Virtual Currencies at the Senate Again: Talking About Potential Tuesday, November 19th was Bitcoin’s second day on Capitol Hill, although this time the title of the hearing they were there for was decidedly more cheery. It was entitled “The Present and Future Impact of Virtual Currency”, and was put on by the Committee on Banking, Housing, and Urban Affairs, the Subcommittee on National Security and International Trade and Finance, and the Subcommittee on Economic Policy. The first panel is inteneded to be more government oriented, while the second panel is to allow for more advocates to have their words be heard. Following this introduction, there will be short biographies for each panelist (both Panel 1 and 2 are being done in this article), followed by a breakdown of the hearing itself, and then my last words/analysis. Bios for the Panelists Panel 1 Jennifer Shasky Calvery has served as Director of the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, since September 23, 2012. As Director, Ms. Shasky Calvery oversees FinCEN’s wide-ranging work to protect the U.S. financial system from money laundering and other forms of illicit financial activity and to advance the national security interests of the United States. (Lovingly taken from her Official About Page with FinCEN) David Cotney has served as the Commissioner of Banks since November 2010. Mr. Cotney is an active contributor to consumer protection efforts both in Massachusetts and nationally. He serves on the Board of the Massachusetts Financial Literacy Trust Fund (FLTF). In 2013, Mr. Cotney was elected as vice chairman of the Board of Directors of the Conference of State Bank Supervisors (CSBS). CSBS is a national organization which advocates for and is dedicated to advancing the state banking system. Mr. Cotney previously served as Chairman and a member of the Board of Managers of the State Regulatory Registry (SRR). SRR, a subsidiary of the Conference of State Bank Supervisors(CSBS), developed and maintains the Nationwide Multi-state Licensing System (NMLS), the system of licensing and supervising mortgage companies and mortgage loan originators in all 50 states. Additionally, in 2013, he was elected chairman of the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council (FFIEC). The FFIEC was created by Congress to promote uniform examination standards and principles by state and federal financial institution regulators. (Taken from the Massachusetts Government’s site) Panel 2 Anthony Gallippi is co-founder and CEO of Bitpay. Mercedes Kelley Tunstall is the Practice Leader of Ballard Spahr’s Privacy and Data Security Group. She is also a member of the software and business methods practice team in the firm’s Patents Group. Ms. Tunstall counsels clients on compliance with consumer financial services laws, including unfair, deceptive, and abusive acts or practices, as well as the investigations, rulemakings, and proceedings of the Consumer Financial Protection Bureau and the Federal Trade Commission. (Taken from her Bio page on the Ballard Spahr, LLP site) Sarah Jane Hughes is a dedicated and dynamic teacher, and for her enthusiastic focus on students she was honored with the Law School’s Leon Wallace Teaching Award in 1993 and the graduating class’s Gavel Award in 1996, 1997, and 2000. Her courses include Sales, Negotiable Instruments, Secured Transactions, Regulated Industries–Banking Law, and White Collar Crime. Hughes is also a nationally recognized expert on payment systems (domestic, international, Internet banking, smart cards, wire transfers, checks, embezzlement, and credit cards); public and private methods to deter, detect, and prosecute domestic and international money laundering; and consumer protection and financial privacy. She is a member of the American Bar Association’s Cyberspace Law Committee (where she co-chairs the Working Group in Electronic Payment Services, and of the Business Law, Antitrust and International Law Sections. In the ABA Business Law Section, she focuses on the areas of electronic commerce, payments systems, and the uniform commercial code. (Taken from the Indiana University Bloomington Site) Paul Smocer oversees BITS, the technology policy division of The Financial Services Roundtable. Previously, Paul served as President of the FSTC divison of the Roundtable and worked to integrate BITS’ and FSTC’s work. Paul joined the Roundtable in February 2008 as Vice President of Security. In this role, he led BITS’ work in promoting the safety and soundness of financial institutions through best practices and successful strategies for developing secure infrastructures, products and services. Prior to BITS, Paul focused on technology risk management at BNY Mellon and leading information security at the former Mellon Financial Corporation. (Taken from the BITS staff page) The Hearing Opening Statements Mr. Warner opens the joint hearing with a rather frank talk about how he had been following Bitcoin for a few months, but only feels he is just starting to see all of advantages, disadvantages, problems, regulation issues, etc. associated with it. He also speaks of how the wheels are already in motion for the adoption of Bitcoin, in some ways, one in particular being the FEC’s allowance of Bitcoin donations to political campaigns. He expresses a very sincere interest in the topic. Sen. Heller then introduces himself and point of the day’s hearing, being to learn about virtual currencies and cryptocurrencies. He looks forward to learning about the long term viability and practicality of these virtual currencies, and how the government regulators can interact with them. He ends with the thought that many innovations have come about via the internet, but often times regulators, and most other people, are unaware of just what it will turn into. Sen. Murkley is the second to last of the co-chairs to introduce himself, and again talks about the innovations these virtual currencies can bring about with new means of transactions and transferring money (with the interesting specific mention of Ripple). He then reviews some of the major questions that have come up as of late about virtual currencies, like fluctuation, illicit acts happening with them, and consumer protections. The hearings themselves are pointed to look into the current and future state of virtual currencies, and what must be done to be prepared for them. An amusing little anecdote is then made by him about a pie cart missing out on the chance to be 1000 Bitcoins richer, back in the early, low value days of Bitcoin. Sen. Kirk is the last to introduce himself with a one sentence introduction, talking about his worries about the currency being used for illicit acts and terrorism. Panel 1 Ms. Shasky is first to speak, and you should recognize her name, as she was the other Senate Panel on virtual currencies also. She says that her organization (FinCEN) has put in hard work finding how to stop illicit actors from taking advantage of the US Financial System as virtual currencies open up new avenues to move money. She then states the regulators must keep legislation up to par to combat money launderers. Also stated is that illicit actors might choose virtual currencies for many of the same reasons average users do, but they can also have some more nefarious reasons for their choice too. Specifically, an illicit actor may choose to use theses currencies because they are easy to navigate, have low fees, provides anonymity, is accessible globally with an internet connection, is generally secure, doesn’t typically have transaction limits, and provides a loophole around AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) legislation around the world. The risk of virtual currencies being exploited for money laundering and illicit acts is real, she says, citing the cases of Liberty Reserve and the Silk Road. To put the scope of these transactions in the proper light, Bitcoin transactions totalled about 8 billion dollars over the last year, while Bank of America made about 245 trillion dollars in wire transfers alone. She then brought up FinCEN’s attempts to refine definitions for certain terms in their legislation, and their further actions making more explicit comments about what virtual currency exchanges ought to do to comply with regulations. The next minute and half or so was ripped almost completely from her last testimony, talking about the good of reporting to them (FinCEN), how institutions that fail to do so will be persecuted to the fullest extent of the law, and how FinCEN must stay up to date on how money is laundered. David Cotney is the only new face in this two person panel, testifying on behalf of the Conference of State Bank Supervisors. Concerns of his about virtual currencies include consumer protection, national security, money laundering, and other illicit activities. He then talks about state regulators actions attempting to find proper ways to handle this technical innovation. He says that states feel an open dialog with stakeholders in these currencies, along with others are key to finding the proper level of oversight on these new currencies. He states, quite sternly, that virtual currencies are, at their core, about the electronic movement of other people’s money, which makes them similar to money transmitters. He then goes through some of the steps of accountability transmitters must go through to be licensed and therefore legal, and the users of some of the more generalized licensing policies. Questions to Panel 1 Mr. Warner’s first question deals with attempting to strike a balance with regulation, making sure it is not too strict so it drives these businesses out of the country, but no so lax as they can exploit, and also what Bitcoin even is, whether it be a currency, an internet protocol, etc. On the issue of whether or not Bitcoin is a currency, Ms. Shasky gives her same answer as the last hearing, that FinCEN has never opined as to what Bitoin is. She does admit that FinCEN has consulted with many other financial regulatory counsels and groups on the topic of Bitcoin, but they have never had to refine the definition of Bitcoin, as FinCEN was able to cover it under old policy. Mr. Cotney talks about the states attempting to find the proper amount of oversight to keep Bitcoin healthy but regulated. He then brings up the fact that many consumers are demanding we move towards real time payments and other advancements, and how our financial system really hasn’t updated in the last 40 years. Sen. Kirk kind of kicks the door down and gets right down to it, immediately asking if any recognized terrorist group has expressed interest in using bitcoin. Ms. Shasky says that they recognize the possibility of it being used as such, but there is no information in the public domain of a terrorist group wishing to use it as such. Mr. Merkley asks a two part question, one being how strong the encryption on Bitcoin is, and secondly (referencing many of the scams, thefts, and break-ins that have happened to Bitcoin sites) if there is a public ledger of all transactions, how does one steal a bitcoin. Again, Ms. Shasky is first to answer, saying she does not know if anyone could break its encryption, however her information points to it being one of the strongest that exists. Regarding the thefts, she points to the irrevokability of the transactions as one of the major factors of the thefts and frauds being successful. She then goes on to explain her limited knowledge of public and private keys. Mr. Cotney then responds, talking about his job with consumer protection, and how major of a role, both good and bad, the irreversibility of these transactions plays into that. Mr. Merkley finds much interest in the fact that the public ledger and other facets of Bitcoin have been robust enough to stand up to the attention, stress, and (most likely) attempted tampering from people. Mr. Warner echoes that idea. Mr. Heller asks approximately when FinCEN started to take notice of Bitcoin and these other virtual currencies. Ms. Shasky gives a date of somewhere around the 2007 E-Gold case. A follow-up question from Mr. Heller asks further if Ms. Shasky knows what percentage of these transactions were participating in illegal activities. She responds saying that there is no way for her to know that, however there is belief that some entities, like Liberty Reserve and Silk Road to some extent, were set up to aid in the laundering of money and other illegal activities. Then Heller asks the big question: the approximately 144,000 Bitcoins seized from the Silk Road, what will the US government do with those? Ms. Shasky says luckily that’s not her department (laughs are had all around), but she is sure the Forfeiture department is thinking about whether or not to sell them. Mr. Heller’s attention is then directed towards Mr. Cotney, asking what the volatility of this last week was caused by. He talks about protecting the consumers, but not investors, who should do their due diligence before investing. Heller then inquires about the increasing volume of trades in Europe and China, of which Cotney has no knowledge of. Mr. Heller turns it over to Ms. Shasky, who considers that it might be a more stable currency or holder of value than their native one. Another speaker, Ms. Hettkamp, asks many questions, essentially boiling down to, how does one handle this one ones taxes, with sales tax, income tax, etc. as it becomes more commonly used, and if a new category would need to be made for bitcoin. From Ms. Shasky’s limited view (the AML/CFT view), she considers it not very important. But from the larger countrywide perspective, she sees the speaker’s point, and says that it will be handled at a later date, essentially. Mr. Cotney talks about the rightful juxtaposition between legal and illegal purchases, and how the purchasing currency doesn’t matter. Ms. Hettkamp insists further that sales tax in particular, and other taxes for average users, will become a much larger problem. Mr. Warner echoes that Ms. Hettkamp’s point is important, and passes it off to Mr. Moran, who referenceshis reddit post from eariler in the day, asking for questions and things to know for the hearing. He then goes on to ask if the US becomes the heavy regulator of the world, what sort of downsides might the economy see because of it? Ms. Shasky offers a domestic view and then an international view. She talks about working with the states individually to try and find legislation that works for them, and trying to build federal policy on top of that. Moving to the international view, the anti-money laundering organizations are often ones that help set policy around the world. Further, she says that those who decide to move their business out of the US because of regulatory reasons will find their gain rather short-lived. Mr. Cotney talks about using his “boots on the ground”, ones who are doing international transfers of money to test their systems, and working with other international entities to come up with proper legislation. Mr. Moran presses further, asking what benefits does our economy gain by encouraging, or at least not discouraging, Bitcoin. Ms. Shasky says that by not discouraging them, the US can continue to be and even bolsters its position as a major superpower, where those that want to become successful, go to start businesses. Mr. Cotney speaks about how America always wants to encourage innovation. At this point, closing comments are made quickly, and the second panel is introduced. Panel 2 Mr. Smocer starts us off on the second panel. He starts with the fact that attempts to make internet currencies have happened before this, but as people have gotten more comfortable in the digital era, and computers have gotten faster, systems such as these have become more feasible. A currency’s success ultimately lies with its acceptability though, and who exactly accepts them are important. The standard list of Bitcoin’s advantages are listed out, including helping the unbanked, helping those who are oppressed, and those whose government currencies are under stress. Digital currencies are, as we know, subject to serious volatility, and also lack consumer protections. He also points out that none of the current digital exchanges is subject to regulatory oversight at this point. Another problem is that along with the lack of oversight comes people abusing that to transfer money for illicit acts. He states that as Bitcoin grows, so do the threats to its legitimacy in the form of users abusing the system. Ms. Hughes is the next to speak. The growing monitoring over Bitcoin shows its growing importance in the public eye. She also speaks of the pathbreaking changes in technology, and appropriate legal regimes must be implemented to avoid abuse of the system. She supports the continued separation of state and federal ruling when it comes to policy, and that AML/CFT laws need to be instated explicitly. She stresses the importance in more explicitly creating this policies to help the cold feet of average users and banks. She encourages the exchanges to become more transparent and make many consumer practices and guarantees known. To tie up her introduction, she emphasizes that one should not buy the wild west argument when it comes to Bitcoin, as it is important to get these regulations in place. Ms. Tunstall’s speech talk starts off immediately with a disclaimer that states these are her own opinions, not the company’s or their customer’s. She talks about the many problems we are facing with virtual currencies, and how they have cropped up over the US’s time. She draws back to the 1870′s where, up until that point, a US currency had been nebulous, and not well defined, and no currency had to be accepted. She states that we have a long legal precedent on how to handle other currencies such as Bitcoin. She goes on to talk about the disadvantages/failures of the system. Her first issues is that the system was not made to mesh with the current financial environment, and therefore the banks see them as unreliable. She critiques the anonymity provided by Bitcoin, saying it does not help with regulation, and that personally identifiable information would have to be included on the ledger in some form. She encourages the system to “let go” of anonymity, so that launders and other illicit actors can be better tracked, while keeping the middle man out. Refining her idea, it seems like she wants some sort of personally identifiable information exchanged just by the two parties involved, but not publicly view able, slightly contradicting an earlier idea. Finally, she finds a problem with Bitcoin’s commodity aspects, that cause this sort of boom and bust cycle. She also points out that there needs to be both a definition of virtual currencies, and more guidance from FinCEN. Mr. Gallippi is the last to speak. He immediately speaks of the job and economic benefits of letting Bitcoins flourish. He then brings up issues with credit cards, like credit fraud and identity theft. He talks about Bitpay’s continued compliance with the regulations laid out for the company. The block chain’s advantages are talked about, one new point being replacing many closing costs associated with buying a house. He then makes a comparison of Bitcoin to the early years of the internet, and how it couldn’t of flourished without the lax policy the government took with it. He encourages the committee to help let bitcoin flourish and let it gather a tax and user base in America. Questions To Panel 2 The second panel’s questions were rather constricted on time, so each member of the committee was given 4 minutes to ask questions. First was asked to Mr. Gallippi from Mr. Merkley, as to how much his transaction fee was at Bitpay. He states initially that it was a 1% fee was instituted, but now it operates on a software as a service model. Ms. Hughes is asked if Bitcoin wallets will replace Swiss Bank accounts. She doesn’t know the answer to it, but she speculates that it is harder to use Bitcoin from a private wallet, so most people leave it in exchanges. She pushes further for more explicit rulings as to how ATL/CFT laws apply to virtual currencies, not just Bitcoin. Mr. Merkley talks about Bitpay’s low transaction fees, and how they could change the credit card, debit card, and banking account system, and asks Mr. Smocer how he thinks Bitcoin could effect those. He admits that it could help make transfers expeditious and better help the unbanked. He makes the point that there is no need for Swiss Bank Accounts, as the anonymity covers that just as well. Mr. Heller first asks about what would happen if a person were to corner the virtual currency market, what would that mean for consumers? Mr. Gallippi talks about the liquidity in the exchanges of bitcoins, how none of the top 5 exchanges reside in the US. Mr. Heller asks another question to him, asking him to detail the vetting process for business acceptance to use Bitpay. He explains it is just like operating with a credit card transactor, as he needs to know who you are, what you’re selling, and how much you expect to transact. Ms. Tunstall is asked next what is stopping a bank from making their own virtual currency, and she says nothing is stopping them. He then presses her knowledge on other virtual currencies and asks her to elaborate on some. She explains that there are a number of niche virtual currencies, a number of currencies based on Bitcoin that attempt to fix some of the problems associated with it, and finally, Ripple. She goes into detail how Ripple works within the current financial system. Mr Warner is up next. He asks if virtual currencies might take off or develop quicker is less developed parts of the world. Ms. Tunstall says that one of the reasons virtual currencies have taken off in the US is because of our strong infrastructure. Ms. Hughes echoes that. Mr. Gallippi agrees going into more detail on a currency works in Kenya. Mr. Warner asks if there is a way that Bitcoin could become the sole virtual currency in the US, rather than the dominant one. Ms. Tunstall comments that she does not see a way Bitcoin could become commercially viable without major changes. Warner casts one more editorial talking about the balance between allowing users the anonymity they want while also playing within the bounds of US regulation. Ms. Hettkemp speaks of dangers of the legitimizing of something as we regulate it, and how we face those dangers. Ms. Hughes agrees that if they do regulate, that it will legitimize it. She has a small inkling to take the risk to allow these virtual currencies to legitimize. Ms. Hettkemp cuts in, and asks if she agrees that because of the risk in the currencies has dampened some user participation and adoption. Ms. Hughes insists that the risk falls to the user, and that they might want to just the users continue. Ms. Tunstall draws comparisons to social media, talking about companies not participating in it and losing face publicly. She insists that it could eventually effect their financial system’s reputation. Ms. Hettkemp asks again if perhaps leaving the system alone and saying you’re on your own if you choose to do business with it. Sen. Schumer enters at the end, one of the people responsible for the Silk Road shutdown. He says that he fully intends to support the flourishing and innovation associated with the currency, as long as it finds a way to address the illicit actors exploiting its system. He asks Mr. Gallippi specifically as to what he would suggest to stop those actors without inhibiting the innovation. Mr. Gallippi talks about the multiple levels of bitcoin; the low level protocol that makes it work, and the application and service layer. He insists that the best way to stop these people who use the currency for illegal means is at that top service layer. He talks about how just because you use Bitcoin does not mean you can avoid the law. Mr. Schumer presses further for specific suggestions regarding how to stop these illicit actors. Ms. Tunstall talks about the possibility of purchase flags, addressing what kind of purchase it is while keeping anonymity. A few closing statements are made, and the subcommittee hearing is adjourned. My Thoughts on the Hearing I think this was a reasonably productive hearing. Ms. Tunstall draws a bit of disdain from me, just because of the kinds of regulations she wants to implement on the system, which defeats the purpose of the system we have in place. It also bothers me how there are still some very basic facts about bitcoin that are still being messed up. The one that sticks out like a sore thumb to me is the fact there seemed to be a group idea that private wallets were harder to use than funds in an exchange. I would be interested however, in what kind of system they find to fight the completely anonymity that can achieved through bitcoin when it comes to purchases, or if they might in fact say “you’re on your own if you choose to deal in bitcoin.” I found Mr. Gallippi’s viewpoint on the matter refreshing, as it was nice to see someone who was immersed in the topic, not from a regulation stance. I would be interested as to who has been whispering in some of the other panelist’s and senator’s ears though, as Ripple is not something I see commonly mentioned in all of this. I do believe they raise perfectly valid points when it comes to attempting to stop money laundering, but the emphasis on not funding the terrorists seems a little ridiculous to me. I would like to see the US be able to remain at the forefront of the world by properly legislating Bitcoins and virtual currencies. It would be a shame to see it cast off to the side, and see some other area become a virtual currency powerhouse. Along with most of the panelists, I do think Bitcoins stand a chance of tearing the banking systems major parts apart, however no heed should be given to them. Bitcoin shouldn’t bow down to the bank’s demands, banks should learn how to be flexible and adapt to new technologies, something they haven’t been forced to do in a while. 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Posted on: Thu, 21 Nov 2013 16:36:52 +0000