court, affirm the validity of the ruds to other ruds in general. i think it is important as members read this testimony and i am sure many well as they consider the judgment that they know some of that reality. .. [inaudible conversations]

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>> coming up on c-span2, the homeland security committee examines the use of virtual currencies. then, a look at the process that granting security clearances for federal workers and contractors. and live at noon eastern, a heritage foundation panel on the deal struck in geneva, switzerland, on iran's nuclear program. >> today the heritage foundation examines the deal reached this it's weekend in geneva, switzerland, on iran's nuclear weapons program. watch the event live starting at noon eastern here on c-span2. also here on c-span2, a look at u.s./canada military relations. we'll be live at 1:30u p.m. eastern. >> the senate homeland security committee last week examined the government's ability to regulate

digital currencies like bitcoin. this hearing is two and a half hours. [inaudible conversations] >> well, good afternoon, everyone. thank you for joining us. we especially want to thank our witnesses, panel number one, and somewhere out in the audience, panel number two. lost your id card, go around and pick it up, please, and put it where it belongs. that way we'll know who you are, and you will too. senator rockefeller, who i succeeded here in the united states senate, many years ago he would say, his advice was wear a

big button when you're campaigning so that you'll remember your name and so will other people too. we want to make sure people remember your name. over the past several months, this committee has engaged in an investigation into the potential implications of virtual currencies. during the course of in this inquiry, we've examined the issues and potential risks and threats that virtual currencies pose as well as some of the potential promise that some believe they can bring. in addition, we've explored with several departments and agencies throughout our federal government how they are approaching virtual currencies as an emerging technology. this is included looking at how they are coordinating together to develop a whole-of-government approach that is consistent and informed. virtual currencies, perhaps most notably bitcoin, have captured the imagination of some, struck fear among others and confused

the heck out of the rest of us. including me. indeed, based on conversations that my staff and i have had with dozens, maybe more, dozens of individuals both inside and outside of government, it is clear that the knowledge and expectation gaps are wide. fundamental questions remain about what a virtual currency actually is, how it should be treated and what the future holds. virtual currency can best be described as digital cash. it is generated by computers, lives on the internet and can be used to purchase real and digital goods across the world. some proponents believe that digital currencies can prove valuable to those in developing cups without -- countries without access to stable financial systems. others believe it could prove to be the next generation payment system for retailers both online and in the real world. at the same time, however, virtual currencies have been an effective tool for those looking

to launder money, for those looking to traffic illegal drugs, for those looking to exploit children around the world, and the list goes on. while virtual currencies have seen increased attention from regulators, from law enforcement, from investors and entrepreneurs in recent months, there's still many unanswered questions and unresolved issues. this isn't the first time that advances this technology have posed challenging questions, challenging issues for policymakers and for society as a whole. as we know, technology is dynamic and changes quickly. concepts like e-mail and even the internet itself were once alien and difficult to understand and navigate. now most of us can read and respond to e-mail on a device we keep in a purse or a coat pocket and search the web on multiple platforms. i like to use the example when i first showed up for duty here in the u.s. senate in 2001, we

received for every e-mail that came in to us from constituents in delaware and across the country, for every e-mail we received probably 10-15 letters. i asked my staff a couple of months ago to tell me if that ratio had changed, and now for every 12 or 13 e-mails we get, we get one letter. and there's probably a pretty good metaphor for the situation. i'll be first to admit that, like most americans, i am no technical expert in virtual currencies. i think all of you who are gathered in this room are, and we'll see. but hopefully, some of our panelists are those experts, and we'll learn a lot from you today. what i do know is that a number of smart people both inside and outside of government view this as a major emerging issue that is deserving of our attention, and that includes this committee's attention. the ability to send and receive money over the internet nearly anonymously without a third party has a lot of wide-ranging

implications. our government needs to pay attention to this technology and to understand and, where appropriate, address these implications. this was made all the more clear last month when federal law enforcement took down and seized an online marketplace called silk road on which many illegal products and services were bought and sold via bitcoin. the most popular products for sale were illegal drugs, foreign documents such as ids and passports. other services were also for sale including hacking services. we're told that approximately $1.2 billion in transactions were made through the silk road. this site lived on what is often called the dark web, also known as the deep web. the dark web consists of web pages and data that are only available via special software that keeps users anonymous. many sites and data on the dark web have been deliberately built to be untraceable in order to

protect the anonymity of the user. silk road was one of those sites. my understanding is that individuals could navigate to silk road anonymously and use bitcoin which can be sent to someone nearly anonymously to make purchases. the anonymity of the marketplace and near anonymity of currency made it nearly impossible for law enforcement to track and, therefore, made it an attractive place for criminal activity. in fact, in the course of our investigation, the department of homeland security informed us that the suspects who allegedly sent ricin to president obama in april of this year was a vendor on silk road. law enforcement, including the fbi, immigration and customs enforcement and the secret service, should be applauded for their work in taking down a major international criminal enterprise. but while silk road was perhaps the most well known if not the only marketplace where illicit goods were bought and sold

through bitcoin transactions, today a number of similar enterprises that accept bitcoins are still in business selling weapons, child pornography and even murder for hire services. while today i suspect we'll talk a lot about the well known virtual currency bitcoin, there are numerous other virtual currencies operating on the internet today, each with its own set of specific features. that said, whether it's bitcoin or any of the other virtual currencies, the federal government and society as a whole need to come together to figure out how to effectively deal with it. whether or not digital currencies prove to be a boom or a bust, i think it's clear that some folks just want a chance to try and play by the rules. and that's difficult to do if the rules or proper authorities aren't clear or if the future is uncertain. it's also difficult with a large number of of bad apples being allowed to spoil the bunch. with that, normally i would turn

to my right, and i would say, dr. coburn, you're recognized for whatever comments you would like to offer. i believe he's traveling back from oklahoma. i hope he'll be able to join us at some point during this hearing. others of my colleagues will too. we start voting at 5:30, and what usually happens on monday afternoons is people are coming in, senators are coming in from all over the cub, and they will -- all over the country, and they will drift this and out of hearings like this one. and my mope is a number dr -- my hope is a number of them will be able to join us. i want to take a moment to welcome and introduce just very briefly our first panel of distinguished witnesses. our first panel is jennifer -- on our first panel, our first witness, in fact, the jennifer shasky calvery, director of the financial crimes enforcement network, a bureau of the treasury department. as director, ms. shasky

calvery -- do you go by both names? >> typically just shasky. >> okay. all right. as director, ms. shasky oversees protection of u.s. financial systems from the money laundering and other forms of ill lit sit -- illicit financial crimes. she serves as chief of asset forfeiture and money laundering section at department of justice. our second witness has a name i've never heard before, and her first name is mythili, right? mythili raman. has could have your name ever been mispronounced? >> many times. >> today? >> not today. >> good. we'll try to keep it that way. she's acting attorney general for the department of justice criminal division.

ms. raman oversees nearly 600 attorneys who prosecute federal crime cases across our country. prior to joining the criminal division, ms. raman served for nearly a decade as an assistant u.s. attorney for the district of columbia, our neighbor. our final within on this panel is edward lowery. mr. lowery's a special agent in charge of the criminal investigation division at the secret service. mr. lowery taliban his career -- began his career with the secret service in 1992 and has been in his current position since february of 2012. of in his position mr. lowery directs and coordinates all investigative activities of the agency and the daily operation of the secret service investigative offices located throughout the world. previously, mr. lowery established and ran is secret service's cyber protective initiative and coordinated operations of the cyber investigations branch and the cyber intelligence section. again, we want to thank all of

you for your service. we thank you more your preparation for today, for your testimony and for your willingness to respond to the questions that'll be asked of you here and some that will be asked in writing subsequent to this hearing. with that, ms. shasky, director shasky, you are recognized. and i don't know how long they told you you had to give your testimony. what'd we say? pardon? all right. seven minutes, but you can go a little longer. if you're way beyond that, we'll have to draw it to a close. but you're recognized. please proceed. >> thank you, chairman -- >> just know that for you and the other witnesses, your entire statement will be made a part of the record. please proceed. >> thank you. good amp, chairman carper. as you mentioned, i am jennifer shasky cavalry, the director of the enforcement crimes network, and i'm pleased to be here today to discuss the important regulatory, enforcement and analytical work we are doing to prevent illicit actors from exploiting the u.s. system aztec

logical advances create new ways to create money. fincen's mission is to combat money laundering and promote national security through the collect, analysis and dissemination of financial intelligence and the strategic use of our financial authorities. we work to achieve this mission by administering the bank secrecy act, this country's primary anti-money laundering, counterterrorist financing regulatory regime. by sharing the financial intelligence we collect as well as our analysis and expertise with law enforcement and regulatory partners and by building global cooperation amongst financial intelligence units throughout the world. recognizing the emergence of new payment methods, the potential for abuse by illicit actors and understanding that aml protections must keep pace with these advancements in technology, fincen began working with our partners several years ago to study this issue. here's what we learned.

illicit actors might decide to use a vir cull currency to store and transfer value for many of the same reasons as legitimate users, but also for some more nefarious ones. specifically, an illicit actor may use it because it enables him to remain anonymous, is easy to navigate, may have low fees, is accessible across the globe with a simple internet connection, can be used to both store and make international transfers of value, does not typically have transaction limits, is generally secure, features irrevocable transactions and depending on the system, may have been created with the intent to facilitate money laundering. and finally, provides a loophole from regulatory safeguards in most countries around the world. indeed, the idea that illicit actors might exploit the vulnerabilities of virtual currency to launder money is not merely theoretical.

liberty reserve, a virtual currency administrator, engaged in a $6 billion money laundering operation facilitating credit card fraud, identity theft, investment fraud, computer hacking, narcotics trafficking and child pornography. and just recently the department of justice alleged that customers of silk road, the largest illegal drug and contraband marketplace on the internet, were required to pay in bitcoins to enable the operators and sellers to evade detection and launder hundreds of millions of dollars. that being said, it is also important to put virtual currency in perspective. it has publicly reported that bitcoin processed transactions worth approximately $8 billion over the last year whereas the best estimate for the amount of criminal proceeds available for laundering throughout the financial system at least in 2009 was $1.6 trillion. by way of comparison, in 2012 paypal processed $145 billion in online payments, western union made remittances totaling $81

billion, and bank of america made $245 trillion in wire transfers. thus, while of 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 2011 after a public comment period designed to receive feedback from industry, fincen released two regulations that provide the needed flexibility to accommodate innovation in the payment system space including virtual currencies under our pre-existing regular regulatory framework. then this last march as a poll-up to the regulations, fincen issued additional guidance to further clarify the obligation for those virtual currency actors covered by our regulations. in short, they are required to register with fincen, put aml controls in place to harden

themselves as targets and provide certain reports to fincen on suspicious and other activity. it is in the best interests of virtual currency providers to comply with these regulations for a number of reasons. first is the idea of corporate responsibility. legitimate financial institutions do not go into business the aim of of laundering money on behalf of criminals. any financial institution could be exploited for pun laundering purposes though -- money laundering purposes though. what is important is for institutions to put controls in place to deal with those money laundering threats and to meet their aml reporting obligations. at the same time, being a good corporate citizen and complying with regulatory responsibilities is good for a company's bottom line. every financial institution these to be concerned about its reputation and show that it is operating with transparency and integrity within the wounds -- the bounds of the law. legitimate customers will be drawn to a virtual currency or an administrator or exchanger where they know the company has a reputation for integrity.

and banks will want to provide services to administrators or exchangers that show not only great innovation, but also great integrity and transparency. the decision to bring virtual currency within the scope of our regulatory framework should be viewed as a positive development for this sector. it recognizes the innovation virtual currencies provide and the be benefits they might offer society. several new payment methods in the financial sector have proven tear capacity to empower customers and expand access to financial services. we want such advances to continue. however, those institutions that choose to act outside of the law will be held accountable. fincen will do everything in its regulatory power to stop abuses of the u.s. financial system. we have proven our willingness to do just that by using our targeted financial measures under section 311 of the patriot act to name liberty reserve as a primary must be laundering -- primary money laundering concern and to terminate its access to the u.s. financial system.

we stand ready to take additional regulatory actions as necessary to stop other abuses. as the financial intelligence unit for the united states, fincen must stay current on how money is being laundered in the united states so that we can share this expertise with our many law enforcement, regulatory, industry and foreign partners and effectively serve as the cornerstone of this country's aml cft regime. we are meeting this obligation in the virtual currency space as we continue to deliver cutting edge analytical products to inform the actions of our many partners. we are committed to remaining at the forefront of developments in the days and years to come. the administration has made appropriate oversight of the industry a priority, and fincen is very encouraged by the progress we have 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 for being here, for the meeting you had with our staff and me last week and for your testimony. thank you. many raman? -- ms. raman?

please proceed. >> good afternoon, chairman carper, and thank you for the opportunity to appear before the committee today to discuss the department of justice's work regarding virtual currencies. at the justice department, we look at virtual currencies through the lens of criminal law enforcement. we recognize that virtual currency systems can be a legal means of exchange, but we also recognize that criminals will always seek to take advantage of new technologies to commit or hide their crime. our responsibility as prosecutors is to insure that we continue to enforce the law even in new technological settings and to prevent criminals from using those technologies to create zones of impunity. as i will describe in my testimony today, the department of justice has been aware of the threat pose toed by the criminal -- posed by the criminal use of virtual currencies for several years. we have already brought several important prosecutions involving virtual currencies, and we intend to remain individual p

atlanta in insuring that any criminal use of virtual currency systems is aggressively investigated and prosecuted. as an initial matter, i should note that virtual currency systems -- so long as today comply with applicable anti-money laundering and money transmission laws and regulations -- are not inherently illegal, and they can be appealing to consumers because they can provide cheap, efficient and convenient means to transfer currency. many of those same features, however, also make virtual currencies appealing to criminals. we have seen increasing use of such currencies by drug dealers, traffickers of child pornography and perpetrators of large scale fraud schemes. most significantly, we have seen evidence that criminals are drawn to virtual currencies for two main reasons. first, their perception that virtual currencies offer greater anonymity than traditional financial services and, second, the irreversibility of many virtual currency transactions. these features can significantly

complicate our ability to utilize one of the most basic techniques we use in criminal investigations, following the money. the justice department has long recognized the potential for the criminal misuse of virtual currency and launched our first major prosecution in 2007 when we indicted e-gold and its three principal owners on charges relating to money laundering and operating an unlicensed money-transmitting business. as that indictment alleged, the only information a customer had to provide to set up an e-gold account was a working e-mail address. as a result, e-gold became a popular payment method for sellers of child pornography, operators of investment scams and perpetrators of credit card and identity fraud. at its peak, e-gold reportedly moved over $6 million a day. e-gold and its owners were convicted in 2008. since that time we have continued to insure that we aggressively address any criminal misuse of virtual

currency systems, especially as those systems evolve and develop. when virtual currency systems fail to live up to their obligations you should existing -- under existing law, we take action. earlier this year, for example, we unsealed charges against liberty reserve, an offshore virtual currency business, for allegedly running a $6 billion money laundering operation. the justice department's largest-ever money laundering prosecution. as alleged in the d.'s filings -- department's filings, liberty reserve became a system of choice for cyber criminals and was used in a wide array of illegal activity including credit card fraud, identity theft, investment fraud, computer hacking and the trade of child pornography. as a result of the department's actions and the coordinated actions taken by law enforcement agencies in 17 countries around the world, liberty reserve was effectively put out of business, seven defendants were charged, and numerous assets were seized. one of the defendants pleaded guilty just two weeks ago.

more recently, the department announced significant steps in its investigation of silk road alleged to be one of the largest online marketplaces for illegal goods and services. including large quantities of illicit drugs. allegedly operated by a u.s. citizen living in california at the time of his arrest, silk road accepted bitcoins exclusively as a payment mechanism on its site. charges against silk road and its administrator were unsealed just last month in two different districts. the charges against silk road's operator included drug distribution, attempted witness murder and attempted murder for hire. as part of that takedown of silk road, the department seized over 170,000 bitcoins valued as of this past friday at over $70 million. the department recognizes that in order to stay abreast of rapidly changing technological environment, we must coordinate our enforcement strategy across the federal government.

for that reason we are working closely with the virtual currency emerging threats working group, a variety of law enforcement agencies both here and abroad, and, of course, fincen. from the view of law enforcement, fincen's recent guidance applying anti-money laundering and know your customer requirements to virtual currency exchanges was an important step this safe forwarding our -- safeguarding our collective ability to deter criminal activity and to investigate it successfully when it occurs. while there is much more to do, the department is encouraged by virtual currency services tar attempting to comply with u.s. law. we will continue to reach out to those services and provide them with training and other opportunities for real discussion about emerging threats as we have long done with other financial services industry participants. as the virtual currency industry grows, we will continue to explore how new strategies or legislation can play a role in insuring that virtual currency systems do not become a haven

for criminal activity. we look forward to working with congress to insure that law enforcement continues to have the tools necessary to enforce the law and protect the public. in the meantime, we will continue to aggressively use our existing authorities to deal with those virtual currency systems that to not comply with the law and to aggressively prosecute be criminals who use those systems as part of their criminal scheme. and, of course, we will continue to innovate this how we investigate crime to deal with whatever changes may come. thank you for the opportunity to discuss the department's work in this area, and i look forward to answering any questions you might have. >> good. we look forward to asking some questions. we very much appreciate your testimony and for joining us today. mr. lowery, you're recognized. please proceed. >> good afternoon, chairman carper. thank you for the opportunity to testify on beafter of the department of homeland security regarding the risks and challenges posed by digital currencies and the role of the united states secret service in investigating crimes associated with online payment systems.

digital currencies have developed and grown over the last 17 years as part of the continuing integration of information technology into the financial system. as the workal guard -- original guardians of the nation's financial payment systems, since 1865, the secret service as continually adapted its methods to keep base within the financial system. since the founding of e-gold in 1996, both digital currencies and various internet-based payment processers and exchangers have grown to be a significant participant in the global financial system. processing tens to hundreds of billions of dollars annually in total transaction volume. criminals and other illicit organizations use digital currency. these groups seek out those digital currency exchangers and providers that best enable them to conceal their activities. for example, liberty reserve is alleged to have laundered more than $6 billion during its operation before the secret service joined investigation with i.c.e. and irs criminal

investigations dismantled it. the growth of digital currencies and internet-based payment systems is expected to continue for the foreseeable future along with the use of these systems in the conduct of criminal activity. dhs law enforcement approaches digital currencies within the context of its authorities to investigate criminal activity. as a result of secret service and i.c.e. investigations, exchangers of digital currency have been charged and convicted with operating unlicensed money-transmitting businesses in violation of 18usc1960 and various state laws. additionally, as a result of our investigations, digital currency providers have been charged and convicted for money laundering in violation of 18usc1956 and 1957. as fincen emphasized in march of this year, digital currency administrators and exchangers have legal responsibilities under various anti-money laundering laws, title iii of the patriot act, the bank

secrecy act and fincen regulations. dhs law enforcement works closely with interagency, state, local and international partners in conducting criminal investigations in their respective jurisdictions that may involve the use of digital currencies including their use for money laundering purposes. in particular, as one of the two federal law enforcement agencies with authority to investigate computer intrusions in violation of 18usc1030, one of the secret service's strategic priorities is proactively investigating transnational organized cyber crime and defeating these illicit organizations by arresting their members and seizing and dismantling their criminal infrastructure. the secret service has successfully investigated and arrested numerous leaders of major cyber crime operations. for example, the secret service arrested vad slav -- [inaudible] also known as bad b in 2010 and earlier this year apprehended five individuals allegedly responsible for the largest data breach ever or prosecuted in u.s. history.

over the past four years, the secret service has arrested more than 4,500 cyber criminals preventing over $13 billion in losses based on the financial information recovered from those criminals. importantly, many of these cyber criminals made extensive use of digital currencies as part of their illicit activities. as part of its efforts to disrupt and defeat organized cyber crime, the secret service strategically prioritizes investigations of exchangers and administrators of digital currency that perform a substantial criminal role in facilitating widespread illicit activity. the secret service in cooperation with other law enforcement agencies and interagency partners has apprehended the providers of both e-gold and liberty reserve, ending their operations. the secret service has also arrested various illicit exchangers of digital currency that facilitated criminal activity such as western express incorporated which was prosecuted by the manhattan district attorney's office resulting in 16 individuals

pleading guilty or being convicted. these cases are discussed more fully in my written testimony, and i welcome future opportunities to further discuss our investigative work with you and your staff. our digital currencies are a tool used by a wide variety of criminals. accordingly, numerous law enforcement agencies investigate illicit activity. through the secret service's nationwide network, federal, state and local law enforcement collaborate with the private sector can and academia to effectively address the challenges that criminals' use of information technology -- including digital currency -- pose to law enforcement and all levels of government. additionally, the secret service and i.c.e. are participating agencies in fincen and work closely with them to insure regulatory and enforcement activities are coordinated. and like all federal law enforcement, the success of secret service investigations requires partnering with u.s. attorneys throughout the country. in addition to money laundering and computer crimes and

intellectual property sections of the department of justice's criminal division. the secret service and i.c.e. also a partner with other federal law enforcement for joint investigations and participate in a virtual currency emerging threats working group. while digital currencies may provide potential benefits, they present real risk through their use by the criminal and terrorist organizations trying to conceal their illicit activity. as such, digital currencies challenge law enforcement's abilities to carry out our responsibilitiesing to enforce the law and suppress criminal activity. the secret service has a long history of adapting its investigative methods to main tape the integrity of the nation's financial infrastructure. as a dhs law enforcement agency, we are committed to partnering to increase the security of the nation while addressing the challenges posed by digital currencies. the secret service will continue to conduct effective criminal investigations to keep america safe and prosperous. thank you for the opportunity to testify on this important topic, and i look forward to your questions. ..u for the opportunity to

testify on this important topic and i look forward to your questions. >> mr. lowery, thank you so much. again, our thanks to each of you for your testimonies and preparation today. in anticipation of this hearing a week or two ago, i was trying to get my head around this subject. i asked my staff to talk to me about the early days of the internet. there were a number of concerns raised about how it might foster, facilitate illegal activities. but there are some who said there could be a lot of benefit here as well. i asked them if that was maybe annagy tha when you guys were in middle school, or before that, talk to us about some of your concerns that we have with the bad that make the criminal activity could flow through to the internet and at a time when we never imagined

we would have the kind of commercial activity we're going to see in the coming month as people celebrate the holiday season. a lot of commerce takes place over the internet, a lot of presents are sent using the internet. we never imagine anything like wikipedia, youtube, google searches. pretty amazing what it's become. the ability to download music video. although in the early days i recall hearing a number of concerns about the bad that can flow from the internet. is this a good corollary or not? if so, how? if not, why not? we will start with you, ms. shasky, please. >> senator, i believe your analogy is an apt one. so often when there's a new type of financial service or nuclear in the financial industry, the first reaction by those of us who are concerned about money

laundering or terrorist finance is to think about the gaps and vulnerabilities it creates in the financial system and how illicit actors will take advantage of those vulnerabilities or gaps. it's also important we step back and recognize innovation is a very important part of our economy. it's very important in this country, something we are known for an proud of and want to continue. site think the challenge at least at fincen is for us to balance and have smart regulation that both mitigate the concerns of all his actors operating in our financial system while at the same time minimizing the burden as much as we can. we believe we have done just that with this rule by clarifying that virtual currency exchangers and administrators fit within our pre-existing regulatory regime. >> all right thinking. ms. raman, same question. walk us back in time. early concerns realize and some of the potential that may have

gone on through the internet that perhaps we never envisioned. does that apply to your example? is it appropriate? >> i think as i alluded to in my written testimony, as emerging technologies develop and change, as law enforcement we remain attuned to the criminal misuse of those technologies. but, of course, as you describe it there are many legitimate uses. i hope i have always, also made clear in my testimony, these virtual services are not in and of themselves illegal so long as they comply with our applicable money laundering laws and our money transmission laws and regulations. i think it is our duty as law enforcement to stay vigilant about the criminal misuse of those virtual currency systems while recognizing that, of course, there are many legitimate users of those services. our experience over the last several years has showed us there's reason for our vigilance and there's good reason for us to remain vigilant. liberty reserve was the largest

money-laundering case ever brought by the department of justice. that is an important back. it reminds us that there is good reason for us to remain watchful, and we intend to do that. we also intend to balance that against the need for legitimate users to use those virtual currency system as it was intended to. >> thank you, ma'am. mr. lowery, same question, please spent within the confines of the secret service investigations, the secret service was enacted to fight counterfeiting at the time in 1865. the secret service, the hallmark of our investigations have always been adapting to changing threats. as i said, we started with counterfeit. we've moved into fraud, always defending the nation's financial infrastructure. in the '80s it was access to fraud when credit cards were becoming a major issue, major impact on the financial system and it naturally segued directly into computer crimes. in recognition of that fact as i

mentioned in my testimony, electronics task model is widely respected throughout the country. and it is the way that the service stays in tune with the changing technology and the threats that can come from the internet. >> all right. a couple of years ago there was a film outcome and my wife is usually not a big fan of gangster movie said when i went to a local complex, theater complex in delaware, one of the films showing was dillinger. she said let's go see it. i said okay. i'll never forget one of the scenes in the film, dillinger and his gang made their living robbing banks as you know. near the latter part of the film they were on the run, and dillinger looked up one of his old compadres into bank robbing business to see if they couldn't give him a hand.

i remember they met, the top floor of a big old warehouse that it in retrofitted and he warehouse that it can retrofit and want to answer all these guys, a lot of them were in shirts and ties on old phones taking phone calls. and dillinger said, you know, what's going on? and apparently it was their bookie operation, number operations. the fellow running the operations said we don't rob banks anymore. your stupid to do that. he said this is the future. this is the future for criminal activity, the way to make money. i suspect for some people they see this as the future for them to make money through criminal activity, whether it's pornography, child pornography, money laundering, human trafficking, any number of activities. but we figured out how to deal with those guys in that film wearing the shirts and ties and doing illegal activities, not

robbing banks anymore, not shooting people anymore. we figured out how to deal with that. how confident are you that we are going to be up to do with the potential criminal behavior, this behavior with this new technology that's before us? mr. lowery. and the same part, how does, what role does the legislative body, the three branches of government but what role does the legislative body, those of us privileged to sit in these seats, what role do we have to make sure you have the resources you need? >> again, going back to my testimony, the secret service has investigated many first of their kind investigation. we specialize in the transnational cyber criminal, the professional criminal that is targeting our financial infrastructure. we operate within the confines of the laws that we are

entrusted to enforce. predominately 1028, 1029, 1030 which the access device fraud. again, identity theft and computer hacking. spoke earlier about the change and how the crimes have changed the belief one of the largest changes is the reach of the criminal. it used to be we had to worry about act in the days of early access device fraud with worry about someone dumpster diving or trying to get an actual image of your credit card. today, anyone in the world can reach anyone else in the world and that's changed how we have to enforce our laws. again, we are consistently aggressively and strategically investigating, trying to direct our investigations to the highest impact within the confines of the existing laws, which i believe are plenty of cyber criminals in prison right now would agree are pretty effective. >> the second half of my question, and i would ask you to respond to it and then we will

we will turn to ms. raman. three branches of government, the role attempting to play on this committee is not just an oversight role, although this is a homeland security and governmental affairs committee. historically to oversight. homeland security about 10 years old. we have a role for oversight. we have an obligation an opportunity to make sure the administration is working maybe with law enforcement agencies across the country, but they are working in a cohesive, collaborative manner. i'm encouraged decent might be the case. what advice would you have for us on the legislative side? how can we be supportive and better enable you to do your very difficult work as this new technology appears before us? >> i believe it goes back to the most important part of being

able to do this job is the hiring, developing and retaining of the high the quality -- highly qualified workforce. obviously, you need a technically gifted investor to follow the trail and to run these international criminals down. so that is always a challenge, especially in the current fiscal environment, with any support in the realm would be definitely appreciated. >> thank you. ms. raman. >> your first question whether we can keep up with the change of technology and the do think that law enforcement has proven itself to be nimble and aggressive and willing to work together, not only with agencies here in the united states but abroad in order to effectively combat the threat. i mentioned liberty reserve before but it's an excellent example of our agencies have worked together to take down enormous money-laundering operation. we worked together with fincen and treasure. they coordinated action. at the same time along force of

made arrests here and abroad, we have 17 of the countries working with us for coordinated arrests in takedowns. we seized assets on the same day that arrest arrests were made in whittle down domain names on the same day that arrests were made. so i do think we are noble enough and creative enough and aggressive enough to be able to combat the threat. that doesn't mean we're not unaware of the challenges that are posed by virtual currency, and our specific challenges that in here to virtual currencies that we are remaining attuned to. the anonymity is certainly one that we are paying attention to. the fact that some virtual currency services may be based in countries that have lax or regulatory oversight is of concern to us. there are issues with difficulty in obtaining customer records, and a host of other difficulties and challenges that go along with investigating global organizations. i think as her track record shows we are up to the challenge

and we are continuing to work together to ensure we are innovating as criminals are innovating, and that we stay one step ahead of them. as her with the legislative branch can do, i think as for criminal statute, we feel confident that statutes we have available to us are money-laundering statutes, money transmitter statutes, are broad enough to encompass the activity that we've been talking about this afternoon. and, in fact, that statutes are the one that we use in liberty reserve for example. and, of course, to the extent that criminals are using virtual currencies as part of their criminal enterprises, the actual substantive criminal statutes are also out ago. for example, a child exploitation enterprise is trading child pornographic images and virtual currency, we should be able to charge that at a traditional child exploitation statute. and so we feel confident that the statutes that we have on the

books are flexible enough to meet our need. that having been said, we are always looking for ways to close any gaps that might arise or to close any gaps that we might see that we are not seeing right now. we would be happy to work, continue to work with you and your staff to ensure that we let you know whenever we need those other to. >> thank you. ms. shasky, would you respond to the question as well, please? >> sure. >> actually two questions. >> thankfully, congress' actions in passing the bank secrecy act and the u.s.a. patriot act have already given us a strong platform to meet the challenge. so we are confident that we can meet this challenge, at least in the first instance using that platform. so the bank secrecy act, of course this country's anti-money laundering and counterterrorism financing backbone which would minister at since then, we issue

the regulations under that. in 2011 when we expanded some of our definitions to enable us to have flexibility in going after new payment systems, our hope was that these regulations would live with changes in the market. what we found is it's done just that. so as virtual currency has come more strongly to the forefront over the last year or two years, that definition has been broad enough for us to encompass virtual currency administrators and exchangers and our pre-existing regulations under the bank secrecy act. and then with the u.s.a. patriot act, section 311 of that combats the section that gives us the authority at fincen to name a foreign financial institution as being a primary money-laundering concern and and to cut it often goes enact a system. that's exactly the provision we used to confront liberty exchange. that target financial authority provided to us by congress. so feel like we have a pretty

good basis on which to act already but it's hard to predict where the finances is going to go and what tools we might the next, it would be very thankful to continue that conversation with congress to seek any additional tools might be better. >> thank you. in your testimony, ms. shasky, you said on page 11 i think of your original testament, i'll just read a couple of sentences from if i could. you said several new payment methods in the financial sector have proven their capacity to empower customers, encourage the development of innovative financial products, and expand access to financial services. you went on to say, we want these advances to continue. then you said, however, those institutions that choose to act outside of their aml obligation and outside of the law have and will continue to be held accountable. fincen will do everything in its regulatory power to stop such abuses of u.s. financial

systems. when you talked about several new payment methods in the financial sector that have proven their capacity to empower customers and encourage the development of innovative financial products, expand access to financial services, this is the bright complaining in this technology. virtual currencies. maybe give us some examples, some concrete examples if you will, how does have worked out for the good. >> sure. i think one that comes to mind is the stored value cards. another area where we thought not only about the risks from a list of actors, but also the benefits that it can offer to consumers. we see many of the unbanked use prepaid cards to gain the initial access to the u.s.

financial system and many might argue that many positive for society. in my own personal experience i think of online banking and the changes that's made for me as a consumer and the idea of a ch why cannot take a picture of a check and deposit it into my account. some of these technological advances make things easier for the consumer. and so those would be examples that come to mind. but with each of these we needed to think in the early days as they came to market how my criminals use of these systems, how might they exploit systems. because the fact is, any financial service, any type of financial institution can be exploited. cash is probably the still the best medium for laundering money, but we need, the important thing is to put measures in place that mitigate that risk. >> all right.

i'm going to ask hud take a shot at this question. we have already addressed it to some extent but it want to come back and do a little deeper dive, if we could. the question i want to get to and i want to come back to is whether or not you think that virtual currencies, including, i would include bitcoin, fit into our current legal and regulatory framework. and we talked a little bit about this and i explored in the last question, but come back to me if you will with some further thoughts on whether you see any gaps in our statute, gaps in our regulations, regarding virtual currencies. so that's part of the question. the second half of the question, which agencies do you believe need to be at the forefront of the federal government work on virtual currencies? two questions. and mr. lowery, if you feel up to taking this one first, that will be fine.

>> thank you. so, is virtual currency within the legal existing laws. i can speak, and then obviously bitcoin was the currency that is part of this discussion today. i can speak within the framework of the secret service investigations and what we see out there. i think it's important to recognize that within what we see in our investigations, that the online cybercriminals, the high level international cybercriminals that we're talking about have not by and large gravitated towards the peer-to-peer cryptic currency such as bitcoin. again, this is within the confines of what we have dealt with. the eastern european cybercriminals we have developed a specialty in half by and large gravitated toward centralized digital currency. that is as my colleague discussed earlier, that is based

in a locale that may have less regulatory guidelines can may have less aggressive law enforcement. so that is a distinction i think he's made. the virtual currency within existing laws? i think there are plenty of opportunities for digital currencies to operate within existing laws and regulations. and as far as the secret service investigations are concerned, as long as they fit within the laws and they comply with existing guidance, then there would be no violation, no reason for the secret service to look further into it. >> all right. ms. raman, especially the second half of the question, which agencies do you believe me to be at the forefront of the federal government work on virtual currencies? >> starting with that question then first, i think the department of justice recognized a few years ago that a joint effort was needed. and the fbi set up and lead the

virtual currency emerging threats working group, which is now the working group that my colleagues here and many other agencies participate in. it's born up to be very fruitful. it's a form that allows all of the agencies that you want to be at the table, the treasury department, our law enforcement agencies, even within the department of justice, the fbi, dea and other agencies within the department of justice, prosecutors. with u.s. attorneys offices and two sections of our criminal division, the asset forfeiture and money laundering section, and the computer crime and intellectual property section participating. irs, and a number of other agencies here in the united states that we think are necessary participants are, in fact, participants. we also have four law-enforcement that participates in that group, including the national crime agency in the uk. and these are, i think, the most important agencies to be at the

table. that covers the waterfront in terms of regulations and regulatory enforcement and criminal law enforcement. there is of course room for improvement, and were always looking for additional participants and even in fact last week there were additional participants that were invited to join the working group. i think it's -- >> from foreign, from other countries or from within this country? >> both, but even last week we thought of an additional domestic agency that should be at the table. we've invited them to produce be. i think it's going to be an evolving process. it's proven so helpful thus far, and i think we are intending for that to continue to be an important forum in which we can talk jointly about what the emerging threats are. what each of our agencies can do to gordon it across the government, both here and abroad. as for the regulations and laws that cover virtual currencies, and i feel confident that

currently our criminal statutes that we've used in a prosecutions thus far have been effective tool. are money-laundering statutes have been very effective and our ability to prosecute eagle, liberty reserve for example, our substantive criminal statutes such as a drug trafficking statutes and murder statutes have been effective thus far in being able to charge the administrator of silk road. and our money transmitter statutes, which is 18 usc 1960 has also been used to prosecute liberty reserve and some of its principles, for example. and so i do think that we have the statutory tools for the most part that we are prosecuted to get at this kind of criminal activity. but i will say that the department of justice over the last few years has been proposing and pushing updates to our money-laundering statutes to

the proceeds of crime act and related pieces of legislation. and those changes are ones that we continue to support. money laundering statutes have been on the books for a long time, and they been effective but they can be updated. we propos proposed over the yeas several updates that we continue to support. >> ms. shasky? >> ensure. taking the questions in turn. fincen has never opined and still has -- is not up on whether virtual currency is a real currency or a commodity. as those questions are outside of our purview. we are the anti-money laundering, counterterrorist financing regulator for the federal government. so our regulation focus on that and only that and we tried to make that clear in our guidance this last march. but this country, like all countries, has an interest not only in protecting our financial

system from money-laundering and terrorist finance, but also protecting consumers from fraud, collecting taxes, protecting investors, ensuring economic stability. all things that are a part of our regulatory system but outside of the purview of fincen. and so to the extent that others feel it's appropriate to take those considerations into account with regard to virtual currency, we would look forward to working with him to make sure we are as coordinated as possible in our actions. >> all right, thank you. you all know about the government accountability office, gao, and a lot of people in this country, most people probably have no idea what gao is or what to do. they are a watchdog, sort of a congressional watchdog to make sure that we are minding our peace and cues in the federal government, in a lot of different ways.

the way we run our operations, guided and cost effective way. brought operation from widely diverse operations. every other year gao comes up witwith something they call ther high-risk list. when i first heard about the high-risk list i said what is that? they said it's a high risk, it's a whole list of activities designated, identified by the general accounting office to waste money. every now and then i talk to constituents, we talked about what we do to try to reduce the budget deficit and i people say i don't pay anymore taxes but i'm going -- i just don't want you to waste my money. and that one of the things gao does, once congress identify ways to spend money more effectively. and also to collect monies owed to the treasury more effectively. it's that function i want to

talk about. gao every other year reports to us along with on something called tax gap. monies that are owned and hundreds of billions of dollars that are owed to the treasury not getting collected but in some cases we have pretty good idea who owns the money but it's a lot of money that goes uncollected. i would like to say numbers going down but, unfortunately, my knowledge not yet. what i want to do with that as background, just ask you this, when i think about new types of currencies, i wonder how they fit in to the tax system here in our country. and as you know, we just talked about it, gao, they issued a report earlier this year, make it this year, in which follows my line of thinking and possesses a virtual currencies could present a real

vulnerability and to make worse what is already a difficult situation. they recommended that the irs might -- to taxpayers on the basic tax reporting requirements for virtual currencies. and i just ask, do you know the current status of that guidance? and what did we expect it to include and when can we expect it to be released? and i would say either ms. shasky or ms. raman, if you could tackle that when i would be grateful. >> i would be happy to deal with that one. so personal, the financial intelligence unit for the united states, one thing fincen does after it collects all of the information of the financial institutions provide to us is we make that is able to our partners in law enforcement, not only for the purpose of enforcing our criminal laws but also for the collection of taxes. we have a very close and

long-standing relationship with the irs, both on the colonel side and the civil side, to help them do just that. in fact, this very last week we were meeting with them on this very topic, virtual currencies and i do think that in our joint work. so something that i know they're taking very socially. when it comes to guidance on virtual currency for taxpayers, i know there was the gao report that suggested that the irs come out with some guidance because there is, there may perhaps be some question as to how to treat different uses of virtual currency for purposes of our taxing and. and while i don't know the details and would have to refer you to irs to get into great detail, what i can tell you and i do know is that they're working diligently on such guidance and that -- >> any idea and women might expect to see if? >> my understanding is that the gao report may have said for some deadlines. i think it's 60 to 90 days.

i can tell you they are actively working on it and is at the forefront of their minds. and i think it would be very useful guidance for the taxpayers when it comes out. >> ms. raman, do you want to add anything speak was serving not take away anything. i defer to the irs on the status of the guidance and i am not personally aware of the status of the guidance. i will say that the department of justice was very aware of the gao report. we took an interest in its findings and we've been in discussion with the irs about some of the findings in the gao report. >> thank you. ms. shasky, i think you said earlier that fincen did not opine whether or not a virtual currencies our currencies or commodities. i would just ask you, who do you think should be making that decision? and second question would be, who do you think should be making that decision, do we need a definition to be made to in order to enforce the laws and

regulations? >> i'm not sure i know who should ultimately make that decision. i do know it's outside -- >> you think it should be mr. lowery? >> it should not be mr. lowery. in terms of the legalities of the very things, i'm sure that congress has a role in determining that when mr. talk about commodities, the ct fc comes to mind when we talk about security, the sec -- cftc. regardless of who should be making this determination, our focus at fincen was we know that virtual currency currently exist. we know it is being used to transact payments. we know that it is been exploited by some producers criminal organizations, and we want to protect the u.s. financial system as we are mandated to do from those a list of actors, from laundering or moving money for the purposes of

terrorism through our u.s. financial system. so our entire focus has been on how can we best do that under our current regulatory scheme, and the nice thing is that deregulatory scheme that we have in place has the flexibility in it to change as the landscape changes. so in other words, is some part of the industry were to ultimately be defined to come under the sec or the cftc, our anti-money laundering regulations also applies to those areas of the industry. and so regardless we are going to make sure that we're taking every mitigating step we can to prevent illicit actors from operating through the u.s. financial system. >> okay. let me focus the question on you, and maybe if you like, ms. raman, as i think you both are probably aware, a few weeks after the so-called website was taken down by federal law

enforcement, a new silk road website popped up in its place. and it's hardly alone. numerous other similar marketplace exists on the dark website selling drugs, selling weapons, selling child pornography and in some places a marker for hire for services. whether or not these are real marketplaces or simply some scam artists idea of a sick joke, it's obvious that makes people worried and concerned but how do we develop a strategy? how do we develop a strategy to deal with these sites? and are there particular characteristics of the sites that make it more difficult for law enforcement to respond? would you respond to that, mr. lowery, and then maybe ms. raman? >> absolutely. so the online sites, the secret service in our investigations, once again, we believe there are three infrastructures in place that facilitate the online crimes. the silk road type criminal

forums. one of the secret service specialties are on the criminal forums, eastern european based predominantly. so there are other of these websites that specialize in specific crimes. the other part of the infrastructure is a digital currencies or the use of digital currencies predominately, the digital currencies that fall outside of the guidance of fincen are outside the u.s. law or in country that obviously has less records were controlled. and the third is what we call, we refer to as bulletproof hosting. >> what? >> bulletproof hosting. if the criminal individual who specifically sets of business and a country with very little record store or aggressive law enforcement and provides a platform for a tax to be launched against the u.s. criminal infrastructure.

so the secret service attacks the problem strategically. we are always looking to identify the individual behind the specific crime. the intruder, the large-scale vendor of stolen personal data, what have you. at times it may be that if we can identify a forum or a digital currency that is within legal reach, within reach of u.s. law enforcement, case in point, liberty reserve or e-gold, then it makes strategic sense to take that out of the equation. and disrupting the criminal organization for strategic reasons, quite honestly. usually to facilitate the arrest of other individuals we're looking at. >> ms. raman, do you want to add anything to that statement of? >> i think the challenge that you're going to sometimes really results from anonymity and it results from many criminals migrating to hidden services on the internet spent migrating to

what? >> hidden services on the internet. that is been a challenge for law enforcement. but as you've seen from the results that we've been able to achieve in the last several years, i think we've been able to keep pace with that and we've been able to develop tools and strategies to address it. although it is i think as you mentioned, it can be frustrating to the public to see another website pop up after one that seems similar to it just having been taken down. i do think as mr. lowery said that it's incredibly important to us to be taking those steps, not just to disrupt that particular organization but to send a message to the users of those websites that they cannot trust those types of websites. that law enforcement is watching, and that it is not, in fact, anonymous. and it is not, in fact, immune from investigation. and that is an important message to send. all of us in law enforcement who pay attention to the results of

these takedowns know that the community is aware, the criminal community is aware when we take these actions but it's important that we do so. it's important we put the wrongdoers in prison where they deserve it, and it's important for us to put these organizations out of business but and i think we've been able to do that. >> that was a very encouraging addition. thank you. i have another question on domestic job creation that i'm going to direct to ms. shasky. but before i do, my last question calls right after the and then we will introduce the second panel. maybe take a short recess and then introduced the second panel after that. sometimes i asked a panel before us when we are trying to figure out how to develop some consensus, to address a significant challenge to our country, one of the things i have to, you were very kind to present an opening statement and i appreciate it very much. clear, straightforward responses to the questions i've asked you

but i want to ask each of you to take a minute or two to take a closing statement and just reflect on what you said, what others have said, some of the questions we've asked and some of wha what you for your colleas on the fantasy. so just be thinking about that. while they are think about that, ms. shasky, i'm going to ask you this question about domestic job creation. as you know, there's been some concern that virtual currency businesses might leave the u.s. and move overseas jurisdictions where there's less, strict regular framework. and what, if anything, can the u.s. do to try to keep businesses in this country? what are we doing -- what may be more should we do elect and along those same lines is, is fincen engaging within national partners on regulation of virtual currencies? sounds like we are but if you could expand on that, i'd be grateful. so those two questions, please.

>> sure. so, first in keeping business in the united states. i guess i'd say that if business is going to leave the united states based on perceived or actual regulatory burden, i believe they will find that gain short-lived. every country as i mentioned earlier has an interest in protecting its financial system from a list of actors who would launder money or move money on behalf of terrorist organizations. in collecting taxes and protecting investors and protecting consumers from fraud, and ensuring a stable economy. and so if this payment system, this virtual currency payment system, system about which we're talking today is going to survive and be a real player, significant in the financial system, regulation both at home and abroad is going to catch up because it has to. and so our challenge here is to have smart regulation that both mitigate the risks while at the

same time minimizing the burdens. i feel confident that lease in the aml, see if the speed what does this differ speaks anti-money laundering counter -- >> thank you. >> we've managed to do that. and met that challenge and i think that's going to be borne out over time. so i think the innovation and the jobs will stay in the u.s., or at least come back to the u.s. in terms of working with our international partners to ensure that we have the kind of consistent regulatory framework on anti-money laundering side worldwide, the financial actions task force have international standards and does a good job of ensuring the country around the world have the laws and regulations in place. my understanding is that their interest in taking up this issue. what i can say for sure is that

my counterparts abroad have been reaching out to us quite a bit to find out what we're doing in this revelatory space. we managed and discouraged able to act a bit quicker than some of our colleagues because we have a broad definitions and were able to fit in virtual currency within our pre-existing regime. germany was able to do the same thing, so they already have regulations on the books. of the country are trying to figure out how they can catch up spent all right, thank you. what you think about the answer to the last question that i will allow mr. lowery and ms. raman just went into us a brief closing statement. ms. raman, you want to go first? >> first of all, i want to thank you for holding this hearing. it's encouraging from the law enforcement standpoint to have interest in these kind of issues. because they aren't easy. although we had many successes we clearly have challenges, too,

and it is helpful when we have interest from people like yourself, and it's helpful when we have questions asked of us like, what can we do to help. there's always something we can do better, and it's noble to have these dialogues. i also think it's encouraging that i have colleagues like the ones that are sitting next to me who have been willing to work together on these emerging threats. i think we've all approached it in the same way, which is the virtual currencies in and of themselves are not illegal. we've all recognize that innovation is important. and we've all recognize that, like criminals around, have done for ages, this will be another vehicle through which criminals may try to launder proceeds or commit additional crimes. i feel confident that we have the tools that we need to address those threats. and i feel confident that we have the will to address those threats, but we need to keep

pace with what is going to come. and we will remain vigilant. we intend to be as aggressive in the years to come as we have in the last several years. virtual currencies did sneak up on us as i said in my opening statement. we brought our first indictment in 2007, and so we assume that these kinds of threats will continue to emerge and change and evolve, and we intend to keep pace. >> all right, thank you. that's a pretty good closing statement. you should do this for a living. spent it just so happens i do. >> i think you found the right job. mr. lowery. >> i would echo the statements speak i think -- >> but in closing, as a dhs law enforcement agency, and a long-standing original defender of the secret service infrastructure, under the secret service working with our partners in law enforcement as

well as prosecution and fincen, after international partners will continue to work strategically to remove the gravest threats to our infrastructure. it's going to take consistent awareness of the growing threat and we will adapt as we always have and we're going to have to hurtle the international issues and what have you, working together overseas. and i do know u.s. law enforcement history aggressive, and also very collaborative with our foreign partners. because we realize this issue can't be taken care of just by ourselves. we will continue to work as we respond to these threats, as a part of dhs will continue to work to disseminate the threats through dhs and through our electronic crimes task force and through our various partners to ensure that the remaining 16 ck ours throughout the country's infrastructure are provided the greatest level of protection.

and we believe firmly that aggressive law enforcement is a strong part of cybersecurity which will benefit the nation as a whole. >> thank you. ms. shasky, the last word. >> thank you, senator carper. i'd like to thank you as my colleagues did for convening this very important hearing. you know, i heard a banker, a ceo of a fairly large bank said recently that having the privilege to be a financial institution and be a part of the global financial system is just that, it's a privilege. and there's a reason why countries and jurisdictions ask you to be licensed to be one of those financial institutions. because it also comes with great responsibility. you have great power and your hand as a part of the financial system, and particularly in this country with the financial system we have in the united states. and so while innovation is a wonderful thing, and innovation

in the financial services industry is incredibly important, it does come with obligations to have that andrea and be able to be a part of the u.s. financial system. and one of those obligations is helping to protect that system from a list of actors. so we believe that the regulations in place have met that balance of mitigating the risks while minimizing the burden. in athens, we are asking virtual currency exchangers and administrators to do three things. register with fincen. it's an online form and it's free. put in place aml protections, controls in place to harden yourself to the likelihood that bad actors will take advantage of your system. and maintain records and provide certain reports the fincen, including suspicious activity reports. it's something that many other

players in the financial system already do, from the smallest mom-and-pop check cash are on the corner pocket of the street or to the biggest of the global financial institutions. they've all found a way to offer their services while maintaining the same protections. and so that's what we're asking of virtual currency providers. we believe it's reasonable, given that we've seen that the virtual currency has, in fact, been exploited by some pretty serious actors. that being said, fincen is causally engaged in outreach to industry and has been engaged in outreach with the virtual currency industry. we tried to bring different parts of the industry together so they can learn from each other the practices, best practices, for hardening themselves to elicit finance, and to show the information we collect from them act with them so that they can become even better at protecting the u.s. financial system. so at the end of the day we hope we have that balance right. we think we have that balance

right, we are continuing -- committed to continue the discussions both with industry to see if that's right, as well as our colleagues on the law enforcement side. take you. >> thank you. this has been a thought-provoking presentation. and discussion. it's been encouraging as well. this is probably a stretch of analogy but i'm going to try to make it fit. i served on the committee called environment and public works, and we wrestle all the time with him the need to clean up our environment. and put in place the kind of regulatory structure, legislative structure, combination of laws and regulations and enforcement that enable us to breathe the air and drink the water and do so without fear. i always like to say, we don't have to make -- that's a false

choices they went to choose between a stronger economy and a clean environment. i think that's a false choice. and one of the questions that's been rattling around in my mind of, and as we drill down on this subject, is it possible to reap the benefits him including economic benefits, of this virtual currency, but at the same time cleaning up the kind of misbehavior, criminal behavior that we all know is out there. and it's a concern to all of us. as i've become convinced over the year, have a stronger economy and a clear implement. i'm encouraged that maybe it's possible to have the benefits of a virtual currency, virtual currencies, and to actually be able to not facilitate, hold down the criminal activity that we've talked about here today.

so thank you for giving us both sides. old sides of the story. and we are going to i suspect a chance to work with you some more, and my hope is that you will feel free to come back and tell us informally or formally where the legislative branch of our government needs to be doing some things to make sure that what a potential risk there is for our economy, for consumers. is actually realized. while we can't count on that illicit behavior, criminal behavior, we all want to eliminate. so i'm going to just all a very short recess while we change up the cards. i'm going to need to take a phone call from one of my colleagues, and we will probably resume in about two minutes. but thank you all very, very much for joining us. now we will just take a short recess. [inaudible conversations]

>> ladies and gentlemen, ask you to find your seats. looks like we have are witnesses lined up. and we thank you are joining us today. voting is a 5:30 p.m. so that will be a hard stop for this panel. but let me take just a moment if i could to introduce each member of this panel. distinguished witnesses, my note to say distinguished witnesses, so thank you. first witness is ernie allen, president and chief executive officer of the national center for missing and exploited children. and the international center for missing and exploited children. mr. allen also serves as co-chair of the digital economy task force which was developed to focus on the benefits and risks surrounding the digital

economy and this led joined by the international center for missing and exploited children, and thompson would. our next witness is patrick murck, general counsel for bitcoin foundation. bitcoin foundation works to standardize, to protect and promote bitcoin. mr. murck is also the principal and founder of engaged legal, his expertise extends across illegal and predatory issues governing the use of bitcoin, virtual economies and alternative and systems. previous mr. murck worked in a business and legal affairs at a tech company, big star, as an attorney at dc-based law firm, and also as an international investigator journalist. our third witness is jeremy allaire. mr. allaire is the founder and ceo of circle internet

financial, a startup company focused on promoting mainstream adoption of virtual currencies. internet occupant. mr. allaire also serves as founder and ceo of bread company, the largest online video platforms in the united states. our final witness is mr. jerry brito. mr. brito is a senior research fellow at the mercatus center at the george mason university come and director of the technology, policy program. mr. brito also serves as an adjunct professor of law at george mason university. he is -- his research focus on technology and internet policy, copyright and on the regulatory process. good afternoon and welcome to each of you. you're entitled customers will be made a part of the record it as i said the first group come you are welcome to summarize it if you like and try to keep your comments about seven minutes. if you go way beyond that i will have to range in, otherwise we

will be just fine. mr. allen, why don't you stop? >> thank you, chairman carper. as you mentioned, we have launched a digital economy task force with thomson reuters, the global media and information company. that was created as a result of a conference we brought together in june with private sector leaders and government officials to look at this larger problem. the task force that is working on this issue today includes the bitcoin foundation, the tour project, a gates foundation, the brookings institution, the cato institute, vital voices, law enforcement leaders around the world, and many others. our goal is to bring people together and work towards reasonable, balanced effective solutions that protect the promise of the digital economy while addressing its misuse. and our task force will issue its final report in february. let me begin by saying we are enthusiastic about the potential

of virtual currencies and the digital economy for social good, particularly in helping to bring about financial inclusion for the 2.5 billion adults on the planet today without access to banks, credit cards and mainstream financial system. however, as you pointed out today, there are risks. our primary concern is the migration of child pornography, child sexual exploitation, trafficking, and other criminal enterprises to this new economy. and we believe it's happening for three primary reasons. the first is anonymity. the second is that this is an economy that belongs to no nation and is overseen by no central bank. and thirdly, we believe that most countries have not yet begun to apply existing law and regulations to virtual currencies at the exchange level. the point at which virtual currencies are traded for dollars, euros, pounds or yen.

i have consulted with financial experts around the world about this issue. and they advise as it relates to our core concern, which is explication of children that child pornography is currently being created and disseminated using anonymizing technologies and using virtual currencies for payment. they hasten to add that it is at a lower threshold of volume than drugs and other criminal goods. however, they call the use of these technologies for child pornography significant, because they principally involve the actual producers of the content. for producing content using and anonymizing technology and using virtual currencies for payment. in august, the irish owner of freedom hosting, which the fbi

had called the largest facilitator of child pornography on the planet, was arrested. freedom hosting maintain servers for a number of the so-called deep web chopper knock a few sites. lone leader city, patio empire and others. all which excepted digital currency for payment. expose the ip addresses of users. regarding bitcoin, all the transactions are visible and transparent. the challenge for law enforcement is to go from that transaction to an actual person. the primary challenge that we have learned in our consultations with global law enforcement today is growing internet anonymity. a recent headline read, there's a secret internet for drug

dealers, assassins and pedophiles. this so-called deep web includes sites for the purchase of weapons and counterfeit currencies and stolen credit cards and assassins and child pornography sites. all of these sites accept digital currency for payment. what i hear most from law enforcement today is frustration. the primary investigative technique i've been told that law enforcement around the world is using to investigate these operations is infiltration. but infiltration is expensive, time-consuming, and is often ineffective. and while there are some arrests, the research indicates that most of the arrests are of those who use the anonymizing technology improperly and leave a trail. they connect to a non-anonymous

ip address provided a trail to follow. and even the silk road arrest involve an intimate a series of mistakes. that made it possible for him to be identified. my concern is with the absence of existing law enforcement tools, we are not catching the truly sophisticated, the most high risk of organized criminal offenders. through our task force, one of the things we are doing is exploring new techniques. .. exploring new techniques, including clustering, bitcoin transactions, to identify patterns. and we hope to learn from the techniques that were utilized by law enforcement to penetrate freedom hosting. for the future, the pace of innovation will quicken. there will be new technologies and the intensity of the effort to achieve total internet anonymity, will increase. you ask what can congress do. i think there are four things.

first, you can ensure that existing law and regulation focussing on the point at which virtual currencies are being exchanged for convention yl currencies are used. secondly, you can press for global cooperation. digital economy funds flow globally. network to network, not nation to nation. this is a problem with the u.s. government cannot solve alone. thirdly, you can ensure the response of government to the fragile, emerging, high risk but high reward area is not so draconian, will not push these into areas where there is little or no regulation. you can help us address the court challenge, internet anonymity. for all of its importance in protecting political dissidents, journalists and others, we are very concerned an environment

not be allowed to foster in which child exporters and traffickers can operate with no risk unless they make a mistake. three years ago the then secretary of state hillary clinton in her remarks on a free internet said on the one hand anonymity protect the exploitation of children. on the other hand anonymity protect the free expression of opposition to repressive government. she added we should err on the side of openness while recognizing there are going to be exceptions. that is the challenge, to determine how anonymous the internet can be from the perspective of government and law-enforcement around the world. we feel absolute internet anonymity is a prescription for catastrophe. thank you, sir. >> thank you, very good

testimony. patrick murch, welcome. >> good afternoon, chairman carper, i am pleased to have the opportunity to speak with you. i am patrick murch, general counsel for the big:foundation, i have an executive in legal and business development for a number of companies. additionally i serve on the board of directors for the victim foundation, for the big line community. the big foundation represent the global constituency for business and individuals contributing to the overall ecosystem. our membership is comprised of many of the top companies, entrepreneurs and technologist working to make it a success. the foundation's mission is to promo promote, protect and standardize the use of distributed decentralize currency and free people to transact on their own terms in the global economy. having said that there is no big coin company that manages or controls the software or its

operation. the software is built to maintain by community of volunteer open source software engineers and distributed network of transaction processing often referred to as my name. at its most basic level big coin is an internet protocol like e-mail for money. the big -- the big coin offers a decentralize value open to transparent payment network that is secure, efficient and low-cost. the big coin network can operate without any third-party intermediary and is a highly innovative global financial system and to itself. in the near future the big coin protocol will facilitate advanced payment services and experiments provide additional non-financial services like property management and identity verification. open at participatory systems will produce many economic and social benefits. these systems can reduce exploitation of vulnerable

populations the world over and here in the u.s. by providing safe and private store of wealth in addition to global transaction network that cannot be corrupted or abused by those it seeks to exploit or harm others. financial exclusion is a u.s. problem, not just a problem for the global south. there's the rising tide of people within our borders. access to financial services directly correlates to increases in dignity, liberty and self-determination. big coin can move people trapped in an informal economy to a globally connect the digital economy. like any technology, for abuse of this system, big coin can be used for illicit purposes and the law-enforcement community may develop new methodologies

for investigating criminal activity on the network. this will not prevent misuse of the big coin network more than existing financial systems. as we heard in earlier testimony, big coin's short history, law enforcement and regulatory agencies had a string of notable successes already. rather than be labor the overall headlines about misuse of big coin in the digital economy we should be congratulating the law-enforcement community on their hard work and still adapting investigative techniques to increasingly digital and openly networked world. keeping the big coin network safe is our responsibility, industry led effort underway to help prevent abuse. like you, mr. chairman we are looking beyond the silk road. with the alleged operator of the black market website was arrested the markets expressed relief and optimism with long and sustained rally in the price of big coin. decentralize currencies like big coin have a different risk

profile from the centralized currency system. central control of the transaction measure allows bad actors to shroud their rectory's. decentralized systems with an open ledgers are inherently transparent and may prove too difficult for use in any large-scale land sustained activity. as we address law-enforcement concerns we must bear in mind because of this open and transparent architecture we need to consider the privacy of law-abiding individuals. as it turns out, big coin's public ledger system may be so revealing that the larger problem is not anonymity for criminals but the difficulty law-abiding people have maintaining their own privacy. big coin is not some magical cloaking device that simply allows criminals free rein, nor does big coin pose unique or unsolvable threat to the law enforcement and regulatory community. the use of big coin is not

unregulated. service providers operate in a heavily regulated business environments with a deeply entrenched competitors. for these potential competitors, bank payment network financial service company, big coin represents an opportunity for them to start innovating again. these institutions already have a deep understanding of the control and risk-management necessary safely handle the big -- big coin transactions and big coin accounts. instead what we have seen is a chilling effect through the banking industry as big coin companies try to gain bank accounts. the united states has a strong interest in maintaining as a global leader involved in cutting edge tech riveted -- present spreading individual liberty around world. the digital economy is poised to be significant job creation and economic growth. fostering development of legitimate big coin business in the u.s. is the best preventive measure we can take to keep good

actors in the system. applying consistent rules and regulations that encourage technological experimentation, this committee's work is helpful and charting a safe and sane regulatory environment for the digital economy in general and big coin specifically. as one entrepreneur and member of the big coin foundation put it succinctly of you give us clear rules we will follow them and we will build jobs. to the element of clear rules appears to be happening faster at the federal level than at the state level. having said that we are encouraged by early signs of leadership from states like california and georgia. we believe held the and respectful dialogue between key stakeholders will help to ensure the substantial benefits of the digital economy are met while mitigating many of the risks. in particular we would like to thank the system for opening up a dialogue with the big coin community and demonstrating leadership on this issue at the

federal and state level. big coin foundation look forward to continuing this open dialogue and thank the committee for allowing us to participate in this hearing. >> thank you, patrick murch. jeremy allaire. >> thank you for hearing my testimony this afternoon. my name is jeremy allaire and i am founder and ceo of circle internet financial, recently launched financial services company and facilitating payments and many transfers using global digital currency like big coin. i have been building internet software platforms and online service companies for 20 years having founded and helped to lead multiple public companies with products used by hundreds of millions of consumers and hundreds of thousands of businesses globally. i believe digital currency represents one of the most important technical and economic innovations of our time. specifically digital currency introduceds advancements in electronic payments and money transfers, potentially

materially lowering costs for businesses around world, decreasing fraud risk for consumers and merchants, increasing consumer privacy, expanding the market for consumer financial products on a worldwide basis. as this technology moves from early adopters to mainstream acceptance it is critical federal and state governments understand how big coin fits into existing regulatory guidelines and how to apply them to digital currency. these up polk consumer protections associated with fraud and privacy risks, ensure that criminals and bad actors find it increasingly difficult to utilize these platforms and provide income tax clarity to consumers and businesses that conduct business using digital currency. it is clear that over the past 20 years the internet has been at the center of global economic innovation, open platforms transformed communications, media, software, education, commerce and retail, but for a variety of reasons the

technology and business model around finance has been insulated from similar transformations. this same open platform approach in digital currency specifically big coin presents an opportunity for the same level of innovation and advancement in forms of currency, trade and payments we have seen brought to bear on other industries. i don't think there's much debate we need to see innovation and transformation in banking and finance, not just reform and mediation. specifically payment systems are inefficient and very much build upon systems and processes that predate the internet. the result is higher cost for consumers, lower margins for business and less efficient economic interaction. in many cases our financial systems have excluded enormous base of consumers to remain underbank to. the combination of ubiquitous internet connected mobile devices and digital currency presents a tremendous opportunity to expand access to financial services on a worldwide basis. payments and money transfers are

still operating in the pre internet era. today we can communicate to almost anyone in the world including video format at no cost with instant access to an enormous amount of the world's knowledge also effected let no cost. instant access to more media than we ever imagined was possible, almost at no cost but to send money between friends and family across the table or across the planet takes days and cost the significant amount in transaction fees. to accept the lens merchants must bear significant fraud risk. consumer privacy is often threatened. likewise it takes days for a merchant to actually receive money from an electronic payment not to mention widely perceived high cost of transaction fees. what we doing about this? we are building online services for consumers of businesses to use digital currency and specifically big coin. for consumers we intend to enable them to easily purchase, store, send, receive and make

payments using big coin agribusinesses providing tools to help them easily accept digital currency payments. we are fully committed to complying with all applicable laws and regulations and establishing comprehensive risk-management protocols. we registered with the money transmitter, actively seeking the proper licenses for u.s. state financial authorities. developing platforms to provide high levels of security for users and employing industry leading approaches to customer identity verification, fraud remediation and anti money-laundering designed in partnership with leading regulatory advisers and experts. i want to talk about the risks inherent in digital currency platforms like big coin. as has been made amply clear from earlier testimony i want to emphasize i believe u.s. regulators and law-enforcement adjust the 5 refocused on potential use of digital currency to finance criminal activities including terrorism.

in addition to the guidance and appropriate requirement that big coin operators implement bank secrecy act provisions there's also a risk if the government doesn't support innovative companies gaining access to u.s. banking institutions which will drive companies offshore and overseas. another risk is businesses adoption of digital currency will be hampered without clarification from the irs on income generated from sales, denominated in digital currency and such guidance is also needed to thwart potential tax evaders. without clear guidance on consumer protection consumers and businesses to be defrauded from inadequate systems and risk-management procedures around customer funds. another risk is the united states falls behind in this critical emerging economic innovation. regulatory uncertainty could hold back american companies from participating in driving digital currency innovation. big coin extremes in china, the

largest single trading exchange in the world followed by exchanges in japan and europe. we need to support our incredible history in america of supporting technical innovation and entrepreneurship. in terms of u.s. regulation it appears to meet federal and state regulators seem to have ample statutory authority to adopt regulations and take enforcement actions as necessary to protect consumers and to ensure responsible conduct and enforcement actions to date have been constructive. we are ready to assist them in ongoing efforts to adapt regulatory tools to new digital currency. i.t. believe we are at the forefront of another 20 year journey of internet led transformation, this time in global financial systems and there's a real opportunity to foster the economic change while simultaneously putting in place the safeguards the only government can enable. that concludes my prepared

testimony. i would be happy to insert any further questions. >> that was very helpful testimony. please proceed, we are glad you are here. >> thank you for having me here today. we are here to discuss virtual currencies in general but it is big coin in particular that has so many interested in this topic. online virtual currencies are nothing new. they have existed for decades from world of work craft gold to facebook credits and neither online payment systems to. paypal, visa, western union, these are all examples of what is it about big coin and similar currencies? what everyone may think about big coin's prospect is safe to say it is a remarkable technical achievement. big coin is the first completely decentralize digital currency and is decentralized sentence that is unique. prior to big coin's invention in 2009 online currencies or insistence had to be managed by a central authority weather was

facebook issuing facebook credits or paypal insuring transactions between its customers were reconciled. by solving a long standing conundrum in computer science known as the double spending problem big coin for the first time makes possible transactions online that are person to person without need for an intermediary between them just like cash. this breakthrough presents benefits for consumers and the economy as well as challenges to law-enforcement. because there is no central authority in big coin transactions there are a little too few associated with those transactions which benefit small businesses and prices for consumers and because big coin is not a proprietary platform run by a single company but instead an open network entrepreneurs need no permission to experiment or renovate private services. on the flip side law-enforcement has long relied on financial intermediaries to help protect, preventing investigate illegal

transactions because big coin's transaction can have no intermediaries and big coin transactions are not tied to identities it is not surprisingly is the big coin employed in criminal transactions. particularly used for the sale of drugs and in malware that holds one state hostage and is not difficult to imagine the technology could be employed in money-laundering. emerging technologies often present potential benefits and risks. 3d printing can be used to make prostheses and lifesaving medical devices but also undetectable firearms. domestic commercial drones have the potential to revolutionize agriculture and shipping but the also be used for stalking. the challenge for policymakers is to address the risks posed by emerging technologies while doing no harm to innovative potential of that technology. in many cases where emerging technology poses risks there are already laws and regulations with general applicability that address many of those risks without the need for new laws

targeted at specific technology. this is the case of big coin. big coin transactions do not require intermediaries, one must acquire them by exchanging dollars and merchant class that except coins may use big coin payment processors. there is a fast-growing ecosystem of started exchanges, peer and processors and escrow services that make a package wendy's burgeoning infrastructure. each of the the subject to regulation as many transmitters including state licensing and registration as well as customer and suspicious activity report requirements. serious criminals looking to hide their tracks are more likely to choose a centralized virtual currency run by an intermediary willing to lie to regulators for a fee rather than decentralize currency like big coin's technical matter, must make a record of every transaction. the online black market which used big coin is estimated to have generated less than $200 million in drug sales,

decentralized digital currency liberty reserve is believed to have landed $6 billion related to credit card fraud, identity theft, child pornography. the reason liberty reserve and not big coin was the payment system of choice for criminals online is a it was designed and managed by its creators to allow the customer and reporting rules and as a result to confront risks while ensuring we can reap big coin's beneficial potential is to allow the big coin network and surrounding infrastructure to develop by making sure entrepreneurial innovators can easily comply with existing regulation. the alternative, promulgating special regulations for virtual currencies, making it more costly to operate legitimately in this space that had two and intended consequences:it might mean ceding the network to exclusive the illegal use, visibility that law-enforcement cut unwise gain into activities of compliant firms, and second,

the united states could lose its head starting what could be the next big breakthrough industry if it establishes regulatory regime that has big coin and other countries like china, canada and germany, look for ways to develop workable regulatory framework for big coin. finally, as regulatory law enforcement agencies seek to apply existing laws to big coin will face a challenge that big coin is not a company with an easily identifiable executive. it is an open source project and a community. the big coin foundation is central to the community but does not encompassed the whole community. as new guidelines and procedures are developed policymakers engage the community and solicit comments from the public to assure the benefit of a ride range of perspectives. thank you for your time and i look forward to your questions. >> thanks very much for joining us today and for that testimony. if you were here during the testimony in the first panel you heard me indicate one thing i

like to do, addressing an issue like this which is not a great deal of consensus is to use the opportunity to develop some. i thought we made a little progress with the first panel. i am hopeful we can replicate that with the second panel of witnesses. toward that goal, let me ask you to reflect on what you heard from your colleagues on this panel and tell me and the staff members that are here, whoever is watching on television in the capital or outside the capital, where do see the agreement among the four of view? the perspectives you share with us, the opinions you share with us, where do you think there is general agreement? second question, where do you think there is not agreement? how do we go about reconciling the lack of agreement if we can?

you want to go first, ernie allen? >> senator carper, i think there's broadbased agreement about the potential of digital economy and virgil currencies. there is absolute agreement that there's enormous potential for social good and there's clear agreement that the weekend just ignore the misuse and the misuse of a digital economy and virtual currency jeopardize the viability of virtual currencies in the longer run. so i don't think there is disagreement at all on those points. as it relates to areas -- also don't think there is disagreement on the need for

basic regulation using the existing tools. the application of aml, money transmitter laws that the exchange level, know your customer. those kinds of provisions. ..laws at the exchange level. know your customer, those kinds of provisions. the greatest challenge, the greatest area we have to grapple with is how do we enforce the enforcement techniques. and the fact that this is a global phenomenon. this is something that was just issued in march of this year. the guidance that directors just talk about, the financial action task force, their guidance on this issue was just issued this summer, i think in july.