five minutes of cuddles. the problem is scaling kitten delivery. the supply chain is messed up. what happens is in a year those kittens become cats. it's really problematic. >> here is a fine grain point about the rating system. the driver has to give passengers four, five star ratings and vice versa. obvious systems become corrupted because if it's not five stars it's nothing. how does the rating system work, what have you observed about how it operates? >> the bottom line of the ratings system it's highly predictive in large numbers. people get worried about the specific rating they give on a particular driver but it's not what that is about. it's about thousands of people rating that particular driver. if you get in the car with a driver, you're getting in the

car with an artist. you don't know why. if you get 4.9, only a small percentage get that. 4.8 is competent, 4.7, solid, 4.5 gets a little hairy, may not know the city. we can use it to determine who is providing bad service, good service. those providing poor service we can't partner with. those accounts typically get deactivated. >> as an uber customer, wonder how you balance supply and demand. how are you tuning these algorithms. >> at our country we have a math department. i'm a computer engineer, scientist, background at ucla before i dropped out. i thought that would be funny.

i still sort of directly manage or get involved with that team. basically seems naturally you push a button and a car comes in five minutes. how do you know that will happen. you have to predict ahead of time. the right number of cars at the same time. predicting traffic. how long does it take for a car to get there can affect how all the trips happen -- >> going to leave this. you can watch the rest online at c-span.org. live to capitol hill for senate homeland security meeting on digital currencies that allow people to exchange goods and services online without using real money. the chair, democrat from delaware, senator carper. >> many years ago he would say, his advice was wear a big button when you're campaigning so you'll remember your name and so will other people. 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 the inquiry we requested 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. 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 into how they are coordinating together to develop a whole of government approach that is consistent and informed. virtual currency is perhaps most notedly bitcoin, have captured imagination of some, struck fear in others and confused the heck out of the rest of us, including me. indeed, based on conversations my staff and i 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 virtual currency actually is, how it should be treated and what the future holds. virtual currency can best be described as cash, characterized by computers, lives on the internet and can be used to purchase real and digital goods across the world. some proponents believe digital currency can be valuable in developing countries without access to stable financial systems. others believe it could prove to be the next generation payment system for retailers online and in the real world. same time, however, virtual currencies can be an effective tool for those looking to laundry money, those looking to traffic illegal drugs, for those looking to exploit children around the world and the list

goes on. virtual currencies have seen decreased attention from regulators, from law enforcement, investors, entrepreneurs in recent months, still many unanswered questions and unresolved issues. this isn't the first time advances in delegate have posed challenging questions, challenging issues for policymakers and society as a whole. as we know technology is dynamic and changes quickly. concepts like e-mail and internet were alien and difficult to understand and navigate. now most can read and respond on a device we keep in our coat, pocket and search the web on multiple platforms. gives the example when i first showed up for duty in 2001, we received for every e-mail that came in to us from constitt wants in delaware and across the

country, for every e-mail we saw probably 10 to 15 letters. i asked my staff to tell me a few months ago if that wrash i don't changed. now for every 12, 13 e-mails we get, we get one letter. probably a pretty good metaphor for the situation. i'll be first to admit like most americans i'm not technical experts in virtual currencies. i think all of you gathered in this room are. we'll see. hopefully some of our panelists will learn a lot today. what i do know smart people inside and outside of government view this as major emerging issue deserving of our attention and includes the 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

understand where appropriate address implications. made clear last month when federal lmpaw enforcement took down silk road. illegal drugs, foreign documents, such as ids and passports sold, other services for sale, including hacking services. we're told there are approximately $1.2 billion in transactions made through silk road. this site lived on what is known as dark web, also deep web. consists of web pages and data only available through special software that keeps users anonymous. many sites on the dark web deliberately built to be untraceable in order to protect the anonymity of the user. one of those sites. my understanding is that individuals could navigate

anonymously and use bitcoin, which can be sent to someone nearly anonymously to make purchases. anonymity of the marketplace and near anonymity of the currency made it nearly impossible to track and made an attractive place for criminal activity. in fact, in the course of our investigation, department of homeland security informed us suspects sent ricin to president was a vendor on silk road. fbi, immigration and customs enforcement and secret service should be applauded for their work taking down a major international criminal enterprise. while silk road the most well-known, while not the only marketplace illegal drugs are bought and sold through bitcoin transactions, today a number of similar enterprises september bitcoin, still in business selling weapons, child

pornography and even murder for hire services. while today we'll talk a lot about the well-known currency bitcoin, there are numerous other currencies operating on the internet today, each with its own set of specific features. that said whether it's bit counsel or other virtual currencies, 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, it's clear some folks want to try and play by the rules. that's difficult to do if the rules and authorities aren't clear or future is uncertain. also difficult to a large number of bad apple are allowed to spoil the bunch. with that normally i would turn to my right and 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 during the hearing. other colleagues will, too. we start voting at 5:30. what happens monday afternoons people coming in, senators coming in from all over the country and they will drift in and out of hearings like this one. my hope is before we're done a number of them will be able to join us. i want to take now just a moment if i can to welcome and introduce briefly our first panel of distinguished witnesses. our first panel -- on our first panel, first witness, leadoff hitter, jennifer cavalry, director of the financial crimes enforcement network known as fensen, as director -- do you go by both names? >> typically just shasky. >> okay. all right. as director of fensen, overlo s

overlooks. director shasky cavalry, chief of asset money laundering section at the department of justice. our second witness has a name i've never heard before. her first name is mithely ramen. has your name ever been mispronounced. >> many times? >> today. >> not today. >> we'll try to keep it that way. acting attorney general for department of justice criminal division, as head of the criminal division oversees 600 attorneys who prosecute federal crime cases across our country. prior to joining the criminal position sherved for a decade as

assistant u.s. attorney for the district of columbia, our neighbor. our final witness on this panel is edward lowery. he's a special agent in charge of criminal investigation division at the secret service. mr. lowery began his career in 1992 and has been in his current position since february 2012. in this position mr. lowery directs and coordinates investigative activities of the agency and daily operation of the secret service investigative offices located throughout the world. previously mr. lowery established and ran a secret service cyber protective initiative and coordinated operations of the cyber investigations branch and cyber intelligence section. again, we want to thank all of you for your service. we thank you for your preparation for today, for your testimony and for your willingness to respond to the questions that will be asked of you here and some asked in

writing subsequent to this hearing. with that, miss shasky, director, you are recognized. i don't know how long they told you you had to give your testimony. what did we say? seven minutes. you can go a little longer. if you go way beyond that, we'll have to bring it to a close. you are recognized. please proceed. >> thank you, mr. chairman. >> just note for you and other witnesses your entire statement will be made part of the record. >> thank you. good afternoon, chairman carper. as you mentioned i'm jennifer shasky cavalry director of enforcement network. i'm pleased to be here to decide regulatory, enforcement analytical work at fincen as technological advances such as virtual currency create new ways to move money. fincen's mission is to safeguard financial system from illicit

use, combat money laundering and combat security through collection, analysis and dissemination of intelligence and strategic use of our financial authorities. we work toar chief this mission by administering the bank's secrecy act, this country's primary antimony laundering counter-terrorist financing regulatory regime. by sharing 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 emergence of new payment methods, potential for abuse by illicit actors and understanding amo protections must keep pace with these advancements in technology, fincen worked with partners to study this issue. here is what we learned. illicit actors might decide to use virtual currency to store and transfer value for many of the same reasons as legitimate

users. also more nefarious ones. specifically an illicit actor may choose to use virtual currency because it enables the users to remain relatively anonymous, "easy to navigate, may have accessible fees, accessible across the globe with an internet connection, can be used to 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. finally provides loophole from aflcft safeguards in most countries around the world. indeed, the idea illicit actors might exploit have you not rabls of virtual currency to launder money is not theoretical. liberty reserve, virtual currency administer engaged in a $6 billion money laundering operation facilitating credit

card theft, narcotics trafficking and child pornography. just recently the department of justice alleged customers of silk road, the largest illegal drug and contraband on the internet were required to pay in bit coins to enable operator of silk road and its sellers to evade detection and launder hundreds of millions of dollars. that being said it's perspective, 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 totalling $81 billion and bank of america made $245 trillion in wire transfers. thus, while a 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 which updates several definitions and provide the needed flexibility to accommodate innovation in the payment systems space including virtual currencies under our pre-existing regulatory framewo framework. then additional guidance to further clarify compliance obligations for those virtual currency actors covered by regulations. in short they are required to register with fincen, put controls in place, and provide certain reports to fincen on suspicious activity. it is in the best interest to

comply with these regulations for a number of reasons. first is the idea of corporate responsibility. legitimate financial institutions do not go to the business with the aim of laundering money on behalf of criminals. any financial institution could be exploited for money laundering purposes. what is important is for institutions to put controls in place to deal with those money laundering threats and meet 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 needs to be concerned about its reputation and show it's operating with transparency and integrity within the bounds of the law. legitimate questions will be drawn to an exchanger where they this their money is safe and the company has a reputation for integrity. banks will want to provide services to administrators or changers 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 the sector. it recognizes innovation virtual currency provide and benefits they might offer society. several new payment methods in the financial sector have proven capacity to empower customers and expand access to financial services. we want such advances to continue. those institutions that act outside of the law will be held accountable. fincen will do everything in its regulatory power to stop abuses of the financial system. we've proven that by using section 311 of the patriot act to name liberty reserve as a primary money laundering concern and entering into rule making 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 united states it must

be current on how money is laundered in the united states so we can share expertise with law enforcement, regulatory, industry partners and effectively serve as cornerstone of the regime. we're meeting this obligation in the virtual currency space as we continue to deliver cutting edge analytical options to inform the actions of partners. we're committed to remaining at the forefront of developments in the days and years to come. the administration has made overside of the industry a priority and fincen is encouraged by progress thus far. thank you for inviting me to testify before you today. i'll be happy to answer any questions you have. >> thank you so much for being here, the meeting you had with our staff last week and your testimony. thank you. >> good afternoon. thank you for the opportunity to appear to decide department of

justice work at virtual currencies. at the justice department we look at virtual currencies through the lens of law enforcement. we recognize virtual currency means illegal exchange but also recognize criminals will always seek to take advantage of new technologies to commit further or hide their crimes. our responsibility as prosecutors is so ensure we continue to enforce the law, even new technological settings and prevent criminals from using technologies to create zones of impunity. as i will describe in my testimony today, the department of justice has been aware of the threat posed by criminal use of virtual currencies for several years. we have already brought several important prosecutions involving virtual currencies and we intend to remain vigilant ensure any criminal use of virtual currency systems is aggressively investigated and prosecuted. as an initial matter, i should note virtual currency systems, so long as they comply with

applicable money laundering and money transmission laws and regulations and are not illegal. they are appealing because they provide cheap, convenient, efficient means to transfer currency. many of the same aspects make it good for criminals. drug users, traffickers of child pornography and perpetrators of large scale fraud schemes. mostly we've seen evidence criminals are drawn to virtual currencies for two main reasons. first providing greater anonymity than traditional financial services. second, ir reversibility of transactions. these features can significantly complicate our ability to utilize one of the most basic techniques we use in criminal investigations, fomg the money. the justice department has long recognized the potential for

criminal misuse of virtual currency and launched our first major prosecution of a service in 2007 when we indicted egold and three principle owners on charges related 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 egold account was an e-mail address. it became popular payment method for sellers of child pornography, operators of investment skams scams and perpetrators of identity fraud. at its peak egold moved over $6 million a day. egold and its owners were convicted in 2008. since that time we've continued to ensure we aggressively address any misuse of virtual currency systems especially as those systems evolve and develop. when virtual currency systems fail to live up to their obligations under existing law

we take. 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. as alleged in filings, liberty reserve became a system of choice for cyber criminals and used in a wide array of activity including credit card fraud, identity theft, investment fraud, computer hacking and trade of child pornography. as a result of the department's actions and 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 dependent 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 method on its site. charges against silk road and its administrator were unsealed last month incident two different districts. charges included drug distribution, tempted witness murder and attempted murder for hire. as part of that takedown of silk roadish the department seized over 170 bitcoins valued as of this past friday at over $70 million. the department recognizes 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 virtual currency emerging threats working group, a variety of law enforcement agencies here and abroad and, of

course, fincen. from a view of law enforcement fincen recent guidance, money laundering and know your customer requirements to virtual currency exchangers was an important step safeguarding our collective ability both to deter criminal activity and investigate it successfully when it occurs. while there is much more to do, the department is encouraged by virtual currency services that are 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 ensuring virtual currency systems do not become a haven for criminal activity. we look forward to working with congress to ensure 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 do not comply with the law and to aggressively prosecutor criminals who use them. we will continue to innovate in how we investigate crime. thank you for the opportunity to discuss the department's work in this area and i look forward to answering questions you have. >> we look forward to asking questions. we 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 the behalf 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 original guardians of the

nation's financial payment systems since 1865 the secret service continually adapted its investigative methods to keep pace with the evolving use of information technology within the financial system. since the founding of egold in 1976, payment-based processors 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 allow them to conceal their activities. liberty reserve is alleged to have laundered more than $6 billion during its operation before the secret service joined investigation with onill c.e., irs investigations dismantled it. growth of internet currencies is expected to continue for the future. along with a use of these

systems in the conduct of criminal activity. law enforcement approaches digital currencies within the context of its authorities to investigate criminal activity. as a result of secret service and ice investigations, exchangers of digital currency have been charged and convicted operating unlicensed money transmitting business in violation of various state laws. additionally as a result of our investigations, digital currency providers have been charged and convicted for money laundering in violation of 18 usc 1956 and 1957. as fincen emphasized in march of this year. digital currency administrators and exchangers have legal responsibilities under various antimony laundering laws, title 3 of patriot act, bank secrecy act and fincen regulations. dhs law enforcement works closely with interagency, state, local, international partners

conducting criminal investigations in their respective 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 18 usc 1030, one of the secret service's strategic priorities is proactively investigating trans national organized cyber crime and defeating illicit organizations by arresting members and seizing and dismantling criminal infrastructure. previously investigated and arrested numerous leaders of major cyber crime operations. for example, secret service arrested bad b in 2010 and earlier this year apprehended five individuals allegedly responsible for the largest data breach ever prosecuted in u.s. history. over the past four years secret service has arrested more than 4,500 cyber criminals preventing over $13 billion in losses based on 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 secret service -- form a substantial criminal role in widespread illicit activity. secret service in connection with other law enforcement agencies and interagency partners has apprehended providers of egold and liberty reserve ending their operations. secret service arrested various exchangers of digital currency, such as western express incorporated which was prrd by manhattan district attorney's office resulting in 16 individuals pleading guilto or getting convicted. these cases discussed more fully in my written testimony. i welcome future opportunities to discuss our investigative work with you and your staff. our digital currencies ar tool

used by a wide variety of criminals. accordingly numerous law enforcement agencies investigate illicit activity that involves the use of digital currencies through the secret services nationwide network of electronic crime task forces federal, state and local law enforcement collaborate with the private sector and academia to effectively address challenges that criminals use of information technology including digital currency posed to law enforcement at all levels of government. secret service and ice are participating agencies with fincen and work closely to ensure 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 asset forfeiture and money laundering, computer crimes, intellectual property, secret service and ice partner with other federal law enforcement for joint investigations and participate in virtual currency emerging

through its working group. while digital currencies may provide potential benefits, they present real risks by criminal and terrorist organizations trying to conceal their illicit activity. as such digital currencies challenge to carry out responsibilities to enforce law and carry out activity. secret service has a long history of adapting methods to maintain the integrity of the nation's financial infrastructure. as dhs law enforcement agency we're committed to partnering with law enforcement at all levels of government to increase the security of the nation while addressing 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. >> 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 an analogy that was applicable for virtual currency. walk us back in time to the early days of the internet when you guys were middle school or before that. talk to us about some of the early concerns that we had with the bad that made criminal activity flow through 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 sent using the internet. we never imagined anything like youtube, wikipedia, 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. are there -- is this a good corollary or not? if so, how? if not, why not? start with you, miss shasky, please. >> senator, i believe your analogy is an apt one. so often when there's a new type of financial service or a new player 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. but 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're known for and proud of and want to continue. so i think the challenge at least at fincen is for us to balance and have smart regulation that both mitt gates concerns of illicit actors operating in our financial system while at the same time minimizing the burden as much as we can. we believe we've done just that with this rule by clarifying that virtual currency exchangers and administrators fit within our pre-existing regulatory regime. >> thank you. same question. walk us back in time. early concerns realized 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 here? >> i think as i aliveded to in my written testimony as emerging

technologies develop and change as law enforcement we remain attune to the criminal misuse of those technologies. 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 songs they comply with applicable money laundering laws and transmission laws and regulations. so i think it is our duty as law enforcement to stay vigilant about the criminal misuse of virtual currency systems while recognizing there are many legitimate users of those services. our experience over the last several years has showed us there's reasons for our vigilence. it was the largest case ever brought by the department of justice. that is an important fact. it reminds us 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 systems as it was intended to. >> thank you, ma'am. mr. lawrie, same question, please. >> within the confines of the secret service investigations, the secret service was enacted to counter -- fight counterfeiting at the time in 1865. the secret service is the hall mark of our investigations have always been adapting though changing threat. as i've said, we started with counterfeit. we moved into fraud, always defending the nation's financial infrastructure. in the 80s access to fraud, credit cards a major issue, major impact on the financial system and it naturally segued directly to computer crimes. in recognition of that fact, as i mentioned in my testimony electronics task for model widely respected throughout the country. it is the way that the service stays in tune with the changing

technology and threats that can come from the internet. >> all right. a couple of years ago a film out called dillen ger, said when i went to a local complex in delaware, one of the films because dillinger. one of the scenes, they made their living robbing banks and getting away with it. near the latter part of the film, they were on the run. dillinger looked up one of his old compadres in the bank robbing business to see if he couldn't give him a hand. it looked like an old warehouse retrofitted. you walked in and these guys in

shirts and ties with old phones making phone calls. he said what's going on here. apparently booking operation and so forth. the fellow running the operation said we don't rob banks anymore. you're stupid to do that. this 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, child pornography, money laundering, human trafficking, any number of activities. but we figured out how to deal with those guys in that film wearing their shirts and ties and doing illegal activities, not robbing banks, not shooting people anymore. we figured out how to deal with that. how confident are you that we're going to be able to deal with the potential criminal behavior,

misbehavior with this new technology that's before us? mr. lowery? in the same part, what role does the legislative body, three branches of government, 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 to meet the dark side of this technology. >> going back to my testimony, secret service has investigated many first of their kind investigations. we specialize currently in the trans national cyber criminal, the professional criminal targeting our financial infrastructure. we operate within the confines of the laws we're entrusted to enforce. predominantly 1028, 1029, 1030, access to vice fraud, identity theft and computer hacking. spoke earlier about the change

and how the crimes have changed. believer one of the largest changes is the reach of the criminal. used to be we had to worry about back in the days of early access vice fraud, had to 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. that's changed how we have to enforce our laws. again, we're consistently, aggressively, strategically investigating trying to direct our investigations to the highest impact within the confines of the existing laws, which i believe plenty of cyber criminals in prison would be pretty effective. >> my question, i'll ask you to respond to it then turn to miss raman. three branches of government, the role attempting to play on this committee is not just an oversight role, homeland

security and governmental affairs, historically do oversight. homeland security about 10 years old. we have a role for oversight, an obligation and opportunity to make sure the administration working agencies across the country. they are working in a cohesive, collaborative manner. i'm encouraged that would 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 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, hiring, developing, retaining qualified workforce. you need a technically gifted investigator to follow the trail

and run these international criminals down. that is always a challenge in the current environment with any support in that realm is definitely appreciated. >> thank you. miss raman. >> your first question was whether we can keep up with the changing technology. i do think law enforcement proved to the nimble, aggressive, willing to work together, not only with agencies here in the united states but abroad to effectively combat the threat. i've mentioned liberty reserve but it's an excellent example of how our agencies worked together to take down enormous money laundering operation. we worked together with fincen and treasury. they took coordinated action at the same time law enforcement made arrests here and abroad. we had 17 others countries working with us for coordinated arrests and takedowns. we seized assets on the same day that arrests were made and took

down domain names on the day the arrest were made. i do think we're nimble and creative enough and aggressive enough to be able to combat the threat. that doesn't mean we're not unaware of challenges posed by virtual currency. there are specific challenges inherent to virtual currencies we are remain attuned to. anonymity is certainly one we're paying attention to. the fact some virtual currency services may be based in countries that have lacks or regulatory oversight is of concern to us. there are issues obtaining customer records and a host of difficulties and challenges that go along with investigating global organizations. as our track record shows we're up to the challenge and continue to work together to ensure we are innovating as criminals are innovating and we stay one step ahead of them. as for what the legislative

branch can do, for criminal statutes, we feel confident the statutes we have available to us are money laundering statutes, money transmitter statutes, broad enough to encompass the activity we've been talking about this afternoon. in fact, those statutes are the ones we used in egold and liberty reserve, for example. to the extent criminals are using virtual krngss as part of their criminal enterprises, if a child exploitation enterprise is trading child pornographic images under virtual currency we should be able to charge that under child exploitation statutes. we feel comfortable the statutes on the book are flexible enough to meet our needs. that being said, we're looking for ways to close any gaps that might arrive, we might see we're

not seeing now. we'll be happy to continue to work with you and staff to make sure we know when we need those legislative tools. >> miss shasky, would you respond to that question as well, please. >> sure. >> actually, two questions. >> thankfully congress's actions passing bank secrecy act and usa patriot act have already given us a strong platform to meet the challenge. we're confident we can meet this challenge at least in the first instance using that platform. the bank secrecy act this country's antimony laundering and backbone we at fincen issue regulations under that. in 2007 when we expanded some of our definitions to enable us

flexibility in new payment systems. our hope was they would live with changes in the market. what we've 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 pre-existing regulations under bank secrecy act. usa patriot act, section 311 of that. that's the section that gives us authority at fincen to name a foreign financial institution being of primary money laundering concern and cut it off from the u.s. financial system. that's exactly what we use to target liberty exchange that financial authority provided to us by congress. we feel like we have a pretty good basis to act already. it's hard to predict where the financial system is going to go and what tools we might need next. we'd be very thankful to

continue that conversation with congress to see if any additional tools might be better. >> thank you. your testimony, miss shasky, you said on page 11 i think of your original testimony, i'll just read a couple sentences from it, if i could. you said never new payment methods in the financial sector have proven their capacity to empower customers, encourage the development of integrative products and provide 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 obligations and outside of the law have and will continue to be held accountability. fincen will do everything in its regulatory power to stop such abuses of the u.s. financial system. when you talked about semple new payment methods in the financial sector that have proven their capacity to empower customers and encouraged the development of innovative financial

products, expand access it financial services, this is the bright lit ght in the maybe give us some examples. concrete examples, if you will. how those have worked out for the good. >> sure. i think the one that comes first to mind is the stored will have u cards. another area where we thought not only about the risks from elicit actors but also the benefits to consumers. we've seen many of the banked unused prepaid cards to gain their initial access to the u.s. financial system and many might argue that's been a positive for society. in my own personal experience, i think of jn line banking and the changes that's made for me as a consumer and the idea of ach

where i can now 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 might criminals use these systems, how might they exploit systems because the fact is, any final service, any type of financial institution can be exploited. cash is probably 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 each of you to take a shot at this question. we have addressed it to some extent but i want to come back and did 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 currency, and i would include bitcoin, fit into our current legal and regulatory framework. and we talked a little bit about this and exported it in the last question but come back to me if you will with further thoughts on whether you see any gaps in our statutes, any 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's work on virtual currencies. two questions. and mr. laurie, if you feel up to taking this one first, that would be fine. >> thank you. so is virtual currency within the legal existing laws.>> than. so is virtual currency within the legal existing laws.would b. >> thank you. so is virtual currency within

the legal existing laws. i know bitcoin is the currency that's part of the discussion today. i can speak within the framework of the secret service investigations and what we see out there and it's -- i think it's important to recognize that within what we see in our investigations, that the on-line cyber criminals, the high level international cyber criminals that we're talking about have not, by and large, gravitated towards the peer to peer, crypt currency such as bitcoin. eastern european cyber criminals that we have developed a specialty in have by and large gravitated toward the centralized digital currency that is as my colleague discussed earlier, that is based in a locale that may have less guidelines, aggressive law enforcement. so that is a distinct that i think needs made. is the virtual currency within

the existing laws? i like there are plenty of opportunities for digital currencies to work within the regulations. as long as they fit within the laws and they comply with existing guidance, there would be no violation, no reason for the secret service to look further into it. >> which agencies do you believe is at the forefront. >> starting with that question first, i think the department of justice recognized a few years ago, that a joint effort was needed and the fbi set up and led the virtual currency emerging group and which is now the work group that my colleagues here and many other agencies participate in. it is born up to be very fruitful and a form that allows all of the agencies that you'd

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 outises. prosecutors, we have u.s. attorneys offices and two sections of the criminal division. the forfeit you're and money-laundering section and computer crime and intellectual properties 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 foreign law enforcement that participates in that group, including the national crime ij andcy 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's, of course, room for improvement and we're always looking for additional participants and even in fact

last week there were additional participants invited to join that working group. i think it is an -- >> foreign -- from other countries or from within this country. >> well, both. but even last week we thought of an additional domestic agency that should be at the table. and we've invited them to participate. and so, 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 coordinate across the government, both here and abroad. as for the regulations and the laws that cover virtual currencies, i feel confident that currently, our criminal statutes that we have used in our prosecutions thus far have been effective tools. our money-laundering statutes have been effective and our

ability to prosecute egg eagle for example, and thus far being able to charge the administrator ofgg eagle for example, and thus far being able to charge the administrator eagle for example, and thus far being able to charge the administrator ea example, and thus far being able to charge the administrator of silk road. and our money statutes has also been used to prosecute liberty reserve and some of its principles for example. so i do think that we do have the statutory tools for the most part that we, as prosecutors, need 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 and updates to money-laundering statutes through the proceeds of crime enacted 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've been effective, but they have been updated. and those are the updates that we continue to support. >> sure, taking questions in turn. vincent has not opined and is not opining as to whether that currency is, whether this is outside of our purview. we are the money regulator for the federal government so our regulation spoke to 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 under 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 part of our system but out of the purview of fen-he is not. so who others feel it is appropriate yit to take those considerations into account with regard to virtual currency, we would look forward to working with them to make sure we are as coordinated as possible in our actions. >> all right, thank you. >> you all know about the government accountability. and most people, i guess a lot of people in this country, most people probably have no idea what it is they do. but they are a watch dog, congressional watch dog, to make sure we are minding our ps and qs in the federal government and a lot of different ways. the way we run our operations, and try to do it in a cost-effective way. broad operations, widely diverse operations. >> every other year, ngi oe

comes up with something they call their high risk list. when i first heard about the high risk list, i said, what is that. they said, the high risk list is a whole list of activities identified by the accountability office to waste money. every now and then i talk to constituents, we talk about what we are doing to reduce the budget deficit. and i have people who say, i don't want to pay any more taxes. but i just don't want you to waste my money. and one of the things ngio does, working with congress to work on ways to spend money more effectively and also to collect moneys that are owed to the treasury. more effectively. and the second half of that function i want to talk about. every other year, reporting to us along with the help of the irs, on something called tax gap. moneys that are owed, hundreds of billions of dollars owed to

the treasury but not collected. in some cases, we have a pretty good idea who owes the money. but a lot of money that goe is uncollected. i would like to say that number is going down. but unfortunately, to my knowledge, it is not just yet. what i want it do with the background is just ask you, this -- when i think about the new types of currencies, i wonder how they fit in to the tax system here in our country. and as you know, the issue report i think was early this year, may of this year, in which follows my line of thinking and assesses that virtual currencies could produce a vulnerability and make worse what is already a difficult situation. >> they recommended that the irs find relatively low-cost ways to provide guide towns taxpayers on

the basic tax reporting for virtual currencies. do you know the current status of that guidance? and what could we expect it to include and when can we expect it to be released? and i would say, if you could tackle that one, i'd be grateful. >> i would be happy to take that one. so first of all, is the financial intelligence unit for the united states, one thing fen-sen does, after it collects all of the information that our financial institutions provide to us, is we make that available to our partners in law enforcement. not only for the purpose of enforcing our criminal laws but also for the collection of taxes. so we have a very close and long-standing relationship with the irs. both on the criminal side and civil side to help them do just that and in fact this very last week, we were meeting with them on this very topic. virtual currencies and how to think of that in our joint work.

so something that i know they are taking very seriously. when it comes to goidance on virtual currency for taxpayers, i know there was the gao report and that would be suggested that they come out with guidance because there may perhaps be some question as to how to treat different uses of virtual currency for purposes of our taxing regime. 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 are working diligently on such guidance and that -- >> any idea when we might expect to see it? >> my understanding is that the gao report may have set forth deadlines. i think usually 60 to 90 days. i can tell you they are actively working on it t and it is the at forefront of their mind. and i think it'll be very useful guidance for the taxpayers when it comes out. >> thank you.

ms. ramen, do you want it add anything or take anything away. >> certainly not take anything away. i will say that the department of justice was very aware of the gao report. we took an interest in the findings and we have been discussing some of the findings in the gao report. >> i think you said earlier, that fen-sen did not opine on whether or not virtual currencies are currencies or commodities. i would just ask of 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 that definition to be made to in order to enforce the laws and regulations? >> i'm not sure i should know who would make that decision. >> you think it should be mr. --

>> i'm sure congress has a rule and when we start talking about commodities, the ctfc comes to mind. when we talk about securities, the sec. regardless of who should be making those determinations, our focus at fin-cen, we know the currency currently exists. we know it is used to transact payments. we know it has been exploited by some pretty serious criminal organizations. and we want to protect the system as we are mandated to do, to prevent laundering for the purpose 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

regulatory scheme that we have in place has the flexibility in it to change as the landscape changes. so in other words, if some part of the industry were to ultimately be defined to come under the sec or cftc, raml, or anti-money-laundering regulations, also apply to those areas of the industry. and so regardless, we will make sure we take every mitigating step we can to elicit operators from the u.s. financial system. >> okay. we will focus a question on you and maybe if you like, ms. raman, as i think you are both probably aware, a few weeks after the website was taken down by federal law enforcement, a new silk road website popped up in its place. so many dark markets exist, some

selling child pornography, and some market for higher services with, and whether or not these are real marketplaces or a scam artist's idea of a sick joke, it makes people worry and concerned. how do we develop a strategy? how do we develop a strategy to deal with these sites? and are there particular characteristics of these sites that make it more difficult for law enforcement to respond? would you respond to that, mr. lowery and this maybe ms. raman? >> certainly. so the on-line sites, secret service in our investigations, once again, we believe there are three infrastructures in place that facilitate the jn line crimes. the silk road type criminal forums. see, one of the secret service specialties are on the criminal forums. eastern european base predominantly.

so there are -- there are other web sites that specialize in specific crimes. the other part of the infrastructure is the digital currencies. the use of digital currencies predominantly, the digital currencies that fall outside of the guidance of fin-cen or outside countries or as i said earlier, have less regulatory controls. the third what we call, we refer to as bulletproof hosters -- >> what? >> bulletproof hosting. a criminal individual who specifically sets up business in a country with very little regulatory or aggressive law enforcement. and provides a platform for a tax to be launched again the u.s. criminal infrastructure. so the secret service attacks the problems strategically. we are always looking to identify the individual behind a specific crime. the intruder, large scale vendor, stolen personal data and

what have you, and 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, laborty reserve or eagle 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 are looking at. >> thank you. ms. raman, do you want to add anything to that statement? >> i think the challenge you are pointing to, sometimes really results from anonymity and it results from many criminals migrating to hidden services on the internet. >> migrating to what some. >> to hidden services on the internet. that has been a challenge for law enforcement. as you've seen from the results that have been -- 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 the one that seems similar to it, having been taken down, i think as mr. low lowery said, it is important for us to take steps. not just to disrupt the organization but to accepted a message that they cannot test those web sites. 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 take downs know that the community is aware. the criminal community is aware when we take these actions. it's important that we do so. it's important that we put the wrong-doers in prison where they deserve it app enimportant for

us to put these organizations out of business. and i think we've been able to do that. >> that was very encouraging addition. thank you. i have another question on domestic job creation that i will direct to ms. shasky. my last question will probably fall right after that, then we will introduce the second panel. probably take a little recess and then introduce the second panel after that. sometimes i ask 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 do, you were very kind to present an opening statement. i appreciate it. clear straight forward responses to the questions i've asked. but i want to ask each of you to take a minute or to to take a closing statement and just to reflect on what you said and other questions you've said. and what you've urged colleagues

on the panel. just think about that. and while you are thinking about that, i will ask 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 to jurisdictions with a less strict regulatory framework. and what if anything can the u.s. do to try to keep businesses in the country. what are we doing that seems to make sense? what maybe more should we do? and along those same lines is, is fin-cen engaging with national partners on regulation of virtual currency. sound 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 always believe they will find that gain short-lived. every country as i mentioned earlier has an interest in protecting its financial system from elicit actors who would launder money or move money on behalf of terrorist organizations. in collecting taxes and prote protecting investors and protecting from fraud in an unstable economy. so if the current payment system that we are talking about today is going to survive and be a real player, significant player in the financial system, regulation both at home and abroad will catch up. because it has to. so our challenge here is to have smart regulation that both mitigates the risks while the same time minimizing the burdens. i feel confident that at least in the amlcft. >> what does that stand for. >> anti-money-laundering counter

finance terrorism realm. we have managed to do that and met that challenge. and i think that's going to be born out over time. so i think the innovation and 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 have a consistent regulatory framework on the anti-money-laundering side, worldwide, the task force standard setting body and does a good job of ensuring that countries around the world have the laws and regulations in place. my understanding is that they are interested in taking up our issue, what i can tell you for sure is that my counter parts abroad have been reaching out to us quite a bit to find out what we are doing in this regulatory space. we managed in this country to act a bit quicker than some of

our colleagues because we had the broad definitions and were able to fit virtual currency within our preexisting regime. germany was able to do the same thing. so they too already have regulations on the books. other countries are trying to figure out how they can catch up. >> thank you. >> now while you think about the answer to this last question that mr. lowery and ms. raman, just give us a brief closing statements. ms. raman, do you want to do 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've had many successes, we've clearly had 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 that we can do better.

and it's helpful to have these dialogues. i also think it's encouraging that i have colleagues like the ones sitting next to me who have been willing to work together on these emerging threats. i think we have all approached it in the same way, which is that virtual currencies in and of themselves are not illegal. we have all recognized that innovation is important. and we have all recognized 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 cha is going to come and we will remain vigilant. we intend to be aggressive in the years to come as we have in the last several years and

virtual currencies didn't sneak up on us as i said in the opening statement. we had our first indictment in 2007 so we assume that these threats will continue to emerge and change and evolve and we intend to keep pace. >> thank you. >> that's a pretty good closing statement. >> okay, your turn. >> as dhs law enforcement agency and long standing original defender, the secret service working with our partners, in law enforcement as well as prosecution, and our partners will continue to work strategically to remove this to our infrastructure. it will take consistent

awareness of the growing threat and it'll be adapt as we always have and we're going to have to hurdle the international issues and what have you. and i do know u.s. law enforcement is very aggressive and also very collaborative with our foreign partners. and this issue can't be taken care of just by ourselves. and we will continue to work as we respond to these threats. as part of dhs will continue to work to dissem nate the threats through dhs and our electronic crimes task forces through various partners to remain that existing ckrs throughout the countryes a infrastructure are provided the greatest level of protection and we believe firmly the 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. i would like it thank you, as my colleagues did, for convening this important hearing. you know what, i heard a ceo after fairly large bank say recently that having the privilege to be a financial institution and be a part of the global financial system, is just that. a privilege. and there's a reason why countries and jurisdictions asked you to be licensed to be one of those financial institutions. because it also comes with great responsibility. have you great power in your hand as 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 entree 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 elicit actors. so we believe that the regulations in place have met that balance of mitigating the risks while minimizing the burden. ins essence, we're asking virtual currency exchangers and administrators to do three things. register with fin-cen. it is an on-line form and it's free. put in place aml protections, controls in place it harden yourself to the likelihood that bad actors will take advantage of your system.tit harden yourself to the likelihood that bad actors will take advantage of your system.oit harden yourself to the likelihood that bad actors will take advantage of your system.t harden yourself to the likelihood that bad actors will take advantage of your system. harden yourself to the likelihood that bad actors will take advantage of your system. maintain records and provide information to fin-cen. it is something many players doing with from the smallest mom and pop small check casher probably up the street here, to the biggest of the global financial institutions. they have all found a way to offer their services while

maintaining those same protections. and so that's what we're asking of virtual currency providers. we believe it's reasonable. given that we've seen the virtual currency has in fact been exploited by some pretty serious actors. that being said, fin-cen is constantly engaged in outreach to industry and have been engaged in outreach with the virtual currency industry. we try to bring different parts of the industry together so they can learn from each other, the practices, best practices, for hardening themselves to illicit finance and to share the information we collect from them back with them so they can become 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. but we are committed to continuing the discussions both with industry to see if that's right, as well as our colleagues on the law enforcement side. thank you. >> thank you. this has been a thought

provoking presentation. and discussion. it's been encouraging as well. this is probably a stretch of an analogy. i will try it make it fit. i serve on a committee called environment of public works. and we wrestle all the time with the need to clean up you are environment. and to put in place the kind of regulatory structure, legislative structure, combination of laws and enforcement. allow us to breath the air and drink the water without fear. i always say, we don't have to make the close, but we have to clooz between a stronger economy and a clean environment. i think that's a false choice. and one of the questions has been rattling around in my mind

of, and as with drill down on this subject, is it possible to reap the benefits, including the 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 is a concern to all of us. and just that i've become convinced over the years, it is possible to have a stronger economy and cleaner environment. i'm encouraged that maybe it is possible to have the benefits of the virtual currency, virtual currencies. and to actually be able to not facilitate and hold down the criminal activity that we talked about here today. so thank you for giving us both sides. both side of the story. and i suspect there's a chance to talk with you some more and my hope is that you will feel free to come back and tell us

formally or informally where the legislative branch of our government needs to be do something things that make sure that what a potential there is here for economy, for consumers. is actually realized. while we camp down on that little behavior, that criminal behavior, we want to eliminate. i will call 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 take a short recess.

ladies and gentlemen, i will ask you to find your seats. looks like we have our witnesses lined up. and we thank you for joining us today. we will start voting at 5:30. so they will probably be a hard stop for this panel. but let me take a moment, if i could, to introduce each member of this panel. distinguish witnesses. my notes here say distinguished witnesses, so thank you, first witness said ernie alan, president and ceo for national center for missing and exploited center and national center for

missing an exploited children. mr. algeneral also serves on the digital task force which focuses on benefits and risks surrounding the digital economy and is led jointly for the center for missing and exploited children. and thomson reuters. our next witness is patrick murck from the bitcoin foundation. they work to standardized and promote and effect bitcoin. mr. murck is also from engaged legal. his expertise extend across the legal and are eregulatory issue. virtual economies and alternative payment systems. previously mr. murck led legal affairs at the tech company big door, as attorney as d.c. based law firm, and is also an

national investigative journalist. third is jeremy allaire. mr. allaire is founder and ceo of circle internet financial, a start-up company focused on promoting mainstream adoption of virtual currencies. serial internet entrepreneur. mr. allaire is one bright cove, one of the largest video plat forms in the united states. our final witness is jerry rito. mr. rito is senior research center and director of policy program. mr. brito is also an adjunct policy of law. his focus is on the regulatory process. welcome to each of you the

entire testimony will be made part of the record as i said to the first group you're welcome to summarize, if you like, and try to keep your comments about seven minutes. if you go beyond that, i will have to reign you in. otherwise we'll be just fine. >> thank you, chairman, carper. as you mentioned, we have launched a digital 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 and work toward 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 card and mainstream financial system. however, as you've 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 is 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 existing currencies at the exchange level. the point at which virtual currencies are traded for dollars, you're yoes, pound or yen. over the past year, i have consulted with law enforcement experts and financial experts around the world, about this issue. and they advise, as it relates it our core concern, which is the exploitation of children, that child pornography is currently being created and disseminated, using 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 who are using content with technology and virtual currencies for payment. and in august, the irish owner of freedom hosting which the fbi called the largest facilitators of child pornography on the planet, was arrested. freedom hosting maintains supporters for the deep web child pornography sites. lolita city, pedo empire, and others which accepted payment. to shut down freedom hosting, law enforcement penetrated its anonymity and exposed the ip addresses of the users. regarding bit i couldn't, 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 like silk road. but it also 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 currencies 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 as infiltration. but infiltration is expensive, time consuming and often ineffective. and while there are some arrests, the research indicates that most of the arrests are of

those who use the ano onemizing technology improperly and leave a trail. they connect to a nonanonymous ip address providing a trail to follow. and even the silk road arrest involved an offenders who made 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're not catching the truly sophisticated, most high risk organized criminal offenders. through our task force, one of the things that we're doing is 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 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.