america." featuring thoughts from historians and first lady michelle obama on the role of first ladies throughout history. it's available for the discounted price of $12.95 plus shipping at c-span.org/products. and our website has more about the first ladies, including a special section welcome to the white house, produced by our partner, the white house historical association. which chronicles life in the executive mansion during the tenure of each first lady. this is c-span3 with politics and public affairs programming throughout the week and every weekend, 48 hours of people and events telling the american story on american history tv. get our schedules and see past programs at our websites and join in the conversation on social media sites. coming up tonight on c-span3, the senate homeland

security committee examining the policing of virtual currencies. then a house homeland security committee examining the management at the department of homeland security. on monday, the senate homeland security committee examined the government's ability to police the use of digital currency with the laws currently on the books. online decentralized systems allow people to exchange goods and services without using real money, including bit coins. this hearing is two and a half hours. good afternoon, everyone. thank you for joining us, we especially want to thank our witnesses, panel number one, and

somewhere in the audience, panel number two. the i.d. card is there, so pick it up please and put it where it belongs. that way we'll know who you are and you will, too. my succeeder in the senate used to say many years ago, he would say, his advice was wear a big button. wear a big button when you're campaigning so you'll remember your name and so will other people, too. we want to make sure people remember your name. over the past several months, this committee has engaged in a investigation into the potential implications of virtual currencies. during the course of this inquiry, we've examined the issues and potential risks and threats that virtual kecurrenci pose as well as some of the potential promise that some believe they can bring. in addition, we have explored with several departments and agencies throughout our federal government how they are approaching virtual currencies as an emerging technology.

this is included looking at how they are coordinating together to develop a whole of government approach that is consistent and informed. virtual currencies perhaps notably bit coin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us. including me. indeed, based on conversations my staff and i have had with dozens, maybe more, dozens of individuals both inside and outside of government, it is clear that the knowledge and expectation gaps are wide. fundamental questions remain about what a virtual currency actually is, how it should be treated and what the future holds. virtual currency can best be described as digital cash. it's generating by computers, lives on the internet, and can be used to purchase real and digital goods across the world.

some proponents believe that digital currencies can prove valuable to those in developing countries without access to stable financial systems. other believe it could prove to be the next generation payment system for retailers both online and in the real world. at the same time, however, virtual currencies can be an effective tool for those looking to launder money, for those looking to traffic illegal drugs, for those looking to exploit children around the world, and the list goes on. while virtual currencies have seen increased attention from regulators, from law enforcement, investors and aunt ru ppru newers in recent months there's still many unanswered questions and unresolved issues. this isn't the first time advanced in technology 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 even

the internet itself were once alien and difficult to understand and navigate. now most of us can read and respond to e-mail on a device we keep in a purse or a coat pocket and search the web on multiple platforms. i like to use the example, when i first showed up for duty here in the u.s. senate in 2001, we received for every e-mail that came in to us from constituents in delaware and across the country, for every e-mail we received, probably ten to 15 letters. i asked my staff a couple months ago to tell me if that ratio had changed. now for every 12 or 15 e-mails we get, we get one letter. that's probably a pretty good metaphor for the situation. i'll be the first to admit that like most americans i'm no technical expert in virtual currencies. i think all of you are gathered in the room who are, and we'll see. but hopefully some of our

panelists are also experts and we'll learn a lot from you today. what i do know is a number of smart people inside and outside of government view this as a major emerging issue deserving of our attention and deserved this committee's attention. the ability to send and receive money over the internet nearly anonymously without a third party has a lot of wide-ranging implications. our government needs to pay attention to this technology and to understand and where appropriate, address these implications. this was made all more clear last month when the silk road on which many illegal products and services were sold via bit coin. the most popular products were illegal drugs, foreign documents such as i.d.s and passport, other services were also for sale, including hacking services. we're told that approximately 1.2 billion dollars in

transactions were made through the silk road. this lived on what is often called the dark web, also known as the deep web. it consists of web pages and data only available via special software that keeps users anonymous. many sites and data on the dark web have been deliberately built to be untraceable in order to protect the anonymity of the user and silk web is one of those sites. my understanding is individuals can navigate to it anonymously and use bit coin that can be sent to someone essentially anonymously to make a purchase. the anonymity of the currency made it unable for law enforcement to track. in our investigation, the department of homeland security informed us that the suspects who sent ricin to president obama in april of this year was a vendor on silk road.

law enforcement including the fbi, immigration and customs enforcement, and the secret service should be applauded for their work in taking down a major international criminal enterprise. while silk road was perhaps the most well known, if thought tno the only marketplace where illicit drugs were bought and sold through bit coin transactions. today a number of sites are still in business, selling weapons, child pornography and even murder for hire services. while today i suspect we'll talk a lot about the well-known virtual currency bit coin, there are numerous currencies operati operating, each with its own specific set of features. that said, whether it's bit coin or any of the other virtual currencies, the federal government and societies 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 that some folks just want a chance to try and play by the rules. that's difficult to do if the rules and the proper authorities aren't clear or the future is uncertain. it's also difficult if a large number of bad apples are allowed to spoil the bunch. with that, normally i would turn to my light and say, dr. coburn, you're recognized for whatever comments you would like to offer. but he's traveling back from oklahoma, i hope he'll be able to join us at some point during this hearing. we start voting at 5:30, and what usually happens on monday afternoons is people are coming in, senators are coming in from all over the country, and they will drift in and out of here, like this one, and my hope is before we're done, a number of them will be able to join us. i want to take a moment and welcome and indrodeuce very

briefly our first panel of distinguished witnesses. our first witness, jennifer shasky calvary, director of the financial crimes enforcement network, known as fencen. as director, do you go by both names? >> typically, just shasky. >> okay. all right. as director of fensen, ms. shasky received the protection of the u.s. financial systems for money laundering and other forms of illicit financial activity. prior to joining treasury, the director shasky served as a chief of asset forfeiture and money laundering section at the department of justice. our second witness has a name i have never heard before, and her first name is mythili.

sort of rhymes with mightily, right? myhtili raman. has your name ever been mispronounced? >> many times. >> today? >> not today. >> good, she's acting assistant attorney general as head of the criminal division, she receives nearly 600 attorneys who prosecute federal crime cases across our country. prior to joining the criminal division, she served for nearly a decade as an assistant u.s. attorney for the district of columbia, our neighbor. our final witness on this panel is edward lowry. mr. lowry is a special agent in charge of the criminal investigation division at the secret service. mr. lowry began his career with the secret service in 1992 and has been in his current position since february of 2012. he directs and coordinates all

investigative activities of the agency and the daily activities of the service in offices located around the world. previously, he established the cyberprotective initiative and coordinated initiatives in the cyberinitiatives branch and the cyberintelligence dwixz. 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 to you here, and some that will be asked to you in writing subsequent to this hearing. with that, ms. shasky, director shasky, you are recognized. i don't know how long they told you you had to give your testimony. what did we say? pardon? all right. seven minutes, but you can go a little longer. if you're way beyond that, you'll have to close. you're recognized. please proceed. >> thank you, chairman. >> for you and the other witnesses, your entire statement will be made part of the record.

>> thank you, good afternoon, chairman carper. as you mentioned, i'm geniture shasky calvary, and i'm pleased to be here today to discuss the important regulatory, enforcement and analytical works to prevent illicit actors from exploiting the internet system as they create new ways to move money. our mission is to safeguard the financial system from illicit use, combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and the strategic use of our financial authorities. we work to achieve this by administering the bank's skraet act, the antimoney laundering regulatory rujoem. by sharing the financial intelligence we collect as well as our analysis and expertise with law enforcement and

regulatory partners and building globe global partnership throughout the world. recognizing the use of new payment methods and understanding that aml protections must keep pace with these advancements in technology, they began working with our partners senchl years ago to study this issue. here's what we learned. illicit actors might decide to use a virtual currency to store and transfer value for many of the same reasons as legitimate reasons and also for more nefarious reasons. an illicit actor may use it because it enables the using to remain relatively anonymous, is easy to navigate, may have low fees, is accessible across the globe, can be used to both store and make international transfers of value, does not typically have transaction limits, is generally secure, features

irrevocable tranls actisactions depending on the system, may have been created with the intent to facilitate money launders and provides a loophole from aml and most countries around the world. the idea that illicit actors might exploit virtual currency to money launder, a federal facilitates credit card fraud, identity theft, investment fraud, narcotics trafficking and child pornography and recently, the department of justice alleged customers of silk road, the largest illegal drug and contraband place on the internet were required to pay in bit coins to enable the operator of silk road and its sellers to evade detection and launder hundreds of millions of dollars. that being said, it's also important to put virtual currency in perspective. it's been reported that bit coin

transactions worth approximately $8 million over the next year, whereas the best estimate for the amount of criminal proceeds available for laundering throughout the financial system at least in 209 was $1.6 trillion. by way of comparison, in 2012, paypal processed $145 billion in online payments. western union had $181 million, and bank of america made $245 trillion in wire transfers. thus, while of growing concern, to date, virtual currencies have yet to overtake more traditional methods to move funds, whether for legitimate or criminal purposes. nonethele nonetheless, to address growing conce concerns, in july 2011, after a public comment period designed to receive feedback from the companies, they provided the needed flexibility to accommodate innovation in the payment space, including virtual

currencies under our pre-existing regulatory framework. then this march, fensen issued additional guidance to clarify the comply nls obligations for those actors covered by our regulations. in short, they are required to register with fensen, put aml controls in place to harden themselves as targets and provide certain reports to f finsen on suspicious and other activities. it's in the best interests to comply with these regulations for a number of reasons. first is the idea of corporate responsibility. leg legitimate institutions do not go into the business with the aim of laundering money for criminals. any institution could be exploited for money laundering. what is important for institutions to put controls in place to deal with those money laundering threat and meet with their aml obligations. at the same time, being a good

corporate citizen and complying for cape blth abilities is goode bottom line. they ned to show they're operating with transparency and integrity. legitimate customers will be drawn to a virtual currency where they know their money is safe and the company has a reputation for integrity, and banks will want to provide services to administrators or exchanger that show not only great innovation but also great integrity and transparency. the decision to bring virtual currency within the scope of our regulatory framework should be viewed as a positive development for this sector. it recognizes the innovation virtual currencies provide and the benefits they might offer society. several new payment methods in the financial sector have proven their capacity to empower customers and expand access to services. we want such advances to continue. however, those institutions that choose to act outside of the law will be held accountable.

f fincen will do everything in its power to stop abuses of the financial system. we have proven our willingness to do just that by using our targets financial measures under 311 of the patriots act to name liberty reserve as a primary money concern. we stand ready to take additional regulatory actions as necessary to stop other abuses. as the financial intelligence unit for the united states, fincen must stay current on how money is being laundering in the united states so we can share the expertise with our law enforcement, regulatory, industry, and foreign policies and serve as the cornerstone of this country's aml regime. we're meeting this as we continue to deliver cutting edge analyt klt products to inform the actions of our partners. we're committed to remaining at the forefront of development in the years to come. we have made oversight of the

virtual currency development a priority, and we're encouraged by the progress we have made thus far. thank you for inviting me to testify before you today. >> thank you so much for being here. for the meeting you had with our staff and me last week, and for your testimony. thank you. ms. raman, pleasero proceed. >> thank you for the opportunity to come before the committee to discuss the department's work. at the justice department, we look at virtual kerracies through the lenls of criminal law enforcement. we recognize that the currency could be an illegal means of exchange, and we also recognize that criminals will always seek to take advantage of new technologies to commit further or hide their crimes. our responsibility as prosecutors is to insure that we continue to enforce the law even in new technological settings

and to prevent criminals from using those technologies to create zones of impunity. as i will describe in mire testimony today, the department of justice has been aware of the threat posed by virtual currencies for several years. we have already brought several prosecutions involving virtual currencies and we intend to remain vigilant in insuring any use of illegal virch wul currencies is investigated and prosecuted. i should note that virtual currency systems so long as they comply with applicable money laundering administrations are not inherently illegal and they can be appealing to consumers because they can provide cheap, efficient means to transfer currency. many of those same features also make them appealing to criminals. we have seen increase in use of such currencies by drug dealers, traffickers of child pornography and perpetrators of large-scale

fraud schemes. most significantly, we have seen evidence that criminals are drawn to virtual currencies for two main reasons. first, the perception that it offers greater anonymity, and second, the irversability of the transactions. these features can significantly complicate our ability to utilize one of the most basic techniques we use in criminal investigations, following the money. the justice department has long recognized the potential for the criminal misuse of virch wtual currency and launched our first major prosecute of an illegal service in 2007 when we indicted egold on charges of money operating and unlicensed money operating business. as that alleged, the only information a customer had to provide to set up an account was a working e-mail address. as a result, egold became a popular payment method for

sellers of child pornography, operators of investment scams and perpetrators of credit card and identity fraud. at its peak,ege gold reportedly moved over $6 million a day. they were convicted in 2008. since that time, we have continued to insure that we aggressively address any criminal misuse of virtual currency systems. when virtual currency systems fail to live up to their obligations under existing law, we take action. earlier this year, for example, we unsealed charges against liberty reserve, an offshore virtual currency business for allegedly running a $6 billion money laundering system. the justice department's largest ever money laundering prosecution. as alleged in the department's filings, liberty reserve became a system of choice for cyb cyber criminals and was used in a wide array of criminal activity including credit card

fraud, identity theft, and child pornography. as the result of actions taken by the law enforcement agency and 16 countries around the world, numerous assets were seized. one of the defendants pleaded guilty just two weeks ago. more recently, the department announced significant steps in its investigation of silk road, alleged to be one of the largest online marketplaces for illegal goods and services. including large quantities of illicit drugs. allegedly operated by a u.s. citizen living in california at the time of his arrest, silk road accepted bit coins exclusively as a payment mechanism on its site. charges against silk road and its administrator were unsealed just last month in two different districts. the charges against the operator included drug distribution, attempted witness murder and

attempted murder for hire. as part of that takedown of silk road, the department seized over 170,000 bit coins valued as of this friday at over $170 million. the department recognizes that in orger to stay abreast of rapidly changing technological environment, we must coordinate our enforcement strategy across the federal government. for that reason, we're working closely with the virtual currency emerging threats working group, a variety of law enforcement agencies both here and abroad and of course fincen. from the view of law enforcement, fincen's recent guidance applying antimoney laundering and know your customer requirements to virtual currency exchanges was an important step in safe guarding our ability to deter a crime and investigate it successfully when it occurs. the department is encouraged by services attempting to comply

with u.s. law. we'll 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 ledgislation can play a role in insuring that the virtual currency systems do not become a haven for criminal activity. we look forward to working with congress to insure that law enforcement continues to have the tools necessary to enforce the law and protect the public. in the meantime, we will continue to aggressively use our existing authorities to deal with those virtual currency systems that do not comply with the law and to aggressively prosecutor criminals who use those systems as part of their criminal schemes, and of course, we will continue to innovate in how we investigate crime to deal with whatever changes may come. thank you for the opportunity to discuss the department's work in this area and i look forward to answering any questions you might have. >> we look forward to asking some questions. we very much appreciate your

testimony and for joining us today. mr. lowrey, you're recognized. please proceed. >> good afternoon. thank you for the opportunity to testify on behalf of the department of homeland security regarding the risks and challenges posed by digital currencies and the role of the united states secret service in investigating crimes associated with online payment systems. digital currencies have developed and grown over the last 17 years as part of the continuing integrate on technology into the financial system. as the original guardians of the nation's payment systems, since 1885, they have continually adapted their methods to keep base with the evolving information technology within the financial system. since the founding of egold in 1996, digital kerracies and payment processors and exchangers have grown to be a significant participant in the global financial system. that processing 10s to hundreds of billions of dollars annually

in total transaction volume. criminals and other illicit organizations use digital courageacy. they seek out the exchangers and providers that best enable them to conceal their illegal activities. they're alleged to have laund laundered more than $6 billion before the investigations dismantled it. the growth of digital currencies and internet based programs is expected to continue for the foreseeable future as well as the continued use of these systems in illegal activity. they enforce this in the context of their authorities to investigate criminal authority. as a result of the investigations, exchangers of digital currency have been charged and convicted with operating unlicensed money transmitting businesses 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 convict of 1956 and 1957. as fincen emphasized in march of this year, they have legal responsibilities under various anti-money laundering laws, title three of the patriot act, the bank secrecy act, and fincen regulations. dha law enforcement worked closely with inner agency, state, local, and international partners in conducting criminal investigations in their respective jurisdictions that nay involve the use of digital currencies, including their use for money laundering purposes. in particular, as one of the two federal law enforcement agencies with authority to investigate computer intrusions, one of the secret service's strategic priorities is proactively investigating cybercrime and defeating these illicit organizations by arresting their members and seizing and

dismantling their criminal infrastructure. they have investigated and arrested numerous leaderoffs major cyber crime operations. the secret service arrested a man known as bad b, in 2010, and earlier this year, apprehended five individuals allegedly responsible for the largest data breach ever in u.s. history. over the past 4 years, the secret service has arrested more than 4,500 cyber criminals, preventing over $13 billion in losses based on the financial information recovered from those individuals. importantly, they used extensive use of digital currencies as part of their efforts. the secret service strategically prioritized investigations of exchangers and administrators of digical currency that provide a role in facilitating widespread illicit activity. as part of these efforts, the secret service in cooperation

with other partners has apprehended the leaders of egold and liberty reserve. they have also arrested various exchanges of currency that facilitated criminal activity such as west corporated, resulted in 16 individuals pleading guilty or being convicted. these cases are discussed more fully in my written testimony. and i wielcome further opportunities to discuss this. digital currencies are a tool used by a wide variety of criminals. we investigate illicit activity that involves the currencies. through our electronic task forces, federal, state, and local law enforcement collaborate with the private sector and academia to address the challenges that criminals use of information technology, including digital currency, pose to law enforcement at all levels

of government. additionally, the secret service and i.c.e. work closely to make sure that the activities are coordinated and like all federal law enforcement, the success requires partnering with the u.s. attorneys throughout the country. in addition to the asset forefitcher and money laundering of the department of justice's criminal division, the secret service and i.c.e. also partner with other law enforcement for joint investigations and participate in the digital currencies emerging threats group. they present real risk through the use of the criminal and terror organizations trying to conceal their activity. as such, they challenge law enforcement's ability to carry out our responsibilities to enforce the law and suppress criminal activity. the secret service has a long history of adapting its investigative methods to maintain the integrity of the nation's financial structure.

we're committed to partnering with law enforcement at all levels of government to increase the security of the nation while addressing the challenges posed by digital currencies. the secret service will continue to conduct effective criminal investigations to keep america safe and prosperous. thank you for the opportunity to testify on this important topic and i look forward to your questions. >> mr. lowery, thank you so much, and our thanks to each of you for your testimony and your preparation for today. and in anticipation of this hearing a week or two ago, i was trying to get my head around this subject, and i asked my staff to talk to me about the early days of the internet, and there were a number of concerns raised about how it might foster, facilitate illegal activities. but there were some who said there could be a lot of benefit here as well. and i asked them if that was maybe an analogy that was

applicable for digital curren currencies. washington walk atlous the early days when you were in middle school and before that, and talk to us about the early concerns we had with the bad that this -- the criminal activity that can flow through the internet, 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 and buy a lot of commerce that takes place over the internet, a lot of presents that are going to be sent using the internet. we never imagined anything like youtube, wikipedia, google search is 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 could flow from the internet. are there -- is this a good corollary or not?

and if so, how, and if not, why not? start with you, ms. shasky, please. >> 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 financial is to think about the gaps and the vulnerabilities it creates in the financial system and how illicit actors will take advantage of the gaps or vulnerabilities, but it's also important that we step back and recognize that innovation is a very important part of our economy. it's very important in this country as 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 mitigates the concerns of illicit actors operating in our financial system while as the same time minimizing the burden as much as we can. we believe we can done just that

with this rule by clarifying that virtual currency exchangers and administrators fit within our pre-existing regulatory regime. >> all right, thank you. ms. raman, same question. walk us back in time. early concerns realized and some of the potential that may have come along on the internet that perhaps we never envisions and does that apluhere? >> as i alluded to in my written testimony, as emerging technologies change, as law enforcement, we remain attune to the criminal misuse of the 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 currency services are not in and of themselves illegal, so long as they comply with our applicable money laundering laws and our money transmission laws and regulations. so i think it is our duty as law enforcement to stay vigilant

about the criminal misuse of those virtual currency systems while recognizing that of course there are many legitimate users of those services. our experience over the last several years has showed us there's reason for our vigilance and good reason for us to remain vigilant. liberty reserve was the largest money laundering case ever brought by the department of justice. and that is an important fact. and it reminds us that there is good reason for us to remain watchful. and we intend to do that, but 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. lowrey, 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. and the secret service, the hallmark of our investigations have always been adapting to a changing threat.

as i have said, we started with counterfeit. we moved into fraud. always defending the nation's financial structure. in the '80s, it was access device fraud when credit cards were starting to become a major issue, impact on the financial system, and it segues into computer crimes. in recognition of that fact, as i mentioned in my testimony, electronic task force model is widely respected throughout the country, and it is the way that the service stays in tune with the changing technology and the threats that can come from the internet. >> all right. a couple of years ago, there was a film called "dillinger" and my wife is usually not a big fan of gangster movies. said when i went to a local theater complex in delaware, and one of the films was "dillinger." she said, let's go see that. i said, okay. i'll never forget one of the scenes in the film, they made

their living robbing banks, shooting people up and getting away with it. near the latter part of the film, they were on the run. and they -- dillinger looked up one of his old compadries in the bank robbing business to see if he couldn't give him a hand, and i remember, they met in what looked like the top floor of a big old warehouse that had been retrofitted, and you walked in and there's all these guys, a lot of them wearing shirts and ties, on old phones. making phone calls. and dillinger said, you know, what's going on here? and apparently, it's a booking operation, numbers operation. and he said, you're stupid to do that. this is the future. this is the future for criminal activity, the way to make money. i suspect for some people, they see this as a future for them to make money through criminal

activity, whether it's pornography, child pornography, in 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 anymore, not shooting people anymore. we figured out how to deal with that. how confident are you you'll be able to deal with the potential criminal misbehavior with this new technology that's before us. mr. lowery. and the same part, how does -- what role does the legislative body -- you know, three branches of government, but what role does the legislative body, what role do we have to play to make sure you have the resources you need to meet the dark side of this technology? >> well, again, going back to my testimony, the secret service

has investigated many first of their kind investigations. we specialize in the international cybercriminal, the professional criminal targeting our professional infrastructure. we operate within the confines of the laws we're entrusted to enforce. predominantly, 1028, 1029, 1030, which would be access to device fraud. identity theft and computer hacking. you spoke earlier about the change and how the crimes have changed. i believe one of the largest changes is the reach, the reach of the criminal. used to be we had to worry about back in the dayoffs the early device fraud, we have to worry about someone dumpster diving or trying to get an 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 and strategically investigating, trying to direct our investigations to the highest impact within the confines of the existing laws. which i believe there are plenty of cybercriminals in prison right now who would agree we're pretty effective. >> the second half of my question, and i would ask you to respond to it and then we'll turn to ms. raman, but three branches of government. judicial, executive, legislator, the role we're attempting to play on this committee is not just an oversight role, although this is a homeland security and governmental affairs committee, we historically do oversight. the homeland security piece of the committee is newer, only ten years old, but we have sarole for oversight. we also have, i think, an obligation or opportunity to make sure that the administration is working maybe with local law enforcement agencies across the country, but they're working in a cohesive, collaborative manner, and i'm encouraged to see that might be

the case. but what advice would you have for us on the legislative side? how can we be supportive in better enabling you to do your difficult work as this new technology appears before us? >> well, i believe it goes back to the most important part of being able to do this job, is the hiring, developing, and retaining of highly qualified work force. obviously, you need a technically gifted investigator to follow the trail and run these international criminals down. so that is always a challenge, especially in the current fiscal environment, with any support in that realm is definitely appreciated. >> all right, thank you. ms. raman. >> your first question was whether we can keep up with the changing technology, and i do think that law enforcement has proven itself to be nimble and aggressive and willing to work together and not only with agencies here in the united states, but abroad in order to

effectively combat the threat. i've mentioned liberty reserve before, but it's an excellent example of how our agencies have worked together to take down an enormous money laundering operation. we worked together with fincen and treasury. they took coordinated action. at the same time that law enforcement made arrests here and abroad, we had 17 other countries working with us for a coordinated arrest and takedown. we seized assets on the same day that arrests were made, and we took down domain names on the same day that arrests were made. so i do think we're nimble enough and creative enough and aggressive enough to be able to combat the threat. that doesn't mean that we're not unaware of the challenges that are posed by virtual currency, and there are specific challenges that are inherent to virtual currencies that we are remaining attuned to, the anonymity is certainly one that we are paying attention to. the fact that some virtual currency services may be based in countries that have lax

regulatory oversight is of concern to us. there are issues with difficulty in obtaining customer records and a host of other difficulties and challenges that go along with investigating global organizations, but i think as our track record shows, we're up to the challenge and continuing to work together to insure that we are innovating as criminals are innovating and we stay one step ahead of them. as for what the legislative branch can do, i think as for our criminal statutes, we feel confident that the statutes that we have available to us are money laundering statute, our money transmitter statutes, are broad enough to encompass the activity we've been talking about this afternoon, and in fact, those statutes are the ones we used in egold and liberty reserve, for example, and of course, to the extent that criminals are using virtual currencies as part of their criminal enterprises, the

substantive criminal statutes are also applicable. for example, if a child enterprise is charging child pornography, we could charge that. we feel confident that the statutes we have on the books are flexible enough to meet our needs. that having been said, we're also looking for ways to close any gaps that might arise or to close any gaps we might see that we aren't seeing right now, and we would be happy to continue to work with you and your staff to insure that we let you know whenever we need those legislative tools. >> all right, thank you. ms. shasky, will you respond to that question as well, please? >> sure. >> actually, the two questions. >> thankfully, congress' actions in passing the bank secrecy act and the usa patriot act have already given us a strong platform to meet the challenge,

so we're confident that we can meet this challenge, at least in the first instance, using that platform. so the bank secrecy act, of course, is this country's anti-money laundering and counterterrorist financing backbone, which we administer at fincen. we issue the regulations under that. in 2011 when we expanded some of our definitions to enable us to have flexibility in going after new payment systems, our hope was that these regulations would live with changes in the market. what we found is that it's done just that, so as virtual currency has come more strongly to the forefront over the last year or two years, that definition has been broad enough for us to encompass virtual currency administrators and exchangers in our pre-existing regulations under the bank secrecy act.

then section 311 of the patriot act, that gives us the authority to name a foreign financial institution as being of primary money laundering concern and cut it off from the u.s. financial system. that's exactly the provision we used to confront liberty exchange. that targeted financial authority provided to us by congress. so we feel like we have a pretty good basis on which to act already. but it's hard to predict where the financial system is going to go and what tools we might need next, and we would be very thankful to continue that conversation with congress, to see if any additional tools might be better. >> okay, thank you. and your testimony, ms. shasky, you said on page 11, i think, of your original testimony, i'll read a couple sentences from it if i could. you said several new payment methods in the financial sector have proven their capacity to empower customers, encourage the development of innovative financial products and expand access to financial services. and you went on to say, we want

these advances to continue. and 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 accountable. fincen will do in its power to stop such abuses of the u.s. financial system. when you talked about several new payment methods in the financial sector that have proven their capacity to empower customers and encourage the development of innovative financial products, expand access to financial services, this is the bright lining. in this technology of virtual currencies. just 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 value cards.

another area where we've thought not only about the risks from illicit actors but also the benefits that it can offer to consumers. and we have seen many of the unbanked use prepaid cards to gain their nlsh 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 online banking and the changes that it'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 financial 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 already addressed it to some extent, but i want to come back and do a little deeper dive, if we could. the question i want to get to and i want to come back to is whether or not you think that virtual currencies including bit coin, fit into our current legal and regulatory framework. and we talked a little bit about this and i explored 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. lowery, if you feel up to taking this one first, that will be fine. >> thank you. so, is virtual currency within the legal existing laws? i can speak, and i know obviously, bit coin was the currency that is part of this discussion today. i can speak within the framework of the secret service investigations in what we see out there. and i think it's important to recognize that within what we see in our investigations, that the online cyber criminals, the high-level international cyber criminals we're talking about have not by and large gravitated to the currency such

as bit coin. again, this is in the confines of what we have dealt with. the eastern european cyb cyber criminals we have developed a specialty in have by and large gravitated towards a centralized digital currency as my colleague discusses earlier, that is based in a locale that may have less regulatory guideline said, less aggressive law enforcement, so that is a distinction i think needs made. is the virtual currency within the existing laws? i believe there are plenty of opportunities for digital currencies to operate within the existing laws and regulations. as far as the secret service investigations are concerned, as long as they fit within the laws and comply with existing fincen guidelines, there would be no violation, no reason for the secret service to look into it. >> all right. ms. raman, would you respond, especially 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? >> starting with that question then, first, i think the department of justice recognized a few years ago that a joint effort was needed. and the fbi set up and led the virtual currency emerging threats working group, which is now the working group that my colleagues here and many other agencies participate in. it's born up to be very fruitful. it's a forum that allows all of the agencies that you would want to be at the table, the treasury department, our law enforcement agencies, even within the department of justice, the fbi, dea, and other agencies within the department of justice's prosecutors, we have u.s. attorneys offices, and two sections of the criminal division, the asset forfeiture and money laundering section and the 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 agencies 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, even in fact last week, there were additional participants invited to join that working group. i think it's an excellent -- >> foreign -- from other countries or from one the 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 very effective, and our ability to prosecute egold, liberty reserve, for example, our substantive criminal statutes such as our drug trafficking statutes and murder statutes, have been effective thus far in being able to charge the administrator of silk road. and our money transmitter statutes which is 18 usc 1960, has also been used to prosecutor liberty reserve and some of its principals for example.

so i do think we 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 upidates to our money laundering statuteses through the crime act and related pieces of legislation, and those changes are ones that we continue to support. money laundering statutes have been on the books for a long time, and they have been effective, but they can be updated. we have proposed over the years several updates that we continue to sboert. support. >> ms. shasky. >> sure, taking the questions in turn. fincen has never opined and still is not opining on whether virtual currency is a real currency or a commodity, as the questions are outside of our purview. we are the anti-money

laundering, counterterrorist financialing regulator for the federal government, so our regulations 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 in protecting our financial system from money laundering and terrorist financial, but also protecting consumers from fraud, collecting taxes, protecting investors, insuring economic stability, all things that are part of our regulatory system, but outside of the purview of fincen so to the extent that this body or others feel that it's appropriate to take those considerations into account with regard to virtual currency, we would look forward to working with them to make sure we're as coordinated as possible in our actions. >> all right, thank you. you all know about the

government accountable office, gao, and one of the -- i guess a lot of people in the country, most people probably have no idea what gao is or what they do, but they're, as we know, a watchdog, a congressional watchdog to make sure we're minding our ps and qs in the federal government and a lot of different ways. the way we run our operations, trying to do it in a cost-effective way. broadly, broad operations. widely diverse operations. every other year, gao comes up with something they call their high-risk list. and 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 designated by or identified by general accountability office to waste money. every now and then, i talk to constituents, we talk about what we're trying to do to reduce the budget deficit. i have people who say, i don't want to pay any more tax said,

but if i'm going to, i don't want you to waste my money. one thing that gao does is identify ways to spend money more effectively. also to collect moneys that are owed to the treasury. more effectively. and it's led the second half of that function i want to talk about. the gao every other year reports to us along with the irs on something called tax count. moneys that are owed. hundreds of billions of dollars owed to the treasury that are not being collected. in some cases, we have a good idea of who owes. i would like to say that number is going down, but unfortunately to my knowledge, it isn't, not yet. but what i want to do with that is background. 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

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. i don't think there is disagreement at all on those points. as it relates to areas -- i just don't think there is use for the laws at the exchange level. know your customer, those kinds of provisions. the greatest challenge, the greatest area we have to grapple with is how do we enforce the enforcement techniques. and the fact that this is a global phenomenon. this is something that was just

issued in march of this year. the guidance that directors just talk about, the financial action task force, their guidance on this issue was just issued this summer, i think in july. my sense is that most of the world is not applying money laundering principles. getting from here to there is really the issue that the four of us would have to grapple with. >> thank you. how do you go about reconciling the consensus? >> i'll take the second part first. i don't know that i heard a lot of disagreement or anything we would generally disagree with from this panel or even really from the first panel. i was heartened by that.

i think that ernie is correct, that as we move forward, an open dialogue is good, as those disagreements do crop up, and they likely will, we can address them quickly, in a safe and sane way. as to where we have agreement, i think what i heard from the other panelists is, there's a real need to create on ramps into the traditional financial system. by creating those onramps, especially here in the united states, you help to protect the system from abuse. the biggest obstacle from that happening today is not from regulation or law enforcement. it's from the ability of businesses in the space to get bank accounts and to be integrated into the banking system. there is currently a chill in the banking system and the banking industry that is preventing businesses from getting just simple checking accounting. there are stories that if you have the word bit coin anywhere

in your nim or documentation, you will immediately be placed in the circular file as it will. i think there's a way to create some leadership within the banking industry, to make sure that these companies are on board, into the traditional system where some of the systems can be redacted. >> there's consensus around the innovation we see that the potential for financial inclusion. there's consensus that many of the regulatory frameworks and tools are sufficient. i think there's consensus that the open nature of the technology it's technology, use and oversite is a positive framework. i think there is some tension ou