primary money laundering concert and take steps to terminate its access to the u.s. financial system. we stand ready to take additional regulatory actions a necessary to stop other abuses.s as the financial intelligence unit for the united states, fincen must stay current on how, money is being laundered in the united states so that we can share this expertiseow with ourn domestic and foreign partners ri and serve ass the cornerstone o this country's amlcft regime. we are meeting in obligation in the virtual currency space as we continue to deliver cutting edge analytical products to inform the actions of our many r many partners.as m the administration has made appropriate oversight of the ove virtual currency industry a priority and fincen is very encouraged by the progress we have made thus far. thank you for inviting me to testify before you today. i would be happy to answer any questions you may have. >> thank you so much. mr. cotney. >> did you.merkle good afternoon, chairman warner and merkley, ranking members kirk and heller, members of the

submit. my name is david cotney and i serves t as the commissioner of banks for the commonwealth of massachusetts. it is my pleasure to testify before you today on be-half behalf of the conference of ou state supervisor.hold i thank you forin holding this n hearing today to address the risks and benefits of virtual currency. theri risks of virtual currency include consumer protection, payment systems, national ity, m security, money laundering, and other illicit activities. the potential benefits are also differ.fits are speed and efficiency, lower transaction costs, and providin an outlet for the unbanked and underbanked. with these evolving payment technologies states are exploring the connection between existing money transmitter regulation and virtual currencies. state regulators have long supervised money transmitters to protect consumers and preserve national security and lawnete

enforcement interests. state regulators are talking with industry and other regulators about evolving methods of moving funds. this includes virtual currencies, prepaid cards, vir mobile services, andtu peer to pier transactions. state regulators believe that ae open dialogue among regulatory, industry, and other stakeholders is key to accomplishing the goal of determining the appropriate level of oversight and supervision. emerging payment technologies e and alternative currencies are at their core aboutar the movem electronic movement of other people's money. this is not unlike the activities of money transmitters, for which the states have an established structure for regulation and oversight. licensing is the foundation of supervision, ensuring businesses in a position of trust are legitimate and accountable. an entity seeking a state license must submit information

to verify their credentials typically including criminal background checks, business statements and surety bonds. state regulators examine money transmitters on an ongoing basis ensuring that a company does noc lose its customers' money and complies with consumer protection laws. further, states actively examine for bank secrecy act and oordint anti-money laundering requirements coordinating with fincen and the irs. in addition to licensing and examinations, enforcing is a key part of state supervision. after working with the brazilian central bank and two private h banks in brazil my division earlier this year found evidencr of forgery and ongoing illegal conduct by a licensed money transmitter. relying on existing state to state coordination processes, 37 states were able to ensure that

all customers were made hole after we shut down the company.e cooperation has been a hallmark of state supervision, manifested in a uniform licensing system for all states. originally developed by the states as a mortgage licensing platform and codified into federal law by the safe act of 2008, the nationwide multistate licensing system has become an integral part of state supervision for a variety of non-bank financial services providers. massachusetts and 14 other states currently use nmls as the wliensing platform for money inh transmitters and 14 more will start using the system in the next year. to improve the state asability to use the nmls for other licenses like money transmitters i want to note csbs's support for s 947, which enhances the safe ablths protection for

confidential information. to address the rapidly changing technology and payments landscape csbs continues to explore policy options for digital issues facing regulators. we look forward to working with congress and policy makers to continue a collaborative approach to all innovative financial products and services, ensuring individuals and economies are well served. thank you. and i look forward to answering any questions you may have. >> thank you both for your testimony. i will put five minutes on the clock and go back and forth. i'll pick up on something his o senator heller did if his opening statement, as i try to wrap my head around this.he we have to strike the right balance since we're talking about here no governmental enti entity. we're talking about the anonymity that is allowed to take place, the ability to set up these exchanges with very little oversight.

if we lay too much regulatory burden we could simply chase che these exchanges offshore and ant still leave americans unprotected. so i guess my first question for both of the witnesses is we're b talking about this as a currency but have we really determined even that? there are some who say this may simply be an internet protocol. or is this a security? have we thought through -- or is it a currency? and from fincen and also david, if you want to make a comment as well, has fincen consulted at all with the s.e.c. or the cftc as you've started to develop your guidance? and then mr. cotney have you answered the question as well? is there any kind of international convention as you talked with the brazilians, how they're categorizing this development?

>> so thank you, senator. i'll attempt to take those questions in turn.se so first on the issue ofna is ia currency? fincen is the regulator for anti-money laundering and counterterrorist finance ever purposes. we've never opined and still are not opining as to whether virtual currency is a real currency, a commodity, as those questions are really outside our purview. what we do recognize is that it exists and that it's operating and value is being transferred through the u.s. financial system and as such we need to th protect that financial systeatm from illicit actors. so we were able to cover it under our pre-existing definitions and regulations, which include the concept of other value that substitutes for currency. so we did not need to take a no position. but in terms ofpo have we consulted with other regulatory bodies here, at least federally,

and the answer is we have. again, as a part of our rulemaking and our guidance on our narrow lane and issue, we spoke with fbi, the secret e, service, d.e.a., ice, fdic, occ irs, the federal reserve, ncua -- and -- ticate >> andd they all this sophisticated opinions? >> now, that i'll let them answer. but we did consult with -- including cfpb from the consumer fraud perspective. but you know, we've consulted with all of them as we can. this is a developing and innovative arena. we were lucky to be able to cover it under our pre-existingi ralss. as we talk to our counterparts abroad which was the last portion of your question there is great interest in federal s regulators abroad as they try ts get into what is this and what does this mean p.

our german counterparts like usl had fairly flexible regulations in place that they could fit this within pre-existing regulations. so they've done so. and other countries thus far have been asking us to see whats we're doing and why. and finally i understand the financial action task force, ps which is the aml standard-setting body for the p international community plans to take up this topic. >> mr. cotney? >> in answer to your first question about the level of regulation, that's exactly what the states are trying to do by working with our colleagues, ese both state and federal do w regulators, law enforcement, working with industry, to make sure we have the appropriate level of oversight and supervision and that we have tho tools to detect and prevent ueso illegal activity. in terms of your second questio on international regimes i think it's important to note that many of these evolving alternative a

payment systems are in response as we've r demand and seen in europe and as we've see in canada and elsewhere there are -- there is a big demand fon more real-time payments at lower transaction costs, including thi transmission of money from one country to the next. there are many members of europe and canada that have embarked on efforts to speed the payment systems. ours has not really evolved substantially in the last 40 years. so i think now is the time to be talking about this subject. >> let me turn this to senator kirk. i know he'll press on some of p the potential for abuse. but i -- you know, i may want to get back to some of the folks from treasury at some point because i do think there could at least be the potential of serious implications about li monetary policy. we have taken -- even though with congress's recent actions

sometimes we seem to be jeopardizing america's status as the reserve currency with some of our i think mistakes we've made. but if you think a little broadly this could have huge, huge implications.d to i'm looking forward to pursuing this. senator kirk. >> thank you, mr. chairman. i would just ask jennifer a quick question. have we seen any recognized terrorist group ever express er interest or actually use bitcoin for its operations?opera >> so we've certainly recognized the possibility and the vulnerability there. there's nothing in terms of information in the public domain about a terrorist organization expressing such interest or using it. but we would always be more than happy to have any outside briefings to discuss that topic further. >> thank you. over to you, mr. chairman. >> senator merkley? >> thank you very much. i wanted to ask a couple things

related to different forms of crimes that -- quote crimes thaa have occurred with bitcoins. the first thing i want to ask i there is a centralized public ledger that's encrypted. so the anonymity is only in ulyn terms of -- you're not truly anonymous. there is an encrypted version of who owns what. so one concern about the, if you will, the reliability of the currency is whether that encryption can actually be broken. so i want to ask that question. there are some very powerful code breakers in the world. and we certainly have cussio discussions about our own u.s. capability to break codes quite often up here. but the second is we've had this series of reported crimes. one was a bitcoin savings and trust which ran a pyramid scheme in bitcoins. we also had the hacking of a

bitcoin exchange called bit floor. and as it was reported, 24,000 bitcoins were stolen.2 and we had instawallet, a wallet provider that was hacked and ed. they lost 35,000 bitcoins. these are not small dollar items given the value of the individual coins. but maybe to paint a little bit of a picture for us, how does this all work? if there is a public ledger that is keeping track of who owns what, then how does one actually steal a bitcoin? >> all right. so in terms of breaking the code and the really powerful cryptologists that are out eally there, i just don't know the answer to that. i don't know if there is anyone out there that can break the code. it has certainly been represented to us at fincen that it's as strong as encryption as

exists out there. so it seems quite safe from that standpoint. >> this is primeit number trap door cryptology? >> to tell you the truth i don't know the type of cryptology that's used. but i'd be happy to take that back and get you an answer. in terms of some of the types of schemes you mentioned, whether w it'she a pyramid scheme or hacking, probably the most relevant concept that comes up there is the airrevokability of the transactions with bitcoins.. the idea that when i take a bitcoin and pay you with that bitcoin there's no way for me to get that money so to speak, or that bitcoin back unless you t choose to give it to me and choose to tell me who you are. so that can be a great tool for fraudsters in the pyramid scheme sense or hackers who hack into your computer and are able to get your code that is your half

of the bitcoin, so to speak. as i understand it, there's a public key and a private key to bitcoin. i think of the public key myselh almost like thee routing number on my bank account and i give that number to others who want o to send me money. us what i'm not going to give you is the pin that i use to access the atm in my account. and the private key is like that pin. so typically the person holds o' to the pin. or the private key. it's only when you put the h public and private key together you that now have some bitcoin that you can actually do something with.ur so if a hacker gets your private key, they're able to take your a bitcoin and you can't get it back. >> they can modify essentially the public ledger and then the public ledger becomes de facto record of ownership? >> that's exactly right >> so in these -- well, okay. let's see if mr. cotney has any comments on this. >> well, you bring up an

interesting case regarding consumer protections because as the director noted these transactions are irreversible. and as a regulator charged withr consumer protection that's what we are interested in every day. the interests of consumers to make sure that their money gets from point a to point b and that there is someone reliable standing behind that transaction. and that's what we're interested in. >> in a few seconds -- i'll just say it's fascinating that the system, which is not, if you j will, continuously tended but is in this public space, has been r robust enough to hold up for this long without a major flaw that brought entire thing down. it certainly has attracted the attention of innumerable innu programmers around the world asking, can we create a similar?

system?day. so thus we are here today.st thank you. >> and i would just echo, basedl upon other commodities where there's a physical presence, you can somehow trace it back.it bac the fact we're talking about something in the virtual world really has remacable ramifications. senator heller. >> thank you, chairman. i want to thank our witnesses for being here today. we're trying to grapple with this, trying to figure this out, and we have more questions than answers. so hopefully you can answer some of these questions. but miss calvery. i want to know when did fincen start to take notice of these bitcoins and other virtual currencies? >> back>> in probably 2007 with the egold case. was b it was back then that we put out i believe it was an administrative ruling talking about e-gold which was a commodity-backed virtual comm currency. and even back then put out our view that it fell under the money transmitting regulations

issued by fincen. so we've been keeping up with it since that time. >> do you have any idea what percentage of the current virtual currency users and >> perhaps businesses that are participating in illegal activities? >> we would have no way to knowh that. what we do knowat is if you taka currency -- virtual currency like liberty reserve, that was an instance where we believe it was set up for the purpose of laundering money and the vast majority of transactions using liberty reserve were to elieve facilitate criminal activity of all types. it's what the department of justice alleged. it's what we alleged in our 311 action. in regard to bitcoin, it seems there's a lot of legitimate users out there and like any other payment system it can be exploited by illicit actors and we have seen it exploited by st illicit actors.gard t at least with regard to the allegations mid-by the th department of justice in the silk road matter alleging that

it was used, bitcoin was used to facilitate hundreds of millions of dollars on money laundering. >> on that silk road the fbi seized about 144,000 bitcoins.er what does the federal governmens do with those? >> so luckily, that's not an issue we'll have to deal with at fincen, but i can tell you from my past job as the head of the forfeiture program that they will be thinking about whether they can sell those assets. >> so they still have them? >> i would have to defer to my colleagues at the department of justice. >> i will talk, mr. cotn echl y, a little bit about volatility. we know last week it was trading somewhere around $400, went up to around i think 900 yesterday and finally settled at 600. why the volatility? >> well, i think that there's a great interest in this

particular space. there is, as i mentioned, a demand for real-time payments t andhe lower transaction costs. and one of the means today thatg we're looking at is through virtual currency. certainly at the state level we have a regulatory regime in place. as i mentioned, we are a consumer protection regulator. we're not an investment protection regulator. like the s.e.c. like the states. want to we want to make sure those consumers are protected. and just like any investment, someone who's looking at making an investment, whether it's in virtual currency or a stock or a bond investment, they need to do their due diligence. >> do you follow anything that goes on in china and europe? it's my understanding they're increasing in volume in other countries. is is there any reason for this? would you have any knowledge? >> i don't have any direct knowledge, sir, no.kn

>> jennifer? >> myow understanding is in som countries there may be an interest in bitcoin because it can -- where you have a home sm currency considered volatile itself, bit coin mightw behe considered a better place store value.ter and in other places it's also considered a good medium for edo transacting or transferring value. so if there's not a good internal system for transferring value efficiently, it might be used for that purpose as well. >> thank you. thank you, mr. chairman. >> in the category of shameless plugs, congratulations on n holding a hearing on something that could be a problem later on and is not a crisis right now. it's such a rare moment. seriously the committee is starting to weigh in on this and i'm going to take this conversation away from the illegal and to the practical > i

realities of what we're dealingt with here. away f as this becomes a common method of transmitting goods and d services, replacing a dollar bill or replacing a credit card which we knowol are long standi methods. there are a tremendous number of challenges by not categorizing this. i noticed both of you especially you jennifer have deferred that. thank goodness we didn't have to achieve that result because we had enough broad authority that allowed us to pursue this. but let's take, for example, a bit coin being used by a pie.a e how do you ring that up on the cash register? what's the sales tax on that?he how do you record it it for income tax purposes?ncome how do you transmit it for purposes of payroll taxes? how do you deal with this when it becomes more commonly accepted method of transmission.

and so what i'm saying is it's not just nefarious groups.it's n terrorists and illegal operations that have a potentiar of reallyti skirting on the edg. it is, in fact, the more cepted commonly accepted it is and the more available it becomes the more difficult it is for regulaf kind of regulatory activities to be carried out. regula especially tax activities. i would like maybe your thinking on whether categorizing a bit coin achieves a result so we can think about the regulatory regime or whether we need to create a whole new category and think about this differently. either one of you can answer that question.ei >> sure. from an anti-money laundering financing prospective, from thar limited perspective, it's not as important.

we have similar regulations across different parts of the industry. the idea that they are going to have anti-money laundering controls in place, they are going to provide reports on suspicious activity, regardless of whether it's a commodity or a currency or a security.rency or those basic protections will oni follow howeverll we define it. from our perspective, it's not as important. i take your point. this country and all countries are going to have an interest in protecting consumers and preking investors and thinking about monetary policy and thinking about taxing all those things and reasons why we have regulatory and statutory schemes in every country around the world covering these issues.e cn if bitcoin takes off and become a serious part of the financial system, then those issues will need to be brought to the forefront. i think there is still a

question in that we can't assume that bitcoin is going it become the major player that enthusiasts think it will. i did hear some venture capitalists speak recently and saw this as a binary investment. this is either going to. take of and be the next great thing. it's going to be the cell phone of 20 years ago or it's going to be a nice experiment that completely fails. so i thinkse we're waiting to s. in the meantime, we're trying tc make sure we protect the financial system from elicit actors. >>e you pointed out between illegal activity. illegal activity, and we can't be distracted by this, is illegal no matter what the means. whether it's paid for by cash, paid for by ach, or through now> virtual currency opinion on the legal side, those actors want to

play by the rules will work through agencies like mine, played by the rules, and that's really the importance of a s. comprehensive set of regulations both on the state and federal rs level. >> just to follow up on a ons. comprehensive set of regulations. you tell me i'm now the state tax commissioner and someone a paid with a bitcoin and i find out you have expertise. just heard this is trading for $700. is that whatad the pie is worth would you come down and be my expert witness when i collect sales tax on $700? >> unfortunately i'm not the tax commissioners. >> i used to be. >> this is going to be a big challenge. we can focus on the illegal part of this, but to the extent that it becomes recognized as a valid method in the perfectly legitimate world of transferring

goods and services, this is going to become an increasing b. problem and the more the opportunity presents itself to b evade, not illegally, but to ut avoid taxation to say that actually was speculation. spec are you going to pay capital gains on it? it's an interesting challenge. u i think we need to be thinking about these issues if, in fact, we see this becoming a way to transmit goods and services. that's more regularly accept ed. >> i think you raised a great point in the sense that many are focusing on nefarious schemes. they want to be off the grid. >> thank you for being here. i posted earlier this hearing r topic and askedth kansasens in

particular to comment on what id should know, what would be some suggestions for questions that they might have. and interesting in just thew lt few hours, 125 responses, most of them very long and thoughtful. let me explore one of the topics that was raised in a sense that's regulatory. is there an effort to make certain that the regulations are uniform globally in the absence of that is there not a risk of the activity is simply taken offshore if we're the country r that is the regulator and is there an economic consequence te that happening? what's the downside to our country and its economy and the opportunities for innovation if the united states is the heavy regulator and other countries are not.

>> maybe we'll ache that pr a domestic perspective and the ke international. the united states we have the e states and we have the federal regulation. we do, i think, a fairly good job of the states working together to try to find common n approaches whenever possible and then to work with the states on the federal approach and try to get as much common ground there as we can. so we have as much consistency as we can at least within the co united states. then we go externally. externally from the money laundering and counterterrorist finance perspective, the task na forcel is the international standard setting body that attempts to keep consistency in standards across the globe. it's a body that has carrots and sticks and has been effective in getting countries to put regulations in place. but all that being said, i thin ifac businesses are going to lee

the united states based on perceived or real regulatory burden, i think they are going to find the game short lived because as mentioned, countries are going to have an interest in figuring out the tax implications and monetary policies. it's not just the united statesi that has interests in protectini investo investors. so the regulation is going to catch up. and i think there are plentyin good reasons to bring innovative business and keep innovative business in the united states. >> i think it's very important to leverage the strengths of each of us. the state regulators and the federal agencies. at the local level, as a state regulator, i know, for example, that there's a large cambodian e population. i know of loel, massachusetts.ca i know there's a large brazilia population in