[Senate Hearing 113-516]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 113-516

  BEYOND SILK ROAD: POTENTIAL RISKS, THREATS, AND PROMISES OF VIRTUAL 
  
                               CURRENCIES
=======================================================================



                                HEARING

                               before the

                              COMMITTEE ON
                              
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
               
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               __________

                           NOVEMBER 18, 2013

                               __________

        Available via the World Wide Web: http://www.fdsys.gov/
        
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        Committee on Homeland Security and Governmental Affairs

        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                  THOMAS R. CARPER, Delaware Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana          RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri           ROB PORTMAN, Ohio
JON TESTER, Montana                  RAND PAUL, Kentucky
MARK BEGICH, Alaska                  MICHAEL B. ENZI, Wyoming
TAMMY BALDWIN, Wisconsin             KELLY AYOTTE, New Hampshire
HEIDI HEITKAMP, North Dakota

                   Richard J. Kessler, Staff Director
               John P. Kilvington, Deputy Staff Director
               John G. Collins, Professional Staff Member
     Michelle C. Taylor, Federal Bureau of Investigations Detailee
               Keith B. Ashdown, Minority Staff Director
         Christopher J. Barkley, Minority Deputy Staff Director
          William H.W. McKenna, Minority Investigative Counsel
                     Laura W. Kilbride, Chief Clerk
                   Lauren M. Corcoran, Hearing Clerk
                   
                   
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
Prepared statements:
    Senator Carper...............................................    45

                               WITNESSES
                       Monday, November 18, 2013

Jennifer Shasky Calvery, Director, Financial Crimes Enforcement 
  Network, U.S. Department of the Treasury.......................     4
Mythili Raman, Acting Assistant Attorney General, Criminal 
  Division, U.S. Department of Justice...........................     7
Edward W. Lowery, III, Special Agent in Charge, Criminal 
  Investigative Division, U.S. Secret Service, U.S. Department of 
  Homeland Security..............................................     9
Ernie Allen, President and Chief Executive Officer, The 
  International Centre for Missing and Exploited Children........    27
Patrick Murck, General Counsel, The Bitcoin Foundation, Inc......    29
Jeremy Allaire, Chairman and Chief Executive Officer, Circle 
  Internet Financial, Inc........................................    31
Jerry Brito, Senior Research Fellow, The Mercatus Center, George 
  Mason University...............................................    33

                     Alphabetical List of Witnesses

Allaire, Jeremy:
    Testimony....................................................    31
    Prepared statement...........................................   114
Allen, Ernie:
    Testimony....................................................    27
    Prepared statement...........................................    78
Brito, Jerry:
    Testimony....................................................    33
    Prepared statement...........................................   120
Lowery, Edward W., III:
    Testimony....................................................     9
    Prepared statement...........................................    71
Murck, Patrick:
    Testimony....................................................    29
    Prepared statement with attachment...........................    90
Raman, Mythili:
    Testimony....................................................     7
    Prepared statement...........................................    63
Shasky Calvery, Jennifer:
    Testimony....................................................     4
    Prepared statement...........................................    48

                                APPENDIX

Statement submitted for the Record by U.S. Immigration and 
  Customs Enforcement............................................   146
Statement submitted for the Record by Sarah Meiklejohn, Ph.D. 
  Candidate, University of California, San Diego.................   156
Responses to post-hearing questions for the Record:
    Ms. Shasky Calvery...........................................   160
    Ms. Raman....................................................   165
    Mr. Lowery...................................................   171
    Mr. Allen....................................................   176
    Mr. Murck....................................................   184
    Mr. Allaire..................................................   191
    Mr. Brito....................................................   195
 
                           BEYOND SILK ROAD:

      POTENTIAL RISKS, THREATS, AND PROMISES OF VIRTUAL CURRENCIES

                              ----------                              


                       MONDAY, NOVEMBER 18, 2013

                           Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 3:02 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Committee, presiding.
    Present: Senator Carper.

              OPENING STATEMENT OF CHAIRMAN CARPER

    Chairman Carper. Well, good afternoon, everyone. Thank you 
for joining us. We especially want to thank our witnesses, 
panel number one and, somewhere out in the audience, panel 
number two. Mr. Lowery just lost his name plate there. Somebody 
just go around and pick it up please and put it where it 
belongs. That way we will know who you are.
    Senator Bill Roth, whom I succeeded here in the U.S. 
Senate, used to say, many years ago--his advice was, ``Wear a 
big button when you are campaigning so that you will remember 
your name and so will other people.'' So we want to make sure 
people remember your name.
    Over the past several months, this Committee has engaged in 
an investigation into the potential implications of virtual 
currencies. During the course of this inquiry, we have examined 
the issues and potential risks and threats that virtual 
currencies pose, as well as some of the potential promises that 
some believe they can bring.
    In addition, we have explored with several departments and 
agencies throughout our Federal Government how they are 
approaching virtual currencies as an emerging technology. This 
has included looking at how they are coordinating together to 
develop a ``whole of government'' approach that is consistent 
and informed.
    Virtual currencies, perhaps most notably Bitcoin, have 
captured the imagination of some, struck fear among others, and 
confused the heck out of the rest of us, including me. Indeed, 
based on conversations that my staff and I have had with 
dozens--maybe more--of individuals both inside and outside of 
government, it is clear that the knowledge and expectation gaps 
are wide. Fundamental questions remain about what a virtual 
currency actually is, how it should be treated, and what the 
future holds.
    Virtual currency can best be described as digital cash. It 
is generated by computers, lives on the Internet, and can be 
used to purchase real and digital goods across the world.
    Some proponents believe that digital currencies can prove 
valuable to those in developing countries without access to 
stable financial systems. Others believe it could prove to be a 
next generation payment system for retailers both online and in 
the real world.
    At the same time, however, virtual currencies can be an 
effective tool for those looking to launder money, for those 
looking to traffic illegal drugs, for those looking to exploit 
children around the world, and the list goes on.
    While virtual currencies have seen increased attention from 
regulators, law enforcement, investors, and entrepreneurs in 
recent months, there are still many unanswered questions and 
unresolved issues.
    This is not the first time that advances in technology have 
posed challenging questions, challenging issues for 
policymakers and for society as a whole. As we know, technology 
is dynamic and changes quickly. Concepts like e-mail and even 
the Internet itself were once alien and difficult to understand 
and navigate. Now, most of us can read and respond to e-mail on 
a device we keep in a purse or coat pocket and search the Web 
on multiple platforms.
    I like to use the example that when I first showed up for 
duty here in the U.S. Senate in 2001, for every e-mail that 
came in to us from constituents from Delaware and across the 
country--for every e-mail we received probably 10 to 15 
letters. I asked my staff a couple of months ago to tell me if 
that ratio had changed, and now for every 12 or 13 e-mails we 
get, we get 1 letter. And that is probably a pretty good 
metaphor for the situation.
    I will be the first to admit that, like most Americans, I 
am no technical expert in virtual currencies. I think all of 
you who are gathered in this room are. We will see. But 
hopefully some of our panelists are those experts, and we hope 
to learn a lot from you today. What I do know is that a number 
of smart people both inside and outside of government view this 
as a major emerging issue that is deserving of our attention, 
and that includes this Committee's attention.
    The ability to send and receive money over the Internet, 
nearly anonymously, without a third party, has a lot of wide-
ranging implications. Our government needs to pay attention to 
this technology and to understand and, where appropriate, 
address these implications.
    This was made all the more clear last month when Federal 
law enforcement took down and seized an online marketplace 
called the ``Silk Road'' on which many illegal products and 
services were bought and sold via Bitcoin. The most popular 
products for sale were illegal drugs and forged documents, such 
as identifications (IDs) and passports. Other services were 
also for sale, including hacking services. We are told that 
approximately $1.2 billion in transactions were made through 
the Silk Road.
    This site lived on what is often called the ``Dark Web,'' 
also known as the ``Deep Web.'' The Dark Web consists of web 
pages and data that are only available via special software 
that keeps users anonymous. Many sites and data on the Dark Web 
have been deliberately built to be untraceable in order to 
protect the anonymity of the user, and Silk Road was one of 
those sites.
    My understanding is that individuals could navigate to Silk 
Road anonymously and use Bitcoin, which can be sent to someone 
nearly anonymously, to make purchases.
    The anonymity of the marketplace and near anonymity of the 
currency made it nearly impossible for law enforcement to track 
and, therefore, made it an attractive place for criminal 
activity.
    In fact, in the course of our investigation, the Department 
of Homeland Security (DHS) informed us that the suspect who 
allegedly sent ricin to President Obama in April of this year 
was also a vendor on Silk Road.
    Law enforcement, including the Federal Bureau of 
Investigation (FBI), Immigration and Customs Enforcement (ICE), 
and the Secret Service, should be applauded for their work in 
taking down a major international criminal enterprise.
    But while Silk Road was perhaps the most well known, it is 
not the only marketplace where illicit goods are bought and 
sold through Bitcoin transactions. Today a number of similar 
enterprises that accept Bitcoins are still in business, selling 
weapons, child pornography, and even murder-for-hire services.
    While today I suspect we will talk a lot about the well-
known virtual currency Bitcoin, there are numerous other 
virtual currencies operating on the Internet today, each with 
its own set of specific features.
    That said, whether it is Bitcoin or any of the other 
virtual currencies, the Federal Government and society as a 
whole need to come together to figure out how to effectively 
deal with it.
    Whether or not digital currencies prove to be a boom or a 
bust, I think it is clear that some folks just want a chance to 
try and play by the rules. That is difficult to do if the rules 
or proper authorities are not clear or if the future is 
uncertain. It is also difficult if a large number of bad apples 
are allowed to spoil the bunch.
    With that, normally I would turn to my right, and I would 
say, ``Dr. Coburn, you are recognized for whatever comments you 
would like to offer.'' I believe he is traveling back from 
Oklahoma. I hope he will be able to join us at some point 
during this hearing, and that others of our colleagues will, 
too. We start voting at 5:30, and what usually happens on 
Monday afternoons is Senators are coming in from all over the 
country, and they will drift in and out of hearings like this 
one. And my hope is that before we are done, a number of them 
will be able to join us.
    I want to take now just a moment, if I can, to welcome and 
introduce just very briefly our first panel of distinguished 
witnesses.
    On our first panel, our first witness, in fact, the lead-
off hitter, is Jennifer Shasky Calvery, Director of the 
Financial Crimes Enforcement Network (FinCEN), a bureau of the 
Treasury Department. As Director of FinCEN, Ms. Shasky 
Calvery--do you go by both names?
    Ms. Shasky Calvery. Typically just ``Shasky.''
    Chairman Carper. OK. All right. As Director of FinCEN, Ms. 
Shasky oversees the protection of U.S. financial systems from 
money laundering and other forms of illicit financial activity. 
Prior to joining Treasury, Director Shasky, served as the Chief 
of the Asset Forfeiture and Money Laundering Section at the 
Department of Justice (DOJ).
    Our second witness has a name I have never heard before, 
and her first name is Mythili, right? Sort of rhymes with 
``mightily,'' right? Mythili Raman. Do I have that right? Good. 
Has your name ever been mispronounced?
    Ms. Raman. Many times.
    Chairman Carper. Today. [Laughter.]
    Ms. Raman. Not today.
    Chairman Carper. Oh, good. We will try to keep it that way.
    Ms. Raman is Acting Assistant Attorney General for the 
Department of Justice Criminal Division. As head of the 
Criminal Division, Ms. Raman oversees nearly 600 attorneys who 
prosecute Federal criminal cases across our country. Prior to 
joining the Criminal Division, Ms. Raman served for nearly a 
decade as an Assistant U.S. Attorney for the District of 
Columbia, our neighbor.
    Our final witness on this panel is Edward Lowery. Mr. 
Lowery is a Special Agent in Charge of the Criminal 
Investigative Division at the Secret Service. Mr. Lowery began 
his career with the Secret Service in 1992 and has been in his 
current position since February 2012. In this position, Mr. 
Lowery directs and coordinates all investigative activities of 
the agency and the daily operation of the Secret Service 
investigative offices located throughout the world. Previously 
Mr. Lowery established and ran the Secret Service's Cyber 
Protective Initiative and coordinated operations of the Cyber 
Investigations Branch and the Cyber Intelligence Section.
    Again, we want to thank all of you for your service. We 
thank you for your preparation for today, for your testimony, 
and for your willingness to respond to the questions that will 
be asked of you here and some that will be asked in writing 
subsequent to this hearing.
    With that, Director Shasky, you are recognized. And I do 
not know how long they told you you had to give your testimony. 
What did we say? Seven minutes, but you can go a little longer 
than that. If you go way beyond that, we will have to draw it 
to a close. But you are recognized. Just know that for you and 
the other witnesses, your entire statement will be made a part 
of the record. Please proceed.

 TESTIMONY OF JENNIFER SHASKY CALVERY,\1\ DIRECTOR, FINANCIAL 
  CRIMES ENFORCEMENT NETWORK, U.S. DEPARTMENT OF THE TREASURY

    Ms. Shasky. Thank you. Good afternoon, Chairman Carper.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Shasky appears in the Appendix on 
page 48.
---------------------------------------------------------------------------
    Chairman Carper. Good afternoon.
    Ms. Shasky. As you mentioned, I am Jennifer Shasky Calvery, 
the Director of the Financial Crimes Enforcement Network, and I 
am pleased to be here today to discuss the important 
regulatory, enforcement, and analytical work we are doing at 
FinCEN to prevent illicit actors from exploiting the U.S. 
financial system as technological advances such as virtual 
currency create new ways to move money.
    FinCEN's mission is to safeguard the financial system from 
illicit use, combat money laundering, and promote national 
security through the collection, analysis, and dissemination of 
financial intelligence and the strategic use of financial 
authorities. We work to achieve this mission by administering 
the Bank Secrecy Act (BSA), this country's primary anti-money 
laundering/counterterrorist financing (AML/CFT) regulatory 
regime; by sharing the financial intelligence we collect, as 
well as our analysis and expertise, with law enforcement and 
regulatory partners; and, by building global cooperation 
amongst financial intelligence units throughout the world.
    Recognizing the emergence of new payment methods, the 
potential for abuse by illicit actors, and understanding that 
AML protections must keep pace with these advancements in 
technology, FinCEN began working with our partners several 
years ago to study this issue. Here is what we learned.
    Illicit actors might decide to use a virtual currency to 
store and transfer value for many of the same reasons as 
legitimate users, but also for some more nefarious ones. 
Specifically an illicit actor may choose to use virtual 
currency because it enables the user to remain relatively 
anonymous, is easy to navigate, may have low fees, is 
accessible across the globe with a simple Internet connection, 
can be used to both store and make international transfers of 
value, does not typically have transaction limits, is generally 
secure, features irrevocable transactions, and depending on the 
system may have been created with the intent to facilitate 
money laundering; and, finally provides a loophole from AML/CFT 
regulatory safeguards in most countries around the world.
    Indeed, the idea that illicit actors might exploit the 
vulnerabilities of virtual currency to launder money is not 
merely theoretical. Liberty Reserve--a virtual currency 
administrator--engaged in a $6 billion money-laundering 
operation facilitating credit card fraud, identity theft, 
investment fraud, computer hacking, narcotics trafficking, and 
child pornography. And just recently, the Department of Justice 
alleged that customers of Silk Road, the largest illegal drug 
and contraband marketplace on the Internet, were required to 
pay in Bitcoins to enable both the operator of Silk Road and 
its sellers to evade detection and launder hundreds of millions 
of dollars.
    That being said, it is also important to put virtual 
currency in perspective. It has been publicly reported that 
Bitcoin processed transactions worth approximately $8 billion 
over the last year; whereas, the best estimate for the amount 
of criminal proceeds available for laundering throughout the 
financial system, at least in 2009, was $1.6 trillion.
    By way of comparison, in 2012 PayPal processed $145 billion 
in online payments, Western Union made remittances totaling $81 
billion, and Bank of America made $245 trillion in wire 
transfers. Thus, while of growing concern, to date virtual 
currencies have yet to overtake more traditional methods to 
move funds, whether for legitimate or criminal purposes.
    Nonetheless, to address growing concerns, in July 2011, 
after a public comment period designed to receive feedback from 
industry, FinCEN released two regulations which update several 
definitions and provide the needed flexibility to accommodate 
innovation in the payment system space, including virtual 
currencies, under our pre-existing regulatory framework. Then 
this last March, as a followup to the regulations, FinCEN 
issued additional guidance to further clarify the compliance 
obligations for those virtual currency actors covered by our 
regulations.
    In short, they are required to register with FinCEN, put 
AML controls in place to harden themselves as targets, and 
provide certain reports to FinCEN on suspicious and other 
activity. It is in the best interest of virtual currency 
providers to comply with these regulations for a number of 
reasons.
    First is the idea of corporate responsibility. Legitimate 
financial institutions do not go into business with the aim of 
laundering money on behalf of criminals. Any financial 
institution could be exploited for money-laundering purposes, 
though. What is important is for institutions to put controls 
in place to deal with those money-laundering threats and to 
meet their AML reporting obligations.
    At the same time, being a good corporate citizen and 
complying with regulatory responsibilities is good for a 
company's bottom line. Every financial institution needs to be 
concerned about its reputation and show that it is 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 where they know the company has a reputation for integrity. 
And 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 within the scope of 
our regulatory framework should be viewed as a positive 
development for this sector. It recognizes the innovation 
virtual currencies provide, and the benefits they might offer 
society. Several new payment methods in the financial sector 
have proven their capacity to empower customers and expand 
access to financial services. We want such advances to 
continue. However, those institutions that choose to act 
outside of the law will be held accountable. FinCEN will do 
everything in its regulatory power to stop abuses of the U.S. 
financial system.
    We have proven our willingness to do just that by using our 
targeted financial measures under Section 311 of the Uniting 
and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) 
to name Liberty Reserve as a primary money-laundering concern 
and entering into rulemaking to terminate its access to the 
U.S. financial system. We stand ready to take additional 
regulatory actions as necessary to stop other abuses.
    As the financial intelligence unit for the United States, 
FinCEN must stay current on how money is being laundered in the 
United States so that we can share this expertise with our many 
law enforcement, regulatory, industry, and foreign partners and 
effectively serve as the cornerstone of this country's AML/CFT 
regime. We are meeting this obligation in the virtual currency 
space as we continue to deliver cutting-edge analytical 
products to inform the actions of our many partners. We are 
committed to remaining at the forefront of developments in the 
days and years to come.
    The administration has made appropriate oversight of the 
virtual currency industry a priority, and FinCEN is very 
encouraged by the progress we have made thus far.
    Thank you for inviting me to testify before you today. I 
would be happy to answer any questions that you may have.
    Chairman Carper. Thank you so much for being here, for the 
meeting you had with our staff and me last week, and for your 
testimony. Thank you.
    Ms. Raman, please proceed.

   TESTIMONY OF MYTHILI RAMAN,\1\ ACTING ASSISTANT ATTORNEY 
     GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Ms. Raman. Good afternoon, Chairman Carper, and thank you 
for the opportunity to appear before the Committee today to 
discuss the Department of Justice's work regarding virtual 
currencies.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Raman appears in the Appendix on 
page 63.
---------------------------------------------------------------------------
    At the Justice Department, we look at virtual currencies 
through the lens of criminal law enforcement. We recognize that 
virtual currency systems can be a legal means of exchange. But 
we also recognize that criminals will always seek to take 
advantage of new technologies to commit, further, or hide their 
crimes.
    Our responsibility as prosecutors is to ensure that we 
continue to enforce the law, even in new technological 
settings, and to prevent criminals from using those 
technologies to create zones of impunity.
    As I will describe in my testimony today, the Department of 
Justice has been aware of the threat posed by the criminal use 
of virtual currencies for several years. We have already 
brought several important prosecutions involving virtual 
currencies, and we intend to remain vigilant in ensuring that 
any criminal use of virtual currency systems is aggressively 
investigated and prosecuted.
    As an initial matter, I should note that virtual currency 
systems, so long as they comply with applicable anti-money 
laundering and money transmission laws and regulations, are not 
inherently illegal, and they can be appealing to consumers 
because they can provide cheap, efficient, and convenient means 
to transfer currency.
    Many of those same features, however, also make virtual 
currencies appealing to criminals. We have seen increasing use 
of such currencies by drug dealers, traffickers of child 
pornography, and perpetrators of large-scale fraud schemes. 
Most significantly, we have seen evidence that criminals are 
drawn to virtual currencies for two main reasons: first, their 
perception that virtual currencies offer greater anonymity than 
traditional financial services; and, second, the 
irreversibility of many virtual currency transactions. These 
features can significantly complicate our ability to utilize 
one of the most basic techniques we use in criminal 
investigations: following the money.
    The Justice Department has long recognized the potential 
for the criminal misuse of virtual currency and launched our 
first major prosecution of an illicit virtual currency service 
in 2007, when we indicted e-Gold and its three principal owners 
on charges relating to money laundering and operating an 
unlicensed money transmitting business.
    As that indictment alleged, the only information a customer 
had to provide to set up an e-Gold account was a working e-mail 
address. As a result, e-Gold became a popular payment method 
for sellers of child pornography, operators of investment 
scams, and perpetrators of credit card and identity fraud. At 
its peak, e-Gold reportedly moved over $6 million a day. E-Gold 
and its owners were convicted in 2008.
    Since that time, we have continued to ensure that we 
aggressively address any criminal misuse of virtual currency 
systems, especially as those systems evolve and develop. When 
virtual currency systems fail to live up to their obligations 
under existing law, we take action. Earlier this year, for 
example, we unsealed charges against Liberty Reserve, an 
offshore virtual currency business, for allegedly running a $6 
billion money laundering operation, the Justice Department's 
largest ever money laundering prosecution.
    As alleged in the Department's filings, Liberty Reserve 
became a system of choice for cyber criminals and was used in a 
wide array of illegal activity, including credit card fraud, 
identity theft, investment fraud, computer hacking, and the 
trade of child pornography.
    As a result of the Department's actions and the 
coordination actions taken by law enforcement agencies in 17 
countries around the world, Liberty Reserve was effectively put 
out of business, seven defendants were charged, and numerous 
assets were seized. One of the defendants pleaded guilty just 2 
weeks ago.
    More recently, the Department announced significant steps 
in its investigation of Silk Road, alleged to be one of the 
largest online marketplaces for illegal goods and services, 
including large quantities of illicit drugs. Allegedly operated 
by a U.S. citizen living in California at the time of his 
arrest, Silk Road accepted Bitcoins exclusively as a payment 
mechanism on its site. Charges against Silk Road and its 
administrator were unsealed just last month in two different 
districts. The charges against Silk Road's operator included 
drug distribution, attempted witness murder, and attempted 
murder for hire. As part of that takedown of Silk Road, the 
Department seized over 170,000 Bitcoins valued as of this past 
Friday at over $70 million.
    The Department recognizes that in order to stay abreast of 
the rapidly changing technological environment, we must 
coordinate our enforcement strategy across the Federal 
Government. For that reason, we are working closely with the 
Virtual Currency Emerging Threats Working Group, a variety of 
law enforcement agencies both here and abroad, and, of course, 
FinCEN.
    From the view of law enforcement, FinCEN's recent guidance 
applying anti-money laundering and Know Your Customer 
requirements to virtual currency exchanges was an important 
step in safeguarding our collective ability both to deter 
criminal activity and to investigate it successfully when it 
occurs.
    While there is much more to do, the Department is 
encouraged by virtual currency services that are attempting to 
comply with U.S. law. We will continue to reach out to those 
services and provide them with training and other opportunities 
for real discussion about emerging threats, as we have long 
done with other financial services industry participants.
    As the virtual currency industry grows, we will continue to 
explore how new strategies or legislation can play a role in 
ensuring that virtual currency systems do not become a haven 
for criminal activity. We look forward to working with Congress 
to ensure that law enforcement continues to have the tools 
necessary to enforce the law and protect the public.
    In the meantime, we will continue to aggressively use our 
existing authorities to deal with those virtual currency 
systems that do not comply with the law and to aggressively 
prosecute criminals who use those systems as part of their 
criminal schemes. And, of course, we will continue to innovate 
in how we investigate crime to deal with whatever changes may 
come.
    Thank you for the opportunity to discuss the Department's 
work in this area, and I look forward to answering any 
questions you might have.
    Chairman Carper. We look forward to asking some questions. 
We very much appreciate your testimony and thank you for 
joining us today.
    Ms. Raman. Thank you.
    Chairman Carper. Mr. Lowery, you are recognized. Please 
proceed.

TESTIMONY OF EDWARD W. LOWERY III,\1\ SPECIAL AGENT IN CHARGE, 
  CRIMINAL INVESTIGATIVE DIVISION, U.S. SECRET SERVICE, U.S. 
                DEPARTMENT OF HOMELAND SECURITY

    Mr. Lowery. Good afternoon, Chairman Carper. Thank you for 
the opportunity to testify on behalf of the Department of 
Homeland Security regarding the risks and challenges posed by 
digital currencies and the role of the United States Secret 
Service in investigating crimes associated with online payment 
systems.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Lowery appears in the Appendix on 
page 71.
---------------------------------------------------------------------------
    Digital currencies have developed and grown over the last 
17 years as part of the continuing integration of information 
technology (IT) into the financial system. As the original 
guardians of the Nation's financial payment systems since 1865, 
the Secret Service has continually adapted its investigative 
methods to keep pace with the evolving use of information 
technology within the financial system.
    Since the founding of e-Gold in 1996, both digital 
currencies and various Internet-based payment processors and 
exchangers have grown to be a significant participant in the 
global financial system, processing tens to hundreds of 
billions of dollars annually in total transaction volume.
    Criminals and other illicit organizations use digital 
currency. These groups seek out those digital currency 
exchangers and providers that best enable them to conceal their 
illicit activities. For example, Liberty Reserve is alleged to 
have laundered more than $6 billion during its operation before 
the Secret Service's joint investigation with ICE and the 
Internal Revenue Service (IRS) Criminal Investigations 
dismantled it.
    The growth of digital currencies and Internet-based payment 
systems is expected to continue for the foreseeable future, 
along with the use of these systems in the conduct of criminal 
activity.
    DHS law enforcement approaches digital currencies within 
the context of its authorities to investigate criminal 
activity. As a result of Secret Service and ICE investigations, 
exchangers of digital currency have been charged and convicted 
without operating unlicensed money-transmitting businesses in 
violation of 18 U.S.C. 1960 and various State laws.
    Additionally, as a result of our investigations, digital 
currency providers have been charged and convicted for money 
laundering in violation of 18 U.S.C. 1956 and 1957. As FinCEN 
emphasized in March of this year, digital currency 
administrators and exchangers have legal responsibilities under 
various anti-money laundering laws, Title III of the PATRIOT 
Act, the Bank Secrecy Act, and FinCEN regulations.
    DHS law enforcement works closely with interagency, State, 
local, and international partners in conducting criminal 
investigations in their respective jurisdictions that may 
involve the use of digital currencies, including their use for 
money laundering purposes.
    In particular, as one of the two Federal law enforcement 
agencies with authority to investigate computer intrusions in 
violation of 18 U.S.C. 1030, one of the Secret Service's 
strategic priorities is proactively investigating transnational 
organized cyber crime and defeating these illicit organizations 
by arresting their members and seizing and dismantling their 
criminal infrastructure. The Secret Service has successfully 
investigated and arrested numerous leaders of major cyber crime 
operations.
    For example, the service arrested Vladislav Horohorin, also 
known as ``BadB,'' in 2010, and earlier this year apprehended 
five individuals allegedly responsible for the largest data 
breach ever prosecuted in U.S. history. Over the past 4 years, 
the Secret Service has arrested more than 4,500 cyber 
criminals, preventing over $13 billion in losses based on the 
financial information recovered from those criminals.
    Importantly, many of these cyber criminals made extensive 
use of digital currencies as part of their illicit activities.
    As part of its efforts to disrupt and defeat organized 
cyber crime, the Secret Service strategically prioritizes 
investigations of exchangers and administrators of digital 
currency that perform a substantial criminal role in 
facilitating widespread illicit activity. As part of these 
efforts, the Secret Service, in cooperation with other law 
enforcement agencies and interagency partners, has apprehended 
the providers of both e-Gold and Liberty Reserve, ending their 
operations.
    The Secret Service has also arrested various illicit 
exchangers of digital currency that facilitated criminal 
activity such as Western Express, Incorporated, which was 
prosecuted by the Manhattan district attorney's office, 
resulting in 16 individuals pleading guilty or being convicted. 
These cases are discussed more fully in my written testimony, 
and I welcome future opportunities to further discuss our 
investigative work with you and your staff.
    Digital currencies are a tool used by a wide variety of 
criminals. Accordingly, numerous law enforcement agencies 
investigate illicit activity that involves the use of digital 
currencies. Through the Secret Service's nationwide network of 
Electronic Crime Task Forces, Federal, State, and local law 
enforcement collaborate with the private sector and academia to 
effectively address the challenges that criminals' use of 
information technology, including digital currency, pose to law 
enforcement at all levels of government. Additionally, the 
Secret Service and ICE are participating agencies in FinCEN and 
work closely with them to ensure regulatory and enforcement 
activities are coordinated, and like all Federal law 
enforcement, the success of Secret Service investigations 
requires partnering with the U.S. Attorneys throughout the 
country, in addition to the Asset Forfeiture and Money 
Laundering and Computer Crime and Intellectual Property 
Sections of the Department of Justice's Criminal Division.
    The Secret Service and ICE also partner with other Federal 
law enforcement for joint investigations and participate in the 
Virtual Currency Emerging Threats Working Group.
    While digital currencies may provide potential benefits, 
they present real risks through their use by the criminal and 
terrorist organizations trying to conceal their illicit 
activity. As such, digital currencies challenge law 
enforcement's ability to carry out our responsibilities to 
enforce the law and suppress criminal activity. The Secret 
Service has a long history of adapting its investigative 
methods to maintain the integrity of the Nation's financial 
infrastructure. As a DHS law enforcement agency, we are 
committed to partnering with law enforcement at all levels of 
government to increase the security of the Nation while 
addressing the challenges posed by digital currencies. The 
Secret Service will continue to conduct effective criminal 
investigations to keep America safe and prosperous.
    Thank you for the opportunity to testify on this important 
topic, and I look forward to your questions.
    Chairman Carper. Mr. Lowery, thank you so much and, again, 
our thanks to each of you for your testimony and your 
preparation today.
    In anticipation of this hearing, a week or two ago I was 
trying to get my head around this subject, and I asked my staff 
to talk to me about the early days of the Internet, and how 
there were a number of concerns raised about how it might 
foster or facilitate illegal activities. But there were some 
who said there could be a lot of benefit here as well. And I 
asked them if that was maybe an analogy that was applicable 
here for virtual currencies.
    Just walk us back in time, if you will, to the early days 
of the Internet when you guys were in middle school, or before 
that, and talk to us about some of the early concerns that we 
had with this criminal activity that can flow through the 
Internet. At that time, we never imagined we would have the 
kind of commercial activity that we are going to see in the 
coming month as people celebrate the holiday season and a lot 
of commerce that takes place over the Internet, a lot of 
presents sent using the Internet.
    We never imagined anything like YouTube, Wikipedia, or 
Google searches. It is pretty amazing what it has become, the 
ability to download a music video, although in the early days I 
recall hearing a number of concerns about the bad that could 
flow from the Internet.
    Is this a good corollary or not? And if so, how? And if 
not, why not? And we will just start with you, Ms. Shasky, 
please.
    Ms. Shasky. Senator, I believe your analogy is an apt one. 
So often, when there is a new type of financial service or a 
new player in the financial industry, the first reaction by 
those of us who are concerned about money laundering or 
terrorist finance is to think about the gaps and the 
vulnerabilities that it creates in the financial system and how 
illicit actors will take advantage of those vulnerabilities or 
gaps.
    But it is also important that we step back and recognize 
that innovation is a very important part of our economy. It is 
very important in this country. It is something that we are 
known for and proud of and want to continue. So I think the 
challenge, at least at FinCEN, is for us to balance and have 
smart regulation that both mitigates the concerns of illicit 
actors operating in our financial system while at the same time 
minimizing the burden as much as we can. We believe that we 
have done just that with this rule by clarifying that virtual 
currency exchangers and administrators fit within our pre-
existing regulatory regime.
    Chairman Carper. All right. Thank you.
    Ms. Raman, same question. Walk us back in time: early 
concerns, those that were realized, and then some of the 
potential that may have come along through the Internet that 
perhaps we never envisioned. And does that apply here? That 
example, is that appropriate here?
    Ms. Raman. I think as I alluded to in my written testimony, 
as emerging technologies develop and change, as law enforcement 
we remain attuned to the criminal misuse of those technologies. 
But, of course, as you describe it, there are many legitimate 
uses. And as I hope I have also made clear in my testimony, 
these virtual currency services are not in and of themselves 
illegal so long as they comply with our applicable money 
laundering laws and our money transmission laws and 
regulations.
    And so I think it is our duty as law enforcement to stay 
vigilant about the criminal misuse of those virtual currency 
systems while recognizing that, of course, there are many 
legitimate users of those services.
    Our experience over the last several years has showed us 
that there is reason for our vigilance and there is good reason 
for us to remain vigilant. Liberty Reserve was the largest 
money laundering case ever brought by the Department of 
Justice, and that is an important fact. And it reminds us that 
there is good reason for us to remain watchful, an we intend to 
do that. But we also intend to balance that against the need 
for legitimate users to use those virtual currency systems as 
they were intended to.
    Chairman Carper. All right. Thank you, ma'am.
    Mr. Lowery, same question, please.
    Mr. Lowery. Within the confines of the Secret Service 
investigations, the Secret Service was enacted to fight 
counterfeiting at the time in 1865. In the Secret Service, the 
hallmark of our investigations has always been adapting to the 
changing threat. As I said, we started with counterfeiting. We 
moved into fraud, always defending the Nation's financial 
infrastructure. In the 1980s, it was access to device fraud 
when credit cards were starting to become a major impact on the 
financial system, and it naturally segued directly into 
computer crimes.
    In recognition of that fact, as I mentioned in my 
testimony, the Electronic Crimes Task Force model is widely 
respected throughout the country, and it is the way that the 
Service stays in tune with the changing technology and the 
threats that can come from the Internet.
    Chairman Carper. All right. A couple of years ago, there 
was a film out called ``Dillinger,'' and my wife, who is 
usually not a big fan of gangster movies, and I went to a local 
theater complex in Delaware, and one of films showing was 
``Dillinger.'' She said, ``Let us go see that.'' I said, 
``OK.'' And I will never forget one of the scenes in the film, 
Dillinger and his gang, they made their living robbing banks, 
as you know, shooting people up and getting away with it. Near 
the latter part of the film, they were on the run, and 
Dillinger looked up one of his old compadres in the bank-
robbing business to see if he could not give him a hand. And I 
remember they met, and it looked like the top floor of a big 
old warehouse that had been retrofitted, and he walked in, and 
there were all these guys, a lot of them wearing shirts and 
ties, on old phones making phone calls. And Dillinger said, you 
know, ``What is going on here?'' And apparently it was a bookie 
operation, numbers operations and so forth, and the fellow who 
was running the operation said, ``We do not rob banks 
anymore.'' And he said, ``You are stupid to do that. This is 
the future.'' He said, ``This is the future for criminal 
activity, the way to make money.''
    And I suspect for some people they see this as the future 
for them to make money through criminal activity, whether it is 
in pornography, child pornography, whether it is in money 
laundering, human trafficking, any number of activities.
    But we figured out how to deal with those guys in that 
film, wearing their shirts and ties and doing illegal 
activities, not robbing banks anymore, not certain people 
anymore. We figured out how to deal with that.
    How confident are you that we are going to be able to deal 
with the potential criminal behavior, misbehavior, with this 
new technology that is before us? Mr. Lowery. And the second 
part, what role does the legislative body--we have three 
branches of government, but what role does the legislative 
body--those of us who sit in these seats, what role do we have 
to play to make sure you have the resources that you need to 
meet the dark side of this technology?
    Mr. Lowery. Well, again, going back to my testimony, the 
Secret Service has investigated many first-of-their-kind 
investigations. We specialize currently in the transnational 
cyber criminal, the professional criminal that is targeting our 
financial infrastructure. We operate within the confines of the 
laws that we are entrusted to enforce, predominantly 1028, 
1029, and 1030, which would be access to the device fraud, 
identity theft, and computer hacking.
    You spoke earlier about the change, how the crimes have 
changed. I believe that one of the largest changes is the reach 
of the criminal. It used to be that we had to worry about--back 
in the days of early access to device fraud, we had to worry 
about someone dumpster diving or trying to get an actual image 
of your credit card. Today anyone in the world can reach anyone 
else in the world, and that has changed how we have to enforce 
our laws.
    Again, we are consistently, aggressively, and strategically 
investigating, trying to direct our investigations to the 
highest impact within the confines of the existing laws, which 
I believe there are plenty of cyber criminals in prison right 
now who would agree we are pretty effective.
    Chairman Carper. The second half of my question, and I 
would ask you to respond to it, and then we will turn to Ms. 
Raman. But the three branches of government--Judicial, 
Executive, Legislative--the role that we are attempting to play 
today on this Committee is not just an oversight role, although 
this is a Homeland Security and Governmental Affairs Committee, 
we historically do oversight and have for many decades. The 
Homeland Security piece of this Committee is actually newer. It 
is only about 10 years old. But we have a role for oversight. 
We also have, I think, an obligation or an opportunity here to 
try to make sure that the Administration is working, maybe with 
local law enforcement agencies across the country, but that 
they are working in a cohesive, collaborative manner. And I am 
encouraged to see that that might be the case. But what advice 
would you have for us on the legislative side? How can we be 
supportive and better enable you to do your very difficult work 
as this new technology appears before us?
    Mr. Lowery. Well, I believe it goes back to--the most 
important part of being able to do this job is the hiring, 
developing, and retaining of a highly qualified workforce. 
Obviously you need a technically gifted investigator to follow 
the trail and to run these international criminals down. So 
that is always a challenge, especially given the current fiscal 
environment. Any support in that realm is definitely 
appreciated.
    Chairman Carper. All right. Thank you. Ms. Raman.
    Ms. Raman. Your first question was whether we can keep up 
with the changing technology, and I do think that law 
enforcement has proven itself to be nimble and aggressive and 
willing to work together, and not only with agencies here in 
the United States but abroad, in order to effectively combat 
the threat.
    I mentioned Liberty Reserve before, but it is an excellent 
example of how our agencies have worked together to take down 
an enormous money laundering operation. We worked together with 
FinCEN and Treasury. They took coordinated action. At the same 
time that law enforcement made arrests here and abroad, we had 
17 other countries working with us for coordinated arrests and 
takedowns. We seized assets on the same day that arrests were 
made, and we took down domain names on the same day that 
arrests were made.
    So I do think we are nimble enough and creative enough and 
aggressive enough to be able to combat the threat. That does 
not mean that we are not unaware of the challenges that are 
posed by virtual currency, and there are specific challenges 
that are inherent to virtual currencies that we are remaining 
attuned to. Anonymity is certainly one that we are paying 
attention to. The fact that some virtual currency services may 
be based in countries that have laxer regulatory oversight is 
of concern to us. There are issues with difficulty in obtaining 
customer records and a host of other difficulties and 
challenges that go along with investigating global 
organizations, but I think as our track record shows, we are up 
to the challenge, and we are continuing to work together to 
ensure that we are innovating as criminals are innovating, and 
that we stay one step ahead of them.
    As for what the Legislative Branch can do, I think as for 
our criminal statutes, we feel confident that the statutes that 
we have available to us, our money laundering statutes, our 
money transmitter statutes, are broad enough to encompass the 
activity that we have been talking about this afternoon, and, 
in fact, those statutes are the ones that we used in e-Gold and 
Liberty Reserve, for example. And, of course, to the extent 
that criminals are using virtual currencies as part of their 
criminal enterprises, the actual substantive criminal statutes 
are also applicable. For example, if a child exploitation 
enterprise is trading child pornographic images in virtual 
currency, we should be able to charge that under traditional 
child exploitation statutes. And so we feel confident that the 
statutes that we have on the books are flexible enough to meet 
our needs.
    That having been said, we are always looking for ways to 
close any gaps that might arise or to close any gaps that we 
might see that we are not seeing right now. And we would be 
happy to work, continue to work with you and your staff to 
ensure that we let you know whenever we need those legislative 
tools.
    Chairman Carper. All right. Thank you.
    Ms. Shasky, would you respond to that question as well, 
please?
    Ms. Shasky. Sure.
    Chairman Carper. Actually, the two questions.
    Ms. Shasky. Thankfully, Congress' actions in passing the 
Bank Secrecy Act and the USA PATRIOT Act have already given us 
a strong platform to meet the challenge. So we are confident 
that we can meet this challenge, at least in the first 
instance, using that platform. So the Bank Secrecy Act, of 
course, is this country's anti-money laundering and 
counterterrorist financing backbone, which we administer at 
FinCEN. We issue the regulations under that.
    In 2011, when we expanded some of our definitions to enable 
us to have flexibility in going after new payment systems, our 
hope was that these regulations would live with changes in the 
market. What we found is that it has done just that. So as 
virtual currency has come more strongly to the forefront over 
the last year or 2 years, that definition has been broad enough 
for us to encompass virtual currency administrators and 
exchangers in our pre-existing regulations under the Bank 
Secrecy Act.
    And then with the USA PATRIOT Act, Section 311 of that, 
that is the section that gives us the authority at FinCEN to 
name a foreign financial institution as being of primary money 
laundering concern and to cut it off from the U.S. financial 
system, and that is exactly the provision we used to confront 
Liberty Exchange, that targeted financial authority provided to 
us by Congress.
    So we feel like we have a pretty good basis on which to act 
already, but it is hard to predict where the financial system 
is going to go and what tools we might need next, and we would 
be very thankful to continue that conversation with Congress to 
see if any additional tools might be better.
    Chairman Carper. OK. Thank you. In your testimony, Ms. 
Shasky, you said on page 11, I think, of your original 
testimony--I will just read a couple of sentences from it, if I 
could. You said, ``Several new payment methods in the financial 
sector have proven their capacity to empower customers, 
encourage the development of innovative financial products, and 
expand access to financial services.'' And you went on to say, 
``We want these advances to continue.''
    And then you said, ``However, those institutions that 
choose to act outside of their AML obligations and outside of 
the law have and will continue to be held accountable. FinCEN 
will do everything in its regulatory power to stop such abuses 
of the U.S. financial system.''
    Now, when you talked about several new payment methods in 
the financial sector that have proven their capacity to empower 
customers and encourage the development of innovative financial 
products, maybe expand access to financial services, this is 
the bright line in this technology of virtual currencies. Just 
maybe give us some examples, some concrete examples, if you 
will, of how those have worked out for the good.
    Ms. Shasky. Sure. I think the one that comes first to mind 
is prepaid access cards. Another area where we have thought not 
only about the illicit--the risks from illicit actors but also 
the benefits that it can offer to consumers. And we have seen 
many of the unbanked use prepaid cards to gain their initial 
access to the U.S. financial system, and many might argue that 
that has been a positive for society.
    In my own personal experience, I think of online banking 
and the changes that has brought about for me as a consumer and 
the idea of automated clearing house (ACH) where I can now take 
a picture of a check and deposit it into my account. Some of 
these technological advances make things easier for the 
consumer, and so those would be examples that come to mind.
    But with each of these, we needed to think in the early 
days as they came to market how might criminals use these 
systems, how might they exploit systems, because the fact is 
any financial service, any type of financial institution can be 
exploited. Cash is probably still the best medium for 
laundering money, but the important thing is to put measures in 
place that mitigate that risk.
    Chairman Carper. All right. I am going to ask each of you 
to take a shot at this question. We have already addressed it 
to some extent, but I want to come back and dive a little 
deeper, if we could.
    The question that I want to get to and I want to come back 
to is whether or not you think that virtual currencies, that 
would include Bitcoin--fit into our current legal and 
regulatory framework. And we talked a little bit about this and 
explored it in the last question, but come back to me, if you 
will, with some further thoughts on whether you see any gaps in 
our statutes, any gaps in our regulations regarding virtual 
currencies. So that is part of the question.
    The second half of the question, is which agencies do you 
believe need to be at the forefront of the Federal Government's 
work on virtual currencies? Two questions. And, Mr. Lowery, if 
you feel up to taking this one first, that would be fine.
    Mr. Lowery. Thank you. So is virtual currency within the 
existing legal framework? I know obviously, Bitcoin is the 
currency that is part of this discussion today. I can speak 
within the framework of the Secret Service investigations and 
what we see out there, and I think it is important to recognize 
that within what we see in our investigations, that the online 
cyber criminals, the high-level international cyber criminals 
that we are talking about have not, by and large, gravitated 
toward the peer-to-peer crypto-currencies such as Bitcoin. 
Again, this is within the confines of what we have dealt with.
    The Eastern European cyber criminals that we have developed 
a specialty in have, by and large, gravitated toward a 
centralized digital currency that is, as my colleague discussed 
earlier, based in a locale that may have less regulatory 
guidelines, and may have less aggressive law enforcement. So 
that is a distinction that I think needs to be made.
    Is the virtual currency within the existing laws? I believe 
there are plenty of opportunities for digital currencies to 
operate within the existing laws and regulations, and as far as 
the Secret Service investigations are concerned, as long as 
they fit within the laws and they comply with existing FinCEN 
guidance, there would be no violation and no reason for the 
Secret Service to look into it.
    Chairman Carper. All right. Ms. Raman, would you respond to 
the same question, especially the second half of the question: 
Which agencies do you believe need to be at the forefront of 
the Federal Government's work on virtual currencies?
    Ms. Raman. Starting with that question then first, I think 
the Department of Justice recognized a few years ago that a 
joint effort was needed, and the FBI set up and led the Virtual 
Currency Emerging Threats Working Group, which is now the 
working group that my colleagues here and many other agencies 
participate in. It has borne out to be very fruitful. It is a 
forum that allows all of the agencies that you would want to be 
at the table--the Treasury Department, our law enforcement 
agencies, even within the Department of Justice, the FBI, the 
Drug Enforcement Administration (DEA), and other agencies 
within the Department of Justice, prosecutors, we have U.S. 
Attorney's Offices, and two sections of the Criminal Division, 
the Asset Forfeiture and Money Laundering Section and the 
Computer Crime and Intellectual Property Section participating. 
Office of Foreign Assets Control (OFAC), IRS, and a number of 
other agencies here in the United States that we think are 
necessary participants and are, in fact, participants.
    We also have foreign law enforcement that participates in 
that group, including the National Crime Agency in the United 
Kingdom (U.K.), and these are, I think, the most important 
agencies to be at the table. That covers the waterfront in 
terms of regulations and regulatory enforcement and criminal 
law enforcement.
    There is, of course, room for improvement, and we are 
always looking for additional participants. Even, in fact, last 
week there were additional participants that were invited to 
join that working group. I think it is an excellent----
    Chairman Carper. From other countries or from within this 
country?
    Ms. Raman. Both, but even last week we thought of an 
additional domestic agency that should be at the table, and we 
have invited them to participate. And so I think it is going to 
be an evolving process. It has proven helpful thus far, and I 
think we are intending for that to continue to be an important 
forum in which we can talk jointly about what the emerging 
threats are, what each of our agencies can do to coordinate 
across the government, both here and abroad.
    As for the regulations and the laws that cover virtual 
currencies, I feel confident that currently our criminal 
statutes that we have used in our prosecutions thus far have 
been effective tools. Our money laundering statutes have been 
very effective in our ability to prosecute e-Gold and Liberty 
Reserve, for example. Our substantive criminal statutes, such 
as our drug trafficking statutes and murder statutes, have been 
effective thus far in being able to charge the administrator of 
Silk Road. And our money transmitter statute, which is 18 
U.S.C. 1960, has also been used to prosecute Liberty Reserve 
and some of its principals, for example.
    And so I do think that we have the statutory tools, for the 
most part, that we as prosecutors need to get at this kind of 
criminal activity. But I will say that the Department of 
Justice over the last few years has been proposing and pushing 
updates to our money laundering statutes through the Proceeds 
of Crime Act and related pieces of legislation, and those 
changes are ones that we continue to support. Money laundering 
statutes have been on the books for a long time, and they have 
been effective. But they can be updated, and we have proposed 
over the years several updates that we continue to support.
    Chairman Carper. Ms. Shasky.
    Ms. Shasky. Sure. Taking the questions in turn, FinCEN has 
never opined and still is not opining on whether virtual 
currency is a real currency or a commodity, as those questions 
are outside of our purview. We are the anti-money laundering/
counterterrorist financing regulator for the Federal 
Government, and so our regulations spoke to that and only that, 
and we tried to make that clear in our guidance this last 
March. But this country, like all countries, has an interest 
not only in protecting our financial system from money 
laundering and terrorist finance, but also protecting consumers 
from fraud, collecting taxes, protecting investors, ensuring 
economic stability, all things that are a part of our 
regulatory system, but outside of the purview of FinCEN.
    And so, to the extent that this body or others feel that it 
is appropriate to take those considerations into account with 
regard to virtual currency, we would look forward to working 
with them to make sure we are as coordinated as possible in our 
actions.
    Chairman Carper. All right. Thank you.
    You all know about the Government Accountability Office 
(GAO), and I guess a lot of people in this country, most people 
probably have no idea what GAO is or what they do, but they 
are, as we know, a watchdog and sort of the congressional 
watchdog to make sure that we are minding our P's and Q's in 
the Federal Government in a lot of different ways--in the way 
we run our operations, trying to do it in a cost-effective way, 
broad operations, widely diverse operations.
    Every other year, GAO comes up with something they call 
their high-risk list, and when I first heard about the high-
risk list, I said, ``What is that?'' And they said that the 
high-risk list is a whole list of activities designated by or 
identified by the General Accountability Office that waste 
money. Every now and then I talk to constituents, and we talk 
about what we are doing to try to reduce the budget deficit. 
And I have people say, ``I do not want to pay any more taxes, 
but if I am going to, I just do not want you to waste my 
money.'' And one of the things that GAO does, working with the 
Congress, is to identify ways to spend money more effectively, 
and also to collect monies that are owed to the Treasury more 
effectively. And it is the second half of that function I want 
to talk about.
    The GAO every other year reports to us, along with the help 
of the IRS, on something called the ``tax gap''--monies that 
are owed, hundreds of billions of dollars that are owed to the 
Treasury, but that are not being collected. In some cases, we 
have a pretty good idea who owes the money, the entities that 
owe the money. But it is a lot of money that goes uncollected. 
And I would like to say that number is going down, but, 
unfortunately, to my knowledge, it is not, at least not yet.
    But what I want to do is, with that as background, just ask 
you this: When I think about the new types of currencies, I 
wonder how they fit into the tax system here in our country. 
And as you know--we just talked about the GAO, but they issued 
a report, I think it was earlier this year, maybe it was in May 
of this year, which follows my line of thinking, and that is 
that virtual currencies could present a real vulnerability and 
actually make worse what is already a difficult situation.
    They recommended that the IRS find relatively low-cost ways 
to provide guidance to taxpayers on the basic tax reporting 
requirements for virtual currencies.
    Let me just ask, do you know the current status of that 
guidance? And what could we expect it to include? And when can 
we expect it to be released? And I would say, either Ms. Shasky 
or Ms. Raman, if you could tackle that one, I would be 
grateful.
    Ms. Shasky. I would be happy to begin with that one.
    First of all, as the financial intelligence unit for the 
United States, one thing FinCEN does, after it collects all of 
the information that our financial institutions provide to us, 
is we make that available to our partners in law enforcement, 
not only for the purpose of enforcing our criminal laws but 
also for the collection of taxes. And so we have a very close 
and longstanding relationship with the IRS, both on the 
criminal side and the civil side, to help them do just that.
    In fact, this very last week, we were meeting with them on 
this very topic, virtual currencies, and how to think of that 
in our joint work. So it is something that I know they are 
taking very seriously.
    When it comes to guidance on virtual currency for 
taxpayers, I know there was the GAO report that suggested that 
IRS come out with some guidance, because there may perhaps be 
some question as to how to treat different uses of virtual 
currency for the purposes of our tax regime. And while I do not 
know the details and would have to refer you to the IRS to get 
into great detail, what I can tell you and what I do know is 
that they are working diligently on such guidance, and that----
    Chairman Carper. Any idea when we might expect to see it?
    Ms. Shasky. My understanding is that the GAO report may 
have set forth some deadlines. I think it is usually 60 to 90 
days. I can tell you they are actively working on it, and it is 
at the forefront of their minds. And I think it will be very 
useful guidance for the taxpayers when it comes out.
    Chairman Carper. Thank you.
    Ms. Raman, do you want to add or take away anything from 
what Ms. Shasky said?
    Ms. Raman. Certainly not take away anything. I would defer 
to the IRS on the status of the guidance, and I am not 
personally aware of the status of the guidance. I will say that 
the Department of Justice was very aware of the GAO report. We 
took an interest in its findings, and we have been in 
discussions with the IRS about some of the findings in the GAO 
report.
    Chairman Carper. OK. Thank you.
    Ms. Shasky, I think you said earlier that FinCEN did not 
opine on whether or not virtual currencies are currencies or 
commodities. I would just ask of you, who do you think should 
be making that decision? And a second question would be, beyond 
who do you think should be making that decision, do we need 
that definition to be made in order to enforce the laws and 
regulations?
    Ms. Shasky. I am not sure I know who should ultimately make 
that decision. I do know it is outside of the----
    Chairman Carper. Do you think it should be Mr. Lowery? 
[Laughter.]
    Ms. Shasky. I am guessing it should not be Mr. Lowery. In 
terms of the legality of various things, I am sure that 
Congress has a role in determining that. When we start talking 
about commodities, the Commodity Futures Trading Commission 
(CFTC) comes to mind; when we talk about securities, the 
Securities and Exchange Commission (SEC).
    Regardless of who should be making those determinations, 
our focus at FinCEN was that we know that virtual currency 
currently exists; we know that it is being used to transact 
payments; we know that it has been exploited by some pretty 
serious criminal organizations. And we want to protect the U.S. 
financial system, as we are mandated to do, from those illicit 
actors, from laundering or moving money for the purposes of 
terrorism through our U.S. financial system. And so our entire 
focus has been on how can we best do that under our current 
regulatory scheme, and the nice thing is that the regulatory 
scheme that we have in place has the flexibility in it to 
change as the landscape changes. So, in other words, if some 
part of the industry were to ultimately be defined to come 
under the SEC or the CFTC, our anti-money laundering 
regulations also apply to those areas of the industry. And so, 
regardless, we are going to make sure that we are taking every 
mitigating step we can to prevent illicit actors from operating 
through the U.S. financial system.
    Chairman Carper. OK. Mr. Lowery, let me focus a question on 
you, and maybe, if you would like, Ms. Raman. As I think you 
both are probably aware, a few weeks after the Silk Road 
website was taken down by Federal law enforcement, a new Silk 
Road website popped up in its place. And it is hardly alone. 
Numerous other similar marketplaces exist on the Dark Web 
selling drugs, selling weapons, selling child pornography, and 
in some cases murder-for-hire services.
    Whether or not these are real marketplaces or simply some 
scam artist's idea of a sick joke, it obviously makes people 
worry and it makes people concerned.
    How do we develop a strategy to deal with these sites? And 
are there particular characteristics of these sites that make 
it more difficult for law enforcement to respond? Would you 
respond to that, Mr. Lowery? And then maybe Ms. Raman.
    Mr. Lowery. Absolutely. So the online sites. The Secret 
Service in our investigations, once again, we believe there are 
three infrastructures in place that facilitate the online 
crimes:
    The Silk Road-type criminal forums, one of the Secret 
Service specialties are on the criminal forums, Eastern 
European based predominantly, that specialize in large-scale 
trafficking, stolen financial data, and what have you. So there 
are other of these websites that specialize in specific crimes.
    The other part of the infrastructure is the digital 
currencies, the use of digital currencies, predominantly, the 
digital currencies that fall outside of the guidance of FinCEN 
or outside of U.S. law or in countries that obviously, as I 
said earlier, have less regulatory controls.
    And the third is what we refer to as ``bulletproof 
hosters.''
    Chairman Carper. Refer to as what?
    Mr. Lowery. Bulletproof hosting. It is a criminal 
organization, a criminal individual who specifically sets up 
business in a country with very little regulatory or aggressive 
law enforcement and provides a platform for a tax to be 
launched against the U.S. critical infrastructure. So the 
Secret Service attacks the problem strategically. We are always 
looking to identify the individual behind a specific crime, the 
intruder, the large-scale vendor, stolen personal data, or what 
have you. And at times it may be that if we can identify a 
forum or a digital currency that is within legal reach, within 
reach of U.S. law enforcement--case in point, Liberty Reserve 
or e-Gold--then it makes strategic sense to take that out of 
the equation and disrupt the criminal organization for 
strategic reasons, quite honestly, usually to facilitate the 
arrest of other individuals we are looking at.
    Chairman Carper. All right. Thank you.
    Ms. Raman, do you want to add anything to that statement?
    Ms. Raman. I think the challenge that you are pointing to 
sometimes really results from anonymity, and it results from 
many criminals migrating to hidden services on the Internet.
    Chairman Carper. Migrating to what?
    Ms. Raman. To hidden services on the Internet. And that has 
been a challenge for law enforcement, but as you have seen from 
the results that we have been able to achieve in the last 
several years, I think we have been able to keep pace with 
that, and we have been able to develop tools and strategies to 
address it. I think, as you mentioned, it can be frustrating to 
the public to see another website pop up after one that seemed 
similar to it was just taken down, I do think, as Mr. Lowery 
said, that it is incredibly important for us to be taking those 
steps, not just to disrupt that particular organization but to 
send a message to the users of those websites that they cannot 
trust those types of websites, that law enforcement is 
watching, and it is not, in fact, anonymous, and it is not, in 
fact, immune from investigation. And that is an important 
message to send. All of us in law enforcement who pay attention 
to the results of these takedowns know that the community is 
aware, the criminal community is aware when we take these 
actions. It is important that we do so. It is important that we 
put the wrongdoers in prison when they deserve it. And it is 
important for us to put these organizations out of business, 
and I think we have been able to do that.
    Chairman Carper. All right. Well, that was a very 
encouraging addition to Mr. Lowery's response. Thank you.
    I have another question on domestic job creation that I am 
going to direct to Ms. Shasky. But before I do, my last 
question will probably fall right after that, and then we will 
take maybe a short recess and introduce our second panel after 
that. But sometimes I ask a panel that is before us, when we 
are trying to figure out how to develop some consensus to 
address a significant challenge to our country, one of the 
things I will do--you were very kind to present an opening 
statement, and I appreciate very much your clear, 
straightforward responses to the questions I ask. But I want to 
ask each of you to take a minute or two to maybe give a closing 
statement and to just reflect on what you said, what others 
have said, some of the questions that we have asked, and some 
of what you heard your colleagues on the panel say. So just be 
thinking about that.
    And while they are thinking about that, Ms. Shasky, I am 
going to ask you this question about domestic job creation. As 
you know, there has been some concern that virtual currency 
businesses might leave the United States and move overseas to 
jurisdictions with a less strict regulatory framework. What, if 
anything, can the United States do to try to keep businesses in 
this country? What are we doing that seems to make sense? What 
maybe more should we do? And along those same lines, is FinCEN 
engaging with international partners on regulation of virtual 
currencies? It sounds like we are, but if you could expand on 
that, I would be grateful. So those two questions, please.
    Ms. Shasky. Sure. So, first, in terms of keeping business 
in the United States, I guess I would say that if business is 
going to leave the United States based on perceived or actual 
regulatory burden, I at least believe that they are going to 
find that gain short-lived. Every country, as I mentioned 
earlier, has an interest in protecting its financial system 
from illicit actors who would launder money or move money on 
behalf of terrorist organizations, in collecting taxes, in 
protecting investors, in protecting consumers from fraud, in 
ensuring a stable economy.
    And so if this payment system, this virtual currency 
payment system about which we are talking today, is going to 
survive and be a real player, a significant player in the 
financial system, regulation both at home and abroad is going 
to catch up, because it has to. And so our challenge here is to 
have smart regulation that both mitigates the risks while at 
the same time minimizing the burdens. I feel confident that, at 
least in the AML/CFT----
    Chairman Carper. What does that stand for?
    Ms. Shasky. Anti-money laundering/counterterrorist 
financing realm, we have managed to do that and met that 
challenge, and I think that is going to be borne out over time. 
So I think the innovation and the jobs will stay in the United 
States or at least come back to the United States.
    In terms of working with our international partners to 
ensure that we have a kind of consistent regulatory framework 
on the anti-money laundering side worldwide, the Financial 
Action Task Force (FATF) is the international standard-setting 
body and does a good job of ensuring that countries around the 
world have the laws and the regulations in place. My 
understanding is that they are interested in taking up this 
issue at the FATF, as it is known. What I can tell you for sure 
is that our counterparts abroad have been reaching out to us 
quite a bit to find out what we are doing in this regulatory 
space.
    We managed in this country to be able to act a bit quicker 
than some of our colleagues because we had the broad 
definitions and were able to fit virtual currency within our 
pre-existing regime. Germany was able to do the same thing, so 
they, too, already have regulations on the books. Other 
countries are trying to figure out how they can catch up.
    Chairman Carper. All right. Thank you.
    Now, while you think about the answer to this last 
question, I am going to let Mr. Lowery and Ms. Raman go ahead 
and give us just a brief closing statement. Ms. Raman, do you 
want to go first?
    Ms. Raman. Well, first of all, I want to thank you for 
holding this hearing. It is encouraging from the law 
enforcement standpoint to have interest in these kinds of 
issues because they are not easy. Although we have had many 
successes, we have clearly had challenges, too, and it is 
helpful when we have interest from people like yourself and it 
is helpful when we have questions asked of us like, ``What can 
we do to help?'' There is always something that we can do 
better, and it is helpful to have these dialogues.
    I also think it is encouraging that I have colleagues like 
the ones that are sitting next to me who have been willing to 
work together on these emerging threats. I think we have all 
approached it in the same way, which is that virtual currencies 
in and of themselves are not illegal. We have all recognized 
that innovation is important, and we have all recognized that, 
like criminals have done for ages, this will be another vehicle 
through which criminals may try to launder proceeds or commit 
additional crimes.
    I feel confident that we have the tools that we need to 
address those threats, and I feel confident that we have the 
will to address those threats. But we need to keep pace with 
what is going to come, and we will remain vigilant. We intend 
to be as aggressive in the years to come as we have been in the 
last several years. Virtual currencies did not just sneak up on 
us. As I said in my opening statement, we brought our first 
indictment in 2007, and so we assume that these kinds of 
threats will continue to emerge and change and evolve, and we 
intend to keep pace.
    Chairman Carper. All right. Thank you. That was a pretty 
good closing statement. You should do this for a living.
    Ms. Raman. It just so happens I do. [Laughter.]
    Chairman Carper. That is good. I think you found the right 
job. Mr. Lowery.
    Mr. Lowery. I would echo those statements----
    Chairman Carper. In fact, I think each of you have.
    Mr. Lowery. In closing, as a DHS law enforcement agency and 
a longstanding original defender of the U.S. critical 
infrastructure, I know the Service, working with our partners 
in law enforcement as well as in the prosecution and FinCEN and 
our international partners, will continue to work strategically 
to remove the gravest threats to our infrastructure. It is 
going to take consistent awareness of the growing threat. We 
are going to have to adapt, as we always have, and we are going 
to have to handle the international issues and what have you, 
working together overseas.
    I do know U.S. law enforcement is very aggressive and also 
very collaborative with our foreign partners, because we 
realize that this issue cannot be taken care of just by 
ourselves.
    We will continue to work as we respond to these threats. As 
a part of DHS we will continue to work to disseminate the 
threats through DHS and through our Electronic Crimes Task 
Forces, through our various partners to ensure that the 
remaining 16 Critical Infrastructure and Key Resources (CIKRs) 
for the countries' infrastructure are provided the greatest 
level of protection. And we believe firmly that aggressive law 
enforcement is a strong part of cybersecurity, which will 
benefit the Nation as a whole.
    Chairman Carper. Thank you.
    Ms. Shasky, the last word.
    Ms. Shasky. Thank you, Senator Carper. I would like to 
thank you, as my colleagues did, for convening this very 
important hearing. I heard a chief executive officer (CEO) of a 
fairly large bank, say recently that having the privilege to be 
a financial institution and be a part of the global financial 
system is just that--it is a privilege. And there is a reason 
why countries and jurisdictions ask you to be licensed to be 
one of those financial institutions, because it also comes with 
great responsibility. You have greater power in your hands as a 
part of the financial system, and particularly in this country 
with the financial system we have in the United States.
    And so while innovation is a wonderful thing and innovation 
in the financial services industry is incredibly important, it 
does come with obligations to have that entre and be able to be 
a part of the U.S. financial system. And one of those 
obligations is helping to protect that system from illicit 
actors.
    So we believe that the regulations in place have met that 
balance of mitigating the risks while minimizing the burden. In 
essence, we are asking virtual currency exchangers and 
administrators to do three things:
    Register with FinCEN. It is an online form, and it is free;
    Put in place AML protections, controls in place to harden 
yourself to the likelihood that bad actors will take advantage 
of your system;
    And maintain records and provide certain reports to FinCEN, 
including suspicious activity reports. It is something that 
many other players in the financial system already do from the 
smallest Mom-and-Pop check casher that is on the corner, 
probably just up the street here, to the biggest of the global 
financial institutions. They have all found a way to offer 
their services while maintaining those same protections. And so 
that is what we are asking of virtual currency providers. We 
believe it is reasonable given that we have seen that virtual 
currency has, in fact, been exploited by some pretty serious 
actors.
    That being said, FinCEN is constantly engaged in outreach 
to industry and have been engaged in outreach with the virtual 
currency industry. We try to bring different parts of the 
industry together so that they can learn from each other the 
best practices, for hardening themselves to illicit finance and 
to share the information we collect from them back with them, 
so that they can become even better at protecting the U.S. 
financial system.
    So at the end of the day, we hope we have that balance 
right. We think we have that balance right, but we are 
committed to continuing the discussions both with industry to 
see if that is right as well as our colleagues on the law 
enforcement side. Thank you.
    Chairman Carper. Thank you. This has been a thought-
provoking presentation and discussion. It has been encouraging 
as well. I am going to use--this is probably a stretch of an 
analogy, but I want to try to make it fit. I serve on a 
Committee called Environment and Public Works, and we wrestle 
all the time with the need to clean up our environment and to 
put in place the kind of regulatory structure, legislative 
structure, combination of laws and regulations and enforcement, 
that enable us to breathe the air and drink the water and do so 
without fear.
    I always like to say we do not have to make false choices, 
and say: We have to choose between a stronger economy and a 
clean environment. I think that is a false choice. And one of 
the questions that has been rattling around in my mind as we 
drill down on this subject, is it possible to reap the 
benefits, including the economic benefits, of this virtual 
currency, but at the same time clean up the kind of 
misbehavior, criminal behavior, that we all know is out there 
and is a concern to all of us?
    Just as I have become convinced over the years it is 
possible to have a strong economy, a stronger economy and a 
cleaner environment, I am encouraged that maybe it is possible 
to have the benefits of a virtual currency or virtual 
currencies, and to actually be able not to facilitate, but to 
hold down the kind of criminal activity and criminal 
involvement that we have talked about here today.
    So thank you for giving us both sides of the story, and we 
are going to have, I suspect, a chance to work with you some 
more, and my hope is that you will feel free to come back and 
tell us, informally or formally, what the Legislative Branch of 
our government needs to be doing to make sure that whatever 
potential there is here for our economy and for consumers is 
actually realized, while we tamp down on that illegal behavior, 
criminal behavior that we all want to eliminate.
    So I am going to just call a very short recess while we 
change up the cards. I am going to need to take a phone call 
from one of my colleagues, and we will probably resume in about 
2 minutes. But thank you all very, very much for joining us.
    Now we will just take a short recess.
    [Recess.]
    Ladies and gentlemen, I am going to ask you to find your 
seats. It looks like we have our witnesses lined up, and we 
thank you for joining us today.
    I am told that we are still going to start voting at 5:30, 
so that will probably be a hard stop for this panel. But let me 
take just a moment, if I could, to introduce each member of 
this panel, distinguished witnesses, as my notes here say, 
distinguished witnesses. Thank you.
    The first witness is Ernie Allen, who is the President and 
Chief Executive Officer of the International Centre for Missing 
& Exploited Children (ICMEC). Mr. Allen also serves as co-chair 
of the Digital Economy Task Force, which was developed to focus 
on the benefits and risks surrounding the digital economy and 
is led jointly by the International Centre for Missing & 
Exploited Children and Thompson Reuters.
    Our next witness is Patrick Murck, General Counsel for 
Bitcoin Foundation. The Bitcoin Foundation works to 
standardize, to protect, and promote Bitcoin. Mr. Murck is also 
the principal and founder of Engage Legal. His expertise 
extends across the legal and regulatory issues governing the 
use of Bitcoin, virtual economies, and alternative payment 
systems. Previously Mr. Murck worked in business and legal 
affairs at the tech company BigDoor, as an attorney at a D.C.-
based law firm, and also as an international investigative 
journalist.
    Our third witness is Jeremy Allaire. Mr. Allaire is the 
founder and CEO of Circle Internet Financial, a startup company 
focused on promoting mainstream adoption of virtual currencies. 
A serial Internet entrepreneur, Mr. Allaire also serves as 
founder and CEO of Brightcove, one of the largest online video 
platforms in the United States.
    And our final witness is Jerry Brito. Mr. Brito is a senior 
research fellow at the Mercatus Center at the George Mason 
University and Director of the Technology Policy Program. Mr. 
Brito also serves as an adjunct professor of law at George 
Mason University. His research focuses on technology, Internet 
policy, copyright, and on the regulatory process.
    Good afternoon and welcome to each of you. Your entire 
testimonies will be made part of the record, and as I said to 
the first group, you are welcome to summarize, if you would 
like, and try to keep your comments to about 7 minutes. If you 
go way beyond that, I will have to rein you in. Otherwise, we 
will be just fine.
    Mr. Allen, why don't you lead us off? Thank you.

  TESTIMONY OF ERNIE ALLEN,\1\ PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, THE INTERNATIONAL CENTRE FOR MISSING & EXPLOITED 
                            CHILDREN

    Mr. Allen. Thank you, Chairman Carper. As you mentioned, we 
have launched a Digital Economy Task Force with Thomson 
Reuters, the global media and information company. That was 
created as a result of a conference we brought together in June 
with private sector leaders and government officials to look at 
this larger problem. The task force that is working on this 
issue today includes the Bitcoin Foundation, the Tor Project, 
the Gates Foundation, the Brookings Institution, the Cato 
Institute, Vital Voices, law enforcement leaders from around 
the world, and many others. Our goal is to bring people 
together and work toward reasonable, balanced, effective 
solutions that protect the promise of the digital economy while 
addressing its misuse. And our task force will issue its final 
report in February.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Allen appears in the Appendix on 
page 78.
---------------------------------------------------------------------------
    Let me begin by saying we are enthusiastic about the 
potential of virtual currencies and the digital economy for 
social good, particularly in helping to bring about financial 
inclusion for the 2.5 billion adults on the planet today 
without access to banks, credit cards, and the mainstream 
financial system.
    However, as you have pointed out today, there are risks. 
Our primary concern is the migration of child pornography, 
child sexual exploitation, trafficking, and other criminal 
enterprises to this new economy, and we believe it is happening 
for three primary reasons: The first is anonymity; the second 
is that this is an economy that belongs to no nation and is 
overseen by no central bank; and, third, we believe that most 
countries have not yet begun to apply existing law and 
regulations to virtual currencies at the exchange level, the 
point at which virtual currencies are traded for dollars, 
euros, pounds, or yen.
    Over the past year, I have consulted with law enforcement 
experts and financial experts around the world about this 
issue, and they advise as it relates to our core concern, which 
is the exploitation of children, that child pornography is 
currently being created and disseminated using anonymizing 
technologies and using virtual currencies for payment.
    They hasten to add that it is at a lower threshold of 
volume than drugs and other criminal goods; however, they call 
the use of these technologies for child pornography significant 
because they principally involve the actual producers of the 
content who are producing content using anonymizing technology 
and using virtual currencies for payment.
    In August, the Irish owner of Freedom Hosting, which the 
FBI had called ``the largest facilitator of child pornography 
on the planet,'' was arrested. Freedom Hosting maintained 
servers for a number of the so-called deep web child 
pornography sites--Lolita City, PedoEmpire, the Love Zone, and 
others--all of which accepted digital currencies for payment.
    To shut down Freedom Hosting, law enforcement exploited a 
vulnerability in the site to penetrate its anonymity and expose 
the Internet Protocol (IP) addresses of the users.
    Regarding Bitcoin, all the transactions are visible and 
transparent. The challenge for law enforcement is to go from 
that transaction to an actual person.
    The primary challenge that we have learned in our 
consultations with global law enforcement today is growing 
Internet anonymity. A recent headline read, ``There's A Secret 
Internet For Drug Dealers, Assassins and Pedophiles.'' This so-
called deep web includes sites like Silk Road, but it also 
includes sites for the purchase of weapons and counterfeit 
currencies and stolen credit cards and assassins and child 
pornography sites. All of these sites accept digital currencies 
for payment.
    What I hear most from law enforcement today is frustration. 
The primary investigative technique I have been told that law 
enforcement around the world is using to investigate these 
operations is infiltration. But infiltration is expensive, it 
is time-consuming, and it is often ineffective.
    And while there are some arrests, the research indicates 
that most of the arrests are of those who use the anonymizing 
technology improperly and leave a trail. They connect to a non-
anonymous IP address providing a trail to follow. And even the 
Silk Road arrest involved an offender who made a series of 
mistakes that made it possible for him to be identified.
    My concern is, with the absence of existing law enforcement 
tools, we are not catching the truly sophisticated, the most 
high-risk organized criminal offenders.
    Through our task force, one of the things that we are doing 
is exploring new techniques, including clustering Bitcoin 
transactions to identify patterns, and we hope to learn from 
the techniques that were utilized by law enforcement to 
penetrate Freedom Hosting.
    For the future, the pace of innovation will quicken. There 
will be new technologies, and the intensity of the effort to 
achieve total Internet anonymity will increase.
    You asked, ``What can Congress do?'' I think there are four 
things.
    First, you can ensure that existing law and regulation 
focusing on the point at which virtual currencies are being 
exchanged for conventional currencies are used.
    Second, you can press for global cooperation. Digital 
economy funds flow globally, network to network, not nation to 
nation. This is a problem that the U.S. Government cannot solve 
alone.
    Third, you can ensure that the response of government to 
the fragile, emerging, high-risk but high-reward area is not so 
draconian that the effect is simply to push these enterprises 
out of the United States into countries where there is little 
or no regulation.
    And, finally, you can help us address the core challenge: 
Internet anonymity. For all of its importance in protecting 
political dissidents, journalists, and others, we are very 
concerned that an environment not be allowed to prosper in 
which child exploiters and traffickers can operate with no risk 
unless they make a mistake.
    Three years ago, the then-Secretary of State Hillary 
Clinton in her remarks on a free Internet said, ``On the one 
hand, anonymity protects the exploitation of children. And on 
the other hand, anonymity protects the free expression of 
opposition to repressive governments.'' She added, ``We should 
err on the side of openness while recognizing there are going 
to be exceptions.'' That is our challenge, Mr. Chairman, to 
determine how anonymous the Internet can be. From the 
perspective of government and law enforcement around the world, 
we feel that absolute Internet anonymity is a prescription for 
catastrophe.
    Thank you, sir.
    Chairman Carper. Thank you, Mr. Allen. Very good testimony.
    Mr. Murck, welcome.

  TESTIMONY OF PATRICK MURCK,\1\ GENERAL COUNSEL, THE BITCOIN 
                        FOUNDATION, INC.

    Mr. Murck. Good afternoon, Chairman Carper. I am pleased to 
have the opportunity to speak with you today. My name is 
Patrick Murck. I am general counsel for the Bitcoin Foundation. 
I am a founding member of the Bitcoin Foundation, and I have 
been an executive in legal and business development for a 
number of digital currency companies. Additionally, I serve on 
the Board of Directors for the BitGive Foundation, a fledgling 
charitable organization for the Bitcoin community.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Murck appears in the Appendix on 
page 90.
---------------------------------------------------------------------------
    The Bitcoin Foundation is a member-driven nonprofit 
representing a global constituency of businesses and 
individuals contributing to the overall Bitcoin ecosystem. Our 
membership is comprised of many of the top companies, 
entrepreneurs, and technologists working to make Bitcoin a 
success. The foundation's mission is to promote, protect, and 
standardize the use of distributed, decentralized currencies 
and to free people to transact on their own terms in the global 
economy.
    Having said that, there is no Bitcoin company that manages 
or controls the software or its operation. The software is 
built and maintained by a community of volunteer open-source 
software engineers and a distributed network of transaction 
processing, often referred to as ``mining.'' At its most basic 
level, Bitcoin is an Internet protocol. It is like e-mail for 
money.
    The Bitcoin protocol operates a decentralized store of 
value and an open and transparent payment network that is 
secure, efficient, and low cost. The Bitcoin network can 
operate without any third-party intermediaries and is a highly 
innovative global financial system unto itself.
    In the near future, the Bitcoin protocol will also 
facilitate advanced payment services, and experiments are 
currently underway to provide additional non-financial 
services, like property management and identity verification.
    Open and participatory systems like Bitcoin will produce 
many economic and social benefits. These systems can reduce 
exploitation of vulnerable populations the world over and here 
in the United States by providing a safe and private store of 
wealth in addition to a global transaction network that cannot 
be corrupted or abused by those who would seek to exploit or 
harm others.
    Financial exclusion is a U.S. problem. It is not just a 
problem for the global South. There is a rising tide of 
unbanked and underbanked people right within our borders. This 
is important because access to financial services directly 
correlates to increases in dignity, liberty, and self-
determination.
    Bitcoin can help move people trapped in a cash-based 
informal economy into a globally connected digital economy. At 
the same time, we acknowledge that, like any technology, there 
is a potential for abuse of this system. Bitcoin can be used 
for illicit purposes, and the law enforcement community may 
have to develop new methodologies for interdicting and 
investigating criminal activity on the network. This does not 
mean that it will be any harder to prevent the misuse of the 
Bitcoin network than existing financial systems.
    As we heard in earlier testimony, in Bitcoin's short 
history, law enforcement and regulatory agencies have had a 
string of notable successes already. Rather than belabor the 
overwrought headlines about misuse of Bitcoin in the digital 
economy, we should be congratulating the law enforcement 
community on their hard work and skill in adapting 
investigative techniques to an increasingly digital and openly 
networked world. Keeping the Bitcoin network safe is all of our 
responsibility, and industry-led efforts are underway to help 
prevent abuse.
    Like you, Mr. Chairman, we are looking beyond the Silk 
Road. When the alleged operator of that black market website 
was arrested, the markets expressed relief and optimism with a 
long and sustained rally in the price of Bitcoin.
    Decentralized currencies like Bitcoin have a different risk 
profile from centralized currency systems. Central control of 
the transaction ledger allows bad actors to shroud their 
activities. Decentralized systems with open ledgers are 
inherently transparent and may prove too difficult for use in 
any large-scale and sustained illicit activity.
    As we address law enforcement concerns, we must bear in 
mind that because of this open and transparent architecture, we 
need to consider the privacy of law-abiding individuals. As it 
turns out, the blockchain, which is Bitcoin's public ledger 
system, may be so revealing that the larger problem with 
Bitcoin is not anonymity for criminals, but the difficulty law-
abiding people have maintaining their own privacy.
    Bitcoin is not some magical cloaking device that simply 
allows criminals free rein, nor does Bitcoin pose a unique or 
unsolvable threat to the law enforcement and regulatory 
community. The use of Bitcoin is not unregulated. In fact, 
Bitcoin service providers operate in heavily regulated business 
environments with deeply entrenched competitors.
    For these potential competitors, be they banks, payment 
networks, financial service companies, Bitcoin also represents 
an opportunity for them to start innovating again. These 
institutions already have a deep understanding of the controls 
and risk management necessary to safely handle Bitcoin 
transactions and secure consumer Bitcoin accounts. Instead, 
what we have seen is a chilling effect through the banking 
industry as Bitcoin companies try and gain bank accounts.
    The United States has a strong interest in maintaining its 
place as a global leader in developing cutting-edge technology 
and spreading individual freedom and liberty around the world. 
The digital economy is poised to be a driver of significant job 
creation and economic growth.
    Fostering the development of a legitimate Bitcoin business 
in the United States also is the best preventive measure we can 
take to keep good actors in the system. Applying consistent 
rules and regulations that encourage technological 
experimentation is critical to a vibrant, entrepreneurial 
community. This Committee's work is undeniably helpful in 
charting a safe and sane regulatory environment for the digital 
economy in general and Bitcoin specifically.
    As one entrepreneur and member of the Bitcoin Foundation 
put it succinctly, ``If you give us clear rules, we will follow 
them and we will build jobs.'' Development of clear rules 
appears to be happening faster at the Federal level than at the 
State level.
    Having said that, we are encouraged by early signs of 
leadership from States like California and Georgia. We believe 
a healthy and respectful dialogue between key stakeholders will 
help ensure that the substantial benefits of the digital 
economy are met while mitigating many of the risks.
    In particular, we would like to thank FinCEN for opening up 
a dialogue with the Bitcoin community and for demonstrating 
leadership on this issue at both the Federal and State level.
    The Bitcoin Foundation looks forward to continuing this 
open dialogue and thanks the Committee for allowing us to 
participate in this hearing.
    Chairman Carper. Thank you, Mr. Murck. Mr. Allaire.

 TESTIMONY OF JEREMY ALLAIRE,\1\ CHAIRMAN AND CHIEF EXECUTIVE 
            OFFICER, CIRCLE INTERNET FINANCIAL, INC.

    Mr. Allaire. Chairman Carper, thank you for hearing my 
testimony this afternoon. My name is Jeremy Allaire, and I am 
the founder and CEO of Circle Internet Financial, a recently 
launched financial services company aimed at facilitating 
payments and money transfers using global digital currency such 
as Bitcoin. I have been building Internet software platforms 
and online service companies for 20 years, having founded and 
helped to lead multiple global public companies, with products 
used by hundreds of millions of consumers and hundreds of 
thousands of businesses globally.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Allaire appears in the Appendix 
on page 114.
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    I am here to testify because I believe that digital 
currency represents one of the most important technical and 
economic innovations of our time. Specifically, digital 
currency introduces advancements in electronic payments and 
money transfers, potentially materially lowering costs for 
businesses around the world, decreasing fraud risk for 
consumers and merchants, increasing consumer privacy, and 
expanding the market for consumer financial products on a 
worldwide basis.
    As this technology moves from early adopters into 
mainstream acceptance, it is critical that Federal and State 
governments understand how Bitcoin fits into existing 
regulatory guidelines and how to apply them to digital 
currency. These should uphold consumer protections associated 
with fraud and privacy risks, ensure that criminals and bad 
actors find it increasingly difficult to utilize these 
platforms, and provide income tax clarity to consumers and 
businesses that conduct business using digital currency.
    It is very clear that over the past 20 years the Internet 
has been at the center of global economic innovation. Open 
platforms have transformed communications, media, software, 
education, commerce, and retail, but for a variety of reasons, 
the technology and business models around finance have been 
insulated from similar transformations. This same open platform 
approach in digital currency, specifically Bitcoin, presents an 
opportunity for the same level of innovation and advancement in 
forms of currency, trade, and payments that we have seen 
brought to bear on other industries.
    I do not think there is much debate that we need to see 
innovation and transformation in banking and finance, not just 
reform and remediation. Specifically, our payment systems are 
inefficient and very much built upon systems and processes that 
predate the Internet. The result is higher costs for consumers, 
lower margins for business, and less efficient economic 
interaction. And in many cases, our financial systems have 
excluded enormous bases of consumers who remain unbanked or 
underbanked. The combination of ubiquitous Internet-connected 
mobile devices and digital currency presents a tremendous 
opportunity to expand access to financial services on a 
worldwide basis.
    Payments and money transfers are still operating in the 
pre-Internet era. Today we can communicate with almost anyone 
in the world, including in video format, at no cost. We have 
instant access to an enormous amount of the world's knowledge, 
also effectively at no cost. We have instant access to more 
media than we ever imagined was possible, again, almost at no 
cost. Yet to send money between friends and family, whether 
across the table or across the planet, takes days and costs a 
significant amount in transaction fees. To accept payments, 
merchants must bear significant fraud risk; consumer privacy is 
often threatened; and likewise it takes days for a merchant to 
actually receive money from an electronic payment, not to 
mention the widely perceived high costs of transaction fees.
    So what are we at Circle specifically doing about this? At 
Circle, we are building online services for consumers and 
businesses to be able to easily use digital currency and 
specifically Bitcoin. For consumers, we intend to enable them 
to easily purchase, store, send, receive, and make payments 
using Bitcoin. And for businesses, we are providing tools to 
help them easily accept digital currency payments.
    We are fully committed to complying with all applicable 
laws and regulations and establishing comprehensive risk 
management protocols. We have registered with FinCEN as a money 
transmitter and are actively seeking appropriate licenses from 
U.S. State financial authorities. We are developing our 
platforms to provide very high levels of security for our users 
and employing industry-leading approaches to customer identity 
verification, fraud remediation and anti-money laundering, 
designed in partnership with leading regulatory advisors and 
experts.
    I want to talk for a minute, though, about some of the 
risks inherent in digital currency platforms such as Bitcoin.
    First of all, as has been made amply clear from earlier 
testimony, I want to emphasize that I believe that U.S. 
regulators and law enforcement are justifiably focused on the 
potential use of digital currencies to finance criminal 
activities, including terrorism. But in addition to FinCEN's 
guidance and the appropriate requirement that Bitcoin operators 
implement Bank Secrecy Act provisions, it is also a risk if the 
government does not support innovative companies gaining access 
to U.S. banking institutions, which will drive companies 
offshore and overseas.
    Another risk is that businesses' adoption of digital 
currency will be hampered without clarification from the IRS on 
income generated from sales denominated in digital currency, 
and such guidance is also needed to thwart potential tax 
evaders. Without clear guidance on consumer protections 
required of Bitcoin operators, consumers and businesses could 
be defrauded through inadequate systems and risk management 
procedures around customer funds.
    Another risk is that the United States falls behind in this 
critical emerging economic innovation. Regulatory uncertainty 
could hold back American companies from participating in 
driving digital currency innovation. Indeed, today a Bitcoin 
exchange in China has become the largest single trading 
exchange in the world, followed by exchanges in Japan and 
Europe. We need to uphold and support our incredible history in 
America of supporting technical innovation and 
entrepreneurship.
    In terms of U.S. regulation, it appears to me that Federal 
and State regulators seem to have ample statutory authority to 
adopt regulations and take enforcement actions as necessary to 
protect consumers and ensure responsible conduct in the world 
of Bitcoin commerce and that enforcement actions to date have 
been constructive. We stand ready to assist them in their 
ongoing efforts to adapt their regulatory tools to new digital 
currency.
    I believe we are at the forefront of another 20-year 
journey of Internet-led transformation, this time in our global 
financial systems, and there is a real opportunity to foster 
that economic change while simultaneously putting in place the 
safeguards that only government can enable.
    Mr. Chairman, that concludes my prepared testimony. I would 
be happy to answer any further questions.
    Chairman Carper. Thank you, sir. That was very helpful 
testimony. Thanks.
    Mr. Brito, please proceed. Welcome. We are delighted that 
you are here.

   TESTIMONY OF JERRY BRITO,\1\ SENIOR RESEARCH FELLOW, THE 
            MERCATUS CENTER, GEORGE MASON UNIVERSITY

    Mr. Brito. Mr. Chairman, thank you for having me here 
today. We are here today to discuss virtual currencies in 
general, but it is Bitcoin in particular that has so many 
interested in this topic.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Brito appears in the Appendix on 
page 120.
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    But online virtual currencies are nothing new. They have 
existed for decades, from World of Warcraft Gold to Facebook 
Credits to e-Gold. And neither are online payments systems new. 
PayPal, Visa, and Western Union Pay--these are all examples. So 
what is it about Bitcoin and similar cryptographic currencies 
that makes them unique?
    Whatever one may think about Bitcoin's prospects for 
enduring value, it is safe to say that it is a remarkable 
technical achievement. Bitcoin is the world's first completely 
decentralized digital currency, and it is the decentralized 
part of that sentence that is really unique. Prior to Bitcoin's 
invention in 2009, online currencies or payment systems had to 
be managed by a central authority, whether it was Facebook 
issuing Facebook Credits or PayPal ensuring that transactions 
between its customers were reconciled. However, by solving a 
longstanding conundrum in computer science known as the 
``double spending'' problem, Bitcoin for the first time makes 
possible transactions online that are person to person, without 
the need for an intermediary between them, just like cash.
    This technical breakthrough presents potential benefits for 
consumers and the economy as well as challenges to law 
enforcement. For example, because there is no central authority 
in Bitcoin transactions, there are little to no fees associated 
with those transactions, which especially benefits small 
businesses and price-sensitive consumers. And because Bitcoin 
is not a proprietary platform run by a single company but 
instead it is an open network, entrepreneurs need no permission 
to experiment or to innovate new products and services.
    On the flip side, law enforcement has long relied on 
financial intermediaries to help them detect, prevent, and 
investigate illegal transactions. Because Bitcoin transactions 
can have no intermediaries, and because Bitcoin transactions 
are not necessarily tied to identities, it is not surprising 
that we have seen Bitcoin employed in criminal transactions. In 
particular, Bitcoin has been used for the sale of drugs and in 
malware that holds one's data hostage. It is also not difficult 
to imagine how the technology could be employed in money 
laundering.
    Emerging technologies often present both great potential 
benefits as well as real risks. For example, 3D printing can be 
used to cheaply make prostheses and life-saving medical 
devices, but also undetectable firearms. Domestic commercial 
drones have the potential to revolutionize agriculture and 
shipping, but could also be used for stalking. The challenge 
for policymakers is to address the risks posed by emerging 
technologies while doing no harm to the innovative potential of 
that technology.
    In many cases where emerging technologies pose risks, there 
are already laws and regulations of general applicability that 
address many of those risks without the need for new laws 
targeted at the specific technology. This is the case with 
Bitcoin. While Bitcoin transactions do not require 
intermediaries, one must still acquire Bitcoins by exchanging 
dollars, and merchants that accept Bitcoins will very often use 
Bitcoin payment processors. Indeed, there is a fast-growing 
ecosystem of startup exchanges, payment processors, and wallet 
and escrow services that make up Bitcoin's burgeoning 
infrastructure. Each of these are already subject to regulation 
as money transmitters, including State licensing and FinCEN 
registration, as well as Know Your Customer and suspicious 
activity report requirements.
    More to the point, serious criminals looking to hide their 
tracks are more likely to choose a centralized virtual currency 
run by an intermediary willing to lie to regulators for a fee, 
rather than a decentralized currency like Bitcoin that, as a 
technical matter, must make a record of every transaction, even 
if pseudonymously. While the online black market Silk Road, 
which used Bitcoins, is estimated to have generated less than 
$200 million in drug sales, the centralized digital currency 
Liberty Reserve is believed to have laundered more than $6 
billion related to credit card fraud, identity theft, computer 
hacking, and child pornography. The reason Liberty Reserve, and 
not Bitcoin, was the payment system of choice for criminals 
online is that it was designed and managed by its creators to 
avoid Know Your Customer and reporting rules and to evade 
subpoena.
    As a result, the path forward that can best confront risks 
while ensuring that we can reap Bitcoin's beneficial potential 
is to allow the Bitcoin network and its surrounding 
infrastructure to develop by making sure that entrepreneurial 
innovators can easily comply with existing regulation. The 
alternative, promulgating special regulations for virtual 
currencies or otherwise making it more costly to operate 
legitimately in the space, could have two unintended 
consequences. First, it might mean ceding the network to 
exclusively illegal use and forgoing any visibility that law 
enforcement could otherwise gain into the activities of 
compliant firms. And, second, the United States could lose its 
head start in what may be the next big breakthrough industry if 
it establishes a regulatory regime that hampers Bitcoin while 
other countries, like China, Canada, and Germany look for ways 
to develop workable regulatory frameworks for Bitcoin.
    Finally, as regulatory and law enforcement agencies seek to 
apply existing laws to Bitcoin, they will face the challenge 
that Bitcoin is not a company with an easily identifiable 
executive, but instead it is an open-source project and a 
community. The Bitcoin Foundation is central to that community, 
but it does not encompass the whole community. So as new 
guidelines and procedures are developed, policymakers should 
make sure to engage the community and solicit comments from the 
public to ensure that they benefit from a wide range of 
perspectives.
    Thank you for your time, and I look forward to your 
questions.
    Chairman Carper. Thanks very much for joining us today and 
for that testimony.
    If you were here during the testimony of the first panel, 
you heard me indicate that one of the things I like to do to 
address an issue like this, around which there is not a great 
deal of consensus, is to use these hearings as an opportunity 
to see if we can develop some. And I thought we made a little 
progress with the first panel, and I am hopeful that we can 
replicate that with this second panel of witnesses.
    Toward that goal, let me just ask you to reflect on what 
you have heard from your colleagues on this panel, and just 
tell me and the staff members that are here and whoever is 
watching on television here in the Capitol or outside the 
Capitol, where do you see the agreement among the four of you. 
The perspectives you shared with us--the opinions that you 
shared with us, where do you think there is general agreement?
    Second question, where do you think there is not agreement? 
And how do we go about reconciling that lack of agreement, if 
we can? Mr. Allen, do you want to go first?
    Mr. Allen. Senator Carper, I think there is broad-based 
agreement about the potential of a digital economy and virtual 
currencies. I think there is absolute agreement that there is 
enormous potential for social good and that this is an emerging 
technology that needs to be protected.
    I also think there is clear agreement that we cannot just 
ignore the misuse and that the misuse of a digital economy and 
virtual currencies jeopardizes the viability of virtual 
currencies in the longer run. So I do not think there is 
disagreement at all on those points.
    As it relates to area--and I also do not think there is 
disagreement on the need for basic regulation using the 
existing tools: the application of AML, the application of 
money transmitter laws at the exchange level, Know Your 
Customer, those kinds of provisions.
    I think maybe the greatest challenge, the greatest area 
that we have to grapple with is how do we enforce the 
enforcement techniques to deal with the misuse while preserving 
the potential long term and the fact that this truly is a 
global phenomenon. This is something that we are just beginning 
to adress--the FinCEN guidance on this was just issued in March 
of this year. The FATF guidance that Director Shasky talked 
about, the Financial Action Task Force, their guidance on this 
issue was just issued this summer, I think in July.
    So my sense is that most of the world is not applying money 
transmitter laws, is not applying any money laundering 
principles. So I think the question of how we get from here to 
there regarding an area that there is not great knowledge and 
understanding about is really the issue that the four of us 
would have to grapple with.
    Chairman Carper. Thank you.
    The same question, Mr. Murck, if you would, please. Where 
do you see consensus agreement? Where do you see a lack of 
that? And how do we go about reconciling that lack of agreement 
or consensus?
    Mr. Murck. I will take the second part first. I do not know 
that I heard a lot of disagreement or anything that we would 
generally disagree with from this panel or even really from the 
first panel. I was heartened by that. I think that Ernie is 
correct that, as we move forward, I think that an open dialogue 
is good so that as those disagreements do crop up--and they 
likely will--we can address them quickly and in a safe and sane 
way.
    As to where we have agreement, I think what I heard from 
the other panelists is there is a real need to create on-ramps 
into the traditional financial system, that by creating those 
on-ramps, especially here in the United States, you help to 
protect the system from abuse.
    The biggest obstacle to that happening today is not from 
regulation or from law enforcement. It is from the ability of 
businesses in the space to get bank accounts and to be 
integrated into the banking system.
    There is currently a chill in the banking system and in the 
banking industry that is preventing businesses from getting 
just simple--even simple checking accounts. There are stories 
that if you have the word ``Bitcoin'' anywhere in your name or 
your documentation, your application will be immediately placed 
in the circular file, as it were.
    So I think there is a need to create some leadership within 
the banking industry to make sure that these companies are 
onboarded into the traditional system where some of the 
protections are in place already and the illicit activity can 
be detected and rooted out.
    Chairman Carper. Good. Thank you. Mr. Allaire.
    Mr. Allaire. I would like to echo some of the other 
panelists' comments. Clearly there is consensus here around the 
innovation that we see the potential for financial inclusion. I 
think there is consensus that many of the regulatory frameworks 
and tools are sufficient and being applied appropriately. I 
think there is consensus that the open nature of this 
technology, its development, its use, and its oversight, is a 
very positive framework.
    I do think that there is some tension around the question 
of the balance between anonymity and privacy and whether there 
are new laws that are required to end the possibility of 
anonymity on the Internet or to address that in some way. I 
think, as I stated, in my comments, we are very focused within 
our business on having very deep levels of identity 
verification, and so we view that as critical. But others 
within the digital currency world, particularly within 
geographies that do not have the same kinds of regulatory 
regimes, may not. And are there other things that we need to be 
thinking about, other tools that we need to be thinking about 
for law enforcement that can address some of those issues? So I 
think that arena needs additional and careful consideration.
    Chairman Carper. All right. Thank you. Mr. Brito.
    Mr. Brito. So I think there certainly is broad consensus 
among the panel up here, and I was very heartened to hear the 
first panel's message, and I think we have a lot of consensus. 
I will pick two issues just to give you an answer.
    First, where is there agreement, I was very interested in 
listening to the gentleman from the Secret Service who said 
that, in fact, it is centralized currencies that pose the 
greatest risk as far as money laundering and other illicit 
uses, and that decentralized currencies like Bitcoin, because 
of their nature, were not a greater risk. I think that was a 
great point of agreement there.
    To pick a point of disagreement, Ms. Shasky took issue with 
the idea that U.S. businesses might move overseas seeking a 
better regulatory environment, and I think her suggestion was 
that if somebody leaves the United States seeking lax 
regulatory treatment, they are going to find it eventually. It 
is going to catch up with them. And I think the danger is not 
that somebody who is trying to facilitate an illicit business 
is going to leave the United States. The danger is that real 
hard-working entrepreneurs who are looking to comply just do 
not find a regulatory environment that is amenable here. And 
that is something that we do not want to let stretch for too 
much time.
    Chairman Carper. OK. Thank you. I want to go back to Mr. 
Allen. I think you mentioned the guidance issued earlier this 
year by FinCEN, and I am going to probably ask Mr. Allaire to 
lead off and respond to this question. But they issued their 
guidance earlier this year, I think back in the spring, and 
they stated that virtual currency exchangers and administrators 
would need to register as money service businesses and apply 
for money transmitter licenses in the 48 States that require 
such licenses.
    I want to ask you just to focus on this with me for a 
little bit. I am going to ask you--and some of you have already 
alluded to this guidance and given it some thought, but I just 
want you to give me your thoughts on this guidance from FinCEN. 
Do you believe that the approaches are a good fit for virtual 
currency exchanges or other virtual currency-related 
businesses? And, Mr. Allaire, I am told that your company has 
registered with FinCEN and has applied for money transmitter 
licenses in a couple of States. So could you, if you would, 
just offer the first response.
    Mr. Allaire. Sure. I think a business that is going to 
handle consumer funds, store and manage those, and is going to 
interact with the banking system should be compliant with the 
rules that have been set forth through the Bank Secrecy Act to 
protect consumers and ensure that bad actors are not able to 
operate. So I think in general we very much think that these 
are appropriate guidelines, and I think the digital currency 
business from an entrepreneurial perspective may be different 
than other prior Internet businesses. Two guys can build a 
photo-sharing app and put it up on the Web and get a billion 
users. I do not think it is appropriate that two guys should be 
able to build a financial services business and operate that 
without a sufficient investment to protect consumers and 
protect society.
    And so I do believe that the bar needs to be higher for 
financial services businesses in the United States, and that it 
is not realistic, which I think some in the entrepreneurial 
community would like to see regulation which does not require 
that level of compliance. I do not think that is realistic.
    When I founded the company and sought capital to build this 
company, we understood that the bar was higher and we raised 
sufficient capital to be able to launch our product and service 
in a compliant manner and hire the professionals and staff and 
put in place the systems and protections that were critical. So 
we think it is appropriate. There are challenges with how many 
transmission licenses are granted in the United States, the 
broad number of States, the divergent approaches that each 
State might take, and I do think that creates cost and 
complexity and could be argued to be an unnecessary regulatory 
burden. But that is the system that we have, and that is the 
system that we are pursuing and operating within.
    Chairman Carper. Good. Thanks. Others on the same issue, 
Mr. Allen, do you want to----
    Mr. Allen. Yes, just briefly, Senator Carper. I agree with 
Mr. Allaire totally, and what I think is most appropriate about 
the FinCEN guidance is that it is focused at the exchange 
level. It does not apply to users, it is an application of 
basic money transmitter law, and I think it is an appropriate 
use of the existing law, and I think it is a reasonable 
approach.
    I agree with him that one of the great challenges is 
creating consistency and uniformity because of our Federal 
system and the fact that there could be 50 different 
approaches. But that is not unique to this issue.
    Chairman Carper. OK. Thank you.
    Mr. Murck, any thoughts, please?
    Mr. Murck. Yes, the 50-State money transmitter license 
regime has come up. I do think that States have an interest in 
protecting their consumers. At the same time, it is a bit 
burdensome and it has slowed down progress in the United 
States; I do not know what the answer to that question is. I 
know in the European Union (EU) they have a system of 
reciprocity where they have a minimum threshold for each 
country, and if you attain a license in one country, you can 
passport it to other countries as well. Perhaps that is a 
framework that would work here. But that would be best left to 
the Legislative Branch.
    Chairman Carper. All right. Thanks.
    Mr. Brito, any thoughts?
    Mr. Brito. One small point regarding the FinCEN guidance. I 
think it is very clear as it applies to exchanges and to 
administrators of centralized virtual currencies. I think it is 
less clear when it applies to users, for example. The guidance 
says that you are not required to register with FinCEN if you 
are acquiring, say, Bitcoin in order to buy goods or services. 
But let us say, for example, that--my mother is from Spain, and 
recently I helped her send money back home, and it cost 5 
percent of the total amount. What if I was buying Bitcoin 
simply to remit money overseas as, could be one of the great 
potential benefits to allow remittances to the Third World and 
to other countries? That is not covered by the FinCEN guidance.
    So I think the guidance could use further explanation, and 
I think if FinCEN were to put any further clarification up to 
public comment, they would, I think, get all the wrinkles out.
    Chairman Carper. OK. Thanks.
    Let me go back to you, if I could, Mr. Allen. I understand 
that your organization, International Centre for Missing & 
Exploited Children, was one of the forerunners in bringing 
together private and public stakeholders to talk about virtual 
currencies. If you would, first a couple questions. Who was 
involved in your working group? And why did you form it?
    Mr. Allen. Mr. Chairman, we formed it because several years 
ago we had a very positive experience in bringing together 
financial industry leaders around the fact that the mainstream 
financial system, the mainstream payment system, credit cards, 
were being used for the purchase and distribution of child 
pornography. I called the chairman of a major credit card 
company and said, ``How is this possible?'' And he said, ``We 
do not know what these transactions are for. If you can find 
for us, show us where the merchant bank is, where the account 
resides, this is an illegal use of the payment system, we can 
stop the payments, we can shut down the accounts.
    So we brought together coalitions in North America, Europe, 
and Asia and had enormous positive impact. There was a dramatic 
decline. But as I began to talk to law enforcement and other 
leaders around the world, what we determined was that we did 
not end it. We just moved it. And we were seeing evidence of a 
migration of these kinds of illegal operations into this new 
economy.
    And so in an effort simply to try to understand it better 
and determine if it was a problem, to use that same model to 
bring leaders together, private sector leaders together to try 
to develop shared commonsense solutions, that is why we joined 
with Thomson Reuters to create this task force. And it includes 
the Bitcoin Foundation, it includes the Tor Project, it 
includes the Gates Foundation and the Brookings Institution, 
the Cato Institute, Vital Voices, a human rights group. It 
includes multiple law enforcement groups and representatives.
    The intent was to bring people together, better understand 
the problem, and search for common ground, and so that has been 
our process.
    Chairman Carper. Let me just follow that up, and you have 
partly answered this question, but I want to ask it anyway. But 
just share with me a bit further what you have been able to 
learn from the dialogue that you facilitated, especially as it 
pertains to the exploitation of children around the world.
    Mr. Allen. I think we have really learned a lot in a short 
time. One of the challenges is most of the evidence is 
anecdotal, because relatively few cases are actually being 
made, as we have talked to law enforcement. I talked about that 
earlier in terms of the absence of investigative techniques to 
probe these kinds of things.
    But I think we have learned that there is broad-based 
interest in searching for and finding reasonable solutions that 
work. We have learned, I think, as was pointed out earlier, 
that the digital economy is far broader than Bitcoin. So the 
issues we are focusing on are not just Bitcoin but, for 
example, there are 22 million users today of Russia's WebMoney. 
We have talked about Liberty Reserve and the case that was made 
there, $6 billion in illegal money laundering.
    So I think we are discovering it is a complex issue, but I 
think it is one that is addressable, and I think the most 
encouraging thing to me is I now believe it is addressable 
using many of the tools and laws that we already have in place; 
that one of the biggest challenges for policymakers is simply 
to increase the level of awareness so that countries around the 
world will begin to use the tools they already have.
    Chairman Carper. Well, that in part is why we are having 
this hearing. Good.
    I was talking with a fellow who goes to the same church as 
we do back in Delaware the other day. He is in the auto 
business, sells a lot of cars. He has dealerships, sells a lot 
of cars in our State. And he was talking about the work of the 
Consumer Financial Protection Bureau (CFPB) established a 
couple of years ago, hopefully to look out for the interests of 
consumers throughout this country in a lot of different ways. 
But I want to focus just a little bit on consumers, if we 
could.
    I have been told that virtual currencies pose a number of 
questions as to their use by consumers, and I have maybe two 
questions, but the first is--maybe we should go down the panel, 
or go up the panel. Mr. Brito, we will start with you. And if 
you will, just give us some of your thoughts on whether virtual 
currencies have sufficient protections built into them for 
consumers. And do virtual currencies raise any additional new 
issues for consumer protection? For example, do we need to do 
anything to better protect consumers from fraud or to protect 
consumer privacy as a result of these virtual currencies?
    Mr. Brito. I think that this is a very nascent industry and 
is still trying to find its way. As a result, that means that 
the folks who are, at this point, participating in this economy 
really have to try hard to participate in it. So these are not 
your average consumers, just yet, jumping into this space.
    So at this point I think it gives regulators some time to 
learn more about the technology and learn more about what the 
industry players are doing to address these concerns and 
whether the existing consumer protection laws are enough.
    As far as opportunities, what is interesting about 
especially decentralized digital currencies is that they 
provide a new choice for consumers. Today, if you want to use 
electronic payments, you are probably going to be using a 
credit card or something like PayPal, and that comes with fees, 
sometimes high fees, and those fees are important because they 
provide things like insurance. If your identity is stolen or if 
something that you receive is not what you ordered, you can 
always have the charge reversed.
    Decentralized digital currencies are alike in that there is 
nothing to reverse, but that also means that there are very 
little fees. So this now presents a new choice for consumers. 
They can choose insured but more expensive or not insured but 
less expensive. That is a new choice for consumers that was not 
there before.
    Chairman Carper. OK. Thank you. Mr. Allaire.
    Mr. Allaire. I think there are many issues around consumer 
adoption of digital currency. I will touch on a couple of them.
    We emphasize that Bitcoin as a digital currency offers 
great potential to lower the fraud risk that both consumers and 
merchants face on a day-to-day basis when we conduct payments. 
When we go into a restaurant and give our credit card out or 
when we enter that information online, we are effectively 
giving out the keys to our bank account to every counterparty 
that we interact with. And so it should not be a surprise that 
we have seen dramatic growth in the amount of identity theft 
and specifically financial information, private financial 
information being stolen and sold on black markets and used for 
nefarious reasons.
    Protocols like Bitcoin reduce that risk because the keys to 
your bank account, the keys to your money are never 
transmitted, and that is one of the brilliant aspects of the 
design of the system. And so there is real potential to lower 
occurrences of financial fraud in consumer transactions and 
increase consumer privacy as a result.
    So I think those are really key benefits, but there are 
risks, clearly, for consumers. I think one risk--and this is 
one that we take very seriously as we look at this--is 
increasingly, because of ease of use, consumers that want to 
take advantage of things like Bitcoin are using online services 
that essentially host their Bitcoin on servers or on the 
Internet. And because Bitcoin itself, the mechanism by which 
funds can be used, is based on keys that we then in turn would 
store, there is a real risk around the security of funds, and 
we have seen occurrences just in the past weeks of startups who 
did not have appropriate levels of security around those funds, 
and those funds were effectively stolen.
    And so I think there is really critical requirements around 
the safeguarding of funds, the custodianship of these keys and 
best practices and methods to employ that. I think industry is 
driving forward on that, but I think that is a key issue that 
the CFPB may take a look at.
    The flip side, which is this question of what I would call 
merchant fraud, which is the chargeback scenario--you did not 
get the product, you got the wrong product, someone had 
inappropriately used your account--I think that there are 
methods for addressing that within the technology of Bitcoin 
today and within improvements that are coming in upcoming 
versions of Bitcoin, mechanisms to create refunds to consumers, 
mechanisms to provide greater transparency around what you are 
paying for. And there are mechanisms even that are not well 
understood, I think generally, but which will become available 
where funds can be held in escrow until a product has been 
delivered to a consumer. So there are ways to address some of 
that merchant fraud risk as well, and I think you are going to 
see industry participants pushing forward on that in the coming 
months and years.
    Chairman Carper. OK. Thanks.
    Mr. Murck, any thoughts?
    Mr. Murck. Yes. Thanks for the question. There are consumer 
protection issues in the Bitcoin space, and I will reserve my 
comments strictly to Bitcoin and decentralized currencies.
    When you look at Bitcoin especially, we have not even 
released Version 0.9 yet, so we are not on Version 1.0. It is 
very much still an experimental currency, and it should be 
considered a high-risk environment for consumers and investors 
at the moment.
    That is changing over time as businesses like Mr. Allaire's 
and others' are coming into the space and building the service 
layers on top of the Bitcoin protocol to make it safer for 
consumers to move in. Those service layers are both 
technological--Bitcoin has been referred to as ``programmable 
money,'' so you can build in layers of escrow and dispute 
mediation and things like that right into your payment 
structure, which is a very interesting concept as most of the 
laws that exist for consumer protection in the payment space 
were built around traditional methods where those were not 
possible. So potentially you do not need as much regulation on 
the consumer side in the long term to the mid-term as this 
system grows up.
    In the short term, consumers should be aware that this is a 
high-risk environment and that potentially it is not quite 
ready for mass consumer adoption today. That time is coming, 
but it is not here yet.
    Chairman Carper. Thank you. Mr. Allen.
    Mr. Allen. The other panelists are the experts, so I do not 
think I have much to add other than to say one of the groups we 
met with on this were central bankers and financial industry 
leaders, and they clearly view, as I think the other panelists 
do, virtual currencies as akin to cash. So there is no Federal 
Deposit Insurance Corporation (FDIC), there is not that level 
of protection. So I think it has to be viewed as high risk, and 
I think the points that the other panelists made about the fact 
that consumer protections are part of a work in progress, but 
certainly something that we need to be very much aware of.
    Chairman Carper. OK. In anticipation of this hearing, I was 
asking the members of our staff to tell me a little bit about 
where did Bitcoin come from, who was the creator, who were the 
creators; and I am told that the protocol was developed either 
by maybe a programmer or by a group of programmers that go by 
the name--I think it is Satoshi Nakamoto. Is that correct?
    [No verbal response.]
    OK. And with all the money and attention that has been 
given to Bitcoin, it just seems strange to me that either this 
individual or this group would choose to remain anonymous.
    What do we know about this person or what do we know about 
this group? Does it matter that his, her, or their identity 
remains a mystery? Who wants to go first? Mr. Murck, do you 
want to go first? Go ahead.
    Mr. Murck. I will go ahead and field that one for 
everybody. [Laughter.]
    So, yes, Satoshi Nakamoto is the pseudonym for the creator 
or creators--he, she, they--who developed the Bitcoin protocol 
and released the original white paper, the spec for the Bitcoin 
protocol into the world, in addition to the original code base, 
that was then open-sourced to the entire community. This person 
or group of people has since left the scene, as it were. At 
least, if not more than, half of the code base from that 
original code has already been rewritten. While I think 
everybody is grateful for that incredible contribution, at this 
moment in time, who Satoshi is is largely irrelevant to the 
story of Bitcoin going forward. And I think that was 
intentional and possibly why a pseudonym was chosen in the 
first place.
    Chairman Carper. All right. Anybody want to add to that, 
please? Mr. Brito.
    Mr. Brito. I just want to address that it is a little 
strange that, Bitcoin, we do not know who the creator is, and 
so that often conjures up the idea that there is some risk here 
that we have not seen.
    Chairman Carper. You do not think it was Al Gore, do you? 
[Laughter.]
    Mr. Brito. He has never denied it.
    But I think the key thing to emphasize is that Bitcoin, 
especially the code base, is open source. That means it is 
completely open and auditable and available to anybody to look 
at. And, in fact, many very smart programmers and 
cryptopgraphers have looked at it and have given it their seal 
of approval. And as Mr. Murck said, more than half of the code 
base has been written by others than Satoshi at this point. So, 
I am pretty confident that the software is what it says on the 
tin.
    Chairman Carper. All right. We are just about to start 
voting over in the Capitol, so I think we will wrap it up. I 
just want to say--I love to quote Albert Einstein. Not all my 
colleagues do, but he said some just really memorable things. 
One of the things he said, ``In adversity lies opportunity.'' 
God knows there is plenty of adversity with respect to these 
virtual currencies that we have talked about. It is not just 
potential, it is not just possible. It is real. And we need to 
be not just mindful of that but vigilant to make sure that we 
contain it and eliminate it where we can.
    I only know one quote that is attributable to Mrs. 
Einstein, and I find it sort of relates to my efforts to try to 
get my head around this whole issue of virtual currencies and 
Bitcoin. Mrs. Einstein, who probably was quite brilliant in her 
own right, was once asked if she understood her husband's 
theory of relativity, and she allegedly responded, ``I 
understand the words but not the sentences.''
    When I first started trying to understand what this was all 
about, I sort of felt like Mrs. Einstein: I understand the 
words but not the sentences. But with the help of our first 
panel and all of you on the second panel, and with the help of 
my staff and a lot of other folks that have come by to brief 
us, I am starting to understand more than just the words, but a 
few of the sentences, too. And that is really why we wanted to 
hold this hearing today, to better understand what is going on 
here, the pitfalls that come from this technology, but also the 
potential value toward society, to consumers, and to 
businesses.
    I said earlier I thought the first panel gave us a lot of 
thought-provoking information. I thought they were very 
thoughtful. But it is also encouraging. It was encouraging. And 
I find that that has been true here with this panel as well. So 
for that, we thank you.
    And on behalf of my colleagues who are not here, who are 
flying in from all over the country right now in order to make 
this 5:30 vote, I thank you. They do not know I am thanking 
you, but I will thank you in their absence. Someday they will 
thank me for thanking you, I hope. But we have a bit of a 
shared responsibility here in trying to figure out how to make 
this work so that we minimize the bad that can flow from it and 
maximize the good.
    With that, I think we will wrap it up here, and I am going 
to just note that the hearing record will remain open for 15 
days--that is until December 3 at 5 p.m.--for the submission of 
statements and questions for the record. I suspect we may have 
a few from me. When you receive those questions, I would just 
ask that you respond to them promptly.
    Again, to our staffs, especially John Collins, who first 
brought this to me months ago, I want to thank our staffs, both 
the majority and minority staff, and for you and for our first 
panel for joining us today, and for the work that you have done 
in helping to enlighten us a bit on this subject.
    With that, we are adjourned, and thank you so much.
    [Whereupon, at 5:30 p.m., the Committee was adjourned.]
    
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