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 framingham.gham.

i send examiners out every day to conduct examinations to do transaction testing, money going abroad. so we have the boots on the ground and a local understandint that these companies. then we pair that with the national perspective and knowledge of federal agencies who also interact on an international level.by by leveraging these strengths, i think we do a much better job ah detecting and preventing this de illegal activity. >> i appreciate bothnt those answers. do you have a sense about the importance of this activity being certained in the united states?es? what is it -- what benefits does our economy and environment gain by encouraging or at least not. discouraging the bitcoin from being centered here? >>. >> i think what we gain is our

continued replation as being ths country where into va tors start new businesses. and something we would want to continue. i think the great challenge for the regulators are to encouragew innovation wherever we can and put smart regulation in place that tries to deal with risks, very real risks about which we need to be concerned but mine miezing burden. >>

>> i think we've all got a lot more questions for you, but we understand a vote will be held around 5 sclok. so we want to make sure we get to the second panel. i want to thank you both for your testimony. >> thank you for the opportunity. >> i'll turn to senator merkleyt >> because of the time, i'm going to start introducing as r? you come up,so feel free to tak your seats, quickly. i'll start with paul smoltzer. he's the president of bits. in this role, he led bit's work, in promoting the safety and soundness through best practices and successful strategies for developing secure infrastructures, products and services. second, we have professor sarah jane hughes. she is the university scholar ao

indiana university. for the past 25 years, professor hughes has taught payments law and banking regulation. she's a nationally recognized nn expert on payment systems. public and private methods to detect international money laundering and consumer nt protection and financial privacy. next we have mercedes. she works with privacy and cyber security issues and the use of w marketing, consumer service.ons and we have anthony delipi. hav anthony is the co-founder and an ceo of byte pay. a processing system for bitcoin. mr. galippe foinded byte pay in

201. he has 15 years experience. he was district sales manager au aerotech at industrial devices corporation. thank you for all of you for bringing your expertise to bare on this topic. >> ranking members, kirk and heller and members of the subcommittees.bers of my name is paul spencer and i am the president of bytes, the i financial services round table. attempts to develop digital currencies have existed for decades. as consumers have become more confidentble and computer systems have become more powerful and less expensive, we're seeing digital currency increase. we need to recognize it exists outside financial king and payment systems. in my testimony today, one measure of a currency's successy

is its acceptability. we're seeing retailers accept digital currencies for goods and services. for example, the publishing serv service accepts bitcoin as a form of payment.ederal just last week, the federal election commission indicated it is considering allowing byte coin's use as accepted. digital currencies also allow access where digital currencies do not allow access. digital currencies may also have the ability to provide access ie the under-banked and non-banked. a microfinancing service in kenya recently added a bit-coin. payment for its customers. digital currencies can also hel

individuals in countries with impressive regimes to support causes that they might not otherwise support through their country's traditional payment providers. another interesting aspect related to certain currencies is cryptographic protections. digital currencies do present opportunities to watch, pres including facilitating realtime payments, particularly those involving international partiesc and those involving and th micropayments, possible deeper , cryptographic options and opportunities to serve the under-banked and politically nd oppressed more effectively. while there are opportunities, we also have the recognize the v potential risks.g. first, as noted, significant market risk. without government funding or support, digital currencies are

subject to market moll involve tillty creating to merchants and others who accept as payment. beyond the march, 2013 guidance issue, the digital currency environment incorporates no ronn protections particularly t consumer protections.o for example, also as noted, co within the last two months, there have been multiple reports of currency disappearances from various bitcoin trading f platforms. in none of these cases is it e likely that the owners will recover fig. given the anonimty of the world and the lack of know your customer requirements that apply to traditional financial institutions, using digital currencies, individuals may also be able to donate to illegal organizations that would

otherwise be legitimately be leg banned such as those engaged in terrorist financing. some recent studies as we've as been suggesting suggest it's a haven for illegal activity.r ile we talked about silk road and wd talk about liberty reserve. but those, i think, are probably just the prime examples of the y point that criminals are using broad array of criminal activities. so as we look at the lack of regulatory oversight and the market risk associated with digital currency, there is a en. continuing challenge to overall usage and endorsement. we need to discuss the effectiveness of risk mitigations.

thank you for allowing me to testify and we look forward to . continuing to work with you. >> thank you, professor hughes?s >> ranking members heller and kirk and honorable members of the subcommittees. i am honored to be here with yos today. monitoring the developments and taking a responsible approach ta their regulation reflects their growing presence in domestic and international transactions. recent negative publicity associated with law enforcement actions against silk road and exchange values in china and the czech republic raises policy concer concerns. i have as the chairman said worked in areas that are like this for a long time not as a provider, but as a watcher.wa

and i also wish that my late father could be here today, because he served in world war ii as a kriping to fer for the n united states and was involved in the computing industry in the united states.e i remember being a teenager when he brought home two big briefcases and said it's a computer t. brought and it was. one of the things is that we're seeing in a relatively short od period of time, important path break changes in technology of the characters that senator warner suggested earlier and weo need to be very cautious not to chill those innovation, but we still need to have appropriate legal regimes around them. i think it's appropriate that we take some time and craft with great care in and as flexible a way as possible.ropr particularly with regard to the

remarks of director calvary and commissioner coffee.to the so i had a number of recommendations that responded to the questions that the invitation to appear put forward.on taking them slightly out of order from my prepared testimony, obviously, there has already been some support for the idea of retaining the uppo current division between thert states and the federal government for portions of the role that each do very well. r and i share those views. second, i think it's incredibly important that we enforce our anti-money laundering, anti-terrorism and economic sanctions laws. e as a corollary, i also believe that customers of programs such as bitcoin and other currencies that may develop should get the same federal protections that people get under the privacy act

of 1978, et cetera. fincen has taken important steps for clarifying the application of their authority.k i think we continue to clarifyw particularly so banks and investors don't get cold feet. we have no way of knowing today. what second-stage innovations n that may have completely different roles in our economy. these new technologies may offer us. and we want to be certain you ae don't do anything to take them offline. i would encourage on an interim basis payment systems operators assuming that we all agree that this is a payment system and not something else like commodities or securities to adopt and oulda publicize their own transparent standards of how they will behave. p guarantees for redemption are all important user forms of protections.

notice i said user and not consumer. because businesses who use have many of the same needs as consumers, and we tend to be focused on regulating for consumers. i spent lots of my life lookinge at consumer issues. but i'm equally interested in businesses being protected. i think we need to leave room for depository and nondepository providers in the currency space we don't want a regulatory t wat climate, rather, in which early entrants can freeze out later ones. we'd like to have a lot of innovation in this space. ha i worked at the federal trade c. commission many years ago and id one of the projects i worked on was the rescission of a number of 1940s and 1950s trade lly be regulation rules that had essentially been written by industries for themselves. we'd like not to see that again because they can be very anticompetitive.ti-consu

and if they are anticompetitive, they are very anti-consumer. i'm going to run out of time.thr but i would say that the other thing is don't buy the wild west argument. just because something is new doesn't mean it needs to be ld t regulated with the types of st c activity that it competes. thank you so much for this invitation. i'd be delighted to answer your questions. >> thank you very much, professor. >> chairman merkley, ranking member keller, and members of the subcommittee, i am a partner at ballard spar and i am the head of our privacy and data security group.llm of o my testimony today reflects my personal experience with virtuay currency industry and represents my own opinion. it does not necessarily reflect the opinions of ballard spar or our clients.

thank you for this opportunity to testify. i currently work with a number of clients. one of the things as i have been listening that i feel like it's worth saying is that one of the things that i often say with financial innovation is there's a tendency to say it's completely new. it's so new we have never seen anything like it before. the fact is it is like a lot of things that have happened in the past. so i'm going to go through some of the statements that i have in my testimony. but let's start with the discussion of currency generally in the united states. so the united states actually has a long history of currency. it finally settled down in the 1870s when the supreme court hae a series of opinions called the legal tender cases. and basically, what they said at that time is we're going to stop all of this different stuff with the currencies happening. we're going to say there is a

u.s. currency and the rule is everyone in the u.s. has to accept that currency. you have to accept u.s. currency. it is the currency of the land, et cetera. that's the basis that we're working from. having said that, when we take a look at bitcoin and the lessons that we can learn from byte coin and i want to point to you where we can talk about a bit of their failures.ate wit the first point is that bitcoin was really designed to not integrate within our financial eco-system. it's designed to be its own wih thing and try to break apart the world without working within the practical realities that are -- that we have today. and as a result, financial at w institutions, especially in the united states, view bitcoin and other types of virtual

currencies as being unreliable. it affects their safety and soundness concerns, r so it really is something that,, right now, not much interest in. the next point is that transactions need to be anonymous. there's this sense that becausei it's virtual currency and we'res trying to remake a cash transaction, it has to be anonymous. but if i'm going to take a dollar bill and hand it to you, i have to see you and i know the personal information abouti yo. at least some personal information, what you look like. in the virtual currency world, there is no need for the currency transactions to be anonymous. it can be the other two elements that bitcoin addressed. so i would say in order to address the excesses that we are seeing with virtual currencies,a

where it is being used by s beig criminals and terrorists and iml money launderers today.s we do know that the anonymity part of it, let's let that go. the whole point should be to anm keep that middle man out of it if that's what the virtual currency. we have had lots of people talk about the value that a virtual currency could have. keep the middle man out of it.v. we do have the technology today to make it possible that there g is not a record with personally identifiable information for others to see. s but it is something that is p retained by the two parties involved in the transaction. finally, bitcoin has caused system of its own problems because it has this commodity aspect to it.le and you could design and some of the other virtual currencies out there have been specifically o designed to avoid the boom and s bust cycle that we've heard sigt about today.d

those are the three points, oser really, that we can learn in terms to continue. i'm just going to mention we do need to come to what a defini definition of virtual currency isti. is it a commodity? is it not -- is it a commodity or a security or not? we do need stronger fincen guidance as virtual currency develops.virtual and then, finally, on the er pro consumer protection side, we touched briefly on an unauthorized transactions issued that needs to be addressed and . considered.o take a thank you very much for the opportunity today. and i'm happy to take any questions. >> thank you very much.

>> i appreciate the members for their interest in the commerciae and international trade aspects of digital currencies.ij kal c and more importantly, to create jobs in america and to increasea america's exports. our company, bitpay, was started in may, 2011. we've been operating for two ra years now. during this time, we've acquirec over 12,000 merchants to accept bitcoin using our service. our merchants include small and medium-sized businesses in every state. most online payments are made with credit cards. last year, over 12 million people became victims of identity theft.gs businesses lose over $20 billioo a year due to payment fraud. the banks don't take responsibility. if you're a business, it is your fall that you took a stolen credit card, even if the bank approved it.

the highest fees are paid by the smallest mom and pop businesses. bitcoin is a cheaper, faster and more secure payment system with no discrimination against ainst smaller businesses. at bitpay, our software helps b merchants with their p transactions.ay we need to know who our mer chants are and what they're selling.nd what we only want the good actors using our service. bitpay follows all services to prevent suspicious activity. our strict rules have earned the reputation as a leader and well-respected player in the payment space. compared to credit cards, byte r

card can handle 20,000 transactions per second. so even though it's very small,i bitcoin has invented something pretty amazing. with bitcoin, it is position to transport remotely. that has never exist before. and the possibilities of this interesting, worldwide th settlement are interesting.. it can handle individual accounts with a full chain of custody every time an asset is transferred from one party to another. if you want to energize the housing market, think of by thee bitcoin.co the biggest up front cost for d consumers trying to buy a hem today are the closing costs. high fees for deeds, titles, stamps and other redundant stta tasks.sks. byte coin can replace thousands of dollars in closing costs with a single transaction that costs five cents.ve cen

bitcoin does have risks. criminals use cell phones, e-mail, dollars and banks. many businesses like bitpay offering innovative services share the goals to protect consumers from fraud and keep the criminals away from our businesses. f guidance from the irs, treasury, justice and sec all establish s, that they're legal with anti-money laundering regulations. in the early '90s when the internet was in its infancy, where would social media and other free applications of the internet be today if in the if '90s, we taxed internet access as if it was a telecon. in ' 5 the science lifted e commerce and immediately companies like amazon and ebay were born. americans will benefit from a wait and see approach to bitcoin. bitcoin is a technology with tremendous cost savings for

businesses and consumers. bitcoin is a more secure, faster and more affordable option for transferring funds. if america is the leader in byte coin technology, america will create more jobs and more exports. byte co in conclusion, today, bitcoin is in its infancy. if we look 10-20 years in the future, we will see many companies built upon bitcoin technology. i commend the committee for realizing and recognizing the real, practical uses for virtual currency and thank you for the opportunity to speak today. >> thank you very much. we're going to jump right into questions.ou i'm going to ask four minutes to be on the clock. i'm going to take my four goingo minutes now and i have three questions, so i'm going to try o to move them quickly and see if i can get through all of them. first, what is your transaction fee? wha >> so our transaction fee when t

we first started was 1%. we realized very quickly that our marginal cost to do a transaction is low. so we've actually switched over to a software as a service pricing model. different features and different levels of service. mer chans pay one monthly fee.y >> so it likes to accept bitcoins because it it has a tenth of a percent transaction fee. >> possibly. you could get something that low. >> that's fascinating. thank you. professor hughes, i recently read the book "the wolf of wall street." i think that's coming out as a movie soon.bu br but this broker makes a lot of money and, at one point, he has this is a true story, he has his wife's hand strapping money ands taking it to switzerland.tr are byte coin wallets going to

replace swiss bank accounts? >> i don't know the answer to that question.swer to but i'd be delighted to speculate about it for a second. so there are two ways that currently, you could store -- d you could store anything you want, including bitcoins right now, on a private wallet. the trick is it would be harder to transact business that way. most people who do it use exchanges. but there are so many ways in a which one can store value which could have included in the past putting it on value cards and not even needing to do that. so the answer is yes, technically, you can. and yes, technically, you could be. i think that's one of the cl

reasons why rigorous and clear guidelines for how our anti-money laundering and pliedo economic sanction regimes are applied to virtual currencies.u not just byte coins, but those that may come in the future are very important to us. we really don't want to facilitate hiding money. and we do want to be very careful in which the governments are not reliable or the bankingt system is not like ours. >> thank you. and i'll follow up with some questions about the electronic i transfer act. but i want to use my last minuts to get to this question. m mr. gallipe is talking about , these very low transaction fees which will make many of my mer chants in oregon, their eyes light up.

as we think about this, not byta coin itself, because we have a n limited number of bitcoins, but the con september, in general, poses some interesting models that could significantly change our credit card system, our bank deposit system, our debit u giv system. in your role with the financial? services world, can you give us a little insight on kind of the current thinking of those challenges?, >> sure.. and i actually like the way yout characterized it. when i think about byte coin, we tend to use it as a generic term.king but, in reality, at least for et me, it really is three things. it's a currency, potentially, or

security. it is, secondarily, the way we a use it, a depository system. and third, it is a payment system. we can make it more available on the unbanked and in some cases to people who might not y otherwise be able to use a payment system. but having said that, without l the consumer protections that we think about in traditional le systems, there are a lot of risks to those users as well. and i if could go back actually to answer your question that you posed to miss hughes as well, i'm not sure you even have to