i'm pleased to co-chair this hearing on the present and future impact of virtual currency. my friend senator merkel and i appreciate the work senator heller has done and senator kirk will be joining us as well. we're going to do this a little different because it's a joint subcommittee hearing i will chair the first panel and the senator will chair the second. the uses of virtual currencies have proliferated in recent years. my hope for this hearing is to educate the senate members and others and start the education of the public about virtual currencies, including the potential and drawbacks. i also hope to explore how regulators are keeping up with this technological innovation to

protect consumers. i've got a full statement here but i actually have to acknowledge that i've been following this development of bit coins for the last two months. i would think i'm only starting to wrap my head around the potential upside, downside, regulatory issues, monetary policy issues, taxation issues, consumer protection issues that this innovation represents. rather than going through my whole thing, i'll point out to the witnesses that back in 1982 i had the opportunity to get engaged in a new industry at that point that was on the

cutting edge of an industry called cyber telephones. all of the experts at that point thought it would take the world 30 years to develop out a wireless network. and at the end of that five years, about 30% of americans would use them. luckily for me the experts were wrong. and now these devices transform our lives. getting it right from all the regulatory, financial, consumer points around virtual currencies, bitcoin in particular, could pose as great if not greater challenge and opportunity. and what my hope is this will be the beginnings of an effort to come in with open minds to hear about the potential but to also hear about the important ramifications around monetary

policy, around taxation. think about the notion with this 21 million bit coins that could be created. as we see acceptance, the fec has allowed political contributions to be made in bit coins. this is a development that's already in process. but if this becomes a standard currency or tool, it could radically and dramatically transform the role of central banks, monetary policy. it could transform -- it has enormous security concerns. so i am very, very interested about this hearing as a member of the intelligence committee. i'm concerned as well about the potential abuse of this development. but i think as we see now about

somewhere between 10 to 12 million bit coins that have been mined and just the reactions yesterday from senator carper's hearing where i believe bit coins spiked at over $700 per unit, we're talking about a currency that is already been monetiz monetized. we as policymakers will have to catch up. i'm very much looking forward to this. i appreciate my colleague, particularly the senator's interest in this. with that i'll turn it to senator heller, back and forth with a couple of opening statements and i want to get to introducing the witnesses. >> i want to thank you for holding this subcommittee. i want to thank ranking member kirk and i'm happy we're having this joint committee. i think we need to have more of these. with that i'll keep my statement relatively brief. today we're here to learn about virtual currencies and crypto

currencies. the most popular, of course, which it business coin. generations in nevada mined for gold and silver and copper, today they can mine for virtual currencies on their computer. while these virtual currencies are not widely accepted, the number of users continue to grow. we must recognize these decentralized digital payment systems. today i look forward to learning about the long-term viability and practicality of virtual currencies. i also want to learn how various regulators react with virtual currencies and which by their design are meant to be independent of any government. i will end with this note. internet is new frontier of innovation. i believe members of congress should recognize we often don't know what these new advancement will develop into. while we must ensure proper safeguards, it's my hope through hearings like this we can help

maintain an environment that continues to promote new financial technologies and innovative growth. thank you again to my colleagues. i look forward to hearing all the testimony from my witnesses. thank you. >> senator. >> thank you. it's a pleasure to co-chair this gathering. i see by the full room the level of interest and enthusiasm in this topic. certainly this is a new technological strategy that has a tremendous number of implications. the wave of innovation reaching in the world of currency and money transmission. we've all heard about exciting developments such as mobile developments and companies, classic banking system payments. this generation of technology which we're talking about today takes things to a whole new level. with the creation of virtual currencies like bitcoin and more recently ripple, we're actually seeing payments trans acted entirely with trust. open source code and public

transaction ledger listing every transaction virtual currencies are truly a completely different animal. some of the ways the last decade's innovation in silicon valley and silicon forest improved lives. i had to throw silicon forest in there because that's in oregon, developments in virtual currency have real potential to provide value to american citizens and businesses. lower transaction costs, more secure money transmission. these are significant qualities at the same time using this space unwatched and regulated will ensure pitfalls for users and law enforcement alike. we've had recent news about illicit activities, narcotics money laundering, rapid fluctuations in the market for bit coins. we have questions about consumer questions. there's certainly, therefore, a lot of issues about whether virtual currencies are ready for prime time. today's hearings will explore the current and future state of virtual currency, especially how

it affects core services and businesses to make payments whereas a potential for innovation opportunity and where are the gaffes and weaknesses along the way. i want to note a recent article, portland businesses enter the world of digital currency. back in 2009 greg abbott, the owner of whiffy's fried pies was hanging out with tech enthusiasts by his food cart. he was discussing bitcoin. one of the folks hanging out, early investor offered $1,000 bit coins for one of his hand pies. he says i didn't say no. i got distracted and the individual walked off. that was a $250,000 mistake. silly me. based on yesterday's value that's a $700,000 mistake. that certainly would have been the most expensive pie in the

history of human kind. this is absolutely fascinating. by the way, he did proceed to start accepting bit coins as a number of portland facilities have done using mobile app that converts from bitcoin to dollar and back and forth based on the most recent exchange rate. this is a functional, viable technology at this very moment. so with that, senator kirk. >> thank you. thank you for bringing us together on this bitcoin effort. i would say i've been worried about bitcoin some, because it's so complicated it could facilitate illegal activities or terrorist activities. >> thank you, senator kirk. i think that's obviously one of the focuses on the first panel. lets get to the witnesses, the real experts. first panel, just mentioned,

will focus on the governmental side. the second panel will focus from advocates. it will be an interesting afternoon. we have miss jennifer shasky calvery. fin scecen. she managed a justice department program responsible for annual forfeiture of more than $1.5 billion in criminal assets in related programs to ensure those assets returned to victims and reinvested in law enforcement. she has also testified before congress on a wide range of issues including trans national organized crime, state, business incorporation practices. will probably break new boundaries as well. welcome.

>> mr. david cotton, commissioner of banks for the commonwealth of massachusetts. he has served in that position since november 2010 seeing supervision of 2,000 banks and credit unions with assets in excess of $325 billion. mr. cotney is an active contributor to consumer protection efforts both in massachusetts and nationally. in 2013 he was elected as vice chairman of the board of directors of the conference of state bank supervisors on whose behalf he testifies here today. welcome mr. cotney. miss shasky, cavelry. >> i'm director of treasury p crime enforcement or fincen. i'm here to discuss the work doing at fincen for illicit actors to exploit u.s. financial system as technological advances

such as u.s. currency create new ways to move money. recognizing the potential for abuse ofer merging new payment methods and understanding that the antimony laundering protections must keep pace with these advancements fincen began working with our partners several years ago to study the issue. here is what we learned. illicit actors might decide to use virtual currency for many of the same reasons as legitimate users but also more nefarious ones. specifically an illicit actor may choose to use virtual currency because it provides anonymity, is easy to navigate, may have low fees, accessible global with an internet connection, does not typically have transaction limits, generally secure and provides a loop holy from regulatory safeguards in most countries around the world. indeed the idea that illicit actors might exploit vulnerabilities of virtual money to launder money is not

theoretical. liberty reserve engaged in a $6 billion money laundering operation. just recently, department of justice alleged silk road, largest contraband marketplace on the internet were required to pay in bit coins to avoid detection and facilitate laundering hundreds of make also of dollars. that being said, put it in perspective. recorded bitcoin transactions worth approximately $8 billion last year. by way of comparison in 2012 bank of america alone made $245 trillion in wire transfers. thus while a growing concern to date, virtual currencies have yet to overtake more traditional methods to move funds, whether for legitimate or criminal purposes. nonetheless, to address growing concerns, in july 2011 after a public comment period, fincen released two regulations which updates several definitions and provides accessibility to

accommodate payment system innovation including virtual currencies under pre-existing regulatory framework. then last march fincen issued additional guidance to further clarify compliance obligations for virtual currency actors covered by our regulations. in short they were required to register with fincen, put aml controls in place and provide certain reports to fincen. it's in the best interest of virtual currency providers to comply with regulations. any financial institution could be exploited for money laundering purposes. what's important is for institutions to put controls in place to deal with those money laundering threats. at the same time being a good corporate citizen and complying with responsibilities is good for bottom line. every financial institution needs to be concerned about its reputation and show it's operating with transparency and integrity within the bounds of the law. legitimate customers will be drawn to a virtual currency or

administrator or exchanger where they know their money is safe and they know the country has a reputation for integrity. banks will want to provide services to administrators or exchangers that show not only great innovation but also great integrity and transparency. the decision to bring virtual currency in our regulatory framework should be viewed as a positive development for the sector. it recognizes innovation virtual currencies provide and benefits they might offer society. several new payment methods in the financial sector have proven capacity to empower customers and expand access to financial services. we want such advances to continue. however, those institutions choose to act outside the law will be held accountability. fincen in its regulatory power to stop abuses of the u.s. financial system. we have proven our willingness to do that by using targeted financial measures the patriot

stand ready to take adigszal regulatory actions as necessary to stop other abuses. as the financial intelligence unit for the united states, must stay current on how money is being laundered in the united states so we can share this expertise and service the corner stone of this country's mfl-cfc regime. we continue to deliver cutting edge analytical products from our many parter ins. the administration has made appropriate oversight a requirety and encouraged by the progress we have made thus far. thank you for inviting me to testify before you today. >> thank you so much. >> thank you. good afternoon. chairman warner and merkley.

my name is david cotney and it is my pleasure to testify before you today on behalf of the conference supervisors. i thank you for holding this hearing today to address the risk of virtual currency. including payment protection system, national security, money laundering and other ill ligs sit activities. the potential benefits are also diverse. providing an out link to the unbanked and under-banked. state regulators have long-supervised money transmiters to protect consumers and preserve national security and law enforcement interests. state regulators are talking with industry and other regular

lay toshs about evolving methods of moving funds. this includes virtual currencies and peer-to-peer transactions. state regulators believe that an open dialogue is key to accomplishing the goal of determining the appropriate level of oversight and supervision. emerging payment technologies are at their core of the 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 oversighted. licensing is the foundation.

state regulators examine money trarns mitters on an on going basis. ensuring is that it does not lose a customer's money. further, states actively examine requirements coordinating with finsen and the irs. >> after working with the brazil central bank, my division earlier this year found evidence of forgery and on going illegal condu

condu conduct. cooperation has been a hallmark of state supervision. manifested in a uniformed licensing system for all states. originally codified in federal law back in 2008, the multi-wide licensing system has become an intragal part of state supervision for a viert of non-bank service providers. massachusetts and 14 other states currently use the licensing platform for money transmitters and 14 more will start using the system in the next year. i want to know csvs's support for 947 which enhances the safe act's prerkss.

>> we look forward to continuing a collaborative approach. ensuring individuals and economies are well-se served. thank you. i look forward to answering any questions you may have. >> thank you both for your testimony. we'll put five minutes on the kwlok. in his opening statements, i'll try to wrap my head around this. we have the strength and the right balance since we're talking about here no government entity. the ability to set up these exchanges if we have too much of a regulatory burden, we can

chase these exchanges off-shore and still leave americans unprotected. i guess my question, for both of the witnesses, we're talk about this as a currency. but are we determined that they're simply being an internet protocol. or is this a security. have we thought through their currency. have you consulted as you started to view your guidance? is there any kind of beginning of an international regime.

>> thank you, senator. first, on the issue of currency, fincen is the regulator for antilaundering. and so we've never opined and still are not opining as to whether virtual currency is a real currency, a commodity as those questions are outside our purview. what we do recognize is that it exists through the u.s. financial system. and, as such, we need to protect that financial system from elicit actors. we did not need to take a position. but, in terms of have we consulted with other regulatory bodies here and the answers we

have again, we spoke with sei, the secret service, dea, ice, fbic, occ, irs, the federal reserve, ncua -- >> and they all have sophisticated mean sns. >> yeah. >> we did consult from the consumer perspective. we've consulted with all of them as we can. this is developing an innovative arena and we were lucky to be able to cover it under pre-existing regulations. as we talked to our counter person, as well, with the last portion of your question, there is great interest by fellow regulators as they're trying to get their heads around what is this and what does it mean, our german counter parts, like us,

and other coup tris, thus far, have been asking us what we see and financial aspect pass ports which is aml, standing setting bodies in an international community plans to take us this topic. >> in answer to your first question about the level of regulation, that's exactly what the states are trying to do with states and local regulators to make sure we have an appropriate level of oversight and supervision and if we have the tools to protect and prevent illegal activity. in terms of your second question on international regimes, i think it's important to note that many of these evolving alternative payment systems are in response to consumer demand. and as we've seen in europe and

as we've seen in canada and elsewhere, there is a big demand for more realtime payments at lower transax costs. including transmission of money from one country to the next. ours has not evolved over the past four years. >> i know this has potential for abuse, but, i, you know, i may want to get back some of the folks from the treasury at some point. i do think there could at least be the potential of serious imp l ly cases about monetary cause.

i think the mistakes we've made. but, you know, if you think a little broadly, this could have huge, huge itchly cases. so i'm looking forward to pursuing the senator. >> thank you, mr. chairman. i would just ask jennifer a quick question. have we seen any recognized terrorist group ever express interest for its operations? >> so we've certainly recognized the possibility and the vulnerability there. there's nothing in terms of information. 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. >> thank you.

i want to address a few things. the first thing i want to ask is so there's a centralized public ledger that's encrypted. so the anonimty is only in terms of you're not truly anonymous. there is an encrypted version of who owns what. and so one concern is whether that enkripgs can be broken. there's some very powerful code breakers in the world. we certainly have discussions about our own u.s. capability to break codes. we also had the hacking of a bit coin exchange called bit4.

and, as it was reported, 24,000 byte coins were stolen. we had insta wallet, that was hacked. these are not small dollar items given the value of the individual kwoins. how d does one actually steal a byte coin. >> so in terms of breaking the code and the really powerful kriptologists that are out there, i don't know that i can answer that.

it's as strong as exists that's out there. to tell you the truth, i don't know what type of cryptology that's used. in terms of the scheme that you mentioned, whether it's a pyramid scheme or hacking, probl probably, the most relevant is the ir revoking of byte coins. when i take a byte coin and pay you with that byte coin, there's no way for me to get that money or that byte coin back unless you choose to give it to me and choose to tell me who you are. so that can be a great tool for hackers who are able to get your code that is your half.

i think of the public key almost like the routing number. and i don't give it to others who want to send me money. 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. and so, typically, the person holds on to the pin. and it's only when you put the public and private key together that you now have some bit coin that you can actually do something with. so if a hacker gets your private key, they're able to take your byte coin and you can't get it back. >> they they can modify the public ledger and then it becomes day face facto ener shi. >> that's exactly right. >> okay. let me see if mr. cotney has any comments on this.

>> well, you bring up an interesting case. these transactions are irreversible. that's what we are interested in every day. if there is someone reliable standing behind that transaction and that's what we're interested in. i'll just say it's fascinating if it's not intended but in this space has been robust enough to hold up for this long without a major flaw that brought the entire thing down. it certainly has attracted the attention of innumerable people around the world skgd well, can we create a similar system? those we are here today.

>> and i am just echoing and based on all the other commodities, there's a physical presence that you can somehow trags it back. the fact that we're talking about something in the virtual world. ♪ talking about e-gold, which was a commodity-backed virtual currency and even back then, it fell under the money regulations.

>> do you have any idea of the percentage of people participating in ill reel activities? >> we would have no way to know that. if you take a currency like virtual vir reserve, we believe it was made to facilitate criminal activity. that's what we alleged in our 311 action. with regard to byte coin, it can be exploided by elicit actors and we have seen it exploited by elicit actors, at least with regard to the allegations made by the department of justice and the silk road matter alleging it

was used for money laundering. >> the f.b.i. seized about 144,000 byte coins. what does the federal government do with those? >> luckily, that's not an issue that we'll have to deal with at fin skrrks en. but i can tell you from my past job as the head of the forfeitture program, that they will be thinking about whether they can sell those assets. >> last week, it went up to 900 yesterday and finally settled at 600. why the volatility? >> well, i the there's a great

interest. one of the means today, now, that we're looking at, is through virtual currency. sirn certainly, at the state level, we have a regulatory regime in place. as i mention, we are a consumer regulators. we are not an investment regulator. we want to make sure that those consumers are protected. just like any investment, someone who's looking at making any investment they need to follow their due diligence. >> is there any reason for this? would you have any knowledge? >> my understanding is in some

countries, where you have a home curren currency, byte coin may be considered a better place in which to restore value. in other places, it's also considered a good medium for transferring value. and so if there's not a good internal system for trarnsferrig value efficiently, it might be used for that purpose as well. >> in the category on shameless plugs, congratulations for 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, i fee'm going toe

this away from the illegal action and as was suggested, this become a common method of payments and services. replacing a dollar bill or a credit card which we know are long-standing methods. there are a tremendous number of challenges because we had enough broad authority that allowed us to pursue this. let's take for example a byte coin being used to buy a pie. how do you ring that up on the cash register? what's the sales tax on that? how do you record it for income tax purposes? how do you transmit it for purposes of payroll taxes?

how do you deal with this when it's more commonly accepted? it's not nefarious. it's the potential of really skirting on the edges, sts, in fact, the more commonly accepted it is, and the more available it becomes, the more difficult it is for regular regulatory activities to be carried out. especially tax activities. either one of you can answer that question. >> sure, from an anti-money laundering, counter-terrorist perspecti perspective, it's not as important.

we have similar regulations. regardless of whether it's a commodity or a currency or a security, those basic protections will follow however we define it. so from our perspective, it's not as important. but i take your point. look, this country and all countries are going to have an interest in protecting consumers and protecting investors and thinking about protection. that's why we have every protection in the world covering these issues. if byte coin truly takes off and becomes a serious part of the financial system, then those issues will need to be brought to the forefront.

we can't assume that byte coin is going to become if major player >> i did hear some venture capitalists speak recently and say this is a binary investment. if this is going to become the cell phone of 20 years ago or a nice experiment that completely fails. i think we are waiting to see. at least at fins and we're trying to protect our system from illicit actors. >> i think you rightly pointed out the differences between rifle activity and illegal activity. illegal activity is illegal the matter what the means, whether it is paid for by cash or ach or through virtual currency. side, those actors who want to play by the rules

will work through agencies like mine, will play by the rules set is then, and that importance of regulations on the status of federal level. >> just to follow-up on the regulations, you tell me i'm now the state tax commissioner and someone paid in bit corinth and i call you up because if i know you have expertise and i say i heard this thing is trading for $700. is that with the pies worth? would you come down to be my expert witness when i collect sales tax on $700? >> fortunately i'm not. >> this is going to be a big challenge. we can focus on the legal part of this, but to the extent that it becomes recognized as a valid method than the perfectly legitimate commercial world of trans meeting goods and

services, this is going to become an increasing problem. the more the opportunity presents itself to avoid taxation and to say that was -- is an interesting challenge. i think we need to be thinking about these issues if we see this becoming a way to transmit goods and services that is more generally and regularly accepted. >> i think you have raised a great point. schemes,on nefarious but as i learn about it there are a lot of folks who are interested lack trust in central banks and want to be off the grid. >> thank you both for being here. earlier this afternoon i posted on reddit this hearing topic.

i got some comments on suggestions for questions a might have. themesponses came, most of long and thoughtful. let me explore one of the topics that was raised. in a sense it is regulatory arbitrage. if you're an effort to make sure that the regulations are uniform globally? and in the absence of that, is there not a risk that the activity is simply taken where the country as a regulator and is an economic consequence to that happening? is a downside to our country and its economy and opportunities for innovation if the united states is the heavy regulator and other countries are not? >> thee we can kick up from

domestic and international. here in the united states give the states and federal regulation. job as wasrly good mentioned in testimony of the states working together to find common approaches whenever ncenible and then with fio to work -- then we go externally. least from the money laundering and counterterrorist finance perspective, that financial action task force is international standard setting body that attempts to keep consistency and standards across the globe. it is a body that has both carrots and sticks it has been fairly effective in getting countries to put regulations in place. all that being said, if businesses are going to leave the united states based on perceived or real regulatory

burden, i think they're going to find again short-lived. mentioned, countries are going to have an interest in figuring out the tax implications in monetary policy. as.s not as as as as the regulation is going to catch up. be plenty of reasons to bring innovative business and keep innovative business in the united states. think it is very important to leverage the strengths of each of us. the state regulators and federal agencies. the local level, the state regulator, i know, for example that there is a large cambodian population in lowell, massachusetts. i know that there is a large brazilian population in framingham. i send examiners out every day to conduct examinations to do

transaction testing, testing transactions of money going abroad. we have the boots on the ground in a local understanding of these companies. then the pair that with the national perspective and knowledge of federal agencies who also interact on an international level. by leveraging the strengths we do a much better job at detecting and preventing this illegal activity. >> i appreciate both those answers. to you have a sense of the importance of this activity being centered in the united states? a more broader question in a regulatory one, but what benefits does our economy and our innovative environment gain by encouraging or at least not discouraging the bit corinth --m being centered here bitcoin from being centered

here? >> i think the great challenge for the regulators are to encourage 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 minimizes burden on innovation. >> clearly, the united states, the mother of invention, we want to take advantage of innovation to the extent that we see canvation in this space, it have spillover effects into payments and other financial industries. we want to be able to encourage innovation and have it developed here locally. alexa think we have a lot more questions. but we understand a vote will be held on five and want to make sure we get to the second panel.

thank you for your testimony and we look forward to continuing the dialogue. >> thank you for the opportunity. >> i will turn to senator markley at this point and he can introduce the next panels. >> and what you start introducing as you come up. feel free to take your seats quickly. i will start with paulson moser. with -- in this in he let bits work developing secure infrastructures products and services. second, we have professor sarah jane hughes. for the past 25 years, professor hughes has regularly taught

payments, law, commercial law and banking regulation at them our school of law. she is a nationally recognized expert on payment systems, public and private methods to detect, deter and prosecute domestic and international money laundering and consumer protection and financial privacy. next we have mercedes kelly tunstall. she is a rectus leader of their privacy and data security group. she has extensive expense working with clients to develop new services including virtual currencies. she also works with clients from the spectrum of industries. hewe have anthony galipi. founded bit pay in 2011 he has experience in sales and marketing working in the

robotics industry. pay, he wasing bit regional sales manager at industrial devices corporation. paul, we will start with you. thank you to all of you for bringing your expertise to bear on this topic. >> thank you. asame is paulsmoser smoser. consumers become more comfortable with internet financial activity and computers have become more powerful and less expensive, we are witnessing the viability of digital currencies increase. we need to recognize that digital currency usage exists outside of traditional currency, financial accounting and payment systems. my testimony today will address opportunities and risks in the environment. one measure of a currencies success is its acceptability.

we are seeing select retailers accepting digital currencies for goods and services. for example wordpress except that coin as a form of payment. last week, the federal election commission indicated it is considering allowing declines use for in-kind contributions. digital currencies allow merchants access to new consumers in countries where traditional payment systems to not allow internet access. currencies may have the ability to provide access to the under banked or on banked. unbanked.k

they can also serve as a potentially stable currency in countries where their own currency is in distress, for example during the recent cyprus financial crisis, citizens transferred funds to digital currencies. isther interesting aspect cryptographic protections, which some providers claim prevent counterfeiting a duplication. and thecurrencies supporting infrastructures to present opportunities to watch, including facilitating real-time payment, particularly those involving international parties and those involving micro- payments. options for internet- based transactions and opportunities to serve the under banked and politically repressed. opportunities, we have to recognize potential risks. post-marketthe risk. without government funding or support they are subject to significant volatility, creating

risks to holders of the currency and merchants and others are except the currency is payment. guideline,march 2013 the digital currency environment incorporates no regulatory protections, particularly consumer protections. last twole, within the months there have been multiple reports of currency disappearances from various coin trading platforms. in none of these cases is it likely that the owners will recover anything. the lack of consumer protections extends to other areas such as liability limits for fraudulent or unauthorized payments. currently, none of the digital currency operators or providers are subject to regulatory oversight. given the anonymity of the , using currency world

digital currencies come individuals may be able to donate to illegal organizations that would otherwise be legitimately banned, such as those engaged in terrorist financing. suggestent studies anonymous nature of digital currencies has made me haven for illegal activity. we talked about silk road and liberty reserve but those are just prime examples of the point that criminals are using digital currencies to assist broad array of criminal activities. as we look at the lack of regulatory oversight, there is a continuing challenge to the overall legitimacy, usage and endorsement. conclusion, clearly the use of digital currencies will areinue to evolve and there opportunities to explore, but we need to address the concerns to consumers, to society, the need riskegulation and

mitigations. thank you for the invitation to testify and we look forward to continuing to work with you. you.ank professor hughes? >> monitoring currencies and taking a responsible approach reflects a growing presence in domestic and international transactions. recent negative publicity associated with law enforcement actions against silk road and reports of disappearance of exchange values in china and the czech republic raise important concerns. come as a chairman said, worked in areas that are like this for a long time, not as a provider but as a watcher. that my late father

could be here today because he served in world war ii as a cryptographer for the united states and was really involved in the computing industry in the united states. i remember being a teenager when he brought home to big read cases and said it was a computer. one of the things we're seeing in a relatively short. of time, important, pathbreaking changes in technology of the characters that senator warner suggested earlier. we need to be very cautious not to chill as innovations, but we still need to have appropriate legal regimes around them. i think it is important that we take some time and craft those legal regimes with great care in as flexible a way as possible, particularly with regard to the remarks of director calvary and commissioner cockney. a number of

recommendations that responded to the questions that the invitation to appear put forward . taking them slightly out of order for my prepared testimony, obviously there has already been the idea of for retaining the current division between the states and the federal government for portions each new veryat well. i share those views. second, i think it is incredibly important that we enforce our anti-money laundering, antiterrorism and economic sanctions laws. as a corollary, i also believe that customers of programs such as that coin and other virtual currencies and may develop should get the same federal getections that people under right to financial privacy act of 1978, etc.. has takenen

important steps toward clarifying the application of their existing authority and i think we need to continue to clarify, particularly so the banks and investors don't get cold feet. we have no way of knowing today what second stage innovations that may have completely different roles in our economy these new technologies may offer us and we want to be certain we don't do anything to take them off-line. i would encourage on an interim basis payment systems operators assuming that we all agree this is a payment system and not something else like commodities or securities, to adopt and publicize their own transparent standards of how they will behave. as he suggested, legal liability limits, dispute resolution , guarantees for redemption, opportunities and clear rules when redemption can happen, are all important user protections. notce i said user and

consumer. because businesses who use at many of the same needs as consumers and we tend to be focused on regulating for consumers. i spent lots of my life looking at consumer issues, but am equally interested in business webeing protected. i think need to leave room for depositary and non-depositary providers to innovate in the virtual currency space. so we want a regulatory climate -- we don't want a regulatory climate in which early entrants can freeze out later once there it we'd like to have a lot of innovation in all of this space. i worked at the federal trade commission many years ago and one of the projects i work on was the rescission of a number of 1940s and 1950s trade regulation rules that had essentially been written by industries for themselves. we would like not to see that again because they can be very anti-competitive and if they are anti-competitive they are very anti-consumer. we need an open set of rules. i'm going to run out of time,

but i would say that the other thing is, don't buy the wild west argument very just because something is new doesn't mean it should not be regulated on the same basis as a types of activity with which it competes. thank you so much for this invitation. i would be delighted to answer your questions. >> thank you very much, professor. and now mrs. tim stoll? i am mercedes kelly tunstall, a partner at allard's bar here in d.c. and i am the head of our privacy and data security group. my testimony today reflects my personal experience with virtual currency industry and represents my own opinion. it does not necessarily reflect the opinions of allard's bar -- or our clients. i currently work with a number of clients on financial innovation issues. one of the things, as i have

been listening to the testimony, i feel it is worth saying that one of the things that i often say with financial innovation is there is a tendency to say it is completely new. it is so new we have never seen anything like it before. the fact is that it is like a lot of things that have happened in the past. i am going to go through some of the statements i have in my testimony, but let's start with the discussion of currency generally in the united states. united states actually has a long history of having concerns around currency. it finally settled down in the 1870s when the supreme court had a series of opinions called the legal tender cases. basically what they said at that time is we are going to stop all this different stuff with the currencies happening. we're going to say there's a u.s. currency and the rule is everyone in the united states has to accept that currency. currencies,be other

you can accept other currencies, but you have to accept u.s. currency. it is the currency of the land, etc.. that is the basis that we are working from. we do actually have a long history and long legal precedent that talks about how to handle different types of currency in our financial ecosystem. having said that, when we take a look at that coin and -- when we take a look at bitcoin and the lessons we can learn, i can talk about some of their failures. the first point is that bitcoin was designed not to integrate with our existing system. it was designed to be its own thing and try to break apart the world without working within the practical realities that we have today. as a result, financial institutions, especially the united states you that coin and the united states

view bitcoin and other types of artificial currency as outside. the next reality that bitcoin focus on is that the transactions need to be anonymous. there is a sense that because it is virtual currency and we are trying to remake our cash transaction, it has to be anonymous. but if i'm going to take a dollar bill and handed to you, i have to see you and i know the personal information about you. at least some personal information, what you look like. so, in the virtual currency world there is no need for the currency transactions to be anonymous. it can be. the two elements that bitcoin address besides anonymity is taking up the middleman so the bank involvement and not having a record as personally identifiable information in it. in order to address the excesses

we are seeing with virtual currency is where it is being used by criminals and terrorists and money launderers today, we do know that that is occurring, that the anonymity part of it, let's let that go. the whole point should we keep that middleman out of it, if that's what virtual currency and there are lots of reasons why people do that. we do have the technology today to make it possible so there's not a record with personally identifiable information for others to see, but it is something that is retained by the two parties involved in the transaction. finally, bitcoin has caused some of its own problems because it has this commodity aspect to it. of theld design some other virtual currencies out there have specifically been designed to avoid the boom and bust cycle we have heard about today. so those are the three points,

really, that we can learn from bitcoin to allow virtual currency innovation to continue. in terms of what has to happen from a legal if, i'm going to mention we do need to come to what a definition of virtual currency is. is a commodity or a security or not? we need stronger fincen guidance as virtual currency develops. finally, we touched briefly on unauthorized transactions issue. that issue also needs to be addressed and considered very thank you very much for the opportunity today and i'm happy to take any questions. >> thank you very much. now we will turn to anthony you for the thank opportunity to speak today. and i is tony gallippi am the cofounder and ceo of bit

pay. our company was started in may 2000 11. ribbon operating for over two years now which makes is pretty old in the virtual currencies . include many small and medium-size businesses in every state to accept bitcoin side-by-side with credit cards and other forms of payment. most online payments and are made with credit cards. but credit cards were never designed for the internet. credit cards were designed in the 1950s. last year over 12 million people became victims of identity theft mostly from shopping online. businesses lose over $20 billion a year due to payment fraud. the banks to take responsibility. if you are a business it is your fault if you took a stolen credit card even if a bank approved it. thanks these are discriminatory. paid by thefees are

smallest businesses. bitcoin is a faster and more secure system with no discrimination. bitpay, our software helps merchants clear transactions over the network. yourve a strict know customer policy. we need to know who our merchants are and what they are selling. we only want the good actors using our service. itpay also follows all bank guidelines to report suspicious activity. a positionearned us as a leader. have somees limitations that will keep a small player for some time. these as payment network can handle 20,000 transactions per second. bitcoin can handle seven percent

can. even though it is for a small, bitcoin has invented something pretty amazing. it is now possible to transit thecid remote glely. possibilities of this instant worldwide settlement are very interesting. it can handle quadrants of individual asset accounts with a full chain of custody every time an asset is transferred from one party to another. if you want to address the housing market, think of bitcoin . the biggest upfront cost of the closing costs, high fees for deeds, titles, stamps, insurance and other redundant tasks to record the sale of different record books. bitcoin can replace thousands of dollars in closing costs with a single transaction that cost five cents. bitcoin does have risks.

criminals use cell phones, e- mail, dollars and banks. many businesses like bitpay offering services chair the committee's goal to avoid fraud. are legal. in the early 90s when the internet was in its infancy, congress took a wait-and-see attitude to let the internet develop. where would social media and other free applications on the media be today if in the 90s we required licensing for the asernet and we tasked access if it were an intercom. like amazon, ebay and dell were born. is a technology which runs cost savings for businesses and consumers. it is a markets -- if america is

the leader in big going technology, -- is the leader in bitcoin technology. it can benefit greatly. we will see many companies built upon bitcoin related technology and we want is companies to be base in america, creating jobs in america and building a revenue base and tax base in america. 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. i'm the just four minutes to be on the clock and i'm budgeted performance now and i have three questions. i'm ready to move them quickly. first, what is your transaction fee? >> when we first started it was one percent are compared to credit cards which are three percent, we are one percent.

we realized quickly that our cost to do a transaction is low, so we switched over to software as a service pricing model. different features and different levels of service, members pay a monthly fee and then they can transmit all they want without charges. to any of your transaction fees go as low as 1/10 of one percent? >> possibly. you could get something will if you did the math. >> professor hughes, i recently read the wolf of wall street. i think this is coming out as a movie soon. a broker makes a lot of money and at one point he has -- this is a true story -- he has his -- taking money to swiss bank accounts. are bitcoin while it's

to replace was bank accounts e >> i don't know but i would like to speculate. there are two ways -- you can store anything you want now.ing bitcoins it would be harder to transact business that way. as people who do use exchanges. but there are so many ways in which one can store value, which could have included in the past cards and loading them and taking them to switzerland and not even needing to do that. is, yes, technically you can. and yes, technically they could be heard i think that is one of the reasons why rigorous and clear guidelines for how our

regimesey laundering are applied to virtual currencies. wecoin.tha don't want to facilitate hiding money and we do it to be careful that we protect people who are using currencies of this kind in war-torn areas or areas in which the governments are not reliable or the banking system is not like ours. >> thank you. i will follow up with some questions about the electronic funds transfer act and issues that may arise. i want to use my last minute to get to this question. is talking about very low transaction fees which will make it my merchants in oregon's eyes light up. this -- not bitcoin itself. but we have a limited number of them in circulation.

the concept in general poses some interesting models that could be significant -- that could significantly change our deposit system are different int system and mr.smocer, your role in the financial services world, can you give us some insight on the current aching of those challenges? >> sure. like the way you characterized it. in reality it really is three things. it is a currency or security, it is the way we use it, a depository system. and third is a payment system. we are talking about three different rounds that we need to think about individually. , as i mentioned, it

has value in showing us that there are ways that we can make the payment system more rapid. we can perhaps make it less expensive. we can make it more available to peoplebanked and some who might otherwise be unable to use a payment system. i think having said that, without the consumer protections that we think about in traditional systems, there are a lot of risks to those users as well. if i could go back actually to answer your question that you posed to misuse as well, i'm not sure even have to 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 and cover who owns the money. >> i am out of time, so we're going to pass this on to the ranking member.

>> i would love to be at home when you explain to your wi-fi or virtual company gave you a virtual paycheck using virtual money. hasi assume your business more consumers and investors. >> our business model, and i am -- we are just a merchant acquirer. we only facilitate payments for merchants. we don't offer in exchange for consumers who don't have a wallet. her focus on business acceptance and business adoption of bitcoin . those are fairly well- defined. >> will have their summer like senator warner or urged market i wonderl points -- what would happen if senator warner cornered the market on virtual currency. >> you have to look at the

exchanges because that is where all the liquidity is. right now, the number one exchanges in china, the number two is in japan. number 34 and five is in europe and number six is in canada. right now the u.s. is not a leader. >> you talked about in new testament -- you talked about testing your visits in terms of -- what does it take to get a merchant account with a credit card processor. we need to know that a, your age limit business. we need to know who you are and we need to know who your are selling to. >> will go even deeper into getting back on checks and that everything very ms. tunstall. if virtual currencies become more popular, what gives a bank from starting their own currency? >> absolutely nothing, except that they do have to maintain

their safety and soundness concerns. a u.s. bank needs to be very focused on u.s. money. there is nothing to stop a financial institution from getting into virtual currency themselves. are you familiar with other virtual currency? i am, yes. ?an you share some knowledge >> there are a number of virtual currencies that are designed for very niche purposes are designed for online video gaming type situations so you can play with your partners in china and japan and wherever. there are a number of those types of virtual currencies. there are also a number of virtual currencies that are based on bitcoin and try to basically fix some of the issues that i detailed in my testimony here today. then there is also a virtual that hascalled ripple

started very differently from bitcoin and started with the premise that we are operating in an existing financial ecosystem and we need to be able to comply with the criminal laws and anti- money laundering laws that are in place. >> thank you. i'm going to try to go to the lightning round as well. tost of all i don't want analogy, but just as we saw in developing companies -- countries in many ways as they develop networks to skip the wired system and go to wireless, wouldn't those regimes ,hat have huge restrictions couldn't you see the development of these virtual currencies

cooker and faster in the underdeveloped world than in the developed world? >> my quick response on that is one of the reasons of virtual currencies in the united states have actually glyph rated and succeeded is because of the strength of our financial security. for those other countries where there is not the kind of infrastructure it is unlikely to be able to support the growth of a virtual currency as we are discussing. >> i agree. >> example of cain is a great one. kenya is a country where more people have access to smart then to running water. companies stepped up and saw that there was a need. that the existing banking infrastructure was not meeting the needs of the peoples of the telecoms built in mobile payment system in tenure that today represents 30% of the gdp of kenya.

>> i agree with you. we have to get this balance right heard much keep this innovation in america. but as a former governor the internet-akage from based transactions for states that depend upon sales tax is an enormous challenge. we have got to get this balance right. is one of our challenges going forward. we have thought about competing virtual currencies. withught a few years back second life is going to be all the rage. it seems that the bitcoin 90%ency that has got about of the folks who are not users but our investors, rather than

do youat some point think one of these currencies will emerge? or do you think there will always be that threat that other currencies that try to fit within the legal regime -- >> unless it can make some big changes that allow the silk road type situation to stop from happening, i don't see how it will become commercially viable in the united states. you mentioned- second life. actually in second life i looked at for a client, they wanted to brand the banks in second life and be the bank in second life. as i looked at it, the way that the law works, even if it is in a virtual world, if the bank is doing the transactions, the u.s. banking laws apply. so that was a very interesting

results and what is fascinating about virtual currency actually is that it has found a way to fall through what our infrastructure is right now. that is why we do need to have some kind of framework around it. that because of some of the illicit activities and the interest of some of the folks who want to do this off the grid or not be controlled by -- we have to sort through this. i make mention that as a politician who had a second life avatar, that got me attention for a nanosecond, but -- [laughter] mr. chairman, thank you. take this a different election. i would like to tell a story

about when i used to regulate truth in advertising. i couldn't get my advertisers to tell the truth, so i told them they could tell me whatever they wanted a nap. i was and take out a full-page ad next to their saying that i don't regulate them. i don't regulate them, buyer beware. we are really at that point because the more we legitimize this in regulation, the more we commercialize it. balance, strike that if we get involved in , we recognize it as a true opportunity. >> i think that there is a lot to what you say, senator, that if we regulate, we do legitimize . some of today's witnesses have talked about trust and trust is a very important factor, particularly with financial products and services.

there is that risk. is a bone in my body that says i think that's a risk worth taking. worthk it is particularly taking as we think of this -- these virtual currencies as that are a lots like credit cards and debit cards in some respects. >> wouldn't you agree that right of, without any form intervention, without legitimizing it, every buyer out there has to be careful and that has restricted or limited or tap down the willingness of people to participate. -- saying iy are have adapted to the regulatory screen in a way that other financial institutions to -- to participate.

>> right now, it looks like all the risks fall on the users. >> what is wrong with that? >> that is why maybe we are not seeing the growth we would see if there was a bigger structure around it and greater clarity in that structure. but if people want to do their business that way, they are -- >> we just tell them come at go ahead and do your business that way and we will deal a sales tax consequences. we will work through those issues in terms of value for value transfer. you can deal partner to barter. people can barter and you can still do an analysis. he can do analysis on what it are the capital games or and long-term. on a case- and adapt by-case basis the existing regulation without legitimizing. i'm interested in your point of view.

>> 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 are not going to engage in social media sucks.comthe company that companyd then loses significant reputation when they choose to stick their head in the sand and not engage and not pay attention to what is happening. and so my concern with not getting into regulating this area and being interested in what happens here is that it will be -- it could eventually affect our financial system's reputation. i point is frequency in the situations we think about how we're going to fix or facilitate this when maybe we should leave it alone. a b c approach we need to think about and want people, you are on your own.

>> a thing from a consumer and user perspective that was a very good comment. that is where we are. i think that is a very fair point. >> we are all left with a lot of questions. we will turn to senator schumer. first, we will follow up with some questions from the payment system and banking system. your thoughts about how to avoid the boom and bust cycle that is inherent in bitcoin where it is both a speculative instrument as well as a payment system. of course we are all absolutely enthralled to find out exactly what senator warner's avatar look like. >> i for one do not want to find out what is avatar looks like.

a while back as you know, i called on federal authorities to shut down the website silk road which they recently did. many people interpreted my action at the time as to record was the soleit method of payment on silk road. they assume that it wanted to shut down or stamp out i do not want to do that. at york sits in many ways the nexus of all the issues being discussed today. as financial capital, the potential for creation of a new payment platform and the rise of alternative currencies could have profound and exciting implications to the way we conduct financial transactions. as a rapidly growing hub for technology and venture capital, new york has every interest in building on the promise that technologies like have to revolutionize payment systems or even form the building blocks

for older technology platforms. all of that promise is threatened to the association of criminalurrencies with activities. from purchasing illicit goods and services to money laundering. if continues to attract attention mostly as a way to finance purchases on websites xo the defined itself in the digital wasteland. in order for the legitimate uses flourish,ogy like to its susceptibility to illicit use much be addressed. there must be a way to separate the wheat from the chaff. line is very simple. gallippi, do. you have any specific suggestions about how we should separate the wheat from the chaff?

will you suggest for witnesses on panel one to ensure we address legitimate law enforcement concerns without truly inhibiting the development of these promising new technologies? thank you, senator schumer. i think you have to first understand bitcoin that there are multiple parts to bitcoin. is the low level protocol and then there is the application and service layer that businesses and consumers can engage in. this is typically where you would find businesses. if you want to use separate the legitimate uses from the legitimate ones, the point to do that are by the visible service providers like ourselves. we have over 12,000 businesses using our service to accept4 very strict new customer policy to make sure we know every merchant, who they are and what they're selling. we only want legitimate and good actors using our service. the bad guys are going to try to figure out how to do it on their

own. it shows you with the recent arrest of a guy from silk road is. caught the guy, he is in jail. i think there's a lot of effort and services like ours and others who are willing to work with regulators to make sure that what we do complies with the rules. we all share the same common goal to protect users from fraud and to prevent the bad actors from using the system. >> i'm sure you thought about this because you realized the danger of silk road type actors have to this appropriate new way of payment. do you have any specific suggestions? if you don't, if you'd like to spend a lot of time picking them up and sending it to us, i know this i think a very good point was

made by mr. gillespie. the space to the user is the point to catch the transaction. to the internet gambling restrictions that are , and i would be curious. do you screen as a credit card processor we do? >> yes. >> that type of approach for tagging the transactions, you can still be anonymous as long as it is a transaction between an individual and this company for a purchase. we do have some existing controls that can help on the side. >> i would be interested in you submitting the specifics and writing. any other witnesses?

my time is up. >> well i think he deserves a theof credit to create company he created. created, they he kinds of medication -- mitigations and controls that he put in place need to be applicable to all situations. i hope you will submit suggestions in detail so that we might be able to parlay that two other companies. companies.o other thank you, mr. chairman. to all of our witnesses. we will keep the record open for additional questions for seven days. this concludes the meeting of the subcommittee.

>> on the next washington

journal, what is ahead for the agreement over iran's nuclear program. after that, washington post health care reporters talks about the november 30 deadline for healthcare.gov. that, scott paltrow. live, at 7:00 a.m. eastern, c- span. today we will be live from california for remarks from president obama. he will talk about immigration policy with live coverage scheduled to begin at 2:35 eastern. >> years ago, i don't think

anyone would look at a crystal ball and thought someone on a college campus would be streaming netflix onto an iphone to watch a movie. i think this is what is happening -- we have this huge -- i that the technology remember in northwest ohio, depending on the day, if the antenna on the house was working hannels.ou have two c some days you have any channels. so industry has changed rapidly that i want to make sure we have things out there that spur this innovation because if we've createden,

about 3.8 million jobs. >> technology issues in front of the current congress. tonight on the communicators. during the president's , theyt trip to china noticed how mrs. nixon was looking at a package of cigarettes. the package, she was admiring that. understand you admire the pandas at the zoo. she said yes, aren't they darling. he said we will make sure that you have pandas to go home with. important for her to support her husband. just her being there would being -- would bring so much goodwill. would come out -- they would talk about the president, but they always say what a wonderful job and it. first lady, pat nixon, live,

tonight on c-span and c-span3. >> in a few moments, q and a with josh sapan. 7:00 a.m., washington journal, with your phone calls and the day's latest news. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013] >> this week on q and a, josh sa hisdiscusses his work and latest book. >> what impact do you think television has on the political

system and political culture? >> a big impact in many ways. a lot of people get their news from tv. a lot of people get their point of view and opinions and analysis from tv. and tv has many stories on the dramatic front the have some connection to politics. so, i think it has a pretty big impact. >> of all the programs you produced over the years, which had the most impact on politics, on the pop-culture scene? >> i will answer with a movie we distributed. we distributed a movie several years ago called "in the loop." it was done by a guy named armando d