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 o move money to switzerland in this case, because to me, the anonymity that is associated with users and their wallets would suggest, i really don't need to try to cover who owns the money.se, >> thank you.

i'm out of time. so we're going to pass this on to our ranking member. >> thank you.we i'd love to be at your home as e you're explaining to your wife how your virtual company gave you a virtual paycheck, using virtual money, but that being ry the case, i assume your business wants more consumers than investors. >> we are just a merchandise acquirer. we only facilitate payments for the merchants. we're strictly focusing on business acception and adoption of bit coin.t would >> i'm just wondering what woulr happen if someone like senator warner cornered the market on vi virtual coins. how would that impact the consumer marketplace?we l >> it's interesting. we look at bit coin being traded in open markets today.very and china is getting very aggressive in the open market. if we want america to remain a w leader in technology and in bit coin, you have to look at the e exchanges because that's where t all the liquidity is. the right now the number one umber exchange for bit coin is in coii china, number two japan.china, three, four, and five are in europe. america is not a leader in the t

exchange of bit coins.. >> you talked about vetting these businesses. what is that? what do you have to do? >> it's modelled around the credit card system. what does it take to get a tak merchant account with a credit card processor?e a we know to know you're a legitimate business, who you are, and we need to know what ft you're selling.to depending on the different ven levels of volume that you want n to process, we'll go even deepe. into getting background checks and that kind of thing. >> miss tunstall, if virtual currencies become more popular, what keeps a bank from startinga their own virtual currency?, lie >> absolutely nothing, except that, like i said, they do haven to maintain their safety and nd soundness concerns and a u.s. bank needs to be very focused on u.s. money.ey. but there's nothing to stop a financial institution from getting into virtual currency e themselves. are

>> are you familiar with other virtual currency? >> i'm sorry?cy? >> are you familiar with other virtual currency besides bitre u coins? >> i am, yes. can >> can you share some knowledge> >> sure, there are a number of virtual currencies that are designed for niche purposes, ine that are designed for online video gaming type situations, so you can play with your partnersd across in china and japan and e. wherever. thos so there are a number of those f types of virtual currencies. there are also a number of virtual currencies that are l cr based on bit coin and try to fix some of the issues that i to detailed in my testimony here today. and then there's also a virtual currency called ripple that has started very differently from bit coin and started with the premise we are operating an

existing financial eco-system and we need to comply with the anti-money laundering laws thata are in place. >> thank you.the ligh >> i'm going to try to go through the lightning round as well.well first of all, i don't want to overuse telecom analogy, but just as we saw in developing cunning in many ways, as they develop telecom networks to go s to wireless, wouldn't those regimes with huge currency restrictions, are enormously underbanked, couldn't you actually see initially the development of these virtual currencies actually quicker ando faster in the underdeveloped ldo world than in the developed world? quick responses because i have two or three more questions. >> my quick response is that on of the reasons that virtual esps currencies in the united states have proliferated and succeeded is because of the strength of a

your financial systems security. so for these other countries where there's not that kind of e infrastructure, it is unlikely p to be able to support the growth of a virtual currency as you're discussing. of >> other views? sys similar? as >> i agree. >> yeah, i think the example of kenya say great one.of kenya is a country where more m people have access to smart to phones than to running water. and the telecom company stepped up and saw there was a need thaw the existing structure was not meeting the needs of the peoplef they built a mobile payment system in kenya, it's done by people sending text messages on their cellphone. >> i want to make an editorial n comment. we got to get the balance right. we want to keep it in america opinion but as a former governor, the revenue leakage from internet based transactionr for states that depend upon a et

sales tax is an enormous es challenge. so we've got to get this balancl right, and it is -- that is one of our challenges going forward. i guess i want to press as wellw what senator haller's comments.. miss tunstall you commented about some competing virtual currencies, when second life was going to be the rage and everyone would have an avatar. it seems that the bitcoin currency that my understanding has now got about 90% of the folks who are not users, but art actually investors rather than v users. you know, at some point, do you think that one of these currencies will emerge, and bitcoin seem to be going down that path? down or do you think there will be the threat of other currencies and particularly your comments

about one trying to fit within the legal regime?n >> so i think it's more -- -- unless bitcoin makes some big changes that allow the silk roae type situation to stop from pe happening, i don't see how it id will become commercially viable in the united states.will and you mentioned second life. i'd like to mention that.d liket actually in second life, i in s looked at for a client, they wanted to brand the banks in second life and be the bank in i second life. as i looked at it, the way thatw the law works, even if it's in a virtual world, if the bank is va doing the transactions, the u.s. banking laws apply.tran that was a very interesting result. what's fascinating about virtual currency actually is that it ha found a way to fall through wha our infrastructure is right now for financial regulation, which is why we do need to have some kind of framework put around it.

>> i would just -- my time's it. going to run out, i would simply, say, though, that because of some of the illicit activities and perhaps because of the interest of the folks who want to do this off the grid or not be controlled by a central banking system, or, you know, u we've got to get this balance -- we've got to sort through this right. i'd also make mention that mr. chairman, as a politician who had a second life avatar that got me attention for a nano ] second. [ laughter ] >> mr. chairman, thank you. take this a different directionf use my time to tell a story feoy about when i used to regulate truth in advertising and i couldn't get my advertisers to tell the truth, so i told them they could tell whatever they ul wanted in an ad, but i was going

to take out a full page ad next to them saying, i don't regulatu them, buyer beware.and we and we're really at that point,a because the more we legitimize e this in regulation, the more we commercial it.is how do we strike that balance, because to me, if we get we involved in regulation, we bale legitimize it as a true opportunity. as >> i think there's a lot to what you say, senator, that if we lt regulate, we do legitimize.r, ta some of today's witnesses have talked about trust and trust is a very important factor ses have particularly with financial products and services. and so there is that risk. there is a bone in my body that says, i think that's a risk worth taking. and i think it's particularly worth taking as we think of

these virtual currencies as having functions that are a lot like credit cards or debit cards in this respects. >> wouldn't you agree that right now, without any form of ry intervention, without legitimizing it, every buyer oud there has to be careful and that has restricted or limited or anu tapped down the willingness of people to participate? and you really are, it's kind of ironic because we want all the o free enterprise system, but the regulatory scheme and saying i've adapted to that, buys you s the opportunity to participate e in the market in a way that the other financial institutions participate? >> i couldn't agree more.ight no i think in my prepared statement, i make the observation that right now it th looks like all the risk fall on the users. >> and what's wrong with that?

>> that's why maybe we're not it seeing the growth there would b if there was a bigger structuret around it and greater clarity in that structure, but if people want to do their business that way, they're -- >> we just tell them, you go ahead and do your business that way, but we aren't responsible s and we'll deal with sales tax t consequences, work through thos, issues in terms of value to st value transfer, people can bartter and you still can do ann analysis, you can do an analysis of what in fact is the capital gains or the short-term or long-term.gains o capital gains and just try and adapt on case by case basis without legitimizing.ase i'm interested in your point of you, miss tunstall.ted in >> so my perspective on that is, it's an analogy to social media where a number of companies have decided to stick their head in the sand and say, we're not n going to engage in social media.