using it, but we would always be more than happy to have any outside briefings and discuss that topic further. >> thank you. >> over to you, mr. chairman. >> oh, thank you very much. i wanted to ask a couple things related to different forms of crimes that -- quote, crimes that occur with bitcoins. the first thing i want to ask is there is a centralized public ledger that's encrypted, and so the anonymity is only in terms that you're not truly anonymous

because there's an encrypted version of who owns what, so one concern about the -- if you will, the reliability of the currency is whether that encryption can actually be broken, so i want to ask that question. there's very powerful code breakers in the world, and we certainly have discussions about our own u.s. capability to break codes quite often up here, but the second is, we've had this series of reported crimes. one was a bitcoin savings and trust which ran a pyramid scheme in bitcoins. we also had the hacking of a bitcoin exchange called bitfloor, and as it was reported 24,000 bitcopies were stolen, and we had instawallet, a provider hacked losing 35,000 bitcoins. these are not small-dollar items given the value of the

individual coins, but if maybe you could paint a little of a picture for us. how does this all work? i mean, if there is a public ledger that is keeping track of who owns what, then how does one actually steal a bitcoin? >> all right. in terms of breaking the code and the really powerful crypttologists out there, i don't know the answer to that. i don't know if there's anyone out there who could break the code. it's been represented to us that it's a strong as end cringes as exists out there, and so it seems quite safe from that stand point. .. it's as strong as exists that's out there. to tell you the truth, i don't

know what type of cryptology that's used. in terms of the scheme that you mentioned, whether it's a pyramid scheme or hacking, probl probably, the most relevant is the ir revoking of byte coins. when i take a byte coin and pay you with that byte coin, there's no way for me to get that money or that byte coin back unless you choose to give it to me and choose to tell me who you are. so that can be a great tool for hackers who are able to get your code that is your half. i think of the public key almost like the routing number.

and i don't give it to others who want to send me money. what i'm not going to give you is the pin that i use to access the atm in my account. and the private key is like that pin. and so, typically, the person holds on to the pin. and it's only when you put the public and private key together that you now have some bit coin that you can actually do something with. so if a hacker gets your private key, they're able to take your byte coin and you can't get it back. >> they they can modify the public ledger and then it so in these, well okay let me see if mr. cotney has any comments on this. >> well, you bring up an interesting case regarding consumer protections because as the director noted these transactions are irreversible and as a regulator charged with consumer protection that is what

we are interested in every day. the interests of consumers to make sure that their money money gets from point a to point b and that there is someone reliable standing behind that transaction and that is what we are interested in. >> and in the few seconds i have left i'd just say it's fascinating that the system which is not if you will continuously dependent but in this public space has been robust enough to hold up for this long without a major flaw that brought the entire thing down and it certainly has attracted the attention of innumerable other programs around the world asking well can we create a similar system so thus we are here today. thank you. >> i would just echo, based upon other commodities where there's a physical presence to trace it back the fact that we are talking about about something in

the virtual world with again and remarkable ramifications. >> i want to thank our witnesses for being here today who are trying to grapple with this and trying to figure this out. we have more questions than answers to hopefully answer some of these questions but ms. calvery winded fincen first start to take notice of these bitcoins in other currencies? >> back in probably 2007 with the eagle. it was back then that we put out an administrative ruling talking about eagle as a commodity backed virtual currency and even back then put out her view that it fell under the money translating initiatives by fincen so we have been keeping up with it since that time. >> you have any idea what currency users and perhaps businesses that are participating in illegal activities? >> we would have no way to know

that. what we do know is if you take the currency, virtual currency like liberty reserve that was an instance where we believe it was set up for laundering money and the vast majority of transactions using liberty reserve were to facilitate criminal activity of all types. it is what the department of justice alleged in what we allege. with bitcoin we have a different situation. there are a lot of legitimate users out there and the payment can be exploited by illicit actors and we have seen it with illicit actors with regard to the allegations made by the department of justice and the silk road matter alleging that it was used, bitcoin was used to facilitate hundreds of millions of dollars in money laundering. >> that silk road is 144,000 bitcoins.

what does the federal government do with those? >> so luckily that is not an issue we will have to deal with that fincen but i can tell you from my past job in the forfeiture program that they will be thinking about whether they can sell those assets. i would have to defer to my colleagues at the department of justice. >> talking a little bit about volatility as we know last week it was trading around $400 went up to 900 yesterday and finally 7600. >> i think that there is a great interest in this particular space. there is as i mentioned a demand for real-time payments and lower transaction costs and one of the means today now that we are looking at is through virtual

currency certainly at the state level. we have a regulatory regime in place. as i mentioned we are the consumer protection regulator. we are not an investor protection regulator likely sec and like the state so we want to make sure those consumers are protected and just like any investment someone who is looking at making an investment whether virtual currency or a stock or bond investment they need to do their due diligence. >> do you follow anything going on in china and europe and it's my understanding they are increasing volume and other countries. is there any reason for this? would you have any knowledge? >> i don't have any direct knowledge sir, no. >> my understanding is in some countries there may be an interest in bitcoin because where you have the home currency that might be considered extremely volatile itself, that

coin might he considered a better place in which to store a value and in other places it's also considered a good medium for transacting or transferring value so that there is not a good internal system for transferring value efficiently, it might be used for that purpose as well. >> thank you mr. chairman. >> in the category of shameless plugs congratulations on holding a hearing on something that could be a problem later on and is not a crisis right now. it's such a rare moment. [laughter] seriously, the homeland security committee is starting to weigh in on this and i'm going to take this conversation away from the illegal into the practical realities of what we are dealing with here. as this becomes a senator merkley suggested a common method of transmitting goods and services, payment of goods and services replacing a dollar bill or replacing a credit card which

we now are long-standing methods. there are a tremendous number of challenges and not categorizing bad and i noticed both of you especially if jennifer had deferred that same thing. thank goodness we didn't have to achieve that result because we had enough broad authority that allowed us to pursue this. but let's take for example a bitcoin being used by -- how do you bring that up on the cash register? what is the sales tax on that? how do you reported for income tax purposes? how do you transmit it for purposes of payroll taxes? how do you deal with this when it becomes more commonly accepted method of transition -- transmission? what i'm saying is it's not just the that various groups, terrorists and illegal operations that have the

potential of skirting around the edges. it is in fact the more commonly accept that it is in the more available all it becomes the more difficult it is for regular kind of regulatory's to be carried out especially tech activities. i would like your thinking on whether categorizing a bitcoin achieves a result so we then can think about the regulatory regime or whether we need to create a whole new category and think about this differently. either one of you can answer that question. >> sure. from an anti-money laundering counterterrorist financing perspective and then i will go broader and moment but from that limited perspective it's not as important. we have similar regulations across different parts of the industry, the idea that they are going to have anti-money-laundering controls in place. they're going to provide certain reports on suspicious of activity to send send regardless

of whether it's a commodity or currency or a security. those basic protections will follow however we define it so from our perspective it's not as important. i take your point. this country and all countries are going to have an interest in protecting consumers and protecting investors and thinking about monetary policy and thinking about taxing. all those reasons why we have regulatory and statutory schemes in every country around the world covering these issues. bitcoin truly takes off and becomes a serious part of the financial system than those issues will need to be brought to the forefront. i think there is still a question and though we can't assume bitcoin is going to become the major player that many enthusiast think it will it very well might and it's far from me to know which way this is going to do --

a two-tiered venture capitalists say this is a binary capitalists. it's going to be the cell phone of 20 years ago or it's going to be a nice experiment that completely fails. i think we are waiting see in the meantime that fincen were trying to make sure we protect our u.s. financial system. >> senator i think you pointed out the differences between the glut to the end -- illegal activity. if illegal activity is illegal no matter what the means whether paid for by cash, paid for by ach -- >> guns. >> exactly are now virtual currency. on the legal side those actors who want to play by the rules will work through agencies like mine will play by the rules set by fincen and that's the importance of a comprehensive

set of of regulations both the state and federal level. speech is to follow up on a conference of set of regulations, i'm i have now the state tax commissioner and someone gave me the bitcoin and i call you up and i say okay just heard this is trading for $700. is that what the pie is worth? do you come down and be my expert witness when i collect sales tax on $75? >> fortunately i'm not -- [inaudible] [laughter] >> i used a piece of this is going to be a big challenge and my point is that we can focus on the illegal part of this but to the extent it's recognized as a valid method in the perfectly legitimate commercial world of transferring goods and services this is going to become an increasing problem and the more the opportunity presents itself to a paid, not illegally but to avoid taxation to say that actually was speculation, you

know so are you going to pay capital gains on a? it's a really interesting challenge and i think we need to be thinking about these issues if in fact we see this as a way of becoming to transmit goods and services more regularly. >> thank you. he raised a good point. the point to today's focus on the various games but it seems as i learn about this a lot of folks were interested in central banks kind of off the grid. senator moran. >> thank you both for being here. earlier this afternoon i post and read it this hearing topic and asked kansans in particular to comment on what i should knoe suggestions or questions that they might have and interesting in just the last few hours 125 responses, most of them very

long and thoughtful. let me ask lore one of the topics that was raised and innocents regulatory arbitrage. is there an effort to make certain that the regulations are uniform globally and in the absence of that is there not a risk that the activity is certainly taken offshore if we are the country that is the regulator, and is there an economic consequence to that happening? what is the downside to our country and its economy and the opportunities for innovation if the united states is they had the regulator and other countries are not? >> may be weekend take that from the domestic perspective and the international. of course the united states we have the state and we have a federal regulation. we do i think a fairly good job

as mr. kottke mentions in his testimony of the states working together to try to find common approaches whenever possible and then with fincen to work on the federal approach and try to get as much common ground there as we can so we have as much consistency as we can at least within the united states and then they go externally. the money laundering and counterterrorist finance and the financial action task force is the standard setting body that attempts to keep consistency in standards across the globe and it's a body that has both carrots and sticks and it's been fairly effective in getting countries to put regulations in place. all that being said i think that businesses are going to leave the united states based on perceived or real regulatory burden, think they are going to find the gain short-lived because as mentioned, countries are going to have an interest in figuring out the tax

implementations. it's not just the united states that has an interest in these things in protecting consumers and investors and so forth so the regulation is going to catch up and i think there are plenty of good reasons to bring innovative business and keep innovative business in the united states. >> i think it's very important to leverage the strength of each of this, the state regulators and the federal agencies. at the local level as a state regulator i know for example that there is a large cambodian population. i know that there is a large resilient population in framingham. i send examiners out every day to conduct examinations to do transaction testing testing, acl transactions, money going abroad so we have the boots on the ground now.

and then we pair that with the national perspective and the knowledge of federal agencies who also interact on an international level. by leveraging the strengths i think we do a much better job at detecting and preventing this illegal activity. >> i appreciate both of those answers. do you have a sense about the importance of this act to the being center and the united states? this is a broader question than the predatory one but what benefits does our economy and innovative environment again playing courage in our at least not discouraging the bitcoin from being center here? >> so i think what we gain is their continued reputation and economic advantages as being a country where innovators come to start new businesses and that gives us great economic value and something we would want to continue. so i think the great challenge

for the regulators are to encourage innovation wherever we can input smart regulation in place that tries to deal with risks, the very real risk is about which we need to be concerned but minimized the burden on innovation. >> clearly the united states, the mother of invention, we want to take advantage of innovation and to the extent that we see innovation in this space has spillover effects into other payments or other financial industries or even be on the financial services industry so we want to be able to encourage innovation and have it developed here locally. >> appreciate that. mr. chairman thank you. >> i think we have all got a lot more questions for you but we understand a vote will be held around 5:00 so we want to make sure we get to the second panel. i want to thank you both for your testimony and look forward to continuing the dialogue. >> thank you for the opportunity. >> thank you.

i will turn to senator merkley and you can start introducing the second panel. >> i might introduce you as you, so feel free to take your seats quick read. i will start with paul smocer the presence of minutes. myths in this case does not have any relation to the term bitcoin. it's the policy division of the financial services roundtable. mr. smocer joined in there for 2008 as vice president of security. in this role you promoted the safety and soundness of financial institutions to best practices and successful strategies for developing infrastructure products and services. suddenly a professor sarah jane hughes university scholar and fellow for commercial at indiana university school of law. for the past 25 years professor hughes is taught law, commercial and banking regulation at the lower school of love. she is a nationally recognized expert on public and private methods to detect deter and

prosecute domestic and international money laundering and consumer protection and financial privacy. next we have mercedes kelly tunstall a partner at ballard spot and a practice leader of their privacy and data security group. she has substantial experience working with clients to develop new financial products and services including virtual currencies. she works with clients from a spectrum ventures sees -- industries and the use of social networking sites and crowdsourcing purposes. then we have anthony gallippi the co-founder and ceo of an electronic payment processing system for bitcoin. mr. gallippi founded did pay in 2011 as years of experience in sales and marketing working in the robotics industry. before founding the paid mr. gallippi was sales manager at aerotech and industrial devices corp.. so paul we will start with you.

thank you to all of you for bringing your expertise to bear on this topic. >> thank you chairman mark lee and chairman warren and rankings members kirk and heller and members of the subcommittees for the opportunity to testify today. my name is paul smocer. attempts to develop digital currencies have existed for decades. as consumers have become more comfortable with internet financial activity in computer systems have become more powerful and less expensive we are witnessing the viability digital currencies. however we need to recognize the digital currency usage exists outside of traditional currency financial accounting and payment systems. in my testimony today will address the opportunities and risks in the environment. one measure measure of a currency success is its acceptability. they are beginning to see select retailers accepting digital currencies for goods and services. for example accepts bitcoin is a

form of payment. just last week the federal election commission indicated it is considericonsideri considering allowing bitcoins used as in-kind contributions. merchant and government agency acceptance will establish these currencies legitimacy increase the trust parties have in them and their stability. digital currencies also allow merchants access to new consumers in countries where traditional payment systems do not permit access. the lack of interchange fees and chargebacks also appeal to merchants. digital currencies now set the ability provide access to the underbanked and unbanked. for example mobile phone-based money transferred microfinancing service in kenya recently added a bitcoin payment option for its customers. digital currencies cannot individuals in countries with aggressive aggressive regimes is up for causes they might not otherwise feel to support through the traditional payment providers. they can also serve as the tinsley stable currency in countries whose own currencies are in distress.

for sample during the recent cyprus financial crisis citizens transferred funds to digital currencies. another inching aspect related to digital currencies is cryptographic protection. digital currencies in the supporting infrastructure to present opportunities to watch including facilitating real-time payments particular those involving international parties and those involving micropayments. possible deeper cryptographic internet-based transactions. while there are opportunities we also have to recognize the potential risks. first is noted digital currencies pose significant market risk. without government funding or support digital currencies are subject to significant market volatility creating risk to holders of the currency in and merchants and others who accept the currency is payment. beyond the march 2013 guidance issued by fincen the digital

currency environment incorporates virtually no greater protections particularly consumer protections. for example as noted within last two months there've been multiple reports of currency disappearances from various bitcoin trading platforms radian of these cases is that likely the owners will recover anything. the lack of consumer protections extend to other areas such as liability limits for fraudulent or unauthorized payments. currently now that digital currency operators is subject to editorial or side to play financial providers such as the gramm-leach-bliley act of cybersecurity and eight at breach records of federal financial institution examination regulatory guidance are often too independent regulatory examinations. given the anonymity of the digital currency world and the lack of know your customer requirements that apply using digital currencies individuals may also be able to donate to a legal organization that would otherwise be legitimately and

such as those engaged in terrorist financing. some recent studies as we have been suggesting has made them behave -- we talked about so brought and liberty reserve but those that think they're probably just a prime example of that point the criminals are using digital currencies to assist in a broader way of criminal act to these. as we look at the lack of regulatory oversight the risk to consumers and market digital currency there is a continuing challenge to the overall legitimacy usage and endorsement. in conclusion clearly the use of digital currencies will continue to evolve in their opportunities to to explore what we only to address both the concerns to consumers, society the need for appropriate regulation and effectiveness of risk medications. thank you for their invitation to testify to the subcommittee and they look forward to continuing to work with you. >> thank you. professor hughes.

>> ranking members heller and kirk and honorable members of the subcommittees i am honored to be here with you today. monitoring the developmedevelopme nts in digital currencies and taking a responsible approach to their regulation reflects their growing presence in domestic and international transactions. recent negative publicity associated with law enforcement actions against so -- silk road in the disappearance of bitcoin exchange values raises important policy concerns. i have as the chairman said worked in the areas like this for a long time not as a provider that is a watchman and i also wish my late father could be here today because he served in world war ii as a photographer for the united states and was currently

involved in the computing industry united states. i remember being a teenager when he brought him to the briefcases and he said it's a computer, and it was. when the things we are seeing in a relatively short period of time important pathbreaking changes in technology of the characters that senator warner said justin earlier and we need to be very cautious not to chill those innovations but we still need to have appropriate legal regimes around them. i think it's important that we take time and craft those legal regimes with great care in as flexible a way as possible particularly with regard to their marks of director calvery and commissioner cotney. i have a number of recommendations responding to the invitation to appear put forward and taking them slightly out of order from my prepared testimony.

obviously there is our defense some support for the idea of retaining the current division between the states and the federal government for portions of the role that each do very well and i share those views. second, it gets incredibly important that we enforce our anti-money-laundering, anti-terrorism and economic sanctions laws and as a corollary i also believe the customers for programs such as bitcoin another virtual currencies that may develop should get the same federal protections that people get under gramm-leach-bliley, under the financial, right to financial privacy act of 1978 etc.. i think fincen has taken important steps toward clarifying the application of their existing authority and they think we need to continue to clarify particularly so that

banks and investors don't get cold feet because we have no way of knowing today what second stage innovations may have completely different roles in our economy, and these new technologies may offer us and they want to be certain we don't do anything to take them off-line. i would encourage on an interim basis payment systems, operators assuming that we all agree that this is a payments system and not something else like commodities or securities to adopt and publicize their own transparent standards of how they will behave. as you suggested the legal liability limits dispute resolution possibilities, guarantees for redemption opportunities and clear rules about when redemption can happen our all-important user protections. notice i said user and not consumer because businesses who use at many of the same needs as consumers and we tend to be focused on regulating for consumers.

it i spent much of my life looking at consumer users but i'm interested in business is being protected. i think we need to leave room for depository and nondepository providers to innovate in a virtual currency space so we want the regulatory climate -- we don't want a regulatory climate rather in which a early interest can freeze out later ones. we like to have a lot of innovation in all of this space. i worked at the federal trade commission many years ago and one of the projects i worked on was the rescission of a number of 1940s and 1950s trade regulation rules that essentially were written by industries for themselves. we would like not to see that again because they become very anti-competitive and if they are anti-competitive they are very anticonsumer anticonsumer so when anticonsumer so we need an open set of rules. i'm going to run out of time but i would say the other thing is don't buy the wild west argument. just because something is doesn't mean it should not be regulated on the same basis as

the types of activities with which it competes. thank you so much for this invitation. i'd be delighted to answer your questions. >> thank you very much professor. now ms. tunstall. >> chairman merkley and members of said committee. i am mercedes kelly tunstall a partner at ballard's bar and the head of barb privacy and data security group. my testimony reflects my personal experience with virtual currency industry and represents my own opinion. it does not necessarily reflect the opinion of ballard's bar or our clients. thank you for this opportunity to testify about the present and future of the impact of virtual currency. i currently work with a number of clients on financial innovation issues in one of the things as i've been listening to the testimony today that i feel is worth saying is that one of the things that i often say with financial innovation is there is

a tendency to say well it's completely new. it still may we have never seen anything like it before but the fact is it is like a lot of things have happened in the past. i'm going to go through some of the statements i have in my testimony but let's start with a discussion of currency generally in the united states. the united states actually has a long history of having concerns around currency. and finally settled down in the 1870when the supreme court had a series of opinions called a legal tender cases and basically what they said at that time is we are going to stop all this different stuff with the currencies happening. we are going to say there is a currency and the rule is everyone in united states have to accept that currency. so there could be other currencies and you can accept other currencies that you have to accept u.s. currency. it is the currency of the lancet said rep. that is the basis we are working

from and we do actually have a long history and a long legal precedent that talks about how to handle different types of currency in our financial ecosystem. having said that when we take a look at bitcoin and the lessons we can learn from bitcoin and i want to point to you where we can talk about the failures. the first point is bitcoin was really designed to not integrate with their existing financial ecosystem. it was designed to be its own thing and try to break apart the world without working within the practical realities that we have today. as a result financial institutions especially in the united states viewed bitcoin another types of virtual currencies has been unreliable. getting involved affect their safety and soundness concerns so it really is something that right now there's not much interest in. the next point that bitcoin focused on is that the

transactions need to be anonymous. there is the a sense that because it's virtual currency and trying to remake it cash transaction it has to be anonymous. if i'm going to take a dollar bill and had it to you i have to see you and i know the personal information about you, at least personal -- some personal information. the virtual currency world there is no need for the currency transactions to be anonymous. it can be. the other two elements that bitcoin address besides anonymity is taking out the middleman so the bank involvement and not having a record that has personally identifiable information in it. so i would say in order to address the excesses that we are seeing with virtual currencies where it is being used by criminals and terrorists and money launderers today, we do

not that is occurring, that the anonymity part of it, let's set that go. the whole point should be keep that middleman out of it if that is what virtual currency and we have lots of people talking about the value that virtual currency could have. keep the the middleman out of rehab technology to make it possible for there is not affected -- record with personally tamiflu information for this juicy but something retained by the two parties involved in the track section. transaction. it has this commodity aspect to it and you could design some of the virtual currencies out there has specifically been designed to avoid the boom and bust cycle we have heard about today and so those are the three points really that we can learn from bitcoin to allow virtual currency innovation to continue. in terms of looking at what has

to happen from a legal perspective i'm just going to mention we do need to come to what a definition of virtual currency is. is it a commodity security or not? we do need stronger fincen guidance as virtual currency develops and then finally on the consumer protection side we touched briefly on the unauthorized transaction -- transactions issue in that issue needs to be addressed and considered. thank you very much for the opportunity today and i'm happy to take any questions. >> thank you very much and now we are going to turn to anthony gallippi. >> thank you distinguished members of the committee for the opportunity to speak today. my name is toni gallippi i'm the co-founder and ceo of bit pay. i appreciate the international trade aspect and that pertains for digital currencies to create jobs and american increase america's exports.

the company was started in may 2011 may 2011. we have been operating for two years now which makes us pretty old in the bitcoin space. we have acquired over 12,000 merchants to accept bitcoin using our service through their merchants include many small and medium-sized businesses in every state who accept bitcoin side-by-side with credit cards and other forms of payment. most on line payments today made with credit cards but credit cards were never designed for the internet. credit cards were designed 1950s and last year over 12 million people became victims of identity theft closely from shopping on line. this is his loose over $20 billion a year to payment fraud. the banks don't take responsibility for the fraud. if you are since it's your old that you took a stolen credit card. the credit card fees are discriminatory. the highest fees are paid by the smallest mom-and-pop businesses and the lowest income consumers. bitcoin is a cheaper faster and more secure payment system with no discrimination against smaller businesses. add the payout will in the

system is close to that of a traditional merchant a player in the credit card business printer software helps merchants clear and settle transactions over the bitcoin network. they pay us us a stretch now your customer policies he verify all applications. we need to know who our merchants are and what they are selling. we only want the good at year's using our service. the pay follows all bank secrecy guidelines to prevent detection report suspicious activity. strip follows is to comply with laws has earned it pay the reputation of the leader and oversight that company the payment space. bitcoin does have limitations that will keep a small player in the payment space for quite some time. compared to credit cards for example these as payment network and handle 20,000 transactions per second and bitcoin can happen until -- handle seven transactions per second. even though it's small bitcoin has invented something pretty

amazing. bitcoin it is possible to transfer an asset remotely and settle the transaction with no counterparties list. that type of instrument has never existed before in the possibilities of things and simplify settlement are interesting. bitcoin blog which is a public accounting is the database that can handle asset accounts with the full chain of assets. want wantage is the housing market think of bitcoin. the biggest upfront costs for consumers trying to buy a home today are the closing costs high fees for deeds titles insurance and other redundant tasks. bitcoin can replace thousands of dollars in closing costs with a single transaction and cost 5 cents. bitcoin does have risks. criminals who use cell phones criminals use e-mail criminals use dollars in banks. many businesses like they pay at offering innovative services on

top of bitcoin chair the committee's goal to protect consumers from fraud and keep the criminals away from businesses. guidance from the irs treasury justice and pin cc'ed have established the new coins are legal. in the early 90s on the internet was in its infancy congress took a wait-and-see attitude. so where would social media and other free internet applications be today for the 90s were part of licenses for the internet. in 95 the national science foundation lifted its strict prohibition of e-commerce and immediately companies like amazon and ebay were born. americans benefit from a similar open this wait-and-see approach to bitcoin. bitcoin is safe technology which rumors cost savings for businesses and consumers. bitcoin is a more secure faster affordable option for transferring cost. if america is the leader in bitcoin technologtechnolog y america will create more jobs and more excellence. in conclusion today declined is

in its infancy much like the internet as at the early 90s. if we look 10 to 20 is the future we will see many companies built upon bitcoin related technology those companies to be based in america creating jobs in america in building a revenue base text reason america. i think the committee for recognizing the practical uses for virtual currency and thank you for the opportuniopportuni ties be today. >> thank you very much. we are going to jump in to questions we have four minutes on the clock and i will take my four minutes now and i have three quiet -- questions so soil move quickly. mr. gallippi what is a transaction for you? >> or transaction fee when we first started was 1% so we are around 1% but we realized quickly that the marginal cost is low so we have so switched over to a software service pricing model, different features and levels of service

paying one monthly fee and transsexual they want with no transaction fees. >> do any of your transaction fees -- >> if you take her monthly service and divided by the volume be put through, that's correct. >> that's fascinating. thank you. professor hughes there's a book the wolf of wall street and i think that's coming out as a movie soon but this broker makes a lot of money and at one point he has -- this is true story. he has swiss bank accounts. our bitcoin wallets leg and instant wallet going to replace swiss bank accounts?

>> i don't know the answer to that question but i would be delighted to speculate about it for a second. there are two ways that you can store anything you want including but points right now in a private wallet. the trick trick is a would-be order to transact business that way so most people who do it use exchanges. there are so many ways in which one can store value which could have included in the past putting it on stored value cards and loading them and taking them to switzerland and not even needing to do that. the answer is yes technically you can and yes technically they could be. i think that is one of the reasons why rigorous and clear guidelines for how our anti-money laundering antiterrorist and anti-sanction regimes are applied to virtual currencies not just bitcoins but those that may come in the

future are very important to us. we really don't want to facilitate hiding money and we do want to be very careful that we protect the people using currencies of these kinds in war-torn areas are areas in which the governments are not reliable or the banking system is not like ours. >> thank you. i will follow up with some questions on issues that may arise but i want to use my last minute to get to this question. mr. gallippi was talking about low transaction fees which will make many of my merchants eyes light up. if you think about this, this actually, not bitcoin by itself because we have a limited security issues but the concept in general poses some interesting models at could

significantly change our credit card system, our bank to buses system, our debit card system and mr. smocer your role with the financial services world, and you give us insight on the current thinking of those challenges? >> i actually like the way you characterized it because when i think about bitcoin we tend to use it as a generic term but in reality at least for me it is currency or security. it is secondarily the way we use it it is positive or a system and third it is a payment system so we are talking about three different rounds that i think we need to think about individually. i do think as i mentioned in my testimony has value in showing us there are ways that we can make the payment system more rapid. we can perhaps make it less expensive. we can make it more available to

the unbanked and some cases to people who've who might not otherwise be allowed to use the payment system but i think having said that i think without the consumer protections that we think about in traditional systems their traditional systems there are a lot of risks in those users as well. if i'd go back to answer your question that you post to misuse as well i'm not sure you have to move money to switzerland in this case because to me, the anonymity that is associated with users and their wallet with sid just i really don't need to try and cover who owes the money. >> i am not time so i'm going to pass this on to the directing member. >> i have a couple of questions for you. i assume you're business wants

more consumers and investors. >> actually are business model and i detailed up more in my written testimony we are merchant why are so we only facilitate the payments for merchants. we don't have a consumer wallet or offer in exchange for consumers. the rules and regulations are fairly well defined in the credit card space in their business model is similar to that. >> i'm wondering what would happen if someone like senator warner cornered the market of virtual coins? i would that impact the consumer marketplace? >> it's interesting. they look at bitcoin been treated in open markets today and china is getting very aggressive in the open market. if we want america to remain a leader in technology and bitcoin we have to look at the exchanges because that is where the liquidity is. right now the number one exchange for bitcoin is in china and the number two exchange is in japan and three, four and

five is europe and six canada. america is not a leader in exchange of bitcoins. >> you talked about earlier in your testimony about vetting businesses. what do you have to do? >> it's modeled around the credit card system. what does it take to get a merchant account? we have modeled their system after that's going to know that you are a legitimate business need to know who you are and what you are selling and depending on the different levels of falling onto process we will go even deeper into background checks and that kind of thing. >> miss some six is virtual currencies become more popular with heaps they bank from starting their own virtual currency? >> absolutely nothing except like i said they do have to maintain safety and soundness concerns and a u.s. bank these be focused on u.s. money but there is nothing to stop a

financial institution from getting into virtual currency themselves. >> are you familiar with other virtual currencies? >> i am. >> can you share some knowledge? >> sure. there are number of virtual currencies that are designed for a niche purpose that are designed for on line video gaming type situation so you can play with your partners in china, japan or wherever so there are number of those types of virtual currencies and also a number of virtual currencies based on bitcoin and try to basically take some of the issues that i detailed in my testimony here today. and then there is also a virtual currency called ripple that has started very differently from bitcoin. it started with the premise we are operating in an existing --

existing financial system and we need to be able to comply with the criminal laws and anti-money laundering laws that are in place. >> thank you mr. chairman. >> i want to go through the lightning round as well. first of all i don't want to overuse my telecom analogy but just as we saw in developing companies -- countries in many ways to skip the wired system and immediately go to wireless, wouldn't those regimes that have either huge currency restrictions or enormously underbanked, couldn't you actually see initially the development of these virtual currencies quicker and faster in the undeveloped world than in the developed world?

quick responses and then i have two or three more questions. >> my quick response on that is one of the reasons virtual currencies in the united states have proliferated and succeeded is because of the strength of our financial system security and so for these other countries where there is not that kind of infrastructure it is unlike the to be able to support the birth of virtual currency as you are suggesting. >> i agree. >> i think the example of kenya is a great one. kenya is a country where more people have access to smart phones than they do to running water in the telecom company stepped up and saw there was a need and the existing infrastructure was not meeting the needs of the people so the telecoms built a mobile system that represents 30% of the gdp of kenya. >> want to make an editorial comment. they want to keep its innovation in america but as a former

governor the revenue leakage from internet-based transactions for states that depend upon the sales tax is an enormous challenge that so we have to get this balance right. that is one of our challenges going forward. i guess i want to press senator heller's comments. we have thought about some of these other competing virtual payments. they think that when second life is going to be all the rage. it seems though that the bitcoin currency that my understanding has got 99% of the folks who are not users but investors rather than users, at some point do you think one of these currencies will emerge and bitcoin seem to

be going down that path or do you think there will always be that threat that other currencies and tries to fit within the legal regime? >> i think unless bitcoin makes some big changes that allowed the silk road type situations to stop from happening i don't think how it will become coarsely viable in the united states and you mention second life and i would like to mention that. actually second life a look at clients. they wanted to brand the banks in second life and be that bank in second life and as i looked at the way the law works even if it's in a virtual world, if the bank is doing the transactions, the u.s. banking laws applies. that was a very interesting result and what is fascinating about virtual currency is it has found a way to fall through what our infrastructure is. right now finance recognition

which is why we do need to have some kind of framework put around it. >> by time is going to ring out. i would simply say though that because of some of the elizabeth cavities and because of perhaps the interest of the folks who want to do this off the red or not he controlled by a central banking system, we have got to get -- we have to sort through this and mr. chairman as a politician i had a second life avatar and that god attention or a nanosecond. [laughter] 's. >> mr. chairman, thank you. just to take this in a different direction and use my little time to tell a story about when i used to regulate truth in advertising and i couldn't get my advertisers to tell the truth. i told them they could tell whatever they wanted in ad but i

was going to take out a full-page ad next to their saying i don't regulate them. i don't regulate them, buyer beware. we are really at that point because the more we legitimize this in regulation and the more we commercialize it and so how do we strike that balance? i'm interested in the academic point of view and maybe the legal point of view. how do we strike that balance because to me if we get involved in regulation we legitimize it as it drew opportunity. >> i think that there is a lot to what you say senator, that if we regulate we do legitimize. some of today's witnesses that talked about trust and trust is a very important factor particularly with financial products and services so there is that risk. there is a bone in my body that says i think that is a risk worth taking.

and i think it's particularly worth taking as we think of these virtual currencies as having functions that are a lot like credit cards and debit cards in some respects. >> wouldn't you agree that right now without any form of intervention, without legitimizing it, every buyer out there has to be careful and that is restricted or limited or tapped down the willingness of people to participate. it is kind of ironic because we want to free enterprise system but the free enterprise scheme buys you the opportunity to participate in the market in a way that other financial institutions participate. >> i couldn't agree more and i think there is -- in my prepared statement i make the observation that right now it looks like all the risks fall on the users. >> what's wrong with that?

>> well, that is why maybe we are not seeing the growth we would see if there was a bigger structure around it and greater clarity in that structure. but if people want to do their business that way, -- >> we just tell them, go ahead and do business that way but you are responsible and we will do with the sales tax consequences and the value for value transfer. people can barter and you can still do an analysis. you can do an analysis on what are the capital gains and try to adapt on a case-by-case basis the existing regulation without legitimizing. i'm interested in your point of view ms. tunstall. >> my perspective on that is its an analogy to social media were a number of companies have decided to stick their heads in the sand and say we are not going to engage in social media

and then the company gets founded. somebody sets up a fake facebook page and pretends to be that company and the company loses significant reputation when they choose to stick their head in the sand and not engage or pay attention to what's happening. my concern with not getting into regulating this area and being interested in what happens here is that it could eventually affect our financial system's reputation. >> i understand that but my point is recalling the situations we think about how we are owing to fix or facilitative facilitated by maybe we should just leave it alone. maybe that is the approach we need to think about him warn people, you are on your own. >> from a consumer perspective and a user perspective i think that was a very good comment, that is where we are and i think that's a very fair point.

>> we will follow up on those questions of separation of the payment system from the banking system and your thoughts about how you avoid the boom and bust cycles that is inherent in bitcoin where it is both speculative arrangement as well as a payment system and of course we are all absolutely enthralled to find out exactly what senator warner's avatar looked like. [laughter] and without we are going to turn to senator schumer. >> i for one don't want to see what senator warner's avatar looks like. we think chairman's mark lee and warner for letting us have this hearing and allowing me to participate. i've been very interested in this issue. i have a somewhat different approach than senator height cam. a while back as you know i called and federal authorities to shut down the web site silk road which they recently did. many people interpreted my

action at the time is directed at bitcoin because bitcoin was the sole method of payment on silk road and assume i also wanted to shut down or stamp out bitcoin. that is not the case. i do not want to shut down or stamp out bitcoin. new york sits in many ways at the nexus of all the issues being discussed today and his financial capital the potential for creation of a new payment platform and the rise of alternative currencies could have profound and exciting implications in the way we conduct financial transactions. technology and venture capital, new york has every interest on building on the technologies like bit coin that have to revolutionize payment system or with contain the building blocks for new technology platforms. all of that is threatened by the association