we'll be there. don't worry about that. what we have to look at it's not today. we've got a remarkable capacity, remarkable military. what are we going have in ten years? what are we going have in 15 years? and that's really the issue that is on the table. that's really what vice chairman thorn berry is doing. i think he's looking at one of the most important questions. we can't afford to keep doing things the way we have been doing them and stay on the path we're on. we don't have the resources. and yet the world needs us to be as capable in ten and 15 years as we are today. how are we going do that? that's really the challenge in front of us. and that's the -- i'm not at all surprised that the chairman turned to mac and asked him to head it up. because he is clearly so highly regarded in this town. having been here, i guess, 19

years but having been here for 19 years going on 20, having such distinguished service. having touched the department in so many ways, there's no one better suited for this challenging time. would you please welcome him with your applause? [applause] thank you, john. i have much appreciate the chance to be back at csis as well as all of the serious important work that goes on here. i have to say -- i have benefited tremendously from their guidance and ideas. i have no doubt that the work

that goes on here makes an important difference. and you are nice to come and listen to me. but the truth is, we could all sit here and take notes from dr. hamery or david or some of the other experts here on this topic. i do have to note; however, that the last time i was at csis, it was for a cyber exercise. i was asked to play the president. and dr. hamery has not invited me back since. i think it was deeply disturbing for him as is understandable. chairman and i have been talking about a focus defense reform effort for sometime. among the issues he's asked me to tackle our ak a with a suggestion reform, organizational bloke, and the security clearance process. something that house intelligence committee chairman is equally interested in.

today i'm going focus on the first of those topics and i have to confess that the first two questions that popped in my mind when buck asked me to tackle this were one, is it possible, and worth the effort? and that comes across as somewhat skeptical, then the reason for that is every few years since i've been in congress as you've heard for nearly 20 years we pass some sort of legislation on acquisition reform. now maybe some was helpful. maybe some contributed to the problem. if you look at the whole picture, things are essential no better now and some ways worse than 20 years ago. let me just give you a multiple choice question here. a study was done looking at six problems with dod acquisition, schedule, slippage, cost growth, lack of qualified personnel, high personnel turnover, and adequate cost estimation, and

insufficient training and managing contractors. what do you think it was done? 1962, 1982, 2002, 2012? well, i think the answer is it could have done in any of those years. as a matter of fact, in the last 50 years we have seen 27 major government studies in more than 300 nongovernment studies on exactly those issues. but you're right, that was harvard business school study in 1962 that was looking at the exact same thing. as frank mentioned a few days ago. defense acquisition has been a significant issue since the revolutionary war. at the same time dr. hamery written about this one of the key factors in our success and world leadership has been that industry is an indispensable partner with the armed forces in differenting the country. and as he we have harnessed the

energy and creative -- to national security. so it is a fundamental strength and yet at the same time it's a persistent problem. and most all of the studies that have looked at the problem over the last 50 years have said roughly the same thing. and as i mentioned there's been a number of legislative attempt with unsatisfactory results. the lesson i learn from that we have to go deeper. we have to not just treat the symptoms but deal with the root causes of the problem that have made it so difficult for us to solve these problems over the last 50 years. so you to remember we're talking about a lot of money here. last year the department of defense lead contracts for $36 0 billion. that's 10% of the entire federal budget. and more than 50% of dod's

obligations. and yet as gao testified in our hearing a couple of weeks ago, if you compare 2008 to 2012, and look at cost estimations, just in those four years, we got 7% worse on developmental cost, 13% worse on total acquisition cost. and the average delay in initial operating capability went from 22 months to 27 months. just looking at the last four years, we've gotten worse in all of these categories. but of course, it's not just the acquisition of weapons and equipment, the pentagon spends more on service contracts than it does on weapons. and there it's even harder to know if the taxpayers are getting good value. what we know if you look at the last five years. contract spending is down 10%.

but bid protests are up 45%. there's hardly a contract awarded these days there's not a protest on. so what is the effect of these trends? well, we waste a lot of money and effort. we have more tail and less tooth. more overhead and less fighting capability than we should have for the money we spend. let me just give you another quick historical test. who said this and when? as long as we operate a system where the checkers outnumber the doers, the doers are condemned to spend their time doing paperwork for the checkers. again, it could have been at any or all of the defense manufacturing facilities i've visited in the last two or five years. but in fact, that's admiral quoted by deputy secretary packard in a letter to omb director in 1970. we're at the point where it's

estimated about a third of procurement dollars are going to overhead right now. and the rest of the story is, it's not just waste. we are not as age guile and responsive as we need to be in a dangerous world. and so we face this festering problem of getting good value for the taxpayers in a timely way in a larger context of two essential facts. one of those facts is the world not getting any safer or any less complex. when he retired a couple of months ago deputy cia director mor real said that he doesn't remember a time in his 33 years in the cia when we had so many front-burner national security issues. i won't go on about it. but just a brief list cyber proliferation, terrorism, syria, russia, china, iran, north korea, keeping alliances together makes the point that

things are not getting any easier. i think the second essential fact we face tight defense budgets as far as the eye can see. the truth is we have dug ourselves a deep hole of debt. we hope the economy improves. we need to reform entitle element programs which is where most of the spending is. we need to find a way to get our fiscal house in order without. we need more stability and funding because the disruptions caused by the uncertainty that we face are undermining every attempt to improve the system and costing us dearly. the point i want to make is if all of that stuff is solved in the way i want it to, i know of no scenario that envisions a return to large defense budget increases short of some sort of catastrophic event that none of us want to see. even in the best case scenario, we have to face a dangerous

complicated world with limited resources. and that means we have to get more defense for the dollar. that is the reason chairman asked me to spearhead this effort on these three interrelated topics focusing first on how the pentagon buys goods and services. let me be clear, our purpose is not to cut defense or not to make it easier to cut defense. the purpose is to get more defense, more value out of the dollars we spend. one very encouraging thing is that i think this is completely bipartisan and bicameral. edadam smith as well as senator levin and senator inhofe are just as interested in this as we are on our side. that is, i think, an essential place to start. i'm encouraged with a lot of what frank had to say here just ten days ago. and i guarantee we will be more

than happy to sit down and go through with him line by line federal regulations to thin them out and simplify them. of course, along the way we can't just focus on big dod. we've also got to work with the services up-and-down the chain of command. you're not going do this without full participation of the industry participator ins that dr. hamery talked about. but i think we're at the point where everybody agrees this is the time we have to act. so for our approach, we started on october 29th with a hearing that looked back at the last 25 years of acquisition reform efforts. we had three excellent witnesses that gave us their insights. we're going continue with conversations with people across government and outside of government. and again, so far there's been nothing but eagerness to help. i expect we're going have

working groups across organizations in the coming months and obviously we're going have hearings directly on this topic. but in addition to that, this topic is going to happy -- shape all the rest of the hearings we have. whether it's about shipbuilding or airplanes or how to best meet the needs of our service people deploy and the contract support there. these questions are going influence all the hearings we have in the coming years. now, we're not looking at this as, okay, we're going fake two years to study it and come out with a 2,000-page bill to solve all the problems of the world. we're going look to make progress along the way as we go. and also have a bit of humility understanding that not all the understands to this are going to come through legislation. some of what we need to do in congress is to change our oversight, the questions we ask, and to help encourage some

changes in culture in the pentagon and in the services. for example, one suggestion that already has been made. y'all out to have a hearing on acquisition program done well and pat them on the back. don't just call up the people in trouble. reward the people who have done a good job. and obviously we need y'all's help. your input to make it work. not just about substantiatively what needs to happen, but what sort of process will help us reach the best results. so let me get back to my two questions. is it possible, and is it worth it? i think there's a lot of understandable skepticism that goes with 50 years of frustration. there are some people who argue they basically there's only a few things that you can try. you can centralize our decentralize. you can have greater flexibility or more rigid mandates.

you emphasize the government or emphasize the contractors. there's only sitlimited options. it's not going get any better than this. well, i don't buy that. i think it is important as we did in our first hearing to acknowledge that what we've done so far has not worked out so well. and to try to learn the lessons that teaches us. but i also think we're not going make things better by piling on new mandates, new oversight officers, new micromanagement. that's not the direction we need to go. and the rest the story is, if an automaker can take a car from con -- concept to customer in less than 24 months, if a computer company can change its manufacturing requirements in a day, if boeing can take a commercial airliner and develop and field in less than five years, then surely the goodness we can do better than we're doing now for the men and women who risk their lives to

serve our country around the globe. as with most things, i think the key factor comes down to people. one thing is we're making it harder and harder for people who know what they're doing to serve in the system. and that's a problem. we also have to hone in on the reasons that good people who are in the system act rationally but their decisions are not good for the old "getting the best value for the taxpayers." it seems to me incentive in the system are incredibly important. we have to ask, what does the system encourage someone to do? the simplest example it encornings -- encourages do you spend all the money before the end of the year or else you'll get less next year. here is an example pointed occupy. if your simple example from the homes. if you have to replace the pipe do you pick copper or plastic.

if you have a system from rewarding you taking the less expensive item in acquisition, you know what the answer will be. are we looking enough at the maintenance cost, the repairs that have to be done. the lifetime cost of the decisions we have to make? and isn't that what the taxpayers are ultimately going to be on the hook for? let me give you another example that was brought to our attention. the system today would rather bay a billion dollars for something and allow the contractor to have a 5% profit than pay half as much and allow the contractor to have a 20% profit. now, how can that be good for the taxpayers or for getting the most value for our money? so things have to change, and we may well have before us a unique opportunity to change some of knees built -- these built-in incentive.

they demand from us a better response dealing with those root causes than any time we've in the past 50 years. let me just suggest some of the reasons that give us this opportunity. one is that the defense industrial basis consolidated 25 years ago there were 50 major defense contractor. today there isics suck. secondly, dod is becoming a less influential buyer in the market generally, but also more and more companies are focusing on over customers over dod. and the harder and more expensive it is to do business with discoed the fewer the companies will do so.

what it can moon in saving lives ab and yet we had to set up a separate acquisition system for the things we wanted most. they couldn't get them there fast enough. i want to add a last factor. that is, i think dod is in transition partly because of tieghtder budget. partly because of the wind down in afghanistan. the changes happening around the world. things are in flux. and so. if you put them together, this is the time. not only is it possible, i would suggest it's a necessity we take advantage of it. the goal is to help the pentagon be a smarter buyer of goods and services and help get top quality quality weapons and

services contributing to our security quicker. and the difference to our security that comes from getting more defense for the dollar and having a moring agile response system is just enormous. and reviewing the history warfare since 1500 max writes, innovation has been speeding up. that means that keeping up with the pace of change is getting harder than ever and the risk of getting left behind arising. today there is no room for error. and i have to say that very point was made over and over again this past weekend out at the reagan library at the reagan defense conference. where we heard about the pace of technological change getting faster and faster, and the difficulty in catching up once you get behind.

british military writer wrote in 1944 that military history is filled with the record of military improvements that have been resistested. between the development of new whens or tactic and adoption, there's awrve been a time lag sometimes of generations. and that time lag has often decided the fate of nations. now i'm not going to tell you that i think the fate of our nation is dependent upon the success of this project. but i really do believe that a lot is at stake and that we have to do better and that we have to overcome 50 years of frustration. and we can only do that with your help, with all of us working together toward this common goal. thank you. [applause]

so, ladies and gentlemen, and congressman, thank you very much for the conversation. here is how we are going proceed for the remain of the hour, if you will. we'll engage in a short and brief conversation here. i have a couple of questions i'm going to pick up based on your comments this morning. and we'll open the microphone for questions from the floor. so be thinking about the questions you want to ask. when the time comes we'll ask you to raise your hand and do the usual procedure of wait for the microphone, identify yourself. let me start with the useful discrepancies of why you're doing what you're doing and what you hope to do. there's a lot on the effort peace, if you will i think you made the case very strongly for why it's important. it's a little bit harder, though, to talk about the possibilities not necessarily the possibilities of undertaking the effort. but the possibilities of

actually achieving results. now are you going measure your success here, if you will, are you going to measure it based upon what you can contribute even to next year's bill or the fy16 bill? or a broader set of perspectives you want to use as measures of success? >> well, we have not set a particular time frame. we are thinking roughly about two years. as i mentioned, if we can identify things to do in next year's defense authorization bill. we're going snatch that up. but at the same time we're going continue these conversations working groups, et. cetera, with an idea for next year's bill. but again, i think it's really important you don't hear it that often from people in congress that legislation is not going solve all of this. for example, i had a conversation with one of the service chiefs about career profession for program managers.

part is, i think the conversations we're going have and hoping to influence what is rewarded and what is not. the culture within the constitution. what is your ultimate measure of success? i hope some of the figures i recited look back better in five years' time. i don't know there's one that will tell us the whole answer, and i think it's okay if we don't solve all the problems in the world. but we have to do better. what you describe is the process where this is not a stove pipe effort by the committee but really a not only within the arm service committee i.t. but reaching across the aisle and over to the senate side as well. that's encouraging because pick your example of promotions of individuals. we've learned, i think, the hard way that no matter what the power of an acquisition dynamic is. it's not now have force a change to the overall personnel

management system and the promotion process. there's a whole set of rules and regulations in place there. and fundamentally don't reward people for staying in place too long. sticking tornado see the result of their decision. putting at the committee level perhaps able to bridge some of these nonacquisition-related pieces. is that part of your game. >> think about this for a second. as if you are in charge far highly complex weapons system and on the job for 18 months or two years. by time you figured out your job, you're gone. and to give you another example. in the subcommittee i chair, jim landrieu and i make a habit with nearly every hearing when so you have the services come and testify before us of taunting asking them about cyber careers. because it's a little different than a traditional military career.

if we're going get and keep the best people we need for cyber work, then we have to adjust the career path accordingly. i think the same thing needs to happen here. we need to get and keep the best and they need to be rewarded accordingly. some suggestions are that you can just increase their salary right away. even if they're on the military side. even if they are ultimate propotion opportunities are more and more limited. i don't know we need to talk with the personnel people about what we can do and work with the services to do to have the kind of quality people they have to be trained. but then, again, the question is what does the system reward them for doing? was that will overcome not any legislation that we can pass. so if you going tackle the question of acquisition reform from a broader perspective beyond just the level of acquisition i.t. pick up one thing on incentive

for managers inside the system. there's another aspect and the question of what are you doing it for? answering the for what question. it's kind of a requirement issue but also what is your long-term strategy and structure. do you see your efforts integrating that with the committee's broader review of strategy of structure of answering the question why do we have this military? well, i think some of those questions will inevitably come up. but at the same time, i'm really conscious of not trying to do everything in a single balance. in generally reform it's not something we're going to deal with. i think there's lots of very important questions about strategy and particularly the way the world is changing that

will influence certainly requirements in what we buy but what we're focused on here is the value we get for the money we spend on whatever it is. goods or services. is that something you'll take a look at? it will be part of this ongoing process. again, so at key milestones, a lot depends on the questions we ask in congress. >> right. >> and if we talk about the 70% solution and preventing requirements and all of those problems that people have

identified early on in that funding stream it can make a difference. so, again, we can't solve it all from the hill. on the other hand we can make a difference with the questions we ask. and that will apply across all subcommittees and the full committee. as i say, in all of the meetings and hearings we have for the coming years. >> let me look at the industry piece a little bit as well. you mentioned, you know, that dod has got fewer companies on which they are more dependent now than 25 or 50 years ago. you mentioned there are a lot of disincentive for companies particularly companies in the global commercial market. there might be a good idea somewhere that has national security value that isn't invented inside the defense arena. do you look at how and bring it for defense applications and what kind of processes will be in place to do that? >> yeah. i'm not sure we get in to

specific technologies, but the basic point of how hard it is to do business with the department of defense, which is what limits department of defense from taking advantage of some of those innovations is absolutely part of what we have to deal with. it's not just the innovative. it's the smaller companies that have the niche products and so forth who are just at the point they say it's hardly worth it. one of my favorite say is from a war correspondent who went on to a distinguished career, i think on 60 minutes. the chief cause of problems is solutions. and in many cases what we see a week and a half ago talked about the statutory and regulatory requirements that program managers have to deal with. when you array them all it's a daunting list. every one of those was well intentioned at the time in which it was put in place. none were looked at knowly in a

comprehensive frame work. is that what you're proposing take a comprehensive view of these. >> absolutely. it's a great point. there's a cost overrun here. what is the reaction. the pentagon or congress puts a new restriction, a new oversight or something and then you add those up and you have it's like barnacles that just feed on themselves over time. ..

i am much more egalitarian than that and think in that bureaucratic framework if you will. let me turn to the audience. we have a wealth of talent and expertise here if you will so i'm going to recognize a couple couple -- there are some reporters and of course this is on the record as you know so i will start out actually was sitting in the middle here joshua. just identify yourself and your affiliation. >> sydney friedberg bringing defense.com and former student of doctors berteau. >> does that mean i'm responsible for about whatever you are to us -- going to say? >> my first interview with

mr. thornberry was back in 98 a thing. you mentioned the regulations several times going line by line. what i didn't hear as much was legislation and arguably a huge amount of this problem was created by congress as he said. it's congress personnel system that has now been part of the regulations which are now part of the original legislation, the military personnel act. a lot of this oversight is mandated by congress. is it taking large sections of title x whipping them out and appealing them in such language? >> yes, absolutely. congress has contributed to this problem over the years to a substantial extent so as we go through the regulations that come from the department we absolutely go through the statutes and reporting requirements and breathing

requirements that congress imposes as well. and we need to thin it all out, absolutely. >> mr. pryor. hang on, wait for the microphone. >> i was acquisition and executive of the navy during the 80s. we almost finished 6600 -- [inaudible] the system can be made to run and it has two modes effective and disaster. right now you can see it's an effective mode in the p8 married successfully to the program in d.c. disaster in the lcs interior and now the f-35. those decisions were all made by people and i am very refreshed this morning. you are on the right track. i have been part of the acquisition and a student for 20

and in the last few years i have had the opportunity to study it in detail. your recommendations are close to the ones i worked out and my job there is acquisition all but where do i sign up? [laughter] >> a note has already been made and i'm serious. i am not just saying things when i say we are going to need your help whether its experience in the past working with the system whether it's working in the industry or whatever it is. this cannot need a congress comes up with the answer sort of thing. this is too complex a problem and again what we have got to do is not come up with an answer that you try to impose on the system. we have got to understand what it's like down in the system for program managers and the decisions they make in seeing what those incentives and

rewards and punishments are and then we can start to get at some of those root causes that are ultimately going to prevail. so we need all the help it can get so i appreciate it. thank you. >> let me piggyback on that a little bit in that we will get otto's question. the question i think it's written into the way contacts are done. unfortunately one good solution is everybody's got to do it that way so you have to watch out potentially for successful incentives becoming a requirement process guarantee. those of you on the web if you would like to e-mail your questions you can the e-mail to skos at -- .org. would you bring the microphone to otto in the third row there? >> otto with seapower magazine and several others. after 27 some years of covering

you folks i have seen what congress does to make it worse and one of them was 10 or 15 years ago you did the attack on the pentagon and ordered a 25% cut in dod acquisition. that turned a whole lot of the acquisition process, are indeed initial design over to the contractors. it didn't work out particularly well and as far as expediting procurement, every time anybody suggests speeding up the process gao or congress gets in there and says no, no you are going to go to fast and we have got to regulate in slow the whole thing down. you mentioned part of the problem, we discovered the enemy and it is us so how do you get those contradictory things. if you turn industry loose they

end up in some way complicating the process or congress and another bugaboo. gao, you can process anything until it's technology level 6 which means it's obviously reaching to the fleet. >> the first is i think you are right. we contribute to the problem and so the first thing is understand how we contribute to the problem. the beginning of finding solutions is understanding. secondly i think it's a really good point and i don't know if this analogy works or not but you know walmart tolerates a certain percentage of what do they call it, as shrinkage. if they absolutely prevented shoplifting from every one of their stores they would frisk you coming and going and it's not worth the cost. we will have to be at a point where we are willing to some amount of risk that somebody

will do something they shouldn't do. but at the same time we have to have the transparency and accountability that goes with that in order to find it. not management at the accountability for the decisions. i can't recall the man who worked in the private sector came to the conference a couple weeks ago. she said she was astounding at the little decision-making power that the program managers and the services actually have versus outside. and so we have got to empower them and understand that there are some risks and somebody won't make a good decision but give them more power but also hold them accountable which means leave them there longer. i think that is at least an approach that we need to move toward which is exactly the opposite of the problems you describe. >> you mentioned at the hearing the committee held a few weeks ago we have come back 25 years

which is essentially the creation of the undersecretary of defense for acquisition. those who argue this 25 years of packard commission reforms have failed, others would say they actually never even tried. the basic idea of finding the right person, giving them clear requirements and resources they need to do the job and then setting out the goals and holding them accountable. is that something you can legislate or do you reward that more by as you pointed out finding examples of success in making them visible because congress has quite a role to play to highlighting and illuminating success. >> i think it takes both. there is an eisenhower quote that something like the right system doesn't guarantee success but the wrong system guarantees failure. and i kind of think that applies here. if we have all these barnacles

of legislation and regulation that is else up over time and good people trying to make the right decisions are hamstrung you cannot do it so if you get rid of all those barnacles decide aaron t. you get the right decisions? not necessarily but then you can try to focus on the incentives and encourage people to make decisions they were sold in the best value to the taxpayer. again you may not get a perfect system of course that you may have a lot better one than we have now. >> another question from the audience here. it's been over 30 years now since senator nun and congressman mccurdy joined their names to the nun mccurdy requirements. the basic ideas that there's too much cost growth in the system that has to be canceled or think secretary of defense has to re-baseline in and this time we are not going to overrun the cost. the idea they had was poorly performing programs would be

disastrous in terms of cost schedule and performance would be canceled. the reality is that many have been canceled in that regard. is that partly the congress problem as well and how do you change the structure of congress for at least tolerating or signing up to cancellation or termination of programs? >> i don't underestimate the problem but i agree what we tend to do is stretch things out and make it more expensive rather than making difficult decisions. a lot of that responsibility does rest with us although i would certainly push back on anybody that suggests that congress's job is to automatically go along with whatever cancellations the pentagon proposes and there are lots of examples in the past where that has worked out. it does get back again to the questions we ask and the key milestones along the program's path and we need to do a better job of watching for cost growth

but also understanding why it happens. >> that gets back to the required men's. >> you have your own structure is a member of congress. raise your hand again, sir. >> hi. neal cosby, consultant with. [inaudible] this whole process acquisition process is a very expensive proposition particularly uniformed officer corps. for example a few years ago the army had 6000 officers tied up in the acquisition corps. why not contract the whole thing out? >> well, i think spending taxpayer dollars, so there has

to be some federal oversight of how those dollars are spent. do we need to have the number of federal people that we have? i'm not sure as the rickover quote indicates, how many people the contractors have to put on the payroll just to meet the needs of all of the checkers and the overtime people and then it just gets to be this escalating overhead burden that weighs down the system. so, i guess my initial thought and again we need you walz help on this, is that fewer people empowered to make the decision and a system that can hold them accountable for the decisions that they make is a better model to move for rather than outsourcing the whole thing.

>> let a you add if i could congressman a couple of others particular the value of career military officers as procurement personnel. i think it's too big pluses if you will. one is you actually want the bridge between the operators and the community. the operators being uniformed military who use the equipment and the services that the backend and at least the practice has been that active duty officers will tend to have that operational focus a little better than anything you can write in for a contract or you have to write in flexibility that is difficult to put into place. the second those who need to have somebody who is in the room making decisions saying sir there are reasons why you can't quite do it that way and the contractors are typically not going to be in the room and he do that. there is value in having active duty military. they need however not to be

treated as second-class citizens because if they are treated as second hand -- second-class citizens they won't be part of that. >> thank you very much. i must formal naval person. you made several remarks empowering program managers and helping program managers to become better at what they do. i would encourage you not to focus too narrowly on program managers but also to look equally hard at requiring folks in the pentagon. >> i think it's a very fair point and that is one of the reasons in this process we are not -- we are trying not to look too narrowly as just the regulations for the small abe acquisition but look at requirements and budgeting and how that whole system comes together to operate so i appreciate the point. >> eye of the "below questions from the web --

i have a couple of questions from the web. they are not clearly identified. to what extent is a valid -- the contractor propaganda he used to motivate good performance in acquisition system? you mentioned the example of the billion-dollar cost but only 5% profit versus the half a billion cost versus the 25% profit. can you extend that god if you will? and we use profit as a motivation? is that something that is politically acceptable as well as academically acceptable? >> i do think we can put in the incentive to make a profit and not have arbitrary sorts of ideas on what is fair and right as that goes, because that's certainly -- if you get reimbursed for your overhead cost what is your

incentives? increase the overhead because you get that money back so i was interested in frank kendall's comments 10 days ago when he talked about a study looking at plus cost contracts and there didn't seem to be the kind of difference that one would expect. i think that all of those are avenues that we need to understand better but that too. there hamre's point our history as we have used the profit motive to help make sure that we have the best partnership and the best equipment, the most agile responsive system to did the changing world of garment and it is that -- you know i have no doubt that the contractors will adjust to whatever system we set up, however many contractors are left. what we need to have is a system that encourages them to get the

best value and if that means they make a bigger profit than somebody wants them to make that's the way it works. >> in the days passed companies were all a little bit different if you will than the rest of the publicly traded firms. increasingly though the financial market looks set defense the same. you don't get onus points for patriotism or serving the needs of the military. you have to essentially meet the same requirements as any other as far as return on investment and benefits to capital. how do we take that into account because in many cases that's a short-term focus, a very narrow focus on shareholder equity. a lot of value but it doesn't necessarily have the needs of the nation from a military deal is part of that process. >> it's a fair point although i'm struck by the number of people who point out that we don't really punish contractors

who don't work the job as far as future contracts go. and so one of the things i think we have to at least ask about is if you do a good job how does that enhance the ability to get more jobs and if you don't do a good job what effect does that have on your ability for future contracts? that gets a little bit more back to whether the company is going to be successful or not rather than companies that just play the game and one example given to me is intentionally underbidding the acquisition cost knowing you are going to end up with all the maintenance cost and that will be an even bigger over the next few years than the acquisition but you intentionally do that. i think those are some of the things we need to understand. >> you and certainly in our own lives reward contractors that we hire who do a good job for us by giving them more work and not rewarding those who do a bad job but then again we are not

responsible for buying services from a plumber or purchase kitchen appliances. we are not responsible for maintaining the network plumbers that will be around as appliance provider so there's a bigger trade-off. >> again we are not going to solve all the problems of the world of but the whole industrial base issue here at home is something that i think we need to be thinking about. i was talking several times at the reagan defense complex, might not we want to have some dod programs designed with the purpose of maintaining an industrial base as that base shrinks and i do think that something we have to look at. >> you mentioned some data in your prepared remarks today, a 13% increase in costs and so on.

about five years ago now, four and half years congress passed the requisition reform act a remarkable piece of legislation that created a whole new set of requirements for dod to identify cost and budget reform and office of program analysis to look at some of these things. has it taken this long for those kinds of reforms to take root or maybe the numbers that you cited showed he didn't go far enough? >> its images in question and we have already got in differences of opinion about that. some people say it is making a positive difference. other people say it's not making that big a difference. you know the hard part for any of this is proving what it would then like without that. but even if it is making a positive difference and even if we have not fully realize the full extent of that positive difference is still not enough. to me that's the bottom line. >> one thing i think we can be

certain of is that the problems we have been asked to work on that you fall into this morning and laid out your plan are not going to fix themselves and for the full two years of your effort if you will. we want to thank you very much for coming here this morning and sharing your thoughts with us an entertaining thoughts and comments. we will do everything we can to make you successful in the future. >> thank you very much. [applause] [inaudible conversations] [inaudible conversations]

>> i think the word entitlement often has a negative connotation but really the goal here is for girls and women to operate with a greater sense of entitlement paid to say that i'm deserving of that opportuniopportuni ty, i'm prepared and i'm qualified but it's all those other nagging insecurities and doubts that often get in the way. suwannee was alluding to it earlier but the data says it

takes a minimum of seven to convince a woman to run for office and would you venture a guess how many takes it takes to convince a manned? [laughter] and it actually is not a joke. but i can say i was recruited to run for office. that is the case for most women. i was not sorted in some corner politically calculating my political ascension. i had been in a two senator john kerry for 11 years and prior to that congressman joseph kennedy to second, was rather enjoying be the person behind the person and found great influence and reward of that. prior to my career they had never been a woman of color elected to the council. >> how many times did they ask you? >> more than seven. >> the 60s were different. [laughter]

and there were a lot of things happening involving race, the breakdown of the structure of society. i was suddenly out of the seminary and in new england and there were no rules. things were falling apart, and you know without structure it's very difficult to navigate. i was extremely fortunate to be at holy cross. i was extremely fortunate to still have had a residuum of the way i was raised by the structure that the nuns had given me and the structure that the seminary had given me. i was also extremely fortunate because i had already been in predominantly white schools. i was the only black in my high school in savannah so the transition to a school with very few blacks in those difficult set of circumstances academically and otherwise, i

had sort of a jumpstart. i was ahead of the game so i had something. so it allowed me to continue to do well even though it was very very difficult. supporters of the digital currency midpoint told us that it committed last week that the technology could eventually provide the general public with the safer means for on line transactions however big point foundation general counsel

patrick murck said the technology is still too risky for widespread public use. this panel from the senate select committee hearing is one hour. >> it looks like we have our witnesses lined up. we thank you for joining us today. we will start voting at 5:30 so that will probably be a hard stop for this panel. let me take a moment if i could introduce each member of this panel. distinguished witnesses by my notes here. distinguished witnesses said thank you. first witnesses ernest allen from the office of missing and exploited children in the national center for missing and exploited children. he serves as cochair of the digital economy task force developed to focus on the benefits and use surrounding the digital -- and fled to the international

center for missing and exploited children and. our next witness is patrick murck general counsel were bitcoin foundation. the bitcoin foundation works to standardize to protect and promote bitcoin. mr. murck is founder of engaged legal. his expertise extends across the legal and regulatory issues governing the use of bitcoin for economies and alternative payment systems. previously mr. murck worked in a business and legal affairs at the tech company as an attorney at the dc-based law firm and also is an international investigative journalist. our third witness is jeremy allaire. is it allaire? mr. allaire is the founder and ceo of circle internet to start a company focused on promoting

mainstream adoption of currencies. serial interconnect entrepreneur mr. allaire serves as founder and ceo of. c-span: one of the largest on line video platforms in the united states. our final witness is jerry brito. mr. brito is a senior research fellow at the mercatus center at the george mason university and director of the technology policy program. mr. brito also serves as an adjunct professor of law at george mason university. his research focuses on technology, copyright and the regulatory process. good afternoon to each of you. your entire testimonies will be made part of the record and as i said to the first group you are welcome to summarize if you would like and try to keep your comments at about seven minutes. if you go beyond that i will have to rein you in. otherwise we will be just fine.

.. economy task force with thomson reuters, globa media and information company. that was created as this result as a conference we brought together in june with private secreta sector leaders and government officials to look at this problem. the task force on this issue include the bitcoin foundation, the tour project, the gates foundation, brookings institution,cato institute. vital voices, law enforcement leaders from around the world and many others. our goal is to bring people together tow effective promise of trotect the will issue the final report in february. let me begin bnoy saying we are. ena tuesday yaysic about the potential of virtual current survived and the digital economy and social good. particularly in helping to brig anthe financial inclusion for

the two and a half billion adults on the planet today without access to banks, credit cards, and the main stream financial system. onwever, as you have pointed ou today, there are risks. banks, our primary concern is there ar. migration of child pornography, trafficking, and other criminalt enterprises to this new economy. we believe it's happening forual three primary reasons. the first is anonymity.enterprii thes second, this is an econom that belongs to no nation and the fi therseen by no central bank.y. and thirdly, we believe that to most countries have not yet and begun to apply existing law and regulation to virtual currency at the exchange level. the point at which virtualistinw currency are traded for dollars, euro, pounds, or yen.point atch over the past year, i haveded fr consulted with law enforcement expert and financial e --yr,

experts around the world about this issue.ted with they advise, as it relates toexn our core concern, which is the exploitation of children, that child pornography is currentlyh being created and disseminatedas using technologies and virtual dissemcies for payment. they hasten to add it's at the d lower threshold of volume than drugs and other criminal goods; however, they call the use ofdrd these tjts drk technologies for child pornography significant. because they involve the producers of the content.e in august, the freedom hosting which the fbi had called the largest facilitator of child pornography on the planet waser arrested.host freedom hosinting maintained

servers for a number of so-called deep web child planet pornography sites. the all of which accepted digital currency for payment. to shut down freedom hosting, law enforcement exploited aedo otheerable in the site to to sdowne the anonymity and expose the ip addresses of the users. regarding big coin, automatic is the transactions are visibility and transparent. the challenge for lawuldn't, enforcement to go from the transaction to a person. the challenge we have learned in the consultation with global law enforcement today is growing we internet anonymity. a recent headline read: there's a secret internet for drug dealerring, assassins, and pedophiles.ne the so-called deep web include

sites -- but also includes site for the purchase of weapons and deep counterfeit currencies andilk stolen credit cards andr assassin, and child pornographyn sites. all of these accept digital current simplifieds -- currencies for payment. accep whatear ear is frustration. the primary investigative technique i've been told that the worldement around is to using to investigate thesi operations is infiltration. infiltration is expensive, timee opations as nd it's often ineffective. while there are some arrest, the research indicates that mo of the arrests are of those who use the technology improperly and leave a trail. are they connect tof a nonanonymous ip-based address providing a trail to follow.onymous

that knead possible for him to be identified. silk my concern is with the ab sen oi existing law enforcement tools, we're not catching the truly the sophisticated, most high-riskfon organized criminal offenders. through our task force, one of the thing we're doing isskrganiz exploring new techniquee things including cluster to identify patterns. explorin includghg ope learned from the techniques that were utilized b law enforcement to penetrate freedom hosting. and we for the future, the pace of innovation will quicken, there will be new rate freedom hosting. for the future, the pace of technologyin 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 that the u.s. government cannot solve alone. thirdly, you can ensure that the response of government to the fragile emerging high risk, but high reward area, is not so draconian that the effect is simply to push these new enterprises out of the united states into countries where there's little or no regulation. and finally, you can help us address the core challenge, internet anonymity. for all of its importance, in protecting political disdense, journalists and others, we are very concerned that an environment not be allowed to

foster in which child exploiters and traffickers can operate with no risk unless they make a mistake. three years ago, the then secretary of state hillary clinton and her remarks on the free internet said, on the one hand, anonymity protects the exploitation of children. on the other hand, anonymity protects the free expression of opposition to repressive governments. she added, we should err on the side of openness, while recognizing there are going to be exceptions. that's the challenge, mr. chairman, is to determine how anonymous the internet can be from the perspective of government and law enforcement around the world, we feel that absolute internet anonymity is a prescription for catastrophe. thank you, sir. >> thank you, very good testimony. mr. murck. welcome.

>> good afternoon. chairman carper. i am pleased to have the opportunity to speak with you today. my name is patrick murck. i am general counsel for the bitcoin foundation. i've been in regional development for many digital companies. the bitcoin foundation is a member driven nonprofit global constituency of business and individuals contribute together over all bitcoin ecosystem. it is compromised of many to make bitcoin a success. the foundation's business is to promote, protect and standardize decentralized currencies and free people to transact on their own terms in the global economy. having said that, there is no bitcoin company that manages or controls the software or its operation. the software is built and

maintain bade community of volunteers software engineers. at its most basic level, bitcoin is an internet protocol. like e-mail for money. the bitcoin protocol has a value with open and transparent payment network. it is secure, efficient and low-cost. the bitcoin network can operate without any third party areas and is a highly financial global system unto itself. in the near future the bitcoin protocol will facilitate advance payment services and experiments are currently under way to provide additional nonfinancial services like property management and identity verification. bitcoin will produce many economic services. there is a vulnerable population and the world over and here in the u.s.

by providing a safe and private store of wealth in addition to global transaction network that could not be corrupted or abuse bid those who seek to exploit or harm others. a th is not just a problem for the global south. there is unbanked and underbanked people right within our borders. access services directly increases to dignity, liberty and self determination. bitcoin can help remove people trapped in cash-based informal economy into a global connected digital economy. at the same time we acknowledge that like any technology there is potential for abuse of this system. bitcoin can be used for illicit purposes and the law enforcement kmupity may have it develop new

methodologies for criminal activity on the network. this is not mean it'll be any harder to prevent the misuse of the bitcoin network than existing financial systems. as we heard in earlier testimony, in bitcoin short history, law enforcement and regulatory agencies have add string of notable successets already. rather than belabor headlines, we should be congratulating the law enforcement community on their hard work and still and adapting investigative techniques in the digital and openly network world. keeping the bitcoin network safe is all of our responsibility. in an industry led effort to prevent abuse. like you, mr. claireman, we are looking beyond the silk road. when the originator of that website was arrested, markets expressed relief and optimism with a long and sustained rally in the price of bitcoin. decentralized currencies like bitcoin has a different form.

central control of the transaction ledger allows bad actors to shroud their activity. decentralized systems with open ledgers are inherently trance laceant. as we address law enforcement concerns, we must bear in mind that because of this open and transparent architecture, we need to consider the privacy of law-abiding individuals. as it turns out, the block chain, which is bitcoin's public ledger system, may be so revealing that the lather problem with bitcoin is not anonymity for criminals pu the law abiding problem that people have in maintaining anonymity. bitcoin does not have a threat to the law enrsment for regulatory community. the use of bitcoin is not unregulated.

bitcoin operators cork work in heavily regulated areas. banks, financial service companies, bitcoin also represents an opportunity for them to start innovating again. these institutions already have a deep understanding of the controls and risk management necessary to safely handle bitcoin transactions and secure consumer bitcoin accounts. instead, what we've seen is a chilling effect through the banking industry. as bitcoin companies try and gain bank accounts. the united states has a strong interest in maintaining its place as a global leader and developing cutting edge technology and spreading individual freedom and liberty around the world. the digital economy is poised to be a driver of significant job creation and economic growth. fostering the development of legit mall bitcoin in the u.s. is the best measure we can take to keep good actors in the system. applying consistent rules and

regulations that encourage technological skpeer plen tags is criticiis critical to an entrepreneurial committee. for the digital economy in general and bitcoin specifically. as one entrepreneur and member of the foundation put succinctly, if you give us clear rule, we will follow them and build jobs. development 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 a healthy and respectful dialogue between key stake holders will help ensure that substantial benefits of the digital economy are met while mitigating many of the risks. in particular we would like to thank fin-cen for opening up dialogue with the bitcoin policy and the issue within the federal and state level.

>> thank you for continuing the open i do log and thanks the committee for allowing us to participate in this hearing. >> thank you mr. murck. >> chairman carper, thank you for hearing my testimony this afternoon. my name is jeremy allaire. i'm founder and heir after company facilitating money and currency including bitcoin. i have been operating on-line service companies for 20 years, having found and lead multiple global companies by products used by hundreds of millions of consumers and hundreds of thousands of businesses globery. i believe that digital currency represents one of the most important technical and innovative services of our time. dij digital currency has advancements in electronic payments and money transfers materially lowering costs for businesses around the world.

consumers and merchants, increasing consumer privacy and expanding the market for consumer financial product on a worldwide basis. as this technology moves from early adopters into mainstream acceptance, it is criticize ka will that federal and state governments understand how bitcoin fits into existing regulatory guidelines and how to apply them to regular currency. this is associated with fraud and privacy risks and ensure that criminals and bad actors find it increasingly difficult to utilize the plat forms and provide income tax clarity to consumers and businesses that conduct business using digital currency. it is very claer that over the past 20 years the internet has been at the center of global economic innovation. open platforms have transformed communications, media, software, education, commerce and retail. but for a variety of reasons the technology and business models

around finance has been insulated from similar transformations. the same open platform approach in digital currency specific bitcoin presents an opportunity for the same level of innovation and advancement in forms of currency, trade and payments, that we've seen brought to bear on other industries. i don't think there's much that we need to see innovation and transformation in banking and finance, not just reform and remediation. specifically our payment systems are inefficient and very much built upon systems and processes that predate the internet. higher cost for consumers, lower margins for business and less economic interaction. and many cases our financial systems excluded enormous bases of consumers who are unbanked or underbanked. ubiquitous mobile devices and mobile currency has a tremendous opportunity to expand financial services on a worldwide basis. payments and money is operating

in the preinternet era. today we can communicate to almost anyone in the world including in video format at no cost. with instant access to an enormous amount also effectively at in cost. we have access to more media than we ever i man ined almost ip possible almost at in cost. yet to send money between friend and family, whether across the table or across the planet takes days and cost a significant amount in transaction fee possess. to accept payments merchants must bear significant fraud risk, consumer privacy is often threatened and like ways takes days for merchants to receive money from an electronic payment not to mention the widely perceived high cost of transaction fees. so what are we at circle specifically doing about this? at circle we are building jn line services for consumers and businesses to be able to easily use digital currency and specifically bitcoin. for consumers we intend to eb enable them to store, to easil

send/receive services with bit coin. we're fully committed to apply with all applicable laws and regulations and establishing comprehensive risk management plot toy kohls -- protocols. we're developing our platforms to provide very high levels of security to users and employing industry leading approaches to customer identity verification, fraud remediation and anti-money lawnedering, designed in partnership with leading regu r regulatory advisers and experts. i want to talk for a minute about some of the risks inher t inherent. first of all as has been made clear, u.s. regular laters and law enforcement of justifiably

right to use. bit coin operators implement secrecyprovisions. it is a risk if k347s do not support banking institutions which will drive companies offshore and overseas. another risk is that businesses adoption of digital currency will be hampered without clarification from the irs on income generated from sales, denominated and digital currency and such guidance is also needed to thwart potential tax evaders. without clear guidance, consumers and businesses could be defrauded through inadequate systems and risk management procedures around customer funds. another risk is that the united states falls behind in this critical emerging economic innovation. regulatory uncertainty could hold back american companies from participating in driving digital currency evaluation. bit coin has become the largest

single trading exchange in the world in china. followed by japan and europe. in terms of u.s. regulation, it appears to me that federal and state regulators seem to have ample statutory authority to adopt regulations and take enforcement actions as necessary to protect consumers and ensure responsible conduct. and enforcement actions to date have been constructive. we stand ready to assist them in their ongoing efforts to adapt their regulatory tools to digital currency. i believe we're at the forefront of another 20 year journey. this time in our global financial systems and there's a real opportunity to foster that economic change while simultaneously putting in place the safeguards that only government can enable. mr. chairman that concludes my prepared testimony. i'll be happy to answer any further questions.

>> that was very helpful testimony, thanks. >> we're here today to discuss virtual currencies in general, but it is bit coin in particular that has so many interested in this topic. online virtual currencies are nothing new, they have existed from decades, from world of war craft to facebook credits to e gold and neither are online payment systems new, pay pal, visa, western union pay, these are all examples. what is it about bit coin that makes it unique. whatever anyone may think about bit coin's prospects, is safe to say it is a remarkable technical achievement. it's the world's first decentralized currency. it's the decentralized sentence that is unique. online currencies or payment systems had to be managed by a central authority. whether it was facebook issuing facebook credits or pay pal

ensuring that transactions between its customers were reconciled. however, by solving a longstanding conundrum, bit coin for the first time makes possible transactions online that are person to person without a need for an intermediary. this presents challenges to law enforceme enforcement. because there is no central authority in bit coin transactions, there are little fees associated with those transactions which especially benefit small businesses and consumers. because bit coin is not proprieta proprietary, entrepreneurs need no permissions to innovate new products and services. law enforcement has long relied on financial intermediaries to help them detect, prevent and investigate illegal transactions.

because bit coins transactions are not necessarily tied to identities. it is not surprising that we have some bit coin employed in transactions. it's not difficult to imagine how the technology could be employed in money laundering. 3d printing can be used to make prostheses and firearms. drones have the potential to be used for stalking. the challenge for policy makers is to do no harm while using the technology. in many cases, there are already laws and regulations in general applicability that address many of those risks without the need for new laws targeted.

this is the case for bit coin. bit coin trabz actions do not require intermediaries. merchants that accept the coins will use payment process. there's a fast growing ecosystem of start-up exchanges. each of these are already subject to regulation as money transmitters including state licensing as well as know your customer. more to the point, 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. they must make a record of every transaction. while the online black market grows is estimated to have again righted less than $200 million in drug sales, is believed to have laundered more than $6

billion related to credit card fraud, identity theft, computer hacking and child porn. the reason liberty reserve and not bit coin was the payment system of choice for criminals online, it was designed and managed by its creators to avoid know your customer and reporting it. the path forward that can best con front risks is to allow the bit coin to develop. the alternative promulgating special regulations for virtual currencies or otherwise making it more costly to operate legitimately in this space, could have two unintended consequences. it might mean seeing the network to exclusively illegal use, and forgoing any responsibility of compliant firms. second the united states could lose its heads start in what may

be the next breakthrough industry if it establishes a regulatory regime that hampers bit coin while other countries like china, canada and germany, look for ways to develop workable frameworks for bit coin. as regulatory agencies face a challenge that bit coin is not a company with an easily identifiable project. it does not encompass the whole community. as new guidelines and procedures are developed. policy makers must make sure to engage the community and solicit comments from the public to ensure they benefit from a wide range of perspectives. thank you for your time, and i look forward to your questions. >> thanks very much for joining us today with that testimony 37 if you're here during the testimony, you heard me indicate that one of the things i like to

do in the -- addressing an issue like this, which is not a great deal of consensus, is to use these hearings as an opportunity to see if we can develop some. we thought we made a little progress with the first panel. and i'm hopeful we can do that with the second panel of witnesses. let me ask you and your colleagues on this panel, tell me and the staff members that are here, whoever's watching on television or outside the capitol, what do you see the agreement among the four of you. the prospectives you shared with us, the opinions you shared with us. where do you think there's general agreement. second question, where do you think there's not agreement. and how do we go about reconciling that lack of agreement if we can. >> do you want to go first?

>> senator carper, i think there is broad based agreement about the potential of a digital economy and virtual currencies, i think there is absolute agreement that there is enormous potential for social good, and that this is an emerging technology that needs to be protected. i also think there is clear agreement that we can't just ignore the misuse, and misuse jeopardizes the virtual ability of the currencies in the longer run. i don't think there is disagreement at all on those points. as it relates to areas -- i just

don't think there is use for the 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. my sense is that most of the

world is not applying money laundering principles. getting from here to there is really the issue that the four of us would have to grapple with. >> thank you. how do you go about reconciling the consensus? >> i'll take the second part first. i don't know that i heard a lot of disagreement or anything we would generally disagree with from this panel or even really from the first panel. i was heartened by that. i think that ernie is correct, that as we move forward, an open dialogue is good, as those disagreements do crop up, and they likely will, we can address them quickly, in a safe and sane way. as to where we have agreement, i think what i heard from the other panelists is, there's a real need to create on ramps

into the traditional financial system. by creating those onramps, especially here in the united states, you help to protect the system from abuse. the biggest obstacle from that happening today is not from regulation or law enforcement. it's from the ability of businesses in the space to get bank accounts and to be integrated into the banking system. there is currently a chill in the banking system and the banking industry that is preventing businesses from getting just simple checking accounting. there are stories that if you have the word bit coin anywhere in your nim or documentation, you will immediately be placed in the circular file as it will. i think there's a way to create some leadership within the banking industry, to make sure that these companies are on board, into the traditional

system where some of the systems can be redacted. >> there's consensus around the innovation we see that the potential for financial inclusion. there's consensus that many of the regulatory frameworks and tools are sufficient. i think there's consensus that the open nature of the technology it's technology, use and oversite is a positive framework. i think there is some tension around the balance between anonymity and privacy, and bath there are new laws that are required to end the possibility of anonymity or to address that in some way. i think, you know, as i stated in my comments, we are very focused within our business on

having very deep levels of identity verification, we view that as critical. others within the digital currency world, particularly within geographies that don't have the same type of regulatory regimes do not. there are other things we need to be thinking about that could address those issues. i think that arena needs additional and careful consideration. >> thank you. >> i think there is broad consensus among the panel here, i was very heartened to hear the first panel's message, and i think we have a lot of consensus, i'll pick two issues to give you an answer. first, i was interested in listening to the gentleman from the secret service that said that centralized currencies pose the greatest risk as far as money laundering. and bit coin, because of their

nature, they were not a greater risk, i think there was a great point of agreement there. to pick a point of disagreement. u.s. businesses may move overseas. her suggestion is if someone leaves the u.s. seeking -- the danger is not someone who is trying to facilitate and elicit businesses is going to leave the u.s. the danger is real hardworking entrepreneurs don't find a regulatory environment here that is amenable. that's something we don't want to allow to stretch for too much of a period of time. >> thank you. i want to mr. allen. i think you mentioned the

guidance issue i'm not going to ask this -- probably -- respond and lead off to this question. the issue earlier this year back in the spring stated that administrators would need to register as a money service businesses and apply for money transmitter licenses. in the 48 states that require such licenses. somebody alluded to this guidance. i just want to again -- get your thoughts on guidance. i'm told that your company is

registered with ensen and has applied for money transferred licenses. you could maybe if you would, just offer the first response. >> a business that is going to handle consumer funds, store and manage those and is going to interact with the banking system to protect consumers and ensure that bad actors are not able to operate. we think these are appropriate guidelines, and i think the digital business is different from other prior internet businesses. get a billion users, i don't think it's appropriate that two guys should be able to build a financial services business and operate that without a

sufficient investment to protect consumers and protect society. i do believe that the bar needs to be higher for financial services businesses in the united states and that it is not real estate. some would like to see that level of compliance. i don't think that's realistic. we understood that the bar was higher and we raised sufficient capital to be able to launch our service and hire professionals and put in place the systems. we think it's appropriate there are challenges -- the broad number of states, the diverge end approaches each state might take. that creates cost and complexity, and could be argued to be an unnecessary regulatory burden. but that is the system that we have, and that is the system that we are pursuing and

operating within. >> thanks. >> others on the same -- you want to -- >> yes, just briefly. i agree totally. what i think is most appropriate about the guidance, it's focused at the exchange level. it does not apply to users. only to those -- it's an application of basic money transmitter law. it is an appropriate use of the law, existing law, and i think it's a reasonable approach. i agree with him, one of the great challenges is creating consistency and uniformity. because of our federal system and the fact that there could be 50 different approaches, that's not unique to this issue. >> any thoughts? >> the 50 state license trans t transmitter regime has come up. the states have an interest in

protecting their consumers. at the same time it is a bit burden some and has slowed down progress in the u.s. i don't know what the answer to that question is, i know in the eu, they have a system of reciprocity, where they have a minimum this remember hold for each country. perhaps that's a framework that would work here. but that would be best left to the legislative garage. >> thanks. any thoughts? >> one small point. i think it's very clear as it applies to exchanges and administrators. i think it's less clear when it applies to users guidance says you are not required to register if you are awaring bit coin in order to buy goods or services. my mother's from spain, recently

i helped her send money back home, it cost 5% of the total amount. what if i were buying bit coin to remit money overseas. that is not covered by the guidance. i think the guidance could use further clarification. and i think if they would put it up to further comment they would iron all the wrinkles out. >> let me go back to you if i could, mr. allen. i understand that your organization was one of the forerunners in bringing together currencies. >> who was involved in your working group, and why did you form it? >> mr. chairman, we formed it, because several years ago we had

a very positive experience in bringing together financial industry leaders around the fact that the mainstream financial system, the mainstream system were being used for the purchase and distribution of child porn. i called the chairman of a major credit card company and said, how is this possible? and he said, we don't know what these transactions are for, if you can finds for us show for us, where the account resides. this is an illegal use of the system. we can shut down the accounts. we brought together coalitions in north america, europe and asia, and had enormous positive impact. there was a dramatic decline. but as i began to talk to law enforcement and other leaders around the world, what we determined was that we didn't end it, we just moved, and we were seeing evidence of a

migration into these opportunities. in an effort to try to understand it better and determine if it was a problem to use that same model to bring leaders together. private sector leaders together to try to develop shared common sense solutions, that's why we joined with thomas reuters to create this task force, and it includes the bit coin foundation. it includes the gates foundation the brookings institution. the human rights group. law enforcement groups and representatives. >> let me share with you, what

you've been able to learn, about the exploitation of children around the world. >> one of the challenges is, most of the evidence is anecdotal, because recommendtively few cases are being made as we've talked to law enforcement, i talked about that earlier in interprets of the absence of investigative techniques to probe these kinds of things. i think we have learned that there is broad based interest in searching for and finding reasonable solutions that work. we have learned, i think that the digital economy is far broader than bit coin, so the issues we're focusing on are not just bit coin, but, for example, they're 22 million users today of russia's web money.

we have talked about liberty reserve, and the case that was made there, $6 billion in illegal money laundering. i think we're discovering it's a complex issue, but i think it's one that is addressable. and i think the most encouraging thing to me, i now believe it's addressable using many of the tools and laws that we already have in place. that one of the biggest challenges for policy makers is simply to increase the level of awareness so that countries around the world will begin to use the tools they already have. >> well, that in part is the reason why we're having this hearing. good. i was talking with a fellow that goes to the same church as we do in delaware. he's in the auto business. sells a lot of cars in our

state. and he was talking about the work of the consumer finance protection bureau. established a couple years ago. hopefully to look out for the interest of consumers throughout this country in a lot of different ways. i want to focus just a little bit on consumers if we could. and the -- i've been told that virtual currencies pose a number of questions as to their use by consumers. and i have maybe two questions, but the first is, maybe we should go down the panel or up the panel. i'll start with you, and if you will, just give us some of your thoughts on whether virtual currencies have sufficient protections built in to them for consum consumers. the virtual currencies raise any additional new issues for consumer protection? for example, do we need to do anything to better protect consumers from fraud or to

protect consumer privacy as a result of these virtual currencies? >> so i think that we're still trying to find our way, as a result, that means the folks who are at this point participating in this economy really have to try hard to participate in it, so these are not your average consumers just yet jumping into the space. so at this point i think it gives regulators some time to learn more about the technology and learn more about what the industry players are doing to address these concerns and whether the existing concern protection laws are enough. as far as opportunities, what's interesting about especially decentralized digital currencies, they provide a new choice for consumers.

today if you want to use electronic payments you're going to use a credit card or pay pal, that am coulds with fees. sometimes high fees, and those fees are important, because they provide things like insurance. if you have a -- your identity stolen or something you received, it's not what you ordered. you can always have the charge reversed. decentralized currencies are like cash, there's nothing to reverse, it also means there are very little fees. this now presents a new choice for consumers. they can choose insured more expensive or less expensive. >> thank you. >> i think there's many issues around consumer adoption of digital currency. i'll touch on a couple of them. we emphasize that bit coin as a death tag currency offers great potential to lower the fraud risk that both consumers and merchants face on a day to day

basis when we conduct payments. when we go into a restaurant and give our credit card out or when we enter that information online, we're effectively giving out the keys our bank account. it should not be a surprise that we've seen a dramatic growth in the amount of identity theft, and specifically financial information, private financial information being stolen and sold on black markets and used for nefarious reasons. protocols like bit coin reduce that risk, because the keys to your bank account, the keys to your money are never transmitted, that's one of the brilliant aspects of the design of the system, there's real potential to lower the currency as a financial fraud and consumer transactions, and increase consumer privacy as a result. i think those are key benefits. but there are risks, clearly for consumers, one risk -- and this is one we take very seriously, as we look at this, is increasingly because of ease of use, consumers that want to take

advantage of things are using online services that essentially host their bit coin on servers orrin the internet. and because bit coin itself, the mechanism by which funds can be used is based on keys that we then inturn would store. there's a real risk around the security of fundses, we've seen occurrences in the past weeks of start-ups did not have security around those funds and funds were stolen. industry is driving forward on that, but i think that's a key issue that the cfpb may take a look at. i think there's other -- the flip side which is this question of what i will call merchant fraud, which is the charge back scenario, you didn't get the product, you got the wrong product. someone had inappropriately used your account. i think that there are methods

for addressing that within the technology of bit coin today. and within improvements that are coming in updated, upcoming versions of bit coin, mechanisms to create refunds to consumers, mechanisms to provide greater transparency around what you're paying for, and there are mechanisms that are not well understood, i think, generally, but which will become available where funds can be held in escrow until a product has been delivered to a consumer. there are ways to address some of that merchant fraud risk as well. i think you're going to see industry participate abts coming forward in the coming years. >> there are consumer protection issues. i'll reserve my comments strictly to bit coin and decentralized currencies. when you look at bit coin especially, we haven't even released version 0.9 yet, so we're not on version 1.0, it's

very much still an experimental currency, and it should be a high risk environment for consumers and investors at the moment. that's changing over time, as businesses like mr. olairs and others are coming into the space and building the service layers on top of the protocol, to make it safer for consumers to move in. those service layers are technological, bit coin is referred to as programmable money, you can build in layers of escrow and dispute mediation and things like that, right into your payment structure, which is a very interesting concept as most of the laws that exist for consumer protection and payment space were built around traditional methods where those aren't possible. you don't need as much regulation on the consumer side in the long term to the midterm as the system grows up. in the short term, consumers should be aware this is a high risk environment, and it's not

quite ready for mass adoption today. that time is it coming, but it's not here yet. >> thank you. >> mr. allen opinion. >> i don't think i have much to add, other than to say, one of the groups i met with are industry leaders. they view as the other panelists do, virtual currency akin to cash. there is no fdsc. there is not that level of protection. so i think it has to be viewed as high risk, and i think the points that the other pannists made about the fact that consumer protections are part of a work in progress, but certainly something we need to be aware of. >> the -- in anticipation, this hearing is asking our staff -- tell me a little bit, who was the creator, who are the

creators? and i'm told that the protocol was developed by -- either by a programmer or by a group of programmers, that go by the name toshinakamato. is that correct? and with all the money and attention that's been given to bit coin, it seems strange to me that this -- either this individual or group would choose to remain anonymous. what do we know about this person? what do we know about this group. does it matter that his or her or their identity remains a mystery? who wants to go first? mr. murck. >> i'll field that one for everybody. so toshi nakamoto is the creator for they who develop the bit

coin protocol into the world in addition to the code base, that was open sourced to the entire community. this person or group of people has since left the scene, at least if not more than half of the code base from the original code has already been rewritten. while i think everybody is grateful for that incredible contribution at this moment in time, who sitoshi is is a story of bit coin going-forward. that was intentional and possibly why a pseudonym was chosen in the first place. >> i want to address, it is a little strange that bit coin, we don't know who the creator is, and so that often conjures up the idea that there's a risk

that we have not seen -- >> you don't think it was al gore, do you? >> you know, he's never denied it. >> but i think the key thing to emphasize is open source. open and audible and available for anybody to look at. mr. murck said, more than half of the code base has been written by others. i'm confident that it's -- the software is what it says. >> we're just about to start voting over in the capitol, so i think we'll wrap it up by -- i just want to say -- i'd love to quote albert einstein. he said some memorable things, one of the things he says, in adversity lies opportunity.

but inadversity lies opportunity. god knows there's plenty of adversity with respect to these virtual opportunities we talked about. it's not just potential, it's not just possible, it's real. we need to be not just mindful of that, but make sure we contain it and eliminate it where we can. i know one quote attributed to mrs. einstein. i find it relates to my -- mr. einstein was asked if she understands her husband's theory of relativity? she responded, i understand the words but not sentences. when i first started trying to understand what this was all about, i sort of felt like mrs.

einstein, i understand the words but not the sentences, with the help of our first panel and all of you on the second panel, and with the help of my staff and a lot of other folks, i'm starting to understand more than just the words, but a few of the sentences too. that's why we wanted to hold this hearing, to understand the pitfalls that come from this technolo technology. i said earlier, i thought the first panel gave us a lot of information. i thought they were thoughtful. it was encouraging and i find that that's been true here with this panel as well. on behalf of my colleagues who

are not here, who are flying in from all over the country right now, in order to make this 5:30 vote. thank you. they don't know i'm thank you, but i'll thank you in their absence. >> we have a shared responsible aeblts in trying to make this work. with that, i think we'll wrap it up here, and i'm going to note that the hearing record will remain open for 15 days, that's until december third at 5:00 p.m. submission of statements and others for the record. i would ask you respond to them promptly. our staff, especially months ago, i want to thank our staffs, both majority and minority staff, and for you and our first

panel for joining us today. on that, we're adjourned and thank you so much. before a house science panel that's next on c-span2. and national scurry adviser susan rice warned last week that china's use of cyber ease espionage is undermining economic -- a look at cybersecurity later. then a conversation on the defense challenges facing the u.s. military. ..