[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
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HEARING
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 18, 2013
__________
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Washington, DC 20402-0001
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
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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
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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.
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\1\ The prepared statement of Ms. Shasky appears in the Appendix on
page 48.
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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.
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\1\ The prepared statement of Ms. Raman appears in the Appendix on
page 63.
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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.
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\1\ The prepared statement of Mr. Lowery appears in the Appendix on
page 71.
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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.
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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.
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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.
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\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.
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\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.]
A P P E N D I X
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