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THE PRESENT AND FUTURE IMPACT OF VIRTUAL

CURRENCY

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY AND 

INTERNATIONAL TRADE AND FINANCE

AND THE

SUBCOMMITTEE ON ECONOMIC POLICY

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

FIRST SESSION

ON

EXPLORING THE DEVELOPMENT OF VIRTUAL CURRENCIES, THEIR CURRENT AND POTENTIAL FUTURE USE, AND THE REGULATORY, MONETARY, NATIONAL SECURITY, AND OTHER IMPACTS AND ISSUES ASSOCIATED WITH THEM

NOVEMBER 19, 2013

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

DAWN RATLIFF, Chief Clerk 

KELLY WISMER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

SUBCOMMITTEE ON NATIONAL SECURITY AND INTERNATIONAL TRADE AND FINANCE

MARK R. WARNER, Virginia, Chairman 

MARK KIRK, Illinois, Ranking Republican Member 

SHERROD BROWN, Ohio 

JOE MANCHIN III, West Virginia 

JERRY MORAN, Kansas

MILAN DILAL, Subcommittee Staff Director 

LINDSEY JOHNSON, Republican Subcommittee Staff Director

SUBCOMMITTEE ON ECONOMIC POLICY

JEFF MERKLEY, Oregon, Chairman 

DEAN HELLER, Nevada, Ranking Republican Member 

JOHN TESTER, Montana 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

MIKE CRAPO, Idaho

ANDREW GREEN, Subcommittee Staff Director 

SCOTT RIPLINGER, Republican Subcommittee Staff Director

(II)


BANKI-41578DSA with DISTILLER
CONTENTS

TUESDAY, NOVEMBER 19, 2013

Page

Opening statement of Chairman Warner .............................................................. 1

Opening statement of Chairman Merkley ............................................................. 3

Opening statements, comments, or prepared statements of: 

Senator Heller ................................................................................................... 2

Senator Kirk ..................................................................................................... 4

Prepared statement ................................................................................... 31

WITNESSES 

Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, 

Department of the Treasury ................................................................................ 4

Prepared statement .......................................................................................... 32

Response to written questions of: 

Senator Kirk .............................................................................................. 71

David J. Cotney, Commissioner of Banks, Massachusetts Division of Banks, 

on behalf of the Conference of State Bank Supervisors .................................... 6

Prepared statement .......................................................................................... 38

Paul Smocer, BITS President, on behalf of the Financial Services Roundtable 16

Prepared statement .......................................................................................... 46

Response to written questions of: 

Senator Kirk .............................................................................................. 73

Sarah Jane Hughes, University Scholar and Fellow in Commercial Law, 

Indiana University Maurer School of Law, ........................................................ 18

Prepared statement .......................................................................................... 51

Response to written questions of: 

Senator Kirk .............................................................................................. 74

Mercedes Kelley Tunstall, Partner and Practice Leader, Privacy and Data 

Security Group, Ballard Spahr LLP ................................................................... 19

Prepared statement .......................................................................................... 58

Anthony Gallippi, Cofounder and CEO, Bitpay .................................................... 21

Prepared statement .......................................................................................... 60

Response to written questions of: 

Senator Kirk .............................................................................................. 77

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared statement of Aaron J. Greenspan .......................................................... 81

(III)


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BANKI-41578DSA with DISTILLER
(1)

THE PRESENT AND FUTURE IMPACT OF 

VIRTUAL CURRENCY 

TUESDAY, NOVEMBER 19, 2013

U.S. SENATE, SUBCOMMITTEE ON NATIONAL SECURITY

AND INTERNATIONAL TRADE AND FINANCE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittees met at 3:34 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Mark R. Warner and Hon. Jeff 

Merkley, Chairmen of the Subcommittees, presiding. 

OPENING STATEMENT OF SENATOR MARK R. WARNER 

Senator WARNER. I am pleased to co-chair this joint Subcommittee hearing on ‘‘The Present and Future Impact of Virtual 

Currency.’’ My friend Senator Merkley and I also appreciate the 

work that Senator Heller has done, and I know Senator Kirk is 

going to be joining us as well. 

We are going to do this a little different. Because this is a joint 

Subcommittee hearing, I will chair the first panel, and Senator 

Merkley will chair the second panel. 

The uses of virtual currencies have proliferated in recent years. 

My hope for this hearing is to educate the Senate Members and 

others and start the education of the public about virtual currencies, including the potential and drawbacks. I also hope to explore how regulators are keeping up with this technological innovation to protect consumers. 

I have got a full statement here, but I actually have to acknowledge that, you know, I have been following this development of 

bitcoins for the last few months, and I think I am only starting to 

wrap my head around the potential upside, downside, regulatory 

issues, monetary policy issues, taxation issues, consumer protection 

issues that this innovation represents. And rather than going 

through my whole statement, I just will point out to the witnesses 

that back in 1982 I had the opportunity to get engaged in a new 

industry at that point that was on the cutting edge of innovation 

called cellular telephones. And all of the experts at that point 

thought it would take the world 30 years to develop out a wireless 

network and at the end of that 30 years about 5 percent of Americans would use them. Luckily for me, the experts were wrong, and 

now these devices transform our lives. 

Getting it right from all of the regulatory, financial, consumer 

points around virtual currencies, and Bitcoin in particular, could 

pose as great, if not greater challenge and opportunity. And what 


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my hope is is that this will be the beginnings of an effort to come 

in with open minds, to hear about the potential, but to also hear 

about the important ramifications around monetary policy, around 

taxation. Think about the notion with this 21 million bitcoins that 

could be created, and as we see acceptance—I understand already 

the FEC has allowed political contributions to be made in bitcoins, 

so this is a development that is already in process. But if this becomes a standard currency or tool, it could radically and dramatically transform the role of central banks, monetary policy. It could 

transform—it has enormous security concerns. 

So I am very, very interested about this hearing as a member of 

the Intelligence Committee. I am concerned as well about the potential abuse of this development. But I think as we see now about 

somewhere between 10 to 12 million bitcoins that have been mined 

and just the reactions yesterday from Senator Carper’s hearing 

where I believe bitcoins spiked at over $700 per unit, we are talking about a currency that has already been monetized, and we as 

policymakers in ways will have to catch up. 

So I am very much looking forward to this and really appreciate 

my colleagues and, in particular, Senator Merkley’s interest in this, 

and with that I will turn to Senator Heller, and we will go back 

and forth with just a couple quick opening statements, and then I 

want to get to introducing the witnesses. 

STATEMENT OF SENATOR DEAN HELLER 

Senator HELLER. Very good. Thank you, Mr. Chairman. I want 

to thank you and Chairman Merkley for holding this Subcommittee. I want to thank Ranking Member Kirk, and I am happy 

that we are having this joint Committee. I think we need to have 

more of these, and with that, I will keep my statement relatively 

brief. 

Today we are here to learn about virtual currencies and 

cryptocurrencies, the most popular, of course, which is Bitcoin. 

While generations in Nevada have mined for gold and silver and 

copper, today Nevadans can now mine for new virtual currencies 

on their computer. 

While these virtual currencies are not yet widely accepted, the 

number of users continue to grow, and we must recognize that 

these innovations decentralize digital payment systems. 

Today I look forward to learning about the long-term viability 

and practicality of virtual currencies. I also want to learn how various Government regulators interact with virtual currencies and 

which by their design are meant to be independent, of course, of 

any government. 

I will end with this note: The Internet is a new frontier of innovation. With every new Internet-based technology, I believe that 

Members of Congress should recognize that we often do not know 

what these new advancements will development into. While we 

must ensure proper safeguards, it is my hope that through hearings like this we can help maintain an environment that continues 

to promote new financial technologies and innovative growth. 

So thank you again to my colleagues. I look forward to hearing 

all the testimonies from our witnesses. Thank you. 

Senator WARNER. Thank you, Senator. 


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Senator Merkley. 

OPENING STATEMENT OF SENATOR JEFF MERKLEY 

Senator MERKLEY. Thank you, and it is a pleasure to co-chair 

this gathering. I can see by the full room the level of interest and 

enthusiasm in this topic. Certainly this is a new technological 

strategy that has a tremendous number of implications. The wave 

of innovation is reaching into the world of currency payments and 

money transmission. We have all heard about exciting developments such as mobile payments and companies like Square, which 

rely on classic banking system payments. 

This latest generation of technology which we are talking about 

today takes things to a whole new level. With the creation of virtual currencies like Bitcoin and more recently Ripple, we are actually seeing payments transacted entirely with peer-to-peer trust 

driving the stores of value. Combined with open-source code and a 

public transaction ledger listing every transaction, virtual currencies are truly a completely different animal. 

Similar to the ways that the last decade’s innovations out of the 

Silicon Valley and Silicon Forest have improved people’s lives—I 

had to throw ‘‘Silicon Forest’’ in there because that is in Oregon. 

[Laughter.] 

Senator MERKLEY. Developments in virtual currency have real 

potential to provide value to American consumers and businesses. 

More transaction costs, more secure money transmission—these 

are significant qualities. At the same time, leaving this space 

unwatched and unregulated will all but ensure it is full of pitfalls 

for users and law enforcement alike. We have had recent news 

about illicit activities, narcotics money laundering; we have had 

rapid fluctuations in the value of the market for the bitcoins. We 

have questions about consumer protections, and there is certainly, 

therefore, a lot of issues about whether virtual currencies are ready 

for prime time. 

Today’s hearing will explore the current and future state of virtual currency, especially how it affects core financial services that 

families and businesses rely on to move money and make payments, where is the potential for innovation and opportunity, and 

where are the gaps and weaknesses along the way. 

I wanted to note I have a recent article here called ‘‘Portland 

Businesses Enter the World of Digital Currency.’’ Back in 2009, 

Gregg Abbott, the owner of Whiffies Fried Pies, was hanging out 

with a bunch of tech enthusiasts along his food cart, and he was 

discussing the potential of the then-new online currency known as 

Bitcoin. And one of the folks hanging out, an early investor, offered 

Abbott 1,000 bitcoins for one of his ham pies. He says, ‘‘I did not 

say no. I just got distracted, and the individual wandered off.’’ And 

then he says, ‘‘That was a $250,000 mistake. Silly me.’’ Well, based 

on yesterday’s value, that is a $700,000 mistake. That certainly 

would have been the most expensive pie in the history of humankind. 

This is absolutely fascinating. By the way, he did proceed to start 

accepting bitcoins, as a number of Portland facilities have done, 

using a mobile app that converts from dollar, bitcoin to dollar, and 


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back and forth based on the most recent exchange rate. So this is 

actually a functional, viable technology at this very moment. 

So, with that, Senator Kirk. 

Senator WARNER. Senator Kirk. 

STATEMENT OF SENATOR MARK KIRK 

Senator KIRK. Thank you, Mr. Chairman. I just thank you for 

gathering us together on this Bitcoin effort. I would say that I have 

been worried about Bitcoin, that because it is so complicated it 

could facilitate illegal activities or terrorist activities. 

Senator WARNER. Thank you, Senator Kirk, and I think that is 

obviously one of the focuses we will have on this first panel. 

Let us get to the witnesses. Let us get to the real experts. The 

first panel, as I mentioned, will focus from the governmental side; 

the second panel will focus more from some of the advocates, and 

I think it will be an interesting afternoon. 

We have Ms. Jennifer Shasky Calvery, the Director of Financial 

Crimes Enforcement Network, FinCEN, a bureau of the Treasury 

Department. Prior to joining Treasury, she was Chief of the Asset 

Forfeiture and Money Laundering Section at the U.S. Department 

of Justice. As Chief, Ms. Shasky Calvery managed a Justice Department program responsible for the annual forfeiture of more 

than 1.5 billion in criminal assets and related programs to ensure 

that those assets were returned to victims and reinvested in law 

enforcement. She has also testified before Congress on a wide 

range of issues, including transnational organized crime, financial 

crime, State business incorporation practices, and this one will 

probably break some new boundaries as well. Welcome, Ms. Shasky 

Calvery. 

Mr. David Cotney is Commissioner of Banks for the Commonwealth of Massachusetts. He has served in that position since November 2010 overseeing the supervision of over 200 banks and 

credit unions without assets in excess of $325 billion. Mr. Cotney 

is an active contributor to consumer protection efforts, both in Massachusetts and nationally. In 2013, he was elected as Vice Chairman of the Board of Directors of the Conference of State Bank Supervisors, on whose behalf he testifies here today. Welcome, Mr. 

Cotney. 

Ms. Shasky Calvery, if you could start. 

STATEMENT OF JENNIFER SHASKY CALVERY, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK, DEPARTMENT 

OF THE TREASURY 

Ms. SHASKY CALVERY. Chairmen Warner and Merkley, Ranking 

Members Kirk and Heller, and Members of the Subcommittees, I 

am Jennifer Shasky Calvery, the Director of Treasury’s Financial 

Crimes Enforcement Network, or FinCEN. 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. 

Recognizing the potential for abuse of emerging new payment 

methods and understanding that anti-money-laundering protections must keep pace with these advancements, FinCEN began 


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working with our partners several years ago to study the issue. 

Here is what we learned. 

Illicit actors might decide to use virtual currency for many of the 

same reasons as legitimate users, but also for some more nefarious 

ones. Specifically an illicit actor may choose to use a virtual currency because it provides anonymity, is easy to navigate, may have 

low fees, is accessible globally with a simple Internet connection, 

does not typically have transaction limits, is generally secure, and 

provides a loophole from the 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 theoretical. Liberty Reserve engaged in a $6 billion major money-laundering operation, and just recently, the Department of Justice alleged that customers of Silk Road, the largest contraband marketplace on the Internet, were required to pay in bitcoins to evade detection and facilitate laundering 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. But 

by way of comparison, in 2012 Bank of America alone 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, FinCEN released two regulations which update several definitions and provide flexibility to accommodate payment systems innovation, including virtual currencies, under our 

pre-existing regulatory framework. Then last March, FinCEN 

issued additional guidance to further clarify the compliance obligations for virtual currency actors covered by our regulations. In 

short, they are required to register with FinCEN, put AML controls 

in place, and provide certain reports to FinCEN. 

It is in the best interests of virtual currency providers to comply 

with these regulations. Any financial institution could be exploited 

for money-laundering purposes. What is important is for institutions to put controls in place to deal with those money-laundering 

threats. 

At the same time, being a good corporation 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 the 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 


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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 PATRIOT Act to 

name Liberty Reserve as a primary money—laundering concern 

and take steps 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 domestic and 

foreign partners and 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. 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 you may have. 

Senator WARNER. Thank you so much. 

Mr. Cotney. 

STATEMENT OF DAVID J. COTNEY, COMMISSIONER OF BANKS, 

MASSACHUSETTS DIVISION OF BANKS, ON BEHALF OF THE 

CONFERENCE OF STATE BANK SUPERVISORS 

Mr. COTNEY. Thank you. Good afternoon, Chairmen Warner and 

Merkley, Ranking Members Kirk and Heller, and Members of the 

Subcommittees. My name is David Cotney, and I serve as the Commissioner of Banks for the Commonwealth of Massachusetts. 

It is my pleasure to testify before you today on behalf of the Conference of State Bank Supervisors. I thank you for holding this 

hearing today to address the risks and benefits of virtual currency. 

The risks of virtual currency include consumer protection, payment systems, national security, money laundering, and other illicit activities. The potential benefits are also diverse: speed and efficiency, lower transaction costs, and providing an outlet for the 

unbanked and underbanked. 

With these evolving payment technologies, States are exploring 

the connection between existing money transmitter regulation and 

virtual currencies. State regulators have long supervised money 

transmitters to protect consumers and preserve national security 

and law enforcement interests. 

State regulators are talking with industry and other regulators 

about evolving methods of moving funds. This includes virtual currencies, prepaid cards, mobile services, and peer-to-peer transactions. State regulators believe that an open dialogue among regulatory, industry, and other stakeholders is key to accomplishing the 

goal of determining the appropriate level of oversight and supervision. 

Emerging payment technologies and alternative currencies are, 

at their core, about the electronic movement of other people’s 


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money. This is not unlike the activities of money transmitters for 

which the States have an established structure for regulation and 

oversight. 

Licensing is the foundation of supervision, ensuring that businesses in a position of trust are legitimate and accountable. And 

entities seeking a State license must submit information to verify 

their credentials, typically including criminal background and credit checks, business plans, financial statements, and surety bonds. 

State regulators examine money transmitters on an ongoing 

basis, ensuring that a company does not lose its customer’s money 

and complies with consumer protection laws. Further, States actively examine for Bank Secrecy Act and anti-money-laundering requirements, coordinating with FinCEN and the IRS. 

In addition to licensing and examinations, enforcement is a key 

part of State supervision. After working with the Brazilian Central 

Bank and two private banks in Brazil, my division earlier this year 

found evidence of forgery and ongoing illegal conduct by a licensed 

money transmitter. Relying on existing State-to-State coordination 

processes, 37 States were able to ensure that all customers were 

made whole after we shut down the company. 

Cooperation has been a hallmark of State supervision, manifested in a uniform licensing system for all States. Originally developed by the States as a mortgage licensing platform and codified 

into Federal law by the SAFE Act of 2008, the Nationwide MultiState Licensing System has become an integral part of State supervision for a variety of nonbank financial services providers. Massachusetts and 14 other States currently use NMLS as the licensing 

platform for money transmitters, and 14 more will start using the 

system in the next year. 

To improve the States’ ability to use the NMLS for other licenses 

like money transmitters, I want to note CSBS’ support for S. 947, 

which enhances the SAFE Act’s protections for confidential or privileged information. 

To address the rapidly changing technology and payments landscape, CSBS continues to explore policy options for digital issues 

facing regulators. We look forward to working with Congress and 

policymakers to continue a collaborative approach to all innovative 

financial products and services, ensuring individuals and economies 

are well served. 

Thank you, and I look forward to answering any questions you 

may have. 

Senator WARNER. Thank you both for your testimony. 

We will put 5 minutes on the clock and go back and forth. 

I want to pick up on something Senator Heller said in his opening statement as I try to, again, wrap my head around this. We 

have to strike the right balance since we are talking about here no 

governmental entity, and we are talking about here the anonymity 

that is allowed to take place, the ability to set up these exchanges 

with very little oversight. If we lay too much a regulatory burden, 

we could simply chase these exchanges offshore and still leave 

Americans unprotected. 

So I guess my first question for both of the witnesses is: We are 

talking about this as a currency, but have we really determined 

even that? I mean, there are some who said this may simply be an 


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Internet protocol. Or is this a security? Have we thought through—

or is it a currency? And from FinCEN, and also, David, if you want 

to make a comment as well, you know, has FinCEN consulted at 

all with the SEC or the CFTC as you have started to develop your 

guidance? And then, Mr. Cotney, if you would answer the question 

as well, you know, is there any kind of beginnings of an international regime, as you talked about with the Brazilians, how they 

are categorizing this development? 

Ms. SHASKY CALVERY. Thank you, Senator. I will attempt to take 

those questions in turn. 

So first on the issue of is it a currency, FinCEN is the regulator 

for anti-money-laundering and counterterrorist finance purposes, 

and so we have never opined and still are not opining as to whether virtual currency is a real currency, or a commodity, as those 

questions are really outside our purview. 

What we do recognize is that it exists and that it is operating 

and value is being transferred through the U.S. financial system, 

and as such, we need to protect that financial system from illicit 

actors. 

And so we were able to cover it under our pre-existing definitions 

and regulations, which include the concept of other value that substitutes for currency. So we did not need to take a position. But in 

terms of have we consulted with other regulatory bodies here, at 

least federally, the answer is we have. Again, as a part of our rulemaking and our guidance on our narrow lane and issue, we spoke 

with the FBI, the Secret Service, DEA, ICE, FDIC, OCC, IRS, the 

Federal Reserve, NCUA——

Senator WARNER. And they all have sophisticated opinions on 

Bitcoin? 

[Laughter.] 

Ms. SHASKY CALVERY. Yes. Now that I will let them answer. But 

we did consult with—including CFPB from the consumer fraud perspective. But, you know, we have consulted with all of them as we 

can. This is a developing and innovative arena. We were lucky to 

be able to cover it under pre-existing regulations. As we talked to 

our counterparts abroad, which I think was kind of the last portion 

of your question, there is great interest by fellow regulators abroad, 

as they are trying to get their heads around what is this and what 

does it mean. Our German counterparts, like us, had fairly flexible 

regulations in place that they could fit this within pre-existing regulations, and so they have done so. And other countries thus far 

have been asking us to see what we are doing and why. 

And, finally, I understand the Financial Action Task Force, 

which is the AML standard-setting body for the international community, plans to take up this topic. 

Senator WARNER. Mr. Cotney? 

Mr. COTNEY. In answer to your first question about the level of 

regulation, that is exactly what the States are trying to do by 

working with our colleagues, both State and Federal regulators, 

law enforcement, working with industry, to make sure that we 

have the appropriate level of oversight and supervision, and that 

we have the tools to detect and prevent illegal activity. 

In terms of your second question on international regimes, I 

think it is important to note that many of these evolving alterVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 S:\DOCS\87095.TXT SHERYL

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native payment systems are in response to consumer demand. And 

as we have seen in Europe and as we have seen in Canada and 

elsewhere, there is a big demand for more real-time payments at 

lower transaction costs, including the transmission of money from 

one country to the next. 

There are many members of Europe and Canada that have embarked on efforts to speed the payment systems. Ours has not really evolved substantially in the last 40 years. So I think now is the 

time to be talking about this subject. 

Senator WARNER. Well, I am going to turn to Senator Kirk, who 

I know will press on some of the potential for abuse, but, you know, 

I may want to get back some of the folks from Treasury at some 

point, because I do think there could at least be the potential of 

serious implications about monetary policy. We have taken—even 

though with Congress’ recent actions sometimes we seem to be 

jeopardizing America’s status as the reserve currency, with some of 

our, I think, mistakes we have made, but, you know, if you think 

a little broadly, this could, again, have huge, huge implications. So 

I am looking forward to further pursuing this. 

Senator Kirk? 

Senator KIRK. Thank you, Mr. Chairman. I would just ask Jennifer one quick question. Have we seen any recognized terrorist 

group ever express interest or actually use Bitcoin for its operations? 

Ms. SHASKY CALVERY. So we have certainly recognized the possibility and the vulnerability there. There is nothing in terms of information in the public domain about a terrorist organization expressing such interest or using it, but we would always be more 

than happy to have any outside briefings to discuss that topic further. 

Senator KIRK. Thank you. 

Thank you, Mr. Chairman. 

Senator WARNER. Senator Merkley. 

Senator MERKLEY. Thank you very much. 

I wanted to ask a couple things related to different forms of 

crimes that have occurred with bitcoins. The first thing I want to 

ask is: There is a centralized public ledger that is encrypted, and 

so the anonymity is only in terms of—you are not truly anonymous. 

There is an encrypted version of who owns what. And so one concern about, if you will, the reliability of a currency is whether that 

encryption can actually be broken. So I want to ask that question. 

There are some very powerful code breakers in the world, and we 

certainly have discussions about our own U.S. capability to break 

codes quite often up here. 

But the second is we have had this series of reported crimes. One 

was a Bitcoin savings and trust which ran a pyramid scheme in 

bitcoins. We also had the hacking of a Bitcoin exchange called 

BitFloor, and as it was reported, 24,000 bitcoins were stolen. And 

we had Instawallet, a wallet provider that was hacked, and they 

lost 35,000 bitcoins. These are not small-dollar items given the 

value of the individual coins. But maybe to paint a little bit of a 

picture for us, how does this all work? If there is a public ledger 

that is keeping track of who owns what, then how does one actually 

steal a bitcoin? 


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Ms. SHASKY CALVERY. All right. So in terms of breaking the code 

and the really powerful cryptologists that are out there, I just do 

not know the answer to that. I do not know if there is anyone out 

there that can break the code. It has certainly been represented to 

us at FinCEN that it is as strong an encryption as exists out there, 

and so it seems quite safe from that standpoint. 

Senator MERKLEY. This is prime number trapdoor cryptology? 

Ms. SHASKY CALVERY. To tell you the truth, I do not know the 

type of cryptology that is used, but I would be happy to take that 

back and get you an answer. 

In terms of some of the types of schemes you mentioned, whether 

it is a pyramid scheme or hacking, probably the most relevant concept that comes up there is the irrevocability of the transactions of 

bitcoins. So the idea that when I take a bitcoin and pay you with 

that bitcoin, there is no way for me to get that money, so to speak, 

or that bitcoin back unless you choose to give it to me and choose 

to tell me who you are. And so that can be a great tool for 

fraudsters in the pyramid scheme sense or hackers who hack into 

your computer and are able to get your code that is your half of 

the bitcoin, so to speak. 

So as I understand it, there is a public key and a private key to 

Bitcoin. I think of the public key myself almost like the routing 

number on my bank account, and I do give that to others who 

might want to send me money, and I am happy to give that public 

information. What I am not going to give you is the PIN that I use 

to access the ATM in my account, and the private key is like that 

PIN. And so typically the person holds onto the PIN, as it is—or 

the private key. It is only when you put the public and private key 

together that you now have some bitcoin that you can actually do 

something with. And so if a hacker gets your private key, they are 

able to take your bitcoin, and you cannot get it back. 

Senator MERKLEY. They can modify essentially the public ledger, 

and the public ledger becomes de facto record of ownership. 

Ms. SHASKY CALVERY. That is exactly right. 

Senator MERKLEY. OK. So in these—well, OK. Let me see if Mr. 

Cotney has any comments on this. 

Mr. COTNEY. Well, you bring up an interesting case regarding 

consumer protections, because as the Director noted, these transactions are irreversible. And as a regulator charged with consumer 

protection, that is what we are interested in every day: the interests of consumers to make sure that their money gets from Point 

A to Point B and that there is someone reliable standing behind 

that transaction. And that is what we are interested in. 

Senator MERKLEY. Well, in the few seconds I have left, I will just 

say it is fascinating that this system, which is not, if you will, continuously tended but is in this public space, has been robust 

enough to hold up for this long without a major flaw that brought 

the entire thing down, it certainly has attracted the attention of innumerable other programmers around the world asking, well, can 

we create a similar system, and so thus we are here today. 

Thank you. 

Senator WARNER. And I would just echo, based upon other commodities where there is a physical presence, you can somehow 


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trace it back. The fact that we are talking about something in the 

virtual world really has, again, remarkable ramifications. 

Senator Heller? 

Senator HELLER. Thank you, Chairman. I want to thank our witnesses for being here today. We are trying to grapple with this, trying to figure this out, and we have more questions than answers, 

and hopefully you can answer some of these questions. 

Ms. Calvery, I just want to know when the first time—when did 

FinCEN first start to take notice of these bitcoins and other virtual 

currencies? 

Ms. SHASKY CALVERY. Back in probably 2007 with the e-gold 

case. It was back then that we put out, I believe it was, an administrative ruling talking about e-gold, which was a commoditybacked virtual currency, and even back then put out our view that 

it fell under the money-transmitting regulations issued by FinCEN. 

And so we have been keeping up with it since that time. 

Senator HELLER. Do you have any idea what percentage of the 

current virtual currency users and perhaps businesses are participating in illegal activities? 

Ms. SHASKY CALVERY. We would have no way to know that. 

What we do know is if you take a currency, a virtual currency like 

Liberty Reserve, that was an instance where we believe it was set 

up for the purpose of laundering money, and the vast majority of 

transactions using Liberty Reserve were to facilitate criminal activity of all types. It is what the Department of Justice alleged; that 

is what we alleged in our 311 action. 

With regard to Bitcoin, I think we may have a bit of a different 

situation. It seems that there is a lot of legitimate users out there, 

and like any type of payment system, it can be exploited by illicit 

actors, and we have seen it exploited by illicit actors, at least with 

regard to the allegations made by the Department of Justice in the 

Silk Road matter alleging that it was used—Bitcoin was used to facilitate hundreds of millions of dollars of money laundering. 

Senator HELLER. On that Silk Road issue, the FBI seized about 

144,000 bitcoins. What does the Federal Government do with 

those? 

[Laughter.] 

Ms. SHASKY CALVERY. So luckily that is not an issue that we will 

have to deal with at FinCEN, but I can tell you from my past job 

as the head of the forfeiture program that they will be thinking 

about whether they can sell those assets. 

Senator HELLER. Do they still have them? 

Ms. SHASKY CALVERY. I would have to defer to my colleagues at 

the Department of Justice. 

Senator HELLER. I want to talk, Mr. Cotney, a little bit about volatility. As we know, last week it was trading somewhere around 

$400. It went up to as high as, I think, $900 yesterday, and it finally settled at $600. Why the volatility? 

Mr. COTNEY. Well, I think that there is a great interest in this 

particular space. There is, as I mentioned, a demand for real-time 

payments and lower transaction costs. And one of the means today 

now that we are looking at is through virtual currency. 

Certainly at the State level, we have a regulatory regime in 

place. As I mentioned, we are consumer protection regulator. We 


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are not an investor protection regulator like the SEC, like the 

States. So we want to make sure that those consumers are protected, and just like any investment, someone who is looking at 

making an investment, whether it is in virtual currency or in a 

stock or a bond investment, they need to do their due diligence. 

Senator HELLER. Do you follow anything that goes on in China 

and Europe? It is my understanding that they are increasing in 

volume in other countries. Is there any reason for this? Would you 

have any knowledge? 

Mr. COTNEY. I do not have any direct knowledge, sir, no. 

Senator HELLER. Jennifer? 

Ms. SHASKY CALVERY. My understanding is in some countries 

there may be an interest in Bitcoin because it can—where you have 

a home currency that might be considered extremely volatile itself, 

Bitcoin might be considered a better place in which to store value. 

And in other places, it is also considered a good medium for 

transacting—or transferring value. And so if there is not a good internal system for transferring value efficiently, it might be used for 

that purpose as well. 

Senator HELLER. Thank you. 

Thank you, Mr. Chairman. 

Senator WARNER. Senator Heitkamp. 

Senator HEITKAMP. In the category of shameless plugs, congratulations on holding a hearing on something that could be a problem 

later on and is not a crisis right now. It is such a rare moment. 

[Laughter.] 

Senator HEITKAMP. Seriously the Homeland Security Committee 

is starting to weigh in on this, and I am going to take this conversation away from the illegal to the practical realities of what we 

are dealing with here. As this becomes, as Senator Merkley suggested, a common method of transmitting goods and services, payment of goods and services, replacing a dollar bill or replacing a 

credit card, which we know are longstanding methods, there are a 

tremendous number of challenges by not categorizing this. 

Now, I noticed both of you, especially you, Jennifer, have deferred that, saying thank goodness we did not have to achieve, you 

know, that result because we had enough broad authority that allowed us to pursue this. 

But let us take, for example, a bitcoin being used to buy a pie. 

How do you ring that up on the cash register? What is the sales 

tax on that? How do you record it for income tax purposes? How 

do you transmit it for purposes of payroll taxes? How do you deal 

with this when it becomes a more commonly accepted method of 

transmission? 

And so what I am saying is that it is not just nefarious groups, 

you know, terrorists and illegal operations that have a potential of 

really skirting on the edges. It is, in fact—the more commonly accepted it is and the more available it becomes, the more difficult 

it is for regular kind of regulatory activities to be carried out, especially tax activities. 

I would like maybe your thinking on whether categorizing a 

bitcoin achieves a result so that we then can think about the regulatory regime or whether we need to create a whole new category 


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and think about this differently. Either one of you can answer that 

question. 

Ms. SHASKY CALVERY. Sure. From an anti-money-laundering/

counterterrorist financing perspective—and I will go broader in a 

moment, but from that limited perspective, it is not as important. 

We have similar regulations across different parts of the industry, 

the idea that they are going to have anti-money-laundering controls 

in place, that they are going to provide certain reports on suspicious activity to FinCEN, regardless of whether it is a commodity 

or a currency or a security, those basic protections will follow however we define it. So from our perspective it is not as important. 

But I take your point. Look, this country and all countries are 

going to have an interest in protecting consumers and protecting 

investors and thinking about monetary policy and thinking about 

taxing. All those things and reasons why we have regulatory and 

statutory schemes in every country around the world covering 

these issues, if Bitcoin truly takes off and becomes a serious part 

of the financial system, then those issues will need to be brought 

to the forefront. 

I think there is still a question and that we cannot assume that 

Bitcoin is going to become the major player that many enthusiasts 

think it will. It very well might, and far be it for me to know which 

way this is going to go. I did hear some venture capitalists speak 

recently, though, and say that they saw this as a binary investment. This is either going to take off and be the next great thing. 

It is going to be the cell phone of 20 years ago. Or it is going to 

be a nice experiment that completely fails. And so I think we are 

waiting to see, and in the meantime, at least at FinCEN, we are 

trying to make sure that we protect our U.S. financial system from 

illicit actors. 

Mr. COTNEY. Senator, I think you rightly pointed out the differences between legal activity and illegal activity. Illegal activity—

and we cannot be distracted by this—is illegal no matter what the 

means, whether it is paid for by cash, paid for by ACH, or——

Ms. SHASKY CALVERY. Guns. 

Mr. COTNEY. Exactly, or through now virtual currency. 

On the legal side, those actors who want to play by the rules will 

work through, you know, agencies like mine, will play by the rules 

set by FinCEN, and that is really the importance of a comprehensive set of regulations, both on the State and the Federal level. 

Senator HEITKAMP. Just to follow up on a comprehensive set of 

regulations, you tell me—I am now the State tax commissioner, 

and someone paid in a bitcoin, and I call you up because I find out 

you have expertise, and I say, OK, I just heard that this thing is 

trading for $700, is that what the pie is worth? Do you think you 

could come down and be my expert witness when I collect sales tax 

on $700? 

Mr. COTNEY. Well, fortunately I am not the tax commissioner. 

[Laughter.] 

Senator HEITKAMP. I used to be. And so, I mean, this is going 

to be a big challenge. And my point is that we can focus on the illegal part of this, but to the extent that it becomes recognized as a 

valid method in the perfectly legitimate commercial world of transferring goods and services, this is going to become an increasing 


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problem. And the more the opportunity presents itself to evade, not 

illegally but to avoid taxation, to say that actually was speculation, 

you know, so are you going to pay capital gains on it—I mean, it 

is a really interesting challenge. And I think we need to be thinking about these issues if, in fact, we see this becoming a way to 

transmit goods and services that is more generally and regularly 

accepted. 

Senator WARNER. I think you raised a great point, and since 

many—you know, we point here to today’s focus on nefarious 

schemes, but since it seems from, as I learn about this, a lot of 

folks who are interested lack trust in central banks, you know, 

want to be, in fact, kind of off the grid, a huge, huge number of 

questions. 

Senator Moran? 

Senator MORAN. Mr. Chairman, thank you. Thank you both for 

being here. 

Earlier this afternoon I posted on Reddit this hearing topic and 

asked Kansans in particular to comment on what I should know, 

what would be some suggestions for questions that they might 

have. And, interesting, in just the last few hours 125 responses, 

most of them very long and thoughtful. 

Let me explore one of the topics that was raised, and in a sense 

it is regulatory arbitrage. Is there an effort to make certain that 

the regulations are uniform globally? And in the absence of that, 

is there not a risk that the activity is simply taken offshore if we 

are the country that is the regulator? And is there an economic 

consequence to that happening? What is the downside to our country and its economy and the opportunities for innovation if the 

United States is the heavy regulator and other countries are not? 

Ms. SHASKY CALVERY. Sure. Maybe I can take that from both the 

domestic perspective and then the international, because here, of 

course, in the United States we have the States and we have the 

Federal regulation. 

We do, I think, a fairly good job, as Mr. Cotney mentioned in his 

testimony, of the States working together to try to find common approaches whenever possible, and then with FinCEN to work with 

the States on the Federal approach and try to get as much common 

ground there as we can so that we have as much consistency as 

we can at least within the United States. Then we go externally. 

Externally, at least from the money-laundering and 

counterterrorist finance perspective, the Financial Action Task 

Force is the international standard-setting body that attempts to 

keep a consistency in standards across the globe, and it is a body 

that has both carrots and sticks, and it has been fairly effective in 

getting countries to put regulations in place. 

But all that being said, I think if businesses are going to leave 

the United States based on perceived or real regulatory burden, I 

think they are going to find the gain short-lived because, as mentioned, countries are going to have an interest in figuring out the 

tax implications and monetary policy. It is not just the United 

States that has an interest in these things and in protecting consumers and investors and so forth. So the regulation is going to 

catch up, and I think there are plenty of good reasons to bring inVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\DOCS\87095.TXT SHERYL

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novative business and keep innovative business in the United 

States. 

Mr. COTNEY. I think it is very important to leverage the 

strengths of each of us, the State regulators and the Federal agencies. At the local level, as a State regulator, I know, for example, 

that there is a large Cambodian population in Lowell. I know Lowell, Massachusetts. I know that there is a large Brazilian population in Framingham. I send examiners out every day to conduct 

examinations, to do transaction testing, testing actual transactions 

of money going abroad. So we have the boots on the ground and 

a local understanding of these companies. 

And then we pair that with the national perspective and knowledge of Federal agencies who also interact on an international 

level. By leveraging these strengths, I think we do a much better 

job at detecting and preventing this illegal activity. 

Senator MORAN. I appreciate both those answers. Do you have a 

sense about the importance of this activity being centered in the 

United States? What is it that—this is a broader question than a 

regulatory one, but what benefits does our economy and our innovative environment gain by encouraging or at least not discouraging the bitcoin from being centered here? 

Ms. SHASKY CALVERY. So I think what we gain is our continued 

reputation and economic advantages as being a country where 

innovators come to start new businesses, and that gives us great 

economic value, and it is something we would want to continue. So 

I think the great challenge for the regulators is to encourage innovation wherever we can and put smart regulation in place that 

tries to deal with risks, very real risks about which we need to be 

concerned, but minimizes burden on innovation. 

Mr. COTNEY. Clearly the United States, the mother of invention, 

we want to take advantage of innovation, and to the extent that 

we see innovation in this space, that could have spillover effects 

into other payments or other financial industries or even beyond 

the financial services industry. So we want to be able to encourage 

innovation and have it developed here locally. 

Senator MORAN. I appreciate that. 

Mr. Chairman, thank you. 

Senator WARNER. I think we have all got a lot more questions 

for you, but we understand a vote will be held around 5, so we 

want to make sure we get to the second panel. I want to thank you 

both for your testimony, and I look forward to continuing the dialogue. 

Ms. SHASKY CALVERY. Thank you for the opportunity. 

Mr. COTNEY. Thank you. 

Senator WARNER. Now I will turn the chair over to Senator 

Merkley at this point, and he can go ahead and maybe start introducing the next panel. 

Senator MERKLEY. [Presiding.] Because of the time, I am going 

to start introducing you as you come up, so feel free to take your 

seats quickly. 

I will start with Paul Smocer, the President of BITS. BITS in 

this case I do not believe has any relation to the term ‘‘bitcoin.’’ 

BITS is the technology policy division of the Financial Services 

Roundtable. Mr. Smocer joined the Roundtable in February 2008 as 


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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. 

Second, we have Professor Sarah Jane Hughes. She is a University Scholar and Fellow in Commercial Law at Indiana University’s 

Maurer School of Law. For the past 25 years, Professor Hughes has 

regularly taught payments law, commercial law, and banking regulation at the Maurer School of Law. She is a nationally recognized 

expert on payment systems, public and private methods to detect, 

deter, and prosecute domestic and international money laundering, 

and consumer protection and financial privacy. 

Next we have Mercedes Kelley Tunstall. She is a partner at 

Ballard Spahr and the practice leader of their Privacy and Data Security Group. She has substantial experience working with clients 

to develop new financial products and services, including virtual 

currencies. She also works with clients from a spectrum of industries on mobile and other e-commerce initiatives, privacy and 

cybersecurity issues, and the use of social networking sites for marketing, consumer service, and crowdsourcing purposes. 

And we have Anthony Gallippi. Anthony is the cofounder and 

CEO of BitPay, an electronic payment processing system for 

Bitcoin. Mr. Gallippi founded BitPay in 2011. He has 15 years of 

experience in sales and marketing working in the robotics industry. 

Before founding BitPay, Mr. Gallippi was district sales manager at 

Aerotek and regional sales manager at Industrial Devices Corporation. 

So, Paul, we will start with you. Thank you to all of you for 

bringing your expertise to bear on this topic. 

STATEMENT OF PAUL SMOCER, BITS PRESIDENT, FINANCIAL 

SERVICES ROUNDTABLE 

Mr. SMOCER. Thank you, Chairman Merkley and Chairman Warner, Ranking Members Kirk and Heller, and Members of the Subcommittees for the opportunity to testify today. My name is Paul 

Smocer, and I am the President of BITS, the technology policy division of the Financial Services Roundtable. 

Attempts to develop digital currencies have existed for decades. 

As consumers have become more comfortable with Internet financial activity and computer systems have become more powerful and 

less expensive, we are witnessing the viability of digital currencies 

increase. However, we need to recognize that digital currency usage 

exists outside of traditional currency, financial accounting, and 

payment systems. In my testimony today, I will address both opportunities and risks in the environment. 

One measure of a currency’s success is its acceptability. We are 

beginning to see select retailers accepting digital currencies for 

goods and services. For example, the Web publishing service 

WordPress accepts bitcoin as a form of payment. Just last week, 

the Federal Election Commission indicated it is considering allowing Bitcoin’s use as in-kind contributions. Merchant and Government agency acceptance will establish these currencies’ legitimacy 

and increase the trust parties have in them and their stability. 


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Digital currencies also allow merchants access to new consumers 

in countries where traditional payment systems do not permit access. The lack of interchange fees and chargebacks also appeal to 

merchants. 

Digital currencies may also have the ability to provide access to 

the underbanked and unbanked. For example, a mobile phonebased money transfer and microfinancing service in Kenya called 

M Pesa recently added a bitcoin payment option for its customers. 

Digital currencies can also help individuals in countries with repressive regimes to support causes they might otherwise not be 

able to support through their country’s traditional payment providers. They can also serve as a potentially stable currency in countries whose own currencies are in distress. For example, during the 

recent Cyprus financial crisis, citizens transferred funds to digital 

currencies. 

Another interesting aspect related to certain digital currencies is 

cryptographic protections, which some providers claim prevent 

counterfeiting and duplication. 

Digital currencies and the supporting infrastructures do present 

opportunities to watch, including facilitating real-time payments, 

particularly those involving international parties and those involving micro payments; possibly deeper cryptographic options for 

Internet-based transactions; and opportunities to serve the underbanked and politically repressed more effectively. 

While there are opportunities, we also have to recognize the potential risks. First, as noted, digital currencies pose significant 

market risk. Without Government funding or support, digital currencies are often subject to significant market volatility, creating 

risks to both holders of the currency and to merchants and others 

who accept the currency as payment. 

Beyond the March 2013 guidance issued by FinCEN, the digital 

currency environment incorporates virtually no existing regulatory 

protections, particularly consumer protections. For example, and 

also as noted, within the last 2 months there have been multiple 

reports of currency disappearances from various bitcoin trading 

platforms. In none of these cases is it likely that the owners will 

recover anything. 

The lack of consumer protections extends to other areas, such as 

liability limits for fraudulent or unauthorized payments. Currently 

none of the digital currency operators or infrastructure providers is 

subject to regulatory oversight applied to regulated financial providers, such as the Gramm-Leach-Bliley Act’s cybersecurity and 

data breach notification requirements, the Federal Financial Institutions Examination Council’s regulatory guidance, or often to 

independent regulatory examinations. 

Given the anonymity of the digital currency world and the lack 

of Know Your Customer requirements that apply to traditional financial institutions, using digital currencies individuals may also 

be able to donate to illegal organizations that would otherwise be 

legitimately banned, such as those engaged in terrorist financing. 

Some recent studies, as we have been discussing, suggests the 

anonymous nature of digital currencies has made them a haven for 

illegal activity. We talked about Silk Road, and we talked about 

Liberty Reserve, but those I think are probably just the prime exVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\87095.TXT SHERYL

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amples of the point that criminals are using digital currencies to 

assist in a broad array of criminal activities. 

So as we look at the lack of regulatory oversight, the risks to consumers, and the market risks associated with digital currency, 

there is a continuing challenge to their overall legitimacy, usage, 

and endorsement. 

In conclusion, clearly the use of digital currencies will continue 

to evolve, and there are opportunities to explore, but we will need 

to address both the concerns to consumers, to society, the need for 

appropriate regulation, and the effectiveness of risk mitigations. 

Thank you for your invitation to testify to the Subcommittees, 

and we look forward to continuing to work with you. 

Senator MERKLEY. Thank you. 

Professor Hughes. 

STATEMENT OF SARAH JANE HUGHES, UNIVERSITY SCHOLAR 

AND FELLOW IN COMMERCIAL LAW, INDIANA UNIVERSITY 

MAURER SCHOOL OF LAW 

Ms. HUGHES. Thank you, Mr. Chairman, Chairman Warner, 

Ranking Members Heller and Kirk, and honorable Members of both 

Subcommittees, I am honored to be here with you today. 

Monitoring the developments in digital currencies and taking a 

responsible approach to their regulation reflects their growing presence in domestic and international transactions. Recent negative 

publicity associated with law enforcement actions against Silk 

Road and reports of the disappearance of bitcoin exchange values 

in China and the Czech Republic raises important policy concerns. 

I have, as the Chairman said, worked in areas that are like this 

for a long time, not as a provider but as a watcher. And I also wish 

that my late father could be here today because he served in World 

War II as a cryptographer for the United States and was early involved in the computing industry in the United States. I remember 

being a teenager when he brought home two big briefcases, and he 

said, ‘‘It is a computer.’’ And it was. 

So one of the things is that we are seeing in a relatively short 

period of time important, path-breaking changes in technology of 

the character that Senator Warner suggested earlier, and we need 

to be very cautious not to chill those innovations, but we still need 

to have appropriate legal regimes around them. And I think it is 

important that we take some time and craft those legal regimes 

with great care and in as flexible a way as possible, particularly 

with regard to the remarks of Director Calvery and Commissioner 

Cotney. 

So I had a number of recommendations that responded to the 

questions that the invitation to appear put forward, and taking 

them slightly out of order from my prepared testimony, obviously 

there has already been some support for the idea of retaining the 

current division between the States and the Federal Government 

for portions of the role that each do very well. And I share those 

views. 

Second, I think it is incredibly important that we enforce our 

anti-money-laundering, anti-terrorism, and economic sanctions 

laws. And as a corollary, I also believe that customers of programs 

such as Bitcoin and other virtual currencies that may develop 


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should get the same Federal protections that people get under 

Gramm-Leach-Bliley, under the Right to Financial Privacy Act of 

1978, et cetera.

I think FinCEN has taken important steps toward clarifying the 

application of their existing authority, and I think we need to continue to clarify particularly so that banks and investors do not get 

cold feet, because we have no way of knowing today what secondstage innovations that may have completely different roles in our 

economy these new technologies may offer us, and we want to be 

certain we do not do anything to take them offline. 

I would encourage on an interim basis payment systems operators, assuming that we all agree that this is a payment system and 

not something else like commodities or securities, to adopt and 

publicize their own transparent standards of how they will behave. 

As you suggested, legal liability limits, dispute resolution possibilities, guarantees for redemption opportunities, and clear rules about 

when redemption can happen are all important user protections. 

Notice I said ‘‘user’’ and not ‘‘consumer,’’ because businesses who 

use have many of the same needs as consumers, and we tend to 

be focused on regulating for consumers. I spent lots of my life looking at consumer issues, but I am equally interested in businesses 

being protected. 

I think we need to leave room for depository and nondepository 

providers to innovate in the virtual currency space. And so we 

want a regulatory climate—we do not want a regulatory climate, 

rather, in which early entrants can freeze out later ones. We would 

like to have a lot of innovation in all of this space. 

I worked at the Federal Trade Commission many years ago, and 

one of the projects I worked on was the rescission of a number of 

1940s and 1950s trade regulation rules that had essentially been 

written by industries for themselves. We would like not to see that 

again because they can be very anti-competitive, and if they are 

anti-competitive, they are very anti-consumer. So we need an open 

set of rules. 

I am going to run out of time, but I would say that the other 

thing is do not buy the Wild West argument. Just because something is new does not mean it should not be regulated on the same 

basis as the types of activity with which it competes. 

Thank you so much for this invitation. I would be delighted to 

answer your questions. 

Senator MERKLEY. Thank you very much, Professor. 

And now Ms. Tunstall. 

STATEMENT OF MERCEDES KELLEY TUNSTALL, PARTNER 

AND PRACTICE LEADER, PRIVACY AND DATA SECURITY 

GROUP, BALLARD SPAHR LLP 

Ms. TUNSTALL. Chairman Merkley, Ranking Member Heller, and 

Members of the Subcommittee, I am Mercedes Kelley Tunstall, a 

partner at Ballard Spahr here in DC, and I am the head of our Privacy and Data Security Group. My testimony today reflects my personal experience with the virtual currency industry and represents 

my own opinion. It does not necessarily reflect the opinions of 

Ballard Spahr or our clients. 


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Thank you for this opportunity to testify about the present and 

future impact of virtual currency. I currently work directly with a 

number of clients in financial innovation issues, and one of the 

things, as I have been listening to the testimony today, that I feel 

like is worth saying is that one of the things that I often say with 

financial innovation is there is a tendency to say, ‘‘Well, it is completely new. It is so new, we have never seen anything like it before.’’

But the fact is that it is like a lot of things that have happened 

in the past, so I am going to go through some of the statements 

that I have in my testimony, but let us start with the discussion 

of currency generally in the United States. 

The United States actually has a long history of having concerns 

around currency. It finally settled down in the 1870s when the Supreme Court had a series of opinions called the ‘‘legal tender 

cases,’’ and basically what they said at that time is we are going 

to stop all this different stuff with the currencies, happening, we 

are going to say there is a U.S. currency, and the rule is everyone 

in the United States has to accept that currency. So there could be 

other currencies, you can accept other currencies, but you have to 

accept U.S. currency. It is the currency of the land, et cetera.

So that is the basis that we are working from, and we do actually 

have a long history, long legal precedent that talks about how to 

handle different types of currency in our financial ecosystem. 

Having said that, when we take a look at Bitcoin and the lessons 

that we can learn from Bitcoin—and I want to point to you where 

we can talk about a bit of their failures. 

The first point is that Bitcoin was really designed to not integrate with our existing financial ecosystem. It was designed to be 

its own thing and try to, you know, break apart the world without 

working within the practical realities that we have today. And as 

a result, financial institutions, especially in the United States, view 

Bitcoin and other types of virtual currencies as being unreliable, 

getting involved into them affects their safety and soundness concerns, and so it really is something that right now, not much interest in. 

The next point that Bitcoin really focused on is that the transactions need to be anonymous. There is the sense that because it 

is virtual currency and we are trying to remake a cash transaction, 

it has to be anonymous. But if I am going to take a dollar bill and 

hand it to you, I have to see you and I know the personal information about you, at least some personal information, what you look 

like. So in the virtual currency world, there is no need for the currency transactions to be anonymous. It can be. 

The other two elements that Bitcoin addressed besides anonymity is taking out the middleman, so the bank involvement, and not 

having a record that has personally identifiable information in it. 

So I would say that in order to address the excesses that we are 

seeing with virtual currencies, where it is being used by criminals 

and terrorists and money launderers today—we do know that that 

is occurring—that the anonymity part of it, let us let that go. The 

whole point should be keep that middleman out of it, if that is 

what the virtual currency—and there are lots of reasons—we have 

had lots of people talk about the value that a virtual currency could 


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have. Keep the middleman out of it, and we do have the technology 

today to make it possible that there is no a record with personally 

identifiable information for others to see, but it is something that 

is retained by the two parties involved in the transaction. 

Finally, Bitcoin has caused some of its own problems because it 

has this commodity aspect to it, and you could design—and some 

of the other virtual currencies out there have specifically been designed to avoid the boom-and-bust cycle that we have heard about 

today. 

So those are the three points really that we can learn from 

Bitcoin to allow virtual currency innovation to continue. 

In terms of looking at what has to happen from a legal perspective, I am just going to mention we do need to come to what a definition of virtual currency is. Is it a commodity? Is it not—is it a 

commodity or a security or not? We do need stronger FinCEN guidance as virtual currency develops. 

And then, finally, on the consumer protection side, we touched 

briefly on the unauthorized transactions issue. That issue also 

needs to be addressed and considered. 

Thank you very much for the opportunity today, and I am happy 

to take any questions. 

Senator MERKLEY. Thank you very much. 

Now we are going to turn to Anthony Gallippi, cofounder and 

CEO of BitPay. 

STATEMENT OF ANTHONY GALLIPPI, COFOUNDER AND CEO, 

BITPAY, INCORPORATED 

Mr. GALLIPPI. Thank you, Chairmen Merkley and Warner, Ranking Members Heller and Kirk, and distinguished Members of the 

Committee, for the opportunity to speak today. 

My name is Tony Gallippi, and I am the cofounder and CEO of 

BitPay. I appreciate the Members for their interest in the commercial and international trade aspects of digital currencies and, more 

importantly, the opportunities for digital currencies to create jobs 

in America and to increase America’s exports. 

Our company, BitPay, was started in May 2011. We have been 

operating for over 2 years now, which makes us pretty old in the 

Bitcoin space. During this time we have acquired over 12,000 merchants to accept bitcoin using our service. Our merchants include 

many small and medium-sized businesses in every State, who accept bitcoin side by side with credit cards and other forms of payment. 

Most online payments today are made with credit cards, but 

credit cards were never designed for the Internet. Credit cards 

were designed in the 1950s, and last year, over 12 million people 

became victims of identity theft, mostly from shopping online. Businesses lose over $20 billion a year due to payment fraud. The 

banks do not take responsibility for the fraud. If you are a business, it is your fault that you took a stolen credit card, even if the 

bank approved it. And credit card fees are discriminatory. The 

highest fees are paid by the smallest Mom-and-Pop businesses and 

the lowest-income consumers. Bitcoin is a cheaper, faster, and more 

secure payment system with no discrimination against smaller 

businesses. 


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At BitPay, our role in the Bitcoin ecosystem is very close to that 

of the traditional merchant acquirers in the credit card space. Our 

software helps merchants clear and settle transactions over the 

Bitcoin network. BitPay has a strict Know Your Customer policy to 

verify all of our merchant applications. We need to know who our 

merchants are and what they are selling. We only want the good 

actors using our service. 

BitPay also follows all Bank Secrecy Act guidelines to prevent, 

detect, and report suspicious activity. Our strict policies to comply 

with laws and protect our brand have earned BitPay the reputation 

as a leader and well-respected company in the payments space. 

Bitcoin does have some limitations that will keep it a small player in the payments space for quite some time. Compared to credit 

cards, for example, Visa’s payment network can handle 20,000 

transactions per second worldwide. Bitcoin can handle seven—not 

7,000, but seven transactions per second. So even though it is very 

small, Bitcoin has invented something pretty amazing. With 

Bitcoin, it is now possible to transfer an asset remotely and immediately settle the transaction, with no counterparty risk. That type 

of instrument has never existed before. And the possibilities of this 

instant worldwide settlement are very interesting. The Bitcoin 

block chain, which is the public accounting ledger of Bitcoin, is a 

large property rights database. It can handle quadrillions of individual asset accounts, with a full chain of custody every time an 

asset is transferred from one party to another. 

If you want to energize the housing market, think of Bitcoin. The 

biggest up-front costs for consumers trying to buy a home today are 

the closing costs, high fees for deeds, titles, stamps, insurance, and 

other redundant tasks to record the sale in different record books. 

Bitcoin can replace thousands of dollars in closing costs with a single transaction that costs 5 cents. 

Bitcoin does have risks. Criminals use cell phones, criminals use 

email, criminals use dollars, and criminals use banks. Many businesses like BitPay, offering innovative services on top of Bitcoin, 

share the Committee’s goals to protect consumers from fraud and 

keep the criminals away from our businesses. 

Guidance from the IRS, Treasury, Justice, and SEC have all established that bitcoins are legal and that those dealing with them 

must follow the existing tax laws and anti-money-laundering regulations. 

In the early 1990s, when the Internet was in its infancy, Congress took a wait-and-see attitude to let the Internet develop. So 

where would social media and other free applications of the Internet be today if in the 1990s we required licenses for the Internet 

and we taxed Internet access as if it was a telecom? 

In 1995, the National Science Foundation lifted its strict prohibition of e-commerce, and immediately companies like Amazon, eBay, 

and Dell were born. Americans will benefit from a similar openness 

and wait-and-see approach to Bitcoin. 

Bitcoin is a technology with tremendous cost savings for businesses and consumers. Bitcoin is a more secure, faster, and more 

affordable option for transferring funds. If America is the leader in 

Bitcoin technology, America will create more jobs and more exports. 


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In conclusion, today Bitcoin is in its infancy. It is much like the 

Internet in the early 1990s. If we look 10 to 20 years in the future, 

we will see many companies built upon Bitcoin-related technology, 

and we want those companies to be based in America, creating jobs 

in America, and building a revenue base and a tax base in America. 

I commend the Committee for recognizing the real, practical uses 

of virtual currencies, and thank you for the opportunity to speak 

today. 

Senator MERKLEY. Thank you very much. 

We are going to jump right into questions, and given we have 16 

minutes and four of us, I am going to ask for 4 minutes to be on 

the clock. I am going to take my 4 minutes now, and I have three 

questions, so I am going to try to move them quickly and see if I 

can get through all of them. 

First, Mr. Gallippi, what is your transaction fee? 

Mr. GALLIPPI. So our transaction fee, when we first started, was 

1 percent. So compared to credit cards that are around 3 percent, 

we are 1 percent. But we realized very quickly that our marginal 

cost to do a transaction is low, so we have actually switched over 

to a software as a service pricing model. Different features and different levels of service, merchants pay 1 monthly fee. Then they 

can transact all they want with no transaction fees. 

Senator MERKLEY. So I have got Whiffies out in Oregon that says 

it likes to accept bitcoins because it has a one-tenth of 1 percent 

transaction fee. Do any of your transaction fees go that low? 

Mr. GALLIPPI. Possibly. If you take our monthly service and divide it by the volume that you put through, you could get something that low. That is correct. 

Senator MERKLEY. OK. That is fascinating. Thank you. 

Professor Hughes, I recently read the book ‘‘The Wolf of Wall 

Street,’’ and I think this is coming out as a movie soon, but this 

broker makes a lot of money, and at one point—this is a true 

story—he has his wife’s aunt strapping money and taking it to 

Switzerland to put into Swiss bank accounts. 

Are Bitcoin wallets, like Instawallet, going to replace Swiss bank 

accounts? 

Ms. HUGHES. Mr. Chairman, I do not know the answer to that 

question, but I would be delighted to speculate about it for a second. 

So there are two ways that you can currently—you could store 

anything you want, including bitcoins, right now on a private wallet. The trick is that it would be harder to transact business that 

way, so most people who do it use exchanges. 

But there are so many ways in which one can store value, which 

could and have included in the past putting it on stored value 

cards and loading them and taking them to Switzerland and not 

even needing to do that. 

So the answer is, yes, technically you can, and, yes, technically 

they could be. And I think that that is one of the reasons why rigorous and clear guidelines for how our anti-money-laundering, antiterrorist, and economic sanction regimes are applied to virtual currencies, not just bitcoins but those that may come in the future, are 

very important to us. We really do not want to facilitate hiding 


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money, and we do want to be very careful that we protect people 

who are using currencies of this kind in war-torn areas or areas in 

which the governments are not reliable or the banking system is 

not like ours. 

Senator MERKLEY. Thank you. And I will follow up with some 

questions about the Electronic Funds Transfer Act and issues that 

may arise there. But I want to use my last minute to get to this 

question. 

Mr. Gallippi is talking about these very low transaction fees, 

which will make many of my merchants in Oregon, their eyes light 

up. And as we think about this, this actually—not Bitcoin by itself 

because we have a limited number of bitcoins under the structure 

it has created. It has security issues. But the concept in general 

poses some interesting models that could significantly change our 

credit card system, our bank deposit system, our debit card system. 

And, Mr. Smocer, in your role with the financial services world, can 

you give us a little insight on kind of the current thinking of those 

challenges? 

Mr. SMOCER. Sure. And I actually like the way you characterized 

it because when I think about Bitcoin, we kind of tend to use it 

as a generic term, but in reality, at least for me, it really is three 

things: it is a currency, potentially, or a security; it is secondarily 

the way we use it a depository system, so the wallets and whatnot; and, third, it is a payment system. So we are talking about 

kind of three different realms that I think we need to think about 

individually. 

I do think that, as I mentioned in the testimony, it has value in 

showing us that there are ways that we can make the payment system more rapid; we can perhaps make it less expensive. We can 

make it more available to the unbanked and in some cases to people who might not otherwise be able to use a payment system. But 

I think, having said that, I think without the consumer protections 

that we think about in traditional systems, there are a lot of risks 

to those users as well. 

And, you know, if I could go back actually to answer your question that you posed to Ms. Hughes as well, I am not sure you even 

have to move money to Switzerland in this case because, to me, the 

anonymity that is associated with users and their wallets would 

suggest I really do not need to try and cover who owns the money. 

Senator MERKLEY. Thank you. I am out of time, so we are going 

to pass this on to our Ranking Member. 

Senator HELLER. Thank you. 

Mr. Gallippi, I have a couple questions for you. I would love to 

be at your home as you are explaining to your wife how your virtual company gave you a virtual paycheck using virtual money. 

[Laughter.] 

Senator HELLER. But that being the case, I assume your business 

wants more consumers than investors. 

Mr. GALLIPPI. Well, actually, our business model—and I have detailed it more in my written testimony—we are just a merchant 

acquirer, so we only facilitate the payments for merchants. We do 

not have a consumer wallet. We do not offer an exchange for consumers. So we are strictly focusing on State acceptance and business adoption of Bitcoin, and the rules and regulations around that 


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are fairly well defined, you know, in the credit card space, and our 

business model is very similar to them. 

Senator HELLER. I am just wondering what would happen if 

someone like Senator Warner cornered the market of virtual coins. 

How would that impact the consumer marketplace? 

Mr. GALLIPPI. Well, it is interesting. You know, we look at 

Bitcoin being traded in open markets today, and China is getting 

very aggressive in the open market. And if we want America to remain a leader in technology and in Bitcoin, you have to look at the 

exchanges, because that is where all the liquidity is. And right now 

the number one exchange in the world for Bitcoin is in China. The 

number two exchange is in Japan. Numbers three, four, and five 

are in Europe. Number six is in Canada. America is not a leader 

right now in the liquidity and the exchange of bitcoins. 

Senator HELLER. You talked a little bit earlier in your testimony 

about vetting these businesses. What is that? What do you have to 

do? 

Mr. GALLIPPI. Well, it is modeled really around the credit card 

system. You know, what does it take to get a merchant account 

with a credit card processor? We have modeled our system after 

that. So we need to know that, A, you are a legitimate business; 

we need to know who you are; and we need to know what you are 

selling. And then depending on the different levels of volume that 

you want to process, we will go even deeper into getting background checks and that kind of thing. 

Senator HELLER. Ms. Tunstall, if virtual currencies become more 

and more popular, what keeps a bank from starting their own virtual currency? 

Ms. TUNSTALL. Absolutely nothing, except that, like I said, they 

do have to maintain their safety and soundness concerns, and a 

U.S. bank needs to be very focused on U.S. money. But there is 

nothing to stop a financial institution from getting into virtual currency themselves. 

Senator HELLER. Are you familiar with other virtual currencies? 

Ms. TUNSTALL. I am sorry? 

Senator HELLER. Are you familiar with other virtual currencies 

besides bitcoins? 

Ms. TUNSTALL. I am, yes. 

Senator HELLER. Can you share some knowledge? 

Ms. TUNSTALL. Sure. So there are a number of virtual currencies 

that are designed for very kind of niche purposes that are designed 

for online video gaming-type situations, so you can play with your 

partners across in China and Japan and wherever, so there are a 

number of those types of virtual currencies. 

There are also a number of virtual currencies that are based on 

Bitcoin and try to basically fix some of the issues that I detailed 

in my testimony here today. 

And then there is also a virtual currency called Ripple that has 

started very differently from Bitcoin and started with the premise 

we are operating in an existing financial ecosystem, and we need 

to, you know, be able to comply with the criminal laws and antimoney-laundering laws that are in place. 

Senator HELLER. Thank you. 

Thank you, Mr. Chairman. 


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Senator WARNER. I am going to try to go through the lightning 

round as well. First of all, I do not want to overuse my telecom 

analogy, but just as we saw in developing countries in many ways 

as they developed telecom networks, to skip the wired system and 

immediately go to wireless, wouldn’t those regimes that have either 

huge currency restrictions or are enormously underbanked, couldn’t 

you actually see initially the development of these virtual currencies actually quicker and faster in the underdeveloped world 

than in the developed world? Could we get quick responses? Because I have got two or three more questions. 

Ms. TUNSTALL. So my quick response on that is one of the reasons that virtual currencies in the United States have actually proliferated and succeeded is because of the strength of our financial 

system’s security, and so for these other countries where there is 

not that kind of infrastructure, it is unlikely to be able to support 

the growth of a virtual currency as you are discussing. 

Senator WARNER. Other views? Similar? 

Ms. HUGHES. I agree. 

Mr. GALLIPPI. Yes, I think the example of Kenya is a great one. 

Kenya is a country where more people have access to smartphones 

than to running water. And, you know, the telecom companies 

stepped up and saw that there was a need, that the existing banking infrastructure was not meeting the needs of the people, and so 

the telecoms built a mobile payment system in Kenya that today 

represents 30 percent of the GDP of Kenya. It is done by people 

sending text messages on their cell phone. 

Senator WARNER. And I guess, Mr. Gallippi, I want to just make 

an editorial comment. I agree with you. We have got to get this balance right. We want to keep this innovation in America. But as a 

former Governor, the revenue leakage from Internet-based transactions for States that depend upon a sales tax is an enormous 

challenge. So we have got to get this balance right, and that is one 

of our challenges going forward. 

I guess I would want to press as well Senator Heller’s comments. 

We have thought about and, Ms. Tunstall, you have commented 

about some of these other competing virtual currencies. I think 

about a few years back when Second Life was going to be all the 

rage and everybody was going to have an avatar and we were going 

to trade. 

You know, it seems, though, that the Bitcoin currency—that my 

understanding is—now has about 90 percent of the folks who are 

not users but actually investors rather than users, you know, at 

some point do you think one of these currencies will emerge and 

does Bitcoin seem to be going down that path? Or do you think 

there will always be that threat that other currencies—and, again, 

I think particularly your comments about one that tries to fit within the legal regime? 

Ms. TUNSTALL. So I think it is more—unless Bitcoin makes some 

big changes that allow the Silk Road-type situation to stop from 

happening, I do not see how it will become commercially viable in 

the United States. And I would like to—you mentioned Second Life. 

I would like to mention that. Actually in Second Life, I looked at 

for a client—they wanted to brand the banks in Second Life and 

be the bank in Second Life. And as I looked at it, the way that the 


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law works, even if it is in a virtual world, if the bank is doing the 

transactions, the U.S. banking laws apply. 

And so that was a very interesting result, and what is fascinating about virtual currency actually is that it has found a way 

to fall through what our infrastructure is right now for financial 

regulation, which is why we do need to have some kind of framework put around it. 

Senator WARNER. My time is going to run out, but I would simply say, though, that because of some of the illicit activities and because of perhaps the interest of some of the folks who want to do 

this off the grid or not be controlled by a central banking system, 

you know, we have got to get this—you know, we have got to sort 

through this right. 

I would also make mention, Mr. Chairman, that as a politician 

who had a Second Life avatar, that got me attention for a nanosecond. 

[Laughter.] 

Senator HEITKAMP. Mr. Chairman, thank you. Just take this a 

different direction and just use my little time to tell a little story 

about when I used to regulate truth in advertising, and I could not 

get my advertisers to tell the truth, and so I told them they could 

tell whatever they wanted in an ad, but I was going to take out 

a full-page ad right next to theirs saying I do not regulate them. 

I do not regulate them; buyer beware. And we are really at that 

point because the more we legitimize this in regulation, the more 

we commercialize it. 

And so how do we strike that balance? And I am interested in 

the academic point of view and maybe the legal point of view. How 

do we strike that balance? Because to me, if we get involved in regulation, we legitimize it as a true opportunity. 

Ms. HUGHES. Well, I think that there is a lot to what you say, 

Senator, that if we regulate, we do legitimize. And some of today’s 

witnesses have talked about trust, and trust is a very important 

factor, particularly with financial products and services. So there 

is that risk. 

There is a bone in my body that says I think that is a risk worth 

taking. And I think it is particularly worth taking as we think of 

these virtual currencies as having functions that are a lot like credit cards or debit cards in some respects. 

Senator HEITKAMP. But wouldn’t you agree that right now, without any form of intervention, without legitimizing it, every buyer 

out there has to be careful, and that has restricted or limited or 

tapped down the willingness of people to participate? And you really are—you know, it is kind of ironic because we want all the free 

enterprise system, but the regulatory scheme and saying I have 

adapted to the regulatory scheme buys you the opportunity to participate in the market in a way that other financial institutions 

participate. 

Ms. HUGHES. I could not agree more. And I think that there is—

in my prepared statement, I make the observation that right now 

it looks like all the risks fall on the users, and that——

Senator HEITKAMP. And what is wrong with that? 

Ms. HUGHES. Well, that is why maybe we are not seeing the 

growth that we would see if there was a bigger structure around 


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it and greater clarity in that structure. But if people want to do 

their business that way, they——

Senator HEITKAMP. Well, we would just tell them, you go ahead, 

do your business that way, but——

Ms. HUGHES. Right, and we are not going to help you. 

Senator HEITKAMP.——you are not responsible, and we will deal 

with the sales tax consequences, we will work through those issues 

in terms of value-for-value transfer, because you can deal barter to 

barter. I mean, people can barter, and you still can do an analysis. 

You can do an analysis on what, in fact, is the capital gains or the 

short-term or long-term capital gains and just let—try and adapt 

on a case-by-case basis the existing regulation without legitimizing. 

I am interested in your point of view, Ms. Tunstall. 

Ms. TUNSTALL. So my perspective on that is it is an analogy to 

social media, where a number of companies have decided to kind 

of stick their head in the sand and say we are not going to engage 

in social media, and then, you know, thecompanysucks.com gets 

founded and then somebody sets up a fake Facebook page and pretends to be that company, and that company loses significant reputation when they choose to stick their head in the sand and not 

engage and not pay attention to what is happening. 

And so my concern with not getting into regulating this area and 

being interested in what happens here is that it will be—it could 

eventually affect our financial system’s reputation. 

Senator HEITKAMP. And I understand that, but my point is frequently in these situations we think about how we are going to fix 

it or facilitate it when maybe we should just leave it alone, and 

maybe that is the approach that we need to think about and warn 

people, you are on your own. 

Ms. TUNSTALL. And I think from a consumer perspective and 

from a user perspective, I think that was a very good comment, 

that that is where we are. And I think that that is a very fair 

point. 

Senator MERKLEY. Well, we are all left with a lot of questions. 

We are going to turn to Senator Schumer, but first I just want to 

note that we will follow up on some of those questions, the separation of the payment system from the banking system, Professor 

Hughes, your thoughts about how you avoid the boom-and-bust 

cycle that is inherent in Bitcoin where it is both a speculatory instrument as well as a payment system. And, of course, we are all 

absolutely enthralled to find out exactly what Senator Warner’s avatar looked like. 

[Laughter.] 

Senator MERKLEY. And with that, we are going to turn to Senator Schumer. Welcome. 

Senator SCHUMER. I for one do not want to see what Senator 

Warner’s avatar looked like. 

Anyway, I want to thank Chairmen Merkley and Warner for letting us have this hearing and allowing me to participate. I have 

been very interested in this issue. I have a somewhat different approach than Senator Heitkamp. 

A while back, as you know, I called on Federal authorities to 

shut down the Web site Silk Road, which they recently did. Many 

people interpreted my action at the time as directed at Bitcoin beVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 S:\DOCS\87095.TXT SHERYL

BANKI-41578DSA with DISTILLER
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cause Bitcoin was the sole method of payment on Silk Road, and 

assumed that I also wanted to shut down or stamp out Bitcoin. 

That is not the case. I do not want to shut down or stamp out 

Bitcoin. 

New York sits in many ways at the nexus of all the issues being 

discussed today. As financial capital, the potential for creation of 

a new payment platform and the rise of alternative currencies 

could have profound and exciting implications for the way we conduct financial transactions. As a rapidly growing hub for technology and VC, venture capital, New York has every interest in 

building on the promise that technologies like Bitcoin have to revolutionize payment systems or even form the building blocks for 

whole new technology platforms. 

But all of that promise is threatened by the association of virtual 

currencies with criminal activities, from purchasing illicit goods 

and services to money laundering. If Bitcoin continues to attract attention, mostly as a way to finance purchases on Web sites like 

Silk Road, it is going to find itself in the digital wasteland. 

So in order for the legitimate uses of technology like Bitcoin to 

flourish, it is imperative that its susceptibility to illicit uses be addressed. There must be a way to separate the wheat from the chaff. 

So bottom line is very simple. I would ask Mr. Gallippi, do you 

have any specific suggestions of how we would separate the wheat 

from the chaff? What would you suggest to the witnesses on panel 

one to ensure that we address legitimate law enforcement concerns 

without duly inhibiting the development of these promising new 

technologies? 

Mr. GALLIPPI. Yes, thank you, Senator Schumer. So I think you 

have to first understand that there are multiple parts of Bitcoin. 

There is the low-level protocol, which are the bits and bytes that 

make it work, and then there is the application and service layer 

that businesses and consumers can engage in. And this is typically 

where you find businesses like mine operating. 

So when you want to try to separate the legitimate uses from the 

illegitimate ones, clearly the point to do that are by the visible 

service providers like ourselves, like BitPay. We have over 12,000 

businesses using our service to accept bitcoin, and we have a very 

strict Know Your Customer policy to make sure that we know 

every merchant, you know, who they are and what they are selling, 

because we only want the legitimate and good actors using our 

service. 

The bad guys are going to try to figure out how to do it on their 

own, but it shows you with the recent arrest of the guy from Silk 

Road that just because you use Bitcoin does not mean that you can 

evade law enforcement, right? They caught the guy. He is in jail. 

So——

Senator SCHUMER. It took long enough. 

Mr. GALLIPPI. Yeah. So I think there is a lot of effort, and services like ours and others are willing to work with regulators to 

make sure that what we do complies with the rules, because we all 

share in the same common goal: to protect consumers from fraud 

and to prevent the bad actors from using the system. 


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Senator SCHUMER. Right. And I am sure you have thought about 

this, because you realize the danger Silk Road-type actors have to 

this appropriate new way of payment. 

Do you have any specific suggestions? And if you do not, if you 

would like to try to spend a little time thinking them up and sending them to us—I know the record probably, Mr. Chairman, will remain open for a week—that would be helpful. 

Mr. GALLIPPI. Yes, I would be happy to do that. 

Senator SCHUMER. OK. 

Senator SCHUMER. Other witnesses in answer to my specific 

question? Anyone have any thoughts? Ms. Tunstall? 

Ms. TUNSTALL. Yes, so I think that a very good point was made 

by Mr. Gallippi, and that is that the face to the user is the point 

to catch the transaction. So very similar to the Internet gambling 

restrictions that are in place, and I would actually be curious. Do 

you screen against merchant codes for Internet gambling as a credit card processor would do? 

Mr. GALLIPPI. Yes, correct—we do not allow that. 

Ms. TUNSTALL. OK. So that type of approach, you know, for tagging the transactions and knowing what the parties are, you can 

still be anonymous as long as it is a transaction between an individual and, you know, this company for a purchase. So we do have 

some existing controls and examples that can help on this side. 

Senator SCHUMER. Good. Well, I would, again, be interested in 

your submitting the specifics in writing. 

Senator SCHUMER. Any of the other witnesses? My time is up, so 

you do not——

Mr. SMOCER. I would just say that while I think Mr. Gallippi deserves a lot of credit for creating the company that he created with 

the kinds of controls he created, I would question if that is applicable across the industry and whether there are things we could do 

to make sure that the kinds of mitigations and controls that he has 

put in place are applicable to all in that business. 

Senator SCHUMER. OK. Well, thank you all very much, and I 

hope you will submit some specific suggestions and, Mr. Gallippi, 

in detail about what you have been able to do so we might be able 

to parlay that to other companies, although as Mr. Smocer says, we 

may not be able to do it in certain places. 

Thank you, Mr. Chairmen. 

Senator MERKLEY. Thank you very much, Senator Schumer, and 

thank you to all of our witnesses, and thank you, Co-Chair Warner. 

We will, in fact, keep the record open for additional questions for 

7 days, and this concludes the hearing of the Subcommittee on National Security and International Trade and Finance and the Subcommittee on Economic Policy. 

[Whereupon, at 5:10 p.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:]


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1http://www.dailymail.co.uk/news/article-2492813/Bitcoin-site-hacked-1million-virtual-currency-stolen.html.

PREPARED STATEMENT OF SENATOR MARK KIRK 

I am very pleased to be having this hearing today. I think virtual currencies have 

for too long been something that we were content to let occur and develop without 

fully understanding. Yet the headlines covering virtual currencies are more and 

more each day—many related to the enormous challenges and threats that exist in 

this currency space. What is often overlooked however is the massive innovation in 

the virtual currency space that provides incredible opportunities—a technology 

space where the United State can and should be the global leader. As we seek to 

understand and hopefully curtail many of the nefarious practices that seem to be 

drawn to the virtual currency space, we must also make sure that we do not stifle 

innovation—especially innovation that could be used to help so many people around 

the world. 

As eloquently stated in Jerry McGuire, ‘‘Show me the money’’. The directive within this statement has become both more significant and more challenging than ever 

before as financial transactions have evolved from simple people to people transactions to social networks and complex systems and software—using not only traditional State-backed currencies, but also purely digital ones. 

The movement and transfer of currency in exchange for goods and services have 

been contemplated since the beginning of time. To a great extent, the value and legitimacy of a currency depend on individuals’ confidence and willingness to accept 

it for any particular item. 

One major rationale cited by promoters of virtual currencies is that there is no 

Central Bank and therefore, digital currency is far less susceptible to currency manipulation. This notion is largely correct—the U.S. dollar and other widely accepted 

government currencies are proof. The dollar, which was originally pegged to gold reserves, now essentially derives its value from the confidence that the people using 

it place in it. As we have witnessed during the latest financial crisis, Central Banks, 

including the U.S. Federal Reserve, the Central Bank of Japan and several European Central Banks’ willingness to engage in monetary policies that often resemble 

currency manipulation—which have significant impacts on the value of currency. 

Therefore, I tend to agree that it is appropriate to question if a centralized institution that is susceptible to political and public pressure can be truly ‘‘independent’’ 

and free from currency depression or manipulation. 

Another key justification given by some virtual currency promoters is that there 

is some anonymity to an individual or group’s financial transactions. Parties of financial transactions can have reasons—some legitimate and some not—for desiring 

anonymity. While many of us understand the negative that can come from this anonymity, it is also critical to understand that this anonymity has helped finance revolutions against tyrannical governments and has helped NGO’s and others get money 

to individuals and groups without having to pay a middleman or losing it to illegitimate forces. 

Further, traditional currencies often fail in reaching the nearly 2.5 billion people 

who are unbanked across the globe—those ‘‘credit invisible’’ persons without bank 

accounts, credit lines, or credit histories. This is what makes the prospect of virtual 

currencies so amazing—that it can and already has helped revolutionize access to 

financial services for millions of individuals across the globe. 

Virtual currencies, however, are not without significant problems and complex 

issues that not only users and investors, but also Central Banks and law enforcement agencies, must grapple with. Media headlines surrounding the use of virtual 

currencies for financing the Silk Road, drug and human trafficking and terrorist financing make us aware of the most notorious problems with these currencies that 

can make the user in the transactions and even the transactions themselves anonymous and obscure. 

In addition to these headline stories, other problems exist for virtual currencies 

including massive fluctuations in value, the lack of security in the exchanges, and 

hackers stealing money from Bitcoin users. Other macro concerns include potential 

challenges these currencies create for the U.S. dollar, how governments will choose 

to recognize virtual currencies, and how law enforcement and financial regulators 

can effectively monitor, report, and control illicit activities conducted through the 

use of virtual currencies. Just over a week ago, there was a report of an Australian 

man that had 4,100 bitcoins, worth more than $1.1 million, stolen from him. This 

alleged theft is one of the largest since Bitcoin was created 4 years ago.1 Bitcoin 

hit an all-time high yesterday closing over 600—a fluctuation of over 5000 percent 

over its 52-week low—which compares to a 7 percent 52-week change for the dollar. 


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Further, there have been a number of hacks into Mt. Gox, the largest exchange for 

BitCoin, which in a hacking event in 2011 resulted in an estimated $8.75 million 

USD worth of bitcoins lost to individuals. 

Many of the more significant problems arise from the anonymity that can be 

achieved through the use of virtual currencies. These headlines warn us that virtual 

currencies, like most other currencies in the developed world, need parameters and 

some visibility. While many developers and others in the virtual currency space suggest that anonymity is critical to the currencies’ success, I question whether it is 

privacy, not anonymity that is most critical and if there is anonymity, whether complete anonymity is necessary. I don’t think that there is anyone that would argue 

that governments should not be able to track activities such as terrorism, drug and 

human trafficking and other illicit activities conducted through the use of virtual 

currencies. Yet the many questions related to how, why and where governments can 

and should have access and the ability to track this type of data is debatable. Some 

virtual currencies and exchanges thrive on anonymity, while others try to be more 

transparent, stressing privacy and a lack of a central bank rather than anonymity 

as the selling point. 

Bitcoin, for example, one of the most well known virtual currencies, stresses anonymity as a feature that could be achieved if the user wants it. However it really 

underscores the value of having a decentralized currency as the selling point. 

Bitcoin is a peer-to-peer network, math-based currency. The network is decentralized, which makes it more attractive because it is less susceptible to human judgment errors and manipulation. While Bitcoin touts this decentralization, this lack 

of centralization also makes Bitcoin more susceptible to use of illicit money transfers 

and manipulation including through the use of malware and botnets. Further, this 

decentralization makes Bitcoin incapable of conducting due diligence, monitoring, 

and reporting of suspicious activity and conducting anti-money laundering compliance programs. 

While it appeared that many virtual currencies, such as Bitcoin, allowed financial 

transactions to become completely anonymous, we are learning through cases such 

as the Silk Road scandal that virtual transactions are not entirely anonymous, 

largely dependent on the actions of the user. We also know that not all virtual or 

algorithmic currencies seek or promote anonymity. Other virtual and math-based 

currencies, such as Ripple, seem to be less focused on anonymity and more focused 

on a decentralized currency that has little-to-no counterparty risk. Ripple and others 

appear to also be on the cusp of bringing virtual currencies into mainstream financial services. 

The ability for law enforcement to understand and trace illicit activities being financed through virtual and digital currencies is critical to ensuring the national and 

financial security of the United States. However, it seems imperative that we don’t 

rush to over-regulate this system, pushing it offshore and truly into the shadows. 

Given the rate of change in the virtual and technology-based money transfer systems, it will be nearly impossible for a single government agency to codify a set of 

rules and regulations that will not quickly become obsolete. It appears that the only 

way for governments to address some of the formidable technical and organizational 

challenges associated with detecting and monitoring illicit activities done using digital currencies will come through a combination of self-regulation, government and 

industry collaboration, and large-scale government technological upgrades. 

I look forward to hearing from our first panel to better understand how the U.S. 

Government, including our financial regulators and enforcement agencies are looking at, studying and preparing for the challenges and opportunities presented by 

virtual currencies. 

I also look forward to hearing from our second panel to understand their views 

on possible regulations or standards that might improve the industry, the new innovations, technology developments, and what if any safeguards are being considered 

and developed to better protect the system. I would also like to understand ways 

that the private sector might be able to help self-regulate itself through best practices and standards to make the illicit actors even that much more obvious. 

PREPARED STATEMENT OF JENNIFER SHASKY CALVERY

DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK

DEPARTMENT OF THE TREASURY

NOVEMBER 19, 2013

Chairmen Warner and Merkley, Ranking Members Kirk and Heller, and distinguished Members of the Subcommittees, I am Jennifer Shasky Calvery, Director of 


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the Financial Crimes Enforcement Network (FinCEN), and I appreciate the opportunity to appear before you today to discuss FinCEN’s ongoing role in the Administration’s efforts to establish a meaningful regulatory framework for virtual currencies that intersect with the U.S. financial system. We appreciate the Committee’s 

interest in this important issue, and your continued support of our efforts to prevent 

illicit financial activity from exploiting potential gaps in our regulatory structure as 

technological advances create new and innovative 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 strategic use of financial authorities. 

FinCEN works to achieve its mission through a broad range of interrelated strategies, including:

• Administering the Bank Secrecy Act (BSA)—the United States’ primary antimoney laundering (AML)/counter-terrorist financing (CFT) regulatory regime;

• Sharing the rich financial intelligence we collect, as well as our analysis and 

expertise, with law enforcement, intelligence, and regulatory partners; and

• Building global cooperation and technical expertise among financial intelligence 

units throughout the world.

To accomplish these activities, FinCEN employs a team comprised of approximately 340 dedicated employees with a broad range of expertise in illicit finance, 

financial intelligence, the financial industry, the AML/CFT regulatory regime, technology, and enforcement. We also leverage our close relationships with regulatory, 

law enforcement, international, and industry partners to increase our collective insight and better protect the U.S. financial system. 

What is Virtual Currency? 

Before moving into a discussion of FinCEN’s role in ensuring we have smart regulation for virtual currency that is not too burdensome but also protects the U.S. financial system from illicit use, let me set the stage with some of the definitions we 

are using at FinCEN to understand virtual currency and the various types present 

in the market today. Virtual currency is a medium of exchange that operates like 

a currency in some environments but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. A convertible virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency. In other words, it is a virtual currency that can be exchanged for real currency. At FinCEN, we have focused on two 

types of convertible virtual currencies: centralized and decentralized. 

Centralized virtual currencies have a centralized repository and a single administrator. Liberty Reserve, which FinCEN identified earlier this year as being of primary money laundering concern pursuant to Section 311 of the USA PATRIOT Act, 

is an example of a centralized virtual currency. Decentralized virtual currencies, on 

the other hand, and as the name suggests, have no central repository and no single 

administrator. Instead, value is electronically transmitted between parties without 

an intermediary. Bitcoin is an example of a decentralized virtual currency. Bitcoin 

is also known as cryptocurrency, meaning that it relies on cryptographic software 

protocols to generate the currency and validate transactions 

There are a variety of methods an individual user might employ to obtain, spend, 

and then ‘‘cash out’’ either a centralized or decentralized virtual currency. The following illustration shows a typical series of transactions in a centralized virtual currency, such as Liberty Reserve:


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By way of comparison, the next illustration shows a very similar series of transactions in a decentralized virtual currency such as Bitcoin:

From a ‘‘follow the money’’ standpoint, the main difference between these two series of transactions is the absence of an ‘‘administrator’’ serving as intermediary in 

the case of Bitcoin. This difference does have significance in FinCEN’s regulatory 

approach to virtual currency, and that approach will be addressed further during 

the course of my testimony today. 

Money Laundering Vulnerabilities in Virtual Currencies 

Any financial institution, payment system, or medium of exchange has the potential to be exploited for money laundering or terrorist financing. Virtual currency is 

not different in this regard. As with all parts of the financial system, though, 

FinCEN seeks to understand the specific attributes that make virtual currency vulnerable to illicit use, so that we can both employ a smart regulatory approach and 

encourage industry to develop mitigating features in its products. 

Some of the following reasons an illicit actor might decide to use a virtual currency to store and transfer value are the same reasons that legitimate users have, 

while other reasons are more nefarious. Specifically, an illicit actor may choose to 

use virtually currency because it:

• Enables the user to remain relatively anonymous;

• Is relatively simple for the user to navigate;


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• May have low fees;

• Is accessible across the globe with a simple Internet connection;

• Can be used both to store value and make international transfers of value;

• Does not typically have transaction limits;

• Is generally secure;

• Features irrevocable transactions;

• Depending on the system, may have been created with the intent (and added 

features) to facilitate money laundering;

• If it is decentralized, has no administrator to maintain information on users 

and report suspicious activity to governmental authorities;

• Can exploit weaknesses in the anti-money laundering/counter terrorist financing (AML/CFT) regimes of various jurisdictions, including international disparities in, and a general lack of, regulations needed to effectively support the prevention and detection of money laundering and terrorist financing.

Because any financial institution, payment system, or medium of exchange has 

the potential to be exploited for money laundering, fighting such illicit use requires 

consistent regulation across the financial system. Virtual currency is not different 

from other financial products and services in this regard. What is important is that 

financial institutions that deal in virtual currency put effective AML/CFT controls 

in place to harden themselves from becoming the targets of illicit actors that would 

exploit any identified vulnerabilities. 

Indeed, the idea that illicit actors might exploit the vulnerabilities of virtual currency to launder money is not merely theoretical. We have seen both centralized and 

decentralized virtual currencies exploited by illicit actors. Liberty Reserve used its 

centralized virtual currency as part of an alleged $6 billion money laundering operation purportedly used by criminal organizations engaged in credit card fraud, identity theft, investment fraud, computer hacking, narcotics trafficking, and child pornography. One Liberty Reserve cofounder has already pleaded guilty to money laundering in the scheme. And just recently, the Department of Justice has alleged that 

customers of Silk Road, the largest narcotic and contraband marketplace on the 

Internet to date, 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. 

With money laundering activity already valued in the billions of dollars, virtual currency is certainly worthy of FinCEN’s attention. 

That being said, it is also important to put virtual currency in perspective as a 

payment system. The U.S. Government indictment and proposed special measures 

against Liberty Reserve allege it was involved in laundering more than $6 billion. 

Administrators of other major centralized virtual currencies report processing similar transaction volumes to what Liberty Reserve did. In the case of Bitcoin, it has 

been publicly reported that its users processed transactions worth approximately $8 

billion over the twelve-month period preceding October 2013; however, this measure 

may be artificially high due to the extensive use of automated layering in many 

Bitcoin transactions. By way of comparison, according to information reported publicly, in 2012 Bank of America processed $244.4 trillion in wire transfers, PayPal 

processed approximately $145 billion in online payments, Western Union made remittances totaling approximately $81 billion, the Automated Clearing House (ACH) 

Network processed more than 21 billion transactions with a total dollar value of 

$36.9 trillion, and Fedwire, which handles large-scale wholesale transfers, processed 

132 million transactions for a total of $599 trillion. This relative volume of transactions becomes important when you consider that, according to the United Nations 

Office on Drugs and Crime (UNODC), the best estimate for the amount of all global 

criminal proceeds available for laundering through the financial system in 2009 was 

$1.6 trillion. While of growing concern, to date, virtual currencies have yet to overtake more traditional methods to move funds internationally, whether for legitimate 

or criminal purposes. 

Mitigating Money Laundering Vulnerabilities in Virtual Currencies 

FinCEN’s main goal in administering the BSA is to ensure the integrity and 

transparency of the U.S. financial system so that money laundering and terrorist 

financing can be prevented and, where it does occur, be detected for follow on action. 

One of our biggest challenges is striking the right balance between the costs and 

benefits of regulation. One strategy we use to address this challenge is to promote 

consistency, where possible, in our regulatory framework across different parts of 

the financial services industry. It ensures a level playing field for industry and minimizes gaps in our AML/CFT coverage. 


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Recognizing the emergence of new payment methods and the potential for abuse 

by illicit actors, FinCEN began working with our law enforcement and regulatory 

partners several years ago to study the issue. We understood that AML protections 

must keep pace with the emergence of new payment systems, such as virtual currency and prepaid cards, lest those innovations become a favored tool of illicit actors. In July 2011, after a public comment period designed to receive feedback from 

industry, FinCEN released two rules that update several definitions and provide the 

needed flexibility to accommodate innovation in the payment systems space under 

our preexisting regulatory framework. Those rules are: (1) Definitions and Other 

Regulations Relating to Money Services Businesses; and (2) Definitions and Other 

Regulations Relating to Prepaid Access. 

The updated definitions reflect FinCEN’s earlier guidance and rulings, as well as 

current business operations in the industry. As such, they have been able to accommodate the development of new payment systems, including virtual currency. Specifically, the new rule on money services businesses added the phrase ‘‘other value 

that substitutes for currency’’ to the definition of ‘‘money transmission services.’’ 

And since a convertible virtual currency either has an equivalent value in real currency, or acts a substitute for real currency, it qualifies as ‘‘other value that substitutes for currency’’ under the definition of ‘‘money transmission services.’’ A person that provides money transmission services is a ‘‘money transmitter,’’ a type of 

money services business already covered by the AML/CFT protections in the BSA. 

As a follow-up to the regulations and in an effort to provide additional clarity on 

the compliance expectations for those actors involved in virtual currency transactions subject to FinCEN oversight, on March 18, 2013, FinCEN supplemented its 

money services business regulations with interpretive guidance designed to clarify 

the applicability of the regulations implementing the BSA to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. In 

the simplest of terms, FinCEN’s guidance explains that administrators or exchangers of virtual currencies must register with FinCEN, and institute certain recordkeeping, reporting and AML program control measures, unless an exception to these 

requirements applies. The guidance also explains that those who use virtual currencies exclusively for common personal transactions like buying goods or services 

online are users, not subject to regulatory requirements under the BSA. In all cases, 

FinCEN employs an activity-based test to determine when someone dealing with 

virtual currency qualifies as a money transmitter. The guidance clarifies definitions 

and expectations to ensure that businesses engaged in such activities are aware of 

their regulatory responsibilities, including registering appropriately. Furthermore, 

FinCEN closely coordinates with its State regulatory counterparts to encourage appropriate application of FinCEN guidance as part of the States’ separate AML compliance oversight of financial institutions. 

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, including virtual currency providers, do not go into business with the aim of laundering money on behalf of criminals. Virtual currencies 

are a financial service, and virtual currency administrators and exchangers are financial institutions. As I stated earlier, any financial institution could be exploited 

for money laundering purposes. 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 by those who respect and obey the basic rule of law 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, encourage the 

development of innovative financial products, and expand access to financial services. We want these advances to continue. 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. 


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As previously mentioned, earlier this year, FinCEN identified Liberty Reserve as 

a financial institution of primary money laundering concern under Section 311 of 

the USA PATRIOT Act. Liberty Reserve operated as an online, virtual currency, 

money transfer system conceived and operated specifically to allow—and encourage—illicit use because of the anonymity it offered. It was deliberately designed to 

avoid regulatory scrutiny and tailored its services to illicit actors looking to launder 

their ill-gotten gains. According to the allegations contained in a related criminal 

action brought by the U.S. Department of Justice, those illicit actors included criminal organizations engaged in credit card fraud, identity theft, investment fraud, 

computer hacking, narcotics trafficking, and child pornography, just to name a few. 

The 311 action taken by FinCEN was designed to restrict the ability of Liberty Reserve to access the U.S. financial system, publicly notify the international financial 

community of the risks posed by Liberty Reserve, and to send a resounding message 

to other offshore money launderers that such abuse of the U.S. financial system will 

not be tolerated and their activity can be reached through our targeted financial 

measures. 

Sharing Our Knowledge and Expertise on Virtual Currency 

As the financial intelligence unit for the United States, FinCEN must stay current 

on how money is being laundered in the United States, including through new and 

emerging payment systems, so that we can share this expertise with our many law 

enforcement, regulatory, industry, and foreign financial intelligence unit partners, 

and effectively serve as the cornerstone of this country’s AML/CFT regime. FinCEN 

has certainly sought to meet this responsibility with regard to virtual currency and 

its exploitation by illicit actors. In doing so, we have drawn and continue to draw 

from the knowledge we have gained through our regulatory efforts, use of targeted 

financial measures, analysis of the financial intelligence we collect, independent 

study of virtual currency, outreach to industry, and collaboration with our many 

partners in law enforcement. 

In the same month we issued our guidance on virtual currency, March 2013, 

FinCEN also issued a Networking Bulletin on crypto-currencies to provide a more 

granular explanation of this highly complex industry to law enforcement and assist 

it in following the money as it funnels between virtual currency channels and the 

U.S. financial system. Among other things, the bulletin addresses the role of traditional banks, money transmitters, and exchangers that come into play as intermediaries by enabling users to fund the purchase of virtual currencies and exchange 

virtual currencies for other types of currency. It also highlights known records processes associated with virtual currencies and the potential value these records may 

offer to investigative officials. The bulletin has been in high demand since its publication and the feedback regarding its tremendous value has come from the entire 

spectrum of our law enforcement partners. In fact, demand for more detailed information on crypto-currencies has been so high that we have also shared it with several of our regulatory and foreign financial intelligence unit partners. 

One feature of a FinCEN Networking Bulletin is that it asks the readers to provide ongoing feedback on what they are learning through their investigations so 

that we can create a forum to quickly learn of new developments, something particularly important with a new payment method. Based on what we are learning 

through this forum and other means, FinCEN has issued several analytical products 

of a tactical nature to inform law enforcement operations. 

Equally important to our ongoing efforts to deliver expertise to our law enforcement partners is FinCEN’s engagement with our regulatory counterparts to ensure 

they are kept apprised of the latest trends in virtual currencies and the potential 

vulnerabilities they pose to traditional financial institutions under their supervision. 

FinCEN uses its collaboration with the Federal Financial Institutions Examination 

Council (FFIEC) BSA Working Group as a platform to review and discuss FinCEN’s 

regulations and guidance, and the most recent and relevant trends in virtual currencies. One such example occurred just recently, when several FinCEN virtual currency experts gave a comprehensive presentation on the topic to an audience of Federal and State bank examiners at an FFIEC Payment Systems Risk Conference. The 

presentation covered an overview of virtual currency operations, FinCEN’s guidance 

on the application of FinCEN regulations to virtual currency, enforcement actions, 

and ongoing industry outreach efforts. 

FinCEN also participates in the FBI-led Virtual Currency Emerging Threats 

Working Group, the FDIC-led Cyber Fraud Working Group, the Terrorist Financing 

& Financial Crimes-led Treasury Cyber Working Group, and with a community of 

other financial intelligence units. We host speakers, discuss current trends, and provide information on FinCEN resources and authorities as we work with our partners 


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1Since 2006, State depository regulators have had a voting seat on the FFIEC, an interagency 

body empowered to prescribe uniform principles, standards, and report forms for financial institution examinations. The State Liaison Committee is made up of representatives of State bank, 

credit union and savings bank regulators and serves as the formal means for State input and 

representation on the FFIEC. 

in an effort to foster an open line of communication across the Government regarding bad actors involved in virtual currency and cyber-related crime. 

Finally, FinCEN has shared its strategic analysis on money laundering through 

virtual currency with executives at many of our partner law enforcement and regulatory agencies, and foreign financial intelligence units, as well as with U.S. Government policymakers. 

Outreach to the Virtual Currency Industry 

Recognizing that the new, expanded definition of money transmission would bring 

new financial entities under the purview of FinCEN’s regulatory framework, shortly 

after the publication of the interpretive guidance and as part of FinCEN’s ongoing 

commitment to engage in dialogue with the financial industry and continually learn 

more about the industries that we regulate, FinCEN announced its interest in holding outreach meetings with representatives from the virtual currency industry. The 

meetings are designed to hear feedback on the implications of recent regulatory responsibilities imposed on this industry, and to receive industry’s input on where additional guidance would be helpful to facilitate compliance. 

We held the first such meeting with representatives of the Bitcoin Foundation on 

August 26, 2013 at FinCEN’s Washington, DC, offices and included attendees from 

a cross-section of the law enforcement and regulatory communities. This outreach 

was part of FinCEN’s overall efforts to increase knowledge and understanding of the 

regulated industry and how its members are impacted by regulations, and thereby 

help FinCEN most efficiently and effectively work with regulated entities to further 

the common goals of the detection and deterrence of financial crime. To further capitalize on this important dialogue and exchange of ideas, FinCEN has invited the 

Bitcoin Foundation to provide a similar presentation at the next plenary of the 

Bank Secrecy Act Advisory Group (BSAAG) scheduled for mid-December. The 

BSAAG is a Congressionally chartered forum that brings together representatives 

from the financial industry, law enforcement, and the regulatory community to advise FinCEN on the functioning of our AML/CFT regime. 

Conclusion 

The Administration has made appropriate oversight of the virtual currency industry a priority, and as a result, FinCEN’s efforts in this regard have increased significantly over recent years through targeted regulatory measures, outreach to regulatory and law enforcement counterparts and our partners in the private sector, and 

the development of expertise. We are very encouraged by the progress we have 

made thus far. We are dedicated to continuing to build on these accomplishments 

by remaining focused on future trends in the virtual currency industry and how 

they may inform potential changes to our regulatory framework for the future. 

Thank you for inviting me to testify before you today. I would be happy to answer 

any questions you may have. 

PREPARED STATEMENT OF DAVID J. COTNEY

COMMISSIONER OF BANKS, MASSACHUSETTS DIVISION OF BANKS

ON BEHALF OF THE CONFERENCE OF STATE BANK SUPERVISORS

NOVEMBER 19, 2013

INTRODUCTION 

Good afternoon Chairmen Warner and Merkley, Ranking Members Kirk and Heller. My name is David Cotney and I serve as the Commissioner of Banks for the 

Commonwealth of Massachusetts. The Massachusetts Division of Banks is responsible for the overseeing all State-chartered banks and credit unions as well as regulating a range of nonbank financial service providers including money transmitters. 

I also serve as the Vice Chairman of the Board of Directors of the Conference of 

State Bank Supervisors (CSBS), and as the Chairman of the State Liaison Committee of the Federal Financial Institutions Examination Council (FFIEC).1

It is my pleasure to testify before you today on behalf of CSBS. CSBS is the nationwide organization of banking regulators from all 50 States, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. For more than a century, 


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2Federal Deposit Insurance Corporation Statistics on Depository Institutions, Report Date 

June 30, 2013. 3 Notice of Inquiry on Virtual Currencies, NYDFS (12 August 2013) available at http://

www.dfs.ny.gov/about/press2013/memo1308121.pdf. Superintendent Lawsky explains: ‘‘The 

emergence of Bitcoin and other virtual currencies has presented a number of unique opportunities and challenges. Building innovative platforms for conducted commerce can help improve the 

depth and breadth of our Nation’s financial system. However, we have also seen instances where 

the cloak of anonymity provided by virtual currencies has helped support dangerous criminal 

activity, such as drug smuggling, money laundering, gun running, and child pornography.’’

CSBS has given State supervisors a national forum to coordinate supervision and 

to develop regulatory policy. CSBS also provides training to State banking and financial regulators and represents its members before Congress and the Federal financial regulatory agencies. 

State banking regulators supervise over 5,200 State-chartered banks.2 The majority of State banking departments also regulates a variety of nonbank financial services providers, including money services businesses (MSBs) as well as mortgage 

lenders, check cashers, and payday lenders. This broad supervisory portfolio provides State regulators with a unique perspective in the payments landscape. Unlike 

any single Federal prudential regulator, most States regulate all of the financial 

intermediaries in the payments system: banks, credit unions, and money transmitters. 

I thank you for holding this hearing on virtual currency. The risks virtual currency presents impact consumer protection, payment systems stability, money laundering, national security, and tax evasion. The potential benefits are similarly 

multi-faceted: speed and efficiency, lower transaction costs, and providing an outlet 

for the unbanked and underbanked around the world. To address these areas, State 

regulators view our responsibility as supervising in a manner that mitigates risks 

while not impeding industry innovation and flexibility. 

States and State regulation have served as a forum for market experimentation 

as well as an early warning system of troublesome consumer and market trends. 

As the laboratories of innovation, the States welcome technology developments in 

the payments system that can lead to greater choice, security, and lower costs for 

consumers. Whether it’s the Cambodian community in Lowell, the Somali community in Minneapolis, or the unbanked in Portland, Oregon, the States have a responsibility to ensure their citizens have the best possible options for transmitting value 

in a manner that does not put people, businesses, the payments system, or national 

security at risk. 

My testimony today discusses existing State regulatory regimes and processes 

that offer the ability to supervise payment systems participants in a manner that 

promotes trust, confidence, and regulatory collaboration. I will also set out State 

regulators’ efforts to further define priorities and approaches moving forward. 

PAYMENT SYSTEMS AND STATE SUPERVISION 

Payments systems are increasingly dynamic, signaling a shift in the way consumers and businesses pay for goods and services as well as the manner in which 

funds are remitted domestically and globally. Whether point of sale technologies, 

payment system intermediaries, or virtual currencies, development is ongoing and 

the possibilities are promising. However, while the opportunity for economic and 

consumer benefit is significant, so is the opportunity for real time losses and other 

destabilizing effects. 

Nowhere are opportunities and challenges more starkly visible than in the emerging field of virtual currencies. Virtual currencies are decentralized digital mediums 

of exchange that, depending on the structure, serve as a hybrid of types of value. 

Today’s virtual currencies are mostly math based, finite, verifiable, and open source, 

factors that present an opportunity to enhance the basic manner in which we conceive the exchange of value. In addition to virtual currencies, the business of transmitting value continues to evolve through mobile and Web-based technologies that 

allow for instant and mobile payments on a secure basis. 

To understand the opportunities and the risks presented in this sector, State 

agencies are actively monitoring new entrants into the digital market, including recent high-profile law enforcement actions related to virtual currency. State regulators are engaged in open discussions with a broad range of industry participants, 

joint State and Federal working groups, and State-to-State coordination and strategic planning. States are also using their regulatory and legislative tools to learn 

more about the industry and increase transparency. For example, the New York Department of Financial Services launched an inquiry in August 3 and recently announced it will hold public hearings on virtual currency with an eye toward identiVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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4 Notice of Intent to Hold Hearing on Virtual Currencies, Including Potential NYDFS Issuance 

of a ‘BitLicense,’ NYDFS (14 November 2013) available at http://www.dfs.ny.gov/about/

press2013/virtual-currency-131114.pdf. 5 Notice of Inquiry on Virtual Currencies, supra. 6 California Assembly Bill No. 786, Money Transmissions (2013–2014). Effective January 1, 

2014. Available at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?billlid=2013

20140AB786. 7 ‘‘ ‘Money transmission’ means . . . receiving money or monetary value for transmission . . .’’ 

Alaska Stat. § 06.55.990; Arkansas A.C.A. § 23–55–102 (12) (A); Hawaii HRS § 489D–4; Iowa 

Code § 533C.102; Kansas K.S.A. § 9–508; La. R.S. 6:1032; Michigan MCLS § 487.1003; Miss. 

Code Ann. § 75–15–3; N.C. Gen. Stat. § 53–208.2; N.D. Cent. Code, § 13–09–02; S.D. Codified 

Laws § 51A–17–1; New Hampshire RSA 399–G:1; Tex. Finance Code § 151.301; Vermont 8 

V.S.A. § 2500; Va. Code Ann. § 6.2–1900. 8See, e.g., The California Money Transmitter Act, Cal Fin Code § 2000 et seq. (‘‘The [California] Legislature finds and declares all of the following: * * * (c) The failure of money transmission businesses to fulfill their obligations would cause loss to consumers, disrupt the payments mechanism in this State, undermine public confidence in financial institutions doing business in this State, and adversely affect the health, safety, and general welfare of persons in this 

State.’’). 

fying possible licensing regimes.4 New York’s goal is one all States share, to determine appropriate regulatory guidelines that ‘‘allow new technologies and industries 

to flourish, while also working to ensure that consumers and our national security 

remain protected.’’5 The California legislature has also worked to give regulators 

more tools to make the licensing process more transparent, authorizing the Department of Business Oversight to make written guidance public and offer guidance to 

prospective licensees.6

The States have a legal and regulatory structure that encompasses a broad range 

of financial services offered by a variety of bank and nonbank providers. For emerging payment technologies and alternative currencies, the threshold issue is the electronic movement of value owned by others—conduct over which the States have an 

existing structure for regulation and oversight. Money services businesses are entities that provide money transmission, currency exchange, prepaid access, monetary 

instruments as well as check cashing products and services. These companies provide a variety of financial products and services to a diverse customer base ranging 

from sophisticated financial customers to the underbanked and unbanked. One type 

of MSB, money transmitters, conducts remittance transfer services, domestically 

and internationally. 

State MSB regulation recognizes the reality that money transmitters are local in 

touch, global in scale, and include a broad range of business models. A money transmitter’s business platform may include telephone, online, authorized agent locations, 

or a combination thereof to reach its customer base. Additionally, a money transmitter may offer several different types of MSB activities simultaneously. For example, Moneygram Payment Systems—a company licensed in 48 States, the District 

of Columbia, and Puerto Rico—offers money transmission, bill payment, prepaid 

cards, and money orders through their online platform and authorized agents nationwide. As technology has evolved to include mobile payments and digital commerce, State money transmitter regulation has demonstrated the flexibility to supervise these products and services to consumers. 

At the most basic level, many of the new products and services receive, hold, and 

send funds domestically or internationally. As such, these activities could fit into 

State money transmission definitions: the accepting or delivering of currency, funds, 

or other value, to another location or person by electronic means.7

CREDENTIALING OF FINANCIAL SERVICES PROVIDERS 

Given the position of trust and confidence held by money transmitters and their 

critical function within local economies,8 State law generally requires the licensing 

of companies and individuals that transmit other people’s funds. By credentialing 

those who take and send monetary value on behalf of others, the States limit potential consumer harm and add stability to financial markets. In turn, licensed companies increase consumer and commercial confidence, which encourages the economic 

stability needed to support successful innovation. 

Licensing communicates to the public that a licensee is viable, secure, and able 

to protect funds. State regulatory agencies license and regulate money transmitters 

to ensure compliance with State and Federal regulatory requirements, to help prevent the use of money transmitters to finance illicit activities such as narcotics trafficking and terrorism, while also providing consumer protection for residents. Oversight includes ensuring the proper policies, procedures, and safeguards are in place 

to protect the company and its customers from operational, monetary, and fraud 

risk. Many States have utilized the Uniform Money Services Act, adopted by the 


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9 BSA compliance programs include policies, procedures, and internal controls to detect and 

deter money laundering and other illegal activity. 10Permissible investments are low risk, liquid assets such as cash and high rated investments 

required to be maintained in case an institution is unable to meet its commitments or fails. Permissible investments must be equal to the outstanding transmissions, payment instruments, or 

prepaid access values in the State or in all States. 

National Commission on Uniform State Laws as the outline for their statutory provisions, which includes licensing standards, financial stability requirements, and 

regulatory principles. 

Prospective licensees must file an application that typically includes the submission of credit reports, fingerprints, a business plan, financial statements, and a surety bond. The prospective licensee may provide evidence of policies, procedures, and 

internal controls that will facilitate the organization’s compliance with State and 

Federal regulations, including required Financial Crimes Enforcement Network 

(FinCEN) registration and documentation of a Bank Secrecy Act (BSA) compliance 

program.9 Once a license is granted, management is required to maintain requisite 

permissible investments,10 surety bonds, and submit periodic reports that often include financial statements, permissible investments calculations, branch and agent 

reporting, and transmission volume activity. 

One of the main purposes of licensing is credentialing the entities and individuals 

seeking to engage in money transmission. Prospective licensees may be required to 

undergo rigorous requirements with the State agencies that include dialogue with 

the applicant regarding their business plan. The application may also include a 

background check on all owners, a requirement common in the MSB, banking, mortgage, securities, and other financial industries to ensure persons in a position of 

trust meet established standards to protect consumers and businesses alike. While 

some have complained that the process is cumbersome, most licensees recognize the 

value of identifying and validating market participants. 

Credentialing requirements are vital and elementary to consumer protection. 

Some comments to date suggest this process is invasive and/or unnecessary, a view 

that reflects inexperience with time-validated requirements and unfamiliarity with 

the public policy goals served by licensing and regulatory oversight. We have seen 

this type of initial reaction as the States have enhanced their regulatory responsibilities, such as with the licensing of mortgage brokers and payday lenders. State legislatures have been very deliberate in crafting a credentialing process designed 

around the core objectives of consumer protection and promoting safety and soundness. State agencies would be negligent in their responsibilities if they simply allowed the push of technological innovation to preempt the need to apply the law in 

a thorough and deliberate manner. 

SUPERVISION OF FINANCIAL SERVICES PROVIDERS 

State agencies examine licensed money transmitters on a 12-to-24 month cycle to 

ensure licensees operate in a safe, sound, and legal manner. Between exams, State 

regulators monitor their licensees on an ongoing basis by reviewing the information 

submitted pursuant to reporting requirements. Licensees have periodic reporting requirements covering financial statements, permissible investments adequacy, 

branch and agent listings, and transmission volume activity. Consumer complaints 

provide another input into the supervisory process. 

During the course of an examination, State examiners review complaints, capital, 

asset quality, management, earnings, operations, and compliance with the Bank Secrecy Act and the institution’s anti-money laundering program. All these areas of 

review provide State agencies with data and other information to assess if a licensee 

is complying with applicable laws and conducting business in a safe and sound manner. If a licensee is found operating in an unsafe manner or out of compliance with 

State and Federal requirements, the licensee may face State enforcement actions. 

State enforcement actions vary depending on the entity, substantiated behavior, 

and violation. Importantly, enforcement is subject to appeal to an administrative 

hearing, ensuring licensees are afforded due process. For less serious findings warranting redress, the regulator and the regulated entity might agree to a letter of 

understanding or consent order, acknowledging the violation and setting forth a corrective plan. For more serious violations, temporary or permanent cease and desist 

orders will be issued, potentially limiting or even halting an entity’s ability to operate. In more egregious circumstances, civil money penalties will be imposed in addition to any consumer restitution. Additionally, an entity’s license could be revoked 

and the regulator’s findings may necessitate referral to State and/or Federal law enforcement. 


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11MTRA is a national nonprofit organization dedicated to the efficient and effective regulation 

of the money transmission industry in the United States of America. The MTRA membership 

consists of State regulatory authorities in charge of regulating money transmitters and sellers 

of traveler’s checks, money orders, drafts, and other money instruments. 12The MTRA Cooperative Agreement can be found at http://www.mtraweb.org/about/cooperative-agreement/. 13 ’’Recent developments in money transmitter regulation have been positive for regulated entities, as examinations by multi-State regulator teams have blossomed.’’ Ezra C. Levine, Counsel, The Money Services Roundtable. Hearing before the Subcommittee on Financial Institutions 

and Consumer Credit of the Committee on Financial Services, U.S. House of Representatives, 

112th Congress, Second Session, Serial No. 112–139, 9 (June 21, 2012). See also, Timothy P. 

Daly, Senior Vice President, Global Public Policy, The Western Union Company. Id. at 49. (‘‘Recent developments in money transmitter regulation have been positive for both consumers and 

regulated entities, as examinations of multi-State organizations have grown more efficient, effective and consistent.’’). 14The Enhanced CSBS/MTRA Nationwide Cooperative Agreement for MSB Supervision, available at http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/MSB/MSB

-CooperativeAgreement010512clean.pdf. 15 Braz Transfers Cease and Desist Order, available at http://www.mass.gov/ocabr/business/

banking-services/banking-legal-resources/enforcement-actions/2013-dob-enforcement-actions/

braz04012013.html.

STREAMLINED AND COORDINATED OVERSIGHT 

Many State MSB licensees hold licenses in more than one State. Consequently, 

State agencies have proactively built a foundation for multi-State coordination and 

examinations. The Money Transmitters Regulators Association (MTRA)11 formed 

the foundation for multi-State MSB efforts by executing the Money Transmitter 

Regulators Cooperative Agreement (MTRA Agreement) in 2002 12 and the MTRA 

Examination Protocol (MTRA Protocol) in 2010. These documents established the 

initial framework for States to coordinate MSB examinations and share information. 

The MTRA Agreement started the States on the path to coordinated regulatory 

oversight by promoting concurrent and joint examinations among States. The MTRA 

Protocol provided a process for examinations, including multi-State examination 

schedules, work programs, and reports designed to increase effectiveness and reduce 

regulatory burden. Since the MTRA Agreement and Protocol were implemented, 

State agencies have conducted over 300 multi-State MSB examinations. Through coordination, regulatory oversight is applied in a uniform manner, a benefit that has 

been publicly noted by industry.13

To foster consistency, coordination, and communication, the States have collaborated on the enhanced CSBS/MTRA Nationwide Cooperative Agreement for MSB 

Supervision 14 and the Protocol for Performing Multi-State Examinations. The 

CSBS/MTRA Agreement and Protocol will supplement an effective and efficient regulatory framework for licensees by establishing the Multi-State MSB Examination 

Taskforce (MMET) to oversee joint examinations. Representing all States, the 

MMET has 10 members, currently comprised of State regulators from California, 

Florida, New York, North Carolina, Ohio, Pennsylvania, Texas, Virginia, Washington, and Wyoming. The MMET is working on developing an enhanced supervisory program tailored to multi-State licensees that fosters a process of consistency 

and coordination among State agencies. In its first year, the MMET has improved 

the MSB examination work program and identified MSBs that meet the criteria for 

multi-State examinations. 

As a result of established processes and lines of communication, State agencies 

promptly communicate to one another to reduce the possibility of consumer harm 

when enforcement is necessary across State lines. Over the last several years, the 

Massachusetts Division of Banks and our sister States have been active in ensuring 

that the monies that consumers transmit are received by the intended recipients. 

When companies fail to deliver, we are the only regulators out there to help consumers who may have lost their hard earned money. When we learn that someone 

has lost their funds, either through fraud or the financial instability of the company, 

the Division can act swiftly and in collaboration with our State regulatory counterparts. State collaboration and coordination was evident earlier this year when it became clear to the Division that a money transmitter was possibly misappropriating 

customer funds. The money transmitter in question primarily remitted funds to 

Brazil with transfers in excess of $122 million originating from Massachusetts in 

2012 alone. During an examination that involved coordination with the Brazilian 

Central Bank and two private Brazilian banks, it was determined that transaction 

records were falsified, evidencing an even broader pattern of illegal activity. 

As a result, we promptly issued a Cease and Desist order 15 to stop this company 

from accepting and transmitting money from Massachusetts consumers and initiVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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16 Braz Transfers was licensed in 7 of the 14 States currently using NMLS to license MSBs. 

According to NMLS Consumer Access, the company is no longer authorized to do business in 

any of these States. See http://www.nmlsconsumeraccess.org/EntityDetails.aspx/COMPANY/

907744. 17Memorandum of Understanding between the Internal Revenue Service and the States concerning Money Services Businesses and Certain Other Nonbank Financial Institutions. Available at http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/IRS-States

BSAlMOUl4-22-2005.pdf. 18 ‘‘The Bureau shall coordinate with . . . State regulators, as appropriate, to promote consistent regulatory treatment of consumer financial and investment products and services.’’ DoddFrank Act § 1015, codified at 12 U.S.C. 5495. 19Memorandum of Understanding Between the Consumer Financial Protection Bureau, the 

Conference of State Bank Supervisors, and the Other Signatories Hereto On the Sharing of Information for Consumer Protection and Other Purposes. Available at http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/CFPB %20CSBS%20MOU.pdf. 20The six State regulatory associations are the American Association of Residential Mortgage 

Regulators, Conference of State Bank Supervisors, Money Transmitter Regulators Association, 

National Association of Consumer Credit Administrators, North American Collection Agency 

Regulatory Association, and National Association of Credit Union Supervisors. 

ated a coordinated response across 37 States.16 My agency communicated the enforcement action to our sister States, held multi-State calls, and worked with other 

State regulators to ensure remittance transfers were received and customers were 

assisted in a timely manner. All consumers who lost money have been made whole. 

This investigation is ongoing, but demonstrates that State regulators are prepared 

and capable of promptly acting on a national and international basis. 

STATE-FEDERAL COORDINATION 

Equally important as inter-State action is meaningful coordination with Federal 

regulatory agencies. States recognize the importance of a larger regulatory fabric 

and integrated oversight for consumer protection and national security. In many 

areas of bank and nonbank regulation and supervision, the States have found that 

a more coordinated approach better serves both consumers and regulated entities. 

The FFIEC has proved a valuable venue for coordination on processes between 

State regulators and Federal financial regulators across a wide range of supervisory 

issues and processes. Through the State Liaison Committee to the FFIEC, the 

States collaborate with the FFIEC on the Bank Secrecy Act/Anti-Money Laundering 

Examination Manual, and participate as voting members of the FFIEC BSA/AML 

Working Group, an interagency effort to enhance coordination of BSA/AML training, 

guidance, and policy. The responsibilities of the working group include ensuring consistent agency approaches and collaborating on emerging issues. 

The States have also entered into memorandums of understanding with FinCEN 

and the Internal Revenue Service (IRS) to coordinate BSA/AML supervision in the 

nonbank sector.17 As such, State agencies provide information to FinCEN and the 

IRS on a quarterly and annual basis. This information may include the number of 

BSA examinations conducted, referrals of BSA violations, and State enforcement actions. Additionally, State agencies worked collaboratively with FinCEN and the IRS 

on the FinCEN/IRS Bank Secrecy Act/Anti-Money Laundering Examination Manual 

for MSBs that was issued in 2008. State agencies also have provided resources to 

develop and conduct training for State and IRS examiners nationwide on BSA compliance for MSBs. 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) 

recognized the importance of a holistic approach to supervision. States bring a local 

point of view and a hands-on approach that complements the national priorities and 

perspective of Federal regulators. In addition to existing State/Federal cooperative 

frameworks, Dodd-Frank established new expectations for coordination, collaboration, and information sharing between the States and Federal regulators, including 

with the Consumer Financial Protection Bureau (CFPB).18 In 2011, the States entered into an Information Sharing Memorandum of Understanding with the CFPB 

(Information-Sharing MOU).19 This was the first such MOU that the CFPB signed. 

Sixty-one State agencies and the six State regulatory associations 20 have signed the 

Information-Sharing MOU, which lays the foundation for information-sharing and 

supervision and enforcement cooperation between the CFPB and State regulators. 

Additionally, the State system is coordinating with the CFPB through CSBS on examiner training, examination technology and procedures, and complaint sharing. 

Building on the foundation of the Information-Sharing MOU, on May 20, 2013, 

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21 2013 CFPB–State Supervisory Coordination Framework. Available at http://www.csbs.org/

regulatory/Cooperative-Agreements/Documents/2013-CFPB.pdf. 22The SCC is comprised of representatives of the six State Regulatory Associations and is responsible for representing the State system as a single body to the CFPB. 23P.L. 110–289. Codified at 12 U.S.C. 5101 et seq. 24Timothy P. Daly, Senior Vice President, Global Public Policy, The Western Union Company. 

Hearing before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services, U.S. House of Representatives, 112th Congress, Second Session, 

Serial No. 112–139, 49–50 (June 21, 2012). 

visory Coordination Framework (Framework)21 for the purposes of implementing a 

State-Federal process for coordinated supervision. Under the Framework, the State 

Coordinating Committee (SCC)22—representing nearly 100 State regulatory agencies covering mortgage, MSBs, payday lending, consumer finance, student lending, 

debt collection, and others—is charged with coordinating examination and enforcement efforts directly with the CFPB. Through the SCC, the State system has the 

opportunity to influence and direct supervisory policy on a nationwide basis for nondepository industries including emerging and innovative players in the mobile, payments systems, and virtual currency markets. 

NATIONWIDE MULTI-STATE LICENSING SYSTEM 

State regulators have long understood that regulation needs to adapt alongside 

marketplace changes in order to capture the benefits and mitigate the risks of innovation. State regulators also understand that, in the modern economy, businesses 

and markets grow irrespective of geographic boundaries. Accordingly, the States recognized a need to be able to effectively and efficiently license mortgage companies 

and mortgage loan originators, to keep track of bad actors, and to provide responsible actors with greater efficiency and consistency in the licensing process. To 

achieve these goals, the States collectively developed and currently operate through 

CSBS the Nationwide Multi-State Licensing System and Registry (NMLS or System). After success in the mortgage licensing arena, States are currently using the 

System to license other regulated businesses, including all 12 license types issued 

by the Massachusetts Division of Banks. 

Originally developed as a voluntary State system for mortgage licensing and then 

codified in the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 

(SAFE Act),23 NMLS is a Web-based system that allows State-licensed nondepository companies, branches, and individuals in the mortgage, consumer lending, 

money services businesses, and debt collection industries to apply for, amend, update, or renew a license online for all participating State agencies using a single 

set of uniform applications. 

Last year, NMLS expanded functionality to include MSBs. Massachusetts is 

among 15 States currently using NMLS for MSB licensing, and 14 more are scheduled to come onto the system in the next year. The System enables licensees to 

manage their licenses in one location for multiple States, while States are able to 

track the number of unique companies and individuals, as well as the number of 

licenses they hold in each State. As a system of record for State regulatory authorities and a central point of access for licensing, NMLS brings greater uniformity and 

transparency to these nondepository financial services industries while maintaining 

and strengthening the ability of State regulators to monitor these industries. 

Both industry and regulators see great advantages to NMLS. During last year’s 

House hearing on money services businesses, industry representatives testified that 

widespread adoption of the system ‘‘would eliminate duplication of effort and opportunities for error’’ and ‘‘urge[d] any changes at the Federal level to accommodate 

and encourage its further development.’’24 To that end, I want to thank Senators 

Hagan and Toomey for taking the lead in sponsoring S. 947, which enhances the 

confidentiality and privilege already built into the NMLS. I also want to thank the 

other Members of the Committee—Senators Merkley, Manchin, Heitkamp, and 

Johanns—who have signed on as co-sponsors of S. 947. With the passage of S. 947, 

State regulators will have full confidence in the expanded use of NMLS, bringing 

greater efficiency to the regulatory process. 

In addition to shared functionality between regulators and industry, NMLS provides transparency to consumers seeking information on regulated companies and 

individuals. NMLS Consumer Access (www.nmlsconsumeraccess.org) is a fully 

searchable public Web site that allows consumers to view information concerning 

companies, branches, and individuals holding State licenses in the NMLS. In 2012, 

the information available on the Web site was upgraded to include public State regulatory actions for State licensees. The Web site also enables consumers to connect 

directly to State agencies for the purpose of submitting a consumer complaint 

against a State licensed company. 


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25Section 1022(c) of the Dodd-Frank Act directs the CFPB to ‘‘consult with State agencies regarding requirements or systems (including coordinated or combined systems for registration), 

where appropriate.’’ 26 NMLS complies with the moderate baseline security controls contained in National Institute 

of Standards and Technology (NIST) Special Publication 800–53, and is fully accredited (FISMA 

Certification and Accreditation) by the Consumer Financial Protection Bureau. Technical Details 

and Data Security Protocols for NMLS are available at http://mortgage.nationwidelicensingsystem.org/about/Documents/NMLS%20Data%20Security%20Overview

.pdf. 27Whether virtual currency is ‘‘money’’ is a critical question. Congress has the sole power to 

‘‘coin money’’ and ‘‘regulate the value thereof’’ under Article I, Section 8 of the Constitution. 

Conversely, Article I, Section 10 prohibits States from coining money and from ‘‘mak[ing] any 

Thing but gold and silver Coin a Tender in Payment of Debts.’’ If virtual currency is not money, 

the States must determine whether it holds monetary value for the purposes of money transmission laws, or whether it is an instrument securing an interest in another currency. 28The Electronic Funds Transfer Act requires disclosure and other consumer protections for 

the transfer of funds. As technology accelerates payment clearing, disclosures and liability 

standards will be of the utmost importance. For example, if a virtual currency wallet is hacked, 

who is responsible for the lost funds? 29 Article 4A of the Uniform Commercial Code currently governs commercial fund transfers. 

Though ‘‘funds transfer’’ is broadly defined under the law, the process is reliant on relationships 

through the banking system. 

As we continue to expand NMLS into other license types, regulators and industry 

alike will have the benefit of streamlined licensing requirements at a single source, 

and NMLS will be an important tool to provide understanding and responsiveness 

to companies that are local in touch but global in scale. Considering this, we continue to recommend to our colleagues at FinCEN and the CFPB that they use 

NMLS for any Federal registration requirements.25 State regulators and CSBS are 

ready to work with our Federal counterparts to bring registration and licensing requirements under one shared structure, and NMLS already has the proven capabilities and widespread support for such a streamlined process.26

LOOKING FORWARD 

State regulators are keenly aware that constantly emerging technologies have 

brought exciting and innovative products to the financial marketplace that consumers are utilizing on a daily basis. I and my fellow State banking commissioners 

recognize the need to understand these innovations. We also understand that there 

is a desire by many in the payments and technology industries for greater clarity 

for both State and Federal regulatory requirements. 

State regulators have structures, processes, and systems in place to bring clarity 

and consistency, while promoting consumer protection, safety and soundness, and 

national security goals. The States stand ready to work with our Federal counterparts, as well as with representatives from industry and consumer groups, to seek 

opportunities for greater clarity and consistency, allow for innovation in the payments systems, and both exploit the benefits and minimize the risks of such innovations. 

To address this changing landscape, CSBS is currently exploring policy processes 

for framing and considering issues facing regulators. These threshold issues include 

establishing the right characterization of virtual currency,27 the consumer protection 

needs raised by instantly settled payments,28 the resolution of conflicts between 

commercial entities in an instantaneous transfer system, and whether—and in what 

manner—States should license entities involved with digital currency.29 Our consideration of these and other issues will inform our efforts to preserve marketplace stability while supporting constructive innovation. The States will continue to work 

with this goal in mind, expanding on a framework that ensures safety and soundness, minimizes the use of digital currencies to fund illicit activities, and protects 

consumers and across a diverse landscape of companies and business models. 

Local understanding, coordination between regulators, and collaboration with policymakers has provided the States a unique ability to actively regulate a broad 

range of financial products and services in an effective and timely manner. We look 

forward to working with Congress and our Federal regulatory partners toward an 

integrated and collaborative approach to all innovative financial products and services, ensuring individuals and economies are well served. 


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PREPARED STATEMENT OF PRESIDENT PAUL SMOCER

PRESIDENT, BITS, ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE

NOVEMBER 19, 2013

Thank you Chairmen Warner and Merkley, Ranking Members Kirk and Heller 

and Members of the Committee for the opportunity to testify before you today. 

My name is Paul Smocer and I am the President of BITS, the technology policy 

division of The Financial Services Roundtable. BITS addresses issues at the intersection of financial services, technology and public policy, on behalf of its one hundred member institutions, their millions of customers, and all of the stakeholders 

in the U.S. financial system. 

The financial services market constantly evolves and matures to reflect the explosive growth of technological capacity, entrepreneurial innovation and consumer 

needs and preferences. The topic of today’s hearing, ‘‘Virtual Currency,’’ has been 

and continues to be an area of focus for our member companies and within the industry. As virtual or digital currencies have evolved, our members discuss the potential benefits as well as potential drawbacks—particularly drawbacks related to 

security, fraud and consumer impact. My testimony today will cover the evolution 

of digital currency, as well as opportunities and risks. 

Digital Currency Evolution 

Since the commercialization of the Internet, the concept of digital money has held 

intrigue. The terms ‘‘virtual currencies’’ and ‘‘digital currencies’’ are the generally 

accepted vernacular terminology used to identify forms of electronic currency that 

can be used to effect transactions involving true goods and services. 

Attempts to develop digital currencies, and the methodologies used to exchange 

them for value, have existed for several decades. For example, in the 1990s, we saw 

attempts such as NatWest’s Mondex card, which was an attempt at creating an electronic cash card that acted as alternative to coins and banknotes, and DigiCash Inc., 

which was an electronic money corporation founded by David Chaum. The regulatory community has also been thinking about this subject for some time. For example, in September 1996, the United States Department of the Treasury held a 

conference entitled ‘‘Toward Electronic Money and Banking: The Role of Government’’ that explored this issue. Until recently, however, attempts to launch digital 

currencies have been unsuccessful. What makes today’s environment different and 

enhances the probability of success in launching digital currencies? The answers to 

that question include:

• Consumers are much more comfortable in transacting online through traditional financial systems as well as other vehicles such as online games that 

leads consumers to an increasing overall comfort with the online world.

• Computer systems are more powerful and less expensive thus facilitating some 

of the processing intensive techniques associated with emergent digital currencies.

• A growing interest in having an international currency free of some of the factors such as exchange rate considerations, inter-currency transactional fees, etc.

• The increasing desire for privacy.

• The general cache that some attach to the concept and to innovative developments on the Internet.

• And sadly, but realistically, a desire to facilitate illegal activities such as money 

laundering, fraud, and terrorism financing.

This has allowed a market for, though still on a limited basis, digital currency 

and the development of some infrastructures to support the exchange of digital currency. 

Bitcoin is often the focus of digital currency discussions as it is the largest independent digital currency. Bitcoins are created through a digital process, ‘‘mining’’, 

which involves computer programs working on the same set of data to solve a puzzle. Across the Internet, a bitcoin is mined every 10 minutes through this process 

with allegedly a maximum of 21 million allowed in circulation. Once mined, the 

owner is able to use his or her bitcoins at any participating merchant and the transactions are tracked through a public ledger known as a block chain, which identifies 

users by a unique code. Bitcoin users review these ledgers to validate transactions 

and to ensure that users are spending existing bitcoins. These transactions operate 

outside of the traditional payments system. Thus, they would not intersect with 

credit card, ACH or other trusted financial services networks. The system is not run 


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by any one entity or company, but rather is supported by participants in the Bitcoin 

environment. 

Unlike depository accounts held in traditional financial institutions, bitcoin ownership is not associated with any named individuals. Owners of individual accounts 

are recognized by unique codes intended to assure their anonymity. Even the creator of Bitcoin is considered anonymous. Its creation is often attributed to a Satoshi 

Nakamoto, though it is speculated that this is actually a pseudonym for an anonymous individual or group of anonymous Web developers. In general, Bitcoin provides 

a decentralized system, using peer-to-peer networking, digital signatures and cryptographic proofing to enable funds transfers between participants. 

Other entities in the digital marketplace, such as Ripple, rely on the efficiencies 

of the Internet by developing an open source digital transaction protocol. Ripple 

uses existing currencies or valuable items (e.g., airline miles), which are converted 

into its internal currency called XRP. Users can then quickly transact within XRP. 

Individuals can convert funds back to a monetary value by selling the XRP. Similar 

to Bitcoin, Ripple includes an open ledger to allow all participants to see the activity 

of the system and validate transactions, again with individual accounts recognized 

by a unique code. These transactions also would not cross the traditional payments, 

but could leverage the existing funds in a financial institution consumer’s account 

as an individual could directly transfer dollars into their Ripple account. A unique 

feature of Ripple is to allow individuals to provide loans to others within the network. Individuals establish their own ability to trust different users and decide how 

much they would like to loan the individual. In addition, a trust score can be assessed to different users. 

Opportunities 

As we think about the opportunities associated with digital currencies, I believe 

we need to think of them in two distinct areas—the concept of the currency itself 

and the infrastructure mechanisms being created to exchange them. 

We have witnessed the concepts of new, emerging currencies before. Some have 

noted that even within our country, the creation of new currencies was an early part 

of our history as the States, regions, and even merchant exchanges established currencies. What makes digital currencies different is that they allow the concept of 

cash or a cash equivalent to be used over the Internet. That fact, in turn, essentially 

makes them a global form of currency. 

One measure of a currency’s success is its acceptability. An emergent trend is that 

institutions such as international and large retailers are beginning to accept select 

digital currencies as payment for goods and services. For example, in November 

2012, the Web publishing service WordPress announced they would accept Bitcoin 

as a form of payment for WordPress upgrades. Interestingly too, just last week, we 

all became aware that the Federal Election Commission is seriously considering letting candidates and committees accept bitcoins as in-kind contributions. Given digital currencies today rely neither on Government-Sponsored central banks nor have 

the backing of any national currency, merchant acceptance and certainly acceptance 

by government agencies tends to help these currencies establish their legitimacy 

and increase the trust parties have in them and their stability in the marketplace. 

At this point, however, the established financial services industry still does not generally recognize these currencies as broadly accepted. 

One important aspect to recognize is that, as digital currencies become more 

internationally accepted, there is a growing recognition of their ability to increase 

international sales opportunities and their ability to facilitate simpler international 

funds transfers. Returning to the WordPress example of retailer acceptance, 

WordPress found the acceptance of digital currencies allowed it access to new consumers in countries where traditional payment systems do not permit access for financial, security or international sanction reasons. 

Because of the ability to work internationally and outside of existing markets, 

some suggest digital currencies also have the ability to provide affordable access to 

the unbanked on a global scale. For example, a mobile phone based money transfer 

and microfinancing service in Kenya backed by Kenya’s largest two mobile network 

operators called M–Pesa, recently added a bitcoin payment option for customers in 

Kenya. 

In addition, digital currencies can assist individuals in countries with repressive 

regimes to support causes or efforts that they might otherwise not be able to support. For example, in certain countries where citizens fall under strict government 

control, individuals can often not donate to or purchase from sites that are banned 

by their country’s traditional payments providers. These transactions are made easier using decentralized, unaffiliated, anonymous currencies with their own payment 


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infrastructures. Because of this, often times digital currencies are referred to as a 

‘‘censorship-resistant’’ currency. 

If digital currencies reach a state where their economic stability is more assured, 

they can also function as an outside currency that can provide additional economic 

security for individuals living in a country whose own currency is under financial 

distress. For example, during the recent Cyprus and Argentina financial crises, citizens transferred funds to digital currencies, mostly Bitcoin, to provide a more steady 

assurance for the security of their funds. 

The infrastructure supporting digital currency payments has some appealing 

quality to merchants also due to the lack of interchange fees. For many, digital currencies can provide a lower transaction cost to the benefit of both merchants and 

consumers. Digital currencies may be more attractive to merchants as many do not 

allow the payments to be reversed, so there is no opportunity for chargebacks. 

Another interesting aspect related to certain digital currencies is their cryptographic protections. Ostensibly, the cryptography is intended to provide a level of 

security that both helps limit the amount of a currency in circulation and to bolster 

their providers’ claims that their currencies cannot be duplicated or counterfeited. 

The currency providers also claim that the financial information about any particular user’s wallet (e.g., their identity, their balance) is anonymous and, therefore, 

more secure than in other Internet-based financial transaction environments. If 

these claims hold true, which is questionable, this could be very significant for the 

future of monetary security. 

In summary then, digital currencies and their supporting infrastructure do indeed 

present opportunities that we are closely watching. They could provide a model for 

how to facilitate real-time payments—particularly those involving international parties and those involving micropayments. They offer some opportunity to explore 

deeper cryptographic options for Internet-based transactions and they may offer opportunities to serve more effectively the under-banked and those who are truly politically repressed. 

Risks 

While the opportunities noted above have piqued the interest of the financial services industry in digital currencies, we also have to recognize a plethora of potential 

risks. 

First, digital currencies pose significant market risk. Without government funding 

or support, digital currencies may be subject to extreme market volatility. The participants in the market itself have to decide the worth of each currency. Given the 

immaturity of the market, slight changes in the market can produce significant 

swings in value. In addition, the value of items purchased could change drastically 

and there would not be a single arbitrator to provide final decisions as to the value 

of the currency. Bitcoin is the best example of market volatility. Since its creation 

4 years ago, the market has gone through several significant swings in value, including in 2011 when the value fell 90 percent from $30 to $3. Recently, its value 

took a steep dive again when the use of bitcoins was associated with the alleged 

operations of the drug ring known as ‘‘Silk Road.’’ While its value has bounced back, 

broad swings in value create significant risk to both holders of the currency and to 

merchants and others who accept the currency as payment. With an established currency, merchants can generally be assured that the payment they receive will be 

of equal value to the service or merchandise purchased. With a currency that can 

fluctuate wildly, there is significantly more risk and little to no recourse for the 

merchant if the payment currency’s value falls significantly. If the transaction happens to be international, the payment settlement methods used with established 

currencies do not apply. If, for example, one makes a purchase with a credit card 

issued in the United States from a UK-based merchant, the payment infrastructure 

will convert the purchase price from British pounds to U.S. dollars at a market rate 

and post that amount to the purchaser’s account. The infrastructure to support this 

type of conversion is only in its infancy with the digital currency world. As well, 

we simply do not yet have enough experience to know if these currencies will even 

continue to exist. Many factors including broader acceptability will influence whether we see an increase or collapse in value of these currencies. 

On the consumer side, the use of these currencies and the infrastructure exchange 

mechanisms they utilize are currently subject to few of the consumer protections we 

have come to expect in the traditional world of currency and payments. In addition, 

since these currencies do not carry clear and effective disclosures, even the most sophisticated consumers are unlikely to be aware of and understand the risks associated with them. 

At this point, in the United States, the Financial Crimes Enforcement Network 

(FinCEN) has taken the regulatory lead by creating its formal statement on digital 


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currencies. This March 2013 guidance clarified the responsibilities of participants in 

the digital currency marketplace to register as money services businesses and 

money transmitters. Given the decentralized approach of the currencies, this requires registration by many individuals who previously did not consider themselves 

part of this network. Beyond this March guidance of FinCEN, digital currency providers have virtually no existing regulatory oversight. This is even more meaningful 

for currency providers and users operating outside regulated countries. Without regulations, these digital currencies are not providing appropriate consumer protections 

to ensure individuals understand the risks much less are protected in ways we now 

take for granted. As examples:

• If the value in an individual’s digital currency account is fraudulently stolen, 

the victim has no recourse to recover the funds. In fact, within the last 2 

months there have been multiple reports of Bitcoin currency disappearances 

from various Bitcoin trading platforms. Some allegedly involved hacks into 

Bitcoin repositories. At least one allegedly involved the creation of an ‘‘unlicensed’’ repository into which Bitcoin owners deposited their funds only to have 

the repository suddenly disappear. In none of these cases is it expected that the 

owners will recover a single bitcoin. Contrast that to the recourse available to 

a consumer who is a bank customer. If funds are fraudulently taken from the 

consumer’s deposit account, the bank will make that customer whole. If an entire institution that is an FDIC-insured depository institution were to fail due 

to a major cyber-attack, consumers would generally be afforded protections that 

would allow them to recover a significant balance of their deposit accounts.

• If a consumer’s digital currency account were used to make an unauthorized 

payment, laws that limit the amount of consumer financial responsibility and 

require investigation by the financial institution holding the consumer’s transaction or credit card would not apply. The consumer would simply lose the 

value of the fraudulent payment.

• While there is an emerging trend in the regulatory community, led by FinCEN 

at the Federal level, to consider the classification of certain parties in the digital currency world as money transmitters, laws and regulations that apply to 

funds transfers occurring through traditional financial institutions currently 

have little relevance in the digital currency world. There is no method for attrition or preemptively stopping the transfer of digital currency funds.

These types of fraud protections provided by the financial services industry have 

developed into an essential part of overall consumer protection. Without some level 

of parity, today’s digital currency consumers are essentially unprotected. 

It is important to note however, that while the digital currency market seems ripe 

for further oversight and regulation, the act of regulating it, in and of itself, adds 

legitimacy to the market. 

Another risk related to digital currencies involves the fact that most digital currencies are stored in digital wallets that are associated with personal computers or 

devices. Once these devices are compromised, there are no additional ways for the 

consumer to access their funds. In addition to the fraud risks noted above, there 

have been several recent cases of hacks on digital wallets that hold digital currencies. These hacks use similar techniques to traditional hacking efforts we have 

seen in the financial services industry. For example, phishing techniques are used 

to gain access to a user’s information needed for authentication. 

It is important to recognize too that while FinCEN has taken some action and 

others at the Federal and State levels are considering regulatory actions, currently 

none of the digital currency operators or infrastructure providers are subject to the 

intense level of regulatory oversight applied to regulated and chartered financial 

providers. They are not subject to any required regulatory standards regarding, for 

example, cyber security and data breach notification requirements that grew out of 

the Gramm-Leach-Bliley Act. They are not subject to the regulatory and best practices guidance issued by the Federal Financial Institutions Examination Council and 

its member agencies that they have developed over the last 20 years. Likewise, they 

are not subject to independent examination of their controls environments by any 

regulatory authority. Because digital currency transactions typically occur within 

privately operated, unregulated networks, financial and security risk determination 

and mitigation is left up to the currency or infrastructure provider. 

In addition, while many digital currencies tout that they are anonymous, they rely 

on a unique identifier for each account. Through analysis of transactions or confirmation by an individual, these identifiers could be connected with an individual. 

Given that digital currencies rely on a public ledger, the individual’s transaction 

could become knowledgeable to individuals who have been identified. 


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Earlier I noted in the ‘‘Opportunities’’ section the ability for individuals to provide 

funds to legitimate organizations that their native country might inappropriately 

ban. This can also work in the reverse. Using digital currencies, individuals may 

also be able to donate to illegal organizations that would otherwise be legitimately 

banned by one or more governments. The ability for governments to ban payments 

to sites, for example, is a useful technique in thwarting illegal activity and terrorist 

funding. 

Allowing digital currencies, particularly ones that by design are intended to provide full anonymity to the currency holders, has also invited their use for illicit activities. In fact, some recent studies suggest that the anonymous nature of digital 

currencies has made them a haven for illegal activity. The most notable recent example is the FBI case that resulted in the take down of Silk Road—an operation 

that allegedly was used to anonymously buy or sell illegal drugs, offer guns and assassins for sale, and provide tutorials on hacking ATM machines. The operation was 

completely reliant on digital currency for transactions. When this site was taken 

down, law enforcement had numerous challenges in seizing the funds of the site and 

those of Silk Road’s alleged operators and customers. 

The digital currency environment is also being used as a new way to launder 

money. A recent major example would be the situation involving the May 2013 indictment of Liberty Reserve. Liberty Reserve was a global currency exchange that 

allegedly ran a $6 billion money-laundering operation online ostensibly serving as 

an exchange for criminals engaged in various illegal activities. According to the 

prosecutors who presented the charges, Liberty Reserve was responsible for laundering billions of dollars, conducting 55 million transactions that involved millions 

of customers around the world, including about 200,000 in the United States. It is 

also important to note that all a user need to do to use the system was to provide 

a name, address and date of birth. However, unlike the Know Your Customer requirements that apply to traditional financial institutions, Liberty Reserve, being 

unregulated and incorporated outside the United States, was not required to validate customers’ identities. As the indictment stated, ‘‘Accounts could therefore be 

opened easily using fictitious or anonymous identities.’’

While the Silk Road and Liberty Reserve situations serve as examples, the point 

here is that digital currencies are being used to assist a broad array of criminal activities including illegal drug sales, stolen identities, child pornography, prostitution, 

human trafficking, and illegal weapons sales. It is also being used as a favorite of 

cyber criminals to pay for services such as developing and distributing malicious 

software to the movement of stolen funds resulting from account take overs. 

One additional consideration is the level of clarity that currently exists regarding 

how virtual currencies will be treated within the tax code and whether virtual currencies offer an ability to evade taxes. In May 2013, the U.S. Government Accountability Office issued a report to the U.S. Senate’s Committee on Finance entitled, 

‘‘Virtual Economies and Currencies, Additional IRS Guidance Could Reduce Tax 

Compliance Risks.’’ The report suggests that the IRS should determine and subsequently address the need for additional tax guidance and additional taxpayer education. The lack of regulatory oversight, the risks to consumers and the market 

risks associated with digital currency provide a continuing challenge to its overall 

legitimacy, usage and endorsement by the financial services industry. 

Conclusion 

In conclusion, there is no denying that the use of digital currencies will continue 

to evolve. Consequently, we will continue to discuss that growth and the associated 

opportunities and risks. As with the Internet and electronic commerce in general, 

we have seen innovations grow from early concepts where the risks outweighed the 

advantages to, over time, becoming an accepted norm. For now, I would opine we 

are not yet there with digital currencies. They do provide opportunities—or more accurately perhaps suggest areas of opportunity, but we will need to address the 

threats to consumers and society, the need for appropriate regulation and the effectiveness of risk mitigations. As the discussion continues, we would be happy to continue to participate, particularly where it would be advantaged by public-private collaborations such as through the Federal Reserve Banks study of the future of the 

payments system. 

Thank you for your invitation to testify to the Subcommittees this afternoon. We 

look forward to continuing to work with you relative to this emerging technology. 


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PREPARED STATEMENT OF SARAH JANE HUGHES

UNIVERSITY SCHOLAR AND FELLOW IN COMMERCIAL LAW

INDIANA UNIVERSITY MAURER SCHOOL OF LAW

NOVEMBER 19, 2013

Chairman Merkley and Chairman Warner, Ranking Members Heller and Kirk, 

and Honorable Members of the Subcommittees on Economic Policy and National Security and International Trade and Finance, I am honored to be here with you today 

to discuss virtual currencies. 

Monitoring the developments in virtual currencies and taking a responsible approach to their regulation reflects their growing presence in domestic and international transactions. Recent negative publicity associated with law enforcement action against Silk Road and reports of the disappearance of bitcoin exchanges in 

China and the Czech Republic raises important public policy concerns. 

Part I: Recommendations and a Roadmap to the Balance of This Testimony 

The Committee has invited testimony on a variety of subjects that I have addressed in this prepared statement. I have a number of recommendations that pertain to the Committee’s question. 

My recommendations include:

1. Retain the current division of regulation between the States and Federal Government—with prudential regulation of the nondepository providers of new 

payments systems with the States and retaining the anti-money-laundering, 

anti-terrorism and economic sanctions regulations with the Federal Government.

2. Make providers of virtual currencies comply with the customer-identification 

program and AML compliance program requirements of Sections 326 and 352 

of the USA PATRIOT Act, and with the economic sanctions regulations enforced by OFAC, just as other payments systems providers do. Virtual currency 

customers will have to reveal their identities to issuers of the currencies they 

use. As a corollary, customers should get the same Federal financial privacy 

rights that users of other payments products have under the Right to Financial 

Privacy Act of 1978 and Title V of the Gramm-Leach-Bliley Act.

3. Encourage FinCEN to clarify the manner in which customer-identification and 

AML compliance requirements apply to virtual currencies. This is needed to 

help banks ensure that they can do business with providers and users of virtual currencies and other payments innovators. Second-stage innovations from 

distributed computing and database technologies could offer benefits to payments and commerce far beyond those that virtual currencies now offer. If 

banks cannot determine how to comply with FinCEN regulations, for example, 

they may continue to terminate their relationships with payments innovators 

before the innovators can attract investors and users to make it to the secondstage technologies their current work may generate.

4. Encourage payments systems innovators to adopt and publicize transparent 

payment systems rules for their own systems and even to compete for customers on the basis of the system rules they adopt. It is too early to enact user 

protections for virtual currencies.

5. Ignore the claims that

a. additional regulation of virtual currencies will halt innovations,

b. innovators deserve freedom from regulations that apply to other payments 

systems and their providers, and

c. virtual currencies deserve a single Federal licensure system that preempts 

State prudential regulation and licensure.

6. Monitor the development of virtual currency providers in case they transform 

their products into commodities or securities and, if this happens, then decide 

whether regulating their products under the applicable regulations makes 

more sense.

7. Leave room for nondepository and depository providers of payments products 

to innovate in the virtual currency space.

8. Authorize and fund a study of virtual currencies to be carried out by the Federal Reserve Board or pursuant to the Federal Advisory Committees Act by an 

inter-agency task force and industry participants.

The balance of this statement begins in Part II with a brief history of ‘‘legal tender’’ and the regulation of payments products in the United States. Part III disVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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1The Case of Mixed Money in Ireland, Trin. 2 James I. AD 1605 [Davies’ Reports]. A key sentence from the opinion in that case proclaimed: ‘‘that it appertaineth only to the King of England, to make or coin money within his dominions. [2 Ro. ab. 166. 1 Co. 146, 5 Co. 114. 1 

H.H.P.C. 188.]’’ The court also announced its conviction that there were three attributes of 

‘‘money’’ and ‘‘legal tender’’ that distinguished them: the price, the stamp, and the value. Id. 2See Marine Bank v. Fulton Bank, 69 U.S. (2 Wall.) 252 (1864) (upholding the depositor’s 

right to the sum owed on bank notes by its bank, rather than the lower value prevailing for 

Illinois notes of the time, which had decreased by 50 percent in value during the year that collection took). ‘‘Wildcat banks’’ did not have reserves sufficient to back their issues. Lissa L. 

Broome & Jerry W. Markham, Regulation of Bank Financial Service Activities 17 (Thomson 

Reuters, 2011). 3The Stamp Payments Act of 1862, 12 Stat. 592; Rev. Stat. 711, sect. 3583 (prohibiting circulation of bank notes worth less than one dollar); National Currency Act of 1863, ch. 58, 12 

Stat. 665 (Feb. 25, 1863) (authorizing the chartering of national banks); and the National Bank 

Act of 1864, act June 3, 1864, ch. 106, 13 Stat. 99, as amended (superceding the National Currency Act). The goal of these collective National Banking Acts

. . . was to create a uniform national currency. Rather than have several hundred, or several thousand, forms of currency circulating in the States, conducting transactions could be 

greatly simplified if there were a uniform currency. To achieve this all national banks were required to accept at par the banknotes of other national banks. This insured that national banknotes would not suffer from the same discounting problem with which State banknotes were afflicted. In addition, all national banknotes were printed by the Comptroller of the Currency on 

behalf of the national banks to guarantee standardization in appearance and quality. This reduced the possibility of counterfeiting, an understandable wartime concern. 

American History from Revolution to Reconstruction and Beyond, http://www.let.rug.nl/usa/

essays/general/a-brief-history-of-central-banking/national-banking-acts-of-1863-and-1864.php

(last visited Nov. 17, 2013). Problems of counterfeit or altered notes caused the creation of John 

Thompson’s Bank Note Detector, a precursor of the listing of counterfeit and altered notes 

issued routinely by the Office of the Comptroller of the Currency and Federal Deposit Insurance 

Corporation today. The national currency was commodity currency backed by specie (e.g., gold 

certificates) in place of ‘‘greenbacks.’’ Eventually, as the Members know, the United States replaced commodity currency with fiat currency in the form of Federal Reserve Notes. Proponents 

of virtual currencies and other followers of the Austrian School of Economics distrust fiat currencies for their roles in business cycles and consequences of monetary interventions reasons 

as explained well in the European Central Bank’s 2012 report on Virtual Currency Schemes, 

virtualcurrencyschemes201210en.pdf, at 21. The Austrian School economists also prefer the ‘‘denationalization’’ of currency, effectively an end to governments’ monopoly on the issuance of 

cusses my recommendations in some greater detail. Part IV responds to questions 

posed in the Committee’s invitation to testify. 

Part II: A Short History of ‘‘Legal Tender’’ and Governments’ Roles in Establishing 

it and its Value 

The emergence of a large digital ‘‘currency’’ unconnected to a sovereign threatens 

a sovereign right recognized back to Renaissance times. In one of the earliest court 

decisions involving ‘‘legal tender’’—the 1605 decision in Britain of The Case of Mixed 

Money 1 in which the House of Lords observed that the regulation of currency was 

a sovereign right and declaring the sovereign’s right to declare ‘‘legal tender’’ by decree, the affixing of the sovereign’s stamp, and to decision of the value of increments 

of currency—and later to change its mind about valuation. ‘‘The prince, the stamp, 

and the value’’ became from that point forward hallmarks of what could pass as 

‘‘legal tender’’ that participants in trade transactions were required by the sovereign 

to take from others in satisfaction of obligations (trade or debt) they undertook. Proponents of virtual currencies often seek to end sovereign ‘‘monopolies’’ over legal 

tender, fiat currencies. 

Contributing to the history of sovereign, stamps, and values was the rambunctious, highly problematic period in the United States in the pre-Civil War 19th Century in which ‘‘wild cat’’ banks operated. Banks issued paper notes—a form of what 

economists call fiat currencies— As opposed to coins or other ‘‘specie.’’ Persons who 

took paper ‘‘bank notes’’ encountered significant problems with redeeming the value 

that the notes were supposed to represent.2 They either encountered long waits 

while the notes moved for collection from banks near them to distant issuers of 

these notes, additional long periods while the issuing bank assembled enough funds 

to pay them off, or were forced to take huge discounts from local depositary banks 

against the prospect of these long waits or insolvency when the notes were eventually presented for payment to their issuing banks. ‘‘Wild cat banking’’ was cited as 

a cause of regional recessions and of decades of financial instability on the parts of 

businesses and individuals who had no other providers of financial intermediation 

services close enough to their homes. 

The problems associated with wild cat banks and the pressures of sustaining the 

Federal effort during the Civil War led Congress to create a national paper currency 

and national banks in the 1860s.3 Eventually, the need for financial stability, inVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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money. Id. These economists criticize fractional-reserve banking systems like ours, and urge the 

re-adoption of the gold standard. Id. Broome & Markham also note that as ‘‘electronic money’’ 

came into the market in the 1990s, commentators considered The Stamp Payments Act to bar 

its issuance in the Nation. Supra, note 1 at 19. 4 Congress’ authority was upheld in a series of decisions including United States v. Van 

Auken, 96 U.S. (6 Otto) 366 (1977); Legal Tender Cases, Know v. Lee & Parker v. Davis, 79 

U.S. (12 Wall.) 457 (1870); Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869). The Federal 

Government’s authority thus preempts the issuance by States such as Virginia of competing currencies, as the Virginia Legislature proposed to do in the past year. 5 Canada’s plans have revolved around a State-created digital ‘‘currency’’ that they call ‘‘Mint 

Chips.’’ For more information on the status of this development, see John Greenwood, Canadian 

Mint ready to test its own digital money project, Fin. Post (Canada) (Sept. 19. 2013). 6 Available at virtualcurrencyschemes201210en.pdf (last visited Nov. 17, 2013). (The ISBN for 

this report is 9778–92–899–0862–7 (online).) 7Media reports cite reasons such as avoiding the expense of exchange of currencies and other 

transaction costs associated with use of debit or credit cards, or even checks. 

cluding stable prices, and sound monetary policy was so great as to cause Congress 

to establish the Federal Reserve System. Federal authority in this arena has remained in place since that time—through various ‘‘gold standard’’ debates, the creation of the Bretton Woods’ Agreement that established the current international 

monetary systems in the 1940s, and to the present. The Federal Government has 

the sole power to issue ‘‘legal tender.’’4

All of our principal trading partners also operate in national systems in which a 

single, State-specified currency constitutes ‘‘legal tender’’ for all transactions. There 

is little literature on the attitudes of our principal trading partners about ‘‘virtual 

currencies’’—with the exception of coverage of Canada’s development and plan to 

issue as ‘‘legal tender’’ forms of ‘‘digital currencies known as ‘‘MintChips,’’5 and the 

European Central Bank’s 2012 report on Virtual Currency Schemes.6 Canada’s 

‘‘Mint Chip’’ experiment reveals no intention of abandoning the principles set forth 

in The Case of Mixed Money in 1605: the prince, the stamp, and the value will continue to be the province of the sovereign. The ECB’s report, as one would expect, 

also favors a continuing role for central banks and sovereign currencies. 

But, just because ‘‘legal tender’’ exists as a fact in most developed nations, it does 

not follow that individuals or businesses cannot agree to take barter or nonlegal tender in exchange for goods and services. It just dramatically increases some, primarily legal risks in those transactions, much as we saw with ‘‘wild cat’’ banking 

in the pre-Civil War period here, and in the disappearance of bitcoin exchanges in 

China and also the Czech Republic. In these cases, the risk of engaging in virtual 

currency transactions currently falls entirely on users. 

We must recognize that some individuals and, apparently, an increasing number 

of businesses, see value in using forms of ‘‘virtual currencies’’ to complete their own 

transactions.7 Can we prevent them from doing so? Probably not. Should the United 

States step up their regulatory efforts in this arena? My answer is not yet, and not 

until such time as stronger evidence suggests problems exist with these currencies 

that contribute to financial instabilities, or otherwise enable issuers or intermediaries to commit fraud on users or complicate monetary or other important public policies. 

Part III: Discussion of Recommendations 

Recommendation 1: Retain the current division of regulation between the 

States and Federal Government—with prudential regulation of the nondepository 

providers of new payments systems with the States and retaining the anti-moneylaundering, anti-terrorism and economic sanctions regulations with the Federal Government. 

The current balance between State and Federal regulation affords more opportunities to follow developments in this area with lots of eyes on these innovations, ensure AML and economic sanctions goals are met, and allow room for innovation of 

these intriguing technologies that a comprehensive Federal licensure and supervision scheme might not allow as well. Furthermore, having prudential regulation 

should contribute to the confidence among users—whether consumers or businesses—that their stored value is safe and that their transactions will be executed 

as expected. 

The split between prudential money transmission regulation by the States, and 

anti-money laundering and economic sanctions/ anti-terrorism regulations by the 

Department of the Treasury reflects a robust regulatory, supervision and examination scheme for virtual currency transactions with much room on the prudential side 

of State regulation to promote product innovation without sacrificing important protections for users or, on the Federal side, anti-money laundering (AML) or economic 

sanctions goals. 


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8For a valuable discussion of the regulation of virtual currencies from the perspective of the 

European Central Bank, see Virtual Currency Schemes, supra note 6. This study does not accurately reflect current state of regulation of virtual currencies in the United States in two respects. First, it ignores the presence of State prudential regulation of ‘‘money transmitters.’’ 

Also, it fails to reflect the fact that widely used payments systems here have already moved 

away from reliance on ‘‘payments laws’’ and toward system rules and bilateral agreements for 

processing payments. These system rules and bilateral agreements often augment laws that othSome advocate for a single, Federal scheme of licensure and regulation of virtual 

currencies and their providers. The proponents of this view should be careful what 

they wish for: they could find themselves unable to qualify for a Federal license as 

the efforts of certain retailers to obtain approval from the Federal Deposit Insurance 

Corporation for their industrial loan operations (even after they had obtained a 

State ILC charter) or national bank or Federal savings and loan charters. These 

Federal approvals are also expensive and time-consuming processes with considerable discretion left to regulators to reject applicants. It is not clear to me that early 

applicants will enjoy the relief from 50-State regulation that they seem to expect. 

Some individuals will not adopt payment methods they do not understand and 

whose rules of the road are not transparent. Thus, we should appreciate the longstanding role the States have played in innovating regulations that have encouraged 

users to adopt new payments methods. The work of the Uniform Law Commissioners 

and American Law Institute, begun more than 65 years ago, created the uniform 

and predictable provisions of the Uniform Commercial Code (UCC) that State Legislatures enacted. The UCC’s predominance in payments regulation is now complemented by payments systems rules and bilateral agreements, including those 

that govern transactions that the UCC does not address, as well as limited Federal 

laws and regulations. Federal regulations also may prompt faster user adoptions of 

new technologies, as many believe the Fair Credit Billing Act (FCBA) and the Electronic Fund Transfers Act (EFTA) did in the late 1960s and 1970s, respectively, 

even though the EFTA has been criticized for chilling certain ATM developments. 

Recommendation 2: Make providers of virtual currencies comply with the 

customer-identification program and AML compliance program requirements of Sections 326 and 352 of the USA PATRIOT Act, and with the economic sanctions regulations enforced by OFAC, just as other payments systems providers do. Virtual currency customers will have to reveal their identities to issuers or transaction intermediaries of the currencies they use. They should get the same Federal financial 

privacy rights that users of other payments products have under the Right to Financial Privacy Act of 1978 and Title V of the Gramm-Leach-Bliley Act. 

My concern is that disintermediation of payments—the separation of payment 

flows from the comprehensive recordkeeping and retention requirements applicable 

to payments that eventually flow through the banking system—makes it more difficult to determine the identities of senders and recipients of payments. This may 

contribute to the efficacy of the ‘‘layering’’ stage of money laundering, the passage 

of the funds or credits through so many hands that the identities of payments participants is obscured. This is an important concern for anti-money-laundering, antiterrorism, anti-proliferation, and anti-tax-avoidance purposes. 

Recommendation 3: Encourage FinCEN to clarify the manner in which customer-identification and AML compliance requirements apply to virtual currencies 

to a greater degree if that is needed to stop banks from discontinuing their business 

relationships with virtual currency providers and other payments innovators. If 

banks cannot determine how to comply with FinCEN regulations, for example, they 

will cutoff payments innovators before the innovators can attract investors and 

users to make it to the second-stage distributed computing and database technologies their current work may generate. 

Depository institutions deserve the clearest guidance on how customer-identification and AML compliance requirements apply to virtual currencies. This is one of 

the few ways in which we can stop the recent spate of terminations of banking relationships with providers of virtual currencies—colloquially called ‘‘bank discontinuance.’’

Without the clearest possible guidance available for banks and investors, we are 

likely to experience a domestic decline in innovations and the potential loss of development of future associated uses of the distributed computing and database technologies such as for tracking tangible goods transactions or even in tracking and 

trading intangibles such as electronic mortgages and other evidences of equity or 

debt. Moreover, if bitcoins or other virtual currencies prove to garner even more 

widespread international adoptions, the United States will want to have a share of 

the productive research and applications capacity in the United States and may regret actions that send it offshore.8 This would be even more important if distributed 


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erwise apply to the underlying form of payment being used, but in other cases they provide uniformity and certainty to forms of payments that neither Federal or State laws comprehensively 

govern (credit cards, electronic fund transfers, and certain aspects of payroll cards, for example). 

The Bank’s report mentions a case in which French ‘‘banks shut down the currency exchange 

facility for accounts handling [bitcoins], on the presumption that Bitcoin should conform to electronic money regulations. Id. at 43, citing Finextra: http://

www.finextra.comnews.fullstory.aspx?newscemid=22921.

technologies developing in the next 5 years that would not suffer the perceived disadvantages of bitcoins today were to emerge. 

On the other hand, we should not condone the virtual currency systems that market the anonymity of their users or claim immunity from otherwise applicable compliance responsibilities in the name of ‘‘innovation.’’ If proponents of virtual currencies want access to profits for transactions in the United States, they should be 

prepared to comply with applicable laws, and, in specific, they should obtain sufficient information from customers to enable them to respond to properly authorized 

requests for access from Federal or State regulators and law enforcement agencies. 

A corollary of this recommendation involves providing financial privacy rights to 

users of virtual payments systems equal to those provided to users of more traditional payment systems. In the United States, two functionally different, Federal financial privacy statutes should govern virtual currency transactions—the Right to 

Financial Privacy Act of 1978, which governs access to account and transaction information of individuals and businesses by the Federal Government, and Title V 

(Privacy) of the Gramm-Leach-Bliley Financial Services Act of 1999, which governs 

how providers of consumer financial products and services may use and share the 

nonpublic, personally identifiable information they hold, including with their functional or prudential regulators and with Federal, State, and local law enforcement 

agencies. It is unclear that participants in virtual currency systems are enjoying 

these rights today. As banks increasingly buy providers of digital currencies to develop their own products, it is even clearer that customers should enjoy the same 

financial privacy protections, including due process rights, however limited they 

may be with border seizures and other Title 18 forfeiture provisions. 

Recommendation 4: Encourage payments systems innovators to adopt and 

publicize payment systems rules for their own systems and even to compete for customers on the basis of the system rules they adopt. 

Whenever a consumer or business prepares to make or receive a payment it will 

want to have certainty that:

• the payment is authorized by the person from whose funds or credits the payment will be made,

• the person has sufficient funds or credits for the payment processor to deliver 

those funds on time to the payee/ recipient so that the payee/ recipient will receive ‘‘goods funds’’ instantly or in a reasonable period of time,

• the payment is made to the proper payee and in the timeframe specified or expected by the person whose funds or credits are being used or consistently with 

any applicable contract between the obligor and payee,

• the payment, from the obligee’s perspective, will become final at a specified time 

or after a specified interval and, from the obligor’s perspective, that it will discharge the underlying obligation to pay for goods or services or to retire a debt, 

and

• the payment has integrity—that is, the named payee/ recipient has not been altered, the amount has not been lowered or raised, or the funds will not be held 

up unreasonably in transit.

These are ‘‘regulatory’’ or system rule qualities that will allow the provider to maintain users’ trust. 

Additionally, every person or business that stores funds or other value with a 

bank or broker—or in this case with the issuer, exchange or other provider/ participant in a virtual currency transaction—wants suitable assurances that they can 

redeem/ retrieve their funds or value when they want to do so. This issue surfaced 

with bitcoins when the Federal Government froze some bank accounts belonging to 

the Mt. Gox Exchange and the Exchange was unable to pay holders of bitcoins when 

they sought to redeem value stored in bitcoins. Other issues related to value storage 

include whether any form of insurance against the insolvency of the issuer or exchange is available to protect those who deposit value or otherwise hold accounts 

that they have reasonable expectations to redeem on little or no notice, or even on 

predictable terms. 


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Some virtual currencies have attracted negative publicity, including recent pub- licity about the disappearance of a Bitcoin exchange based in China with $4.1 million of value that belonged to others. This type of negative publicity stands in the 

way of broader adoption of virtual currencies. 

Prudential regulation and transparent system operating rules should help legitimate businesses offering virtual currencies attract more customers—assuming we 

have no reason today to fear competition for legal tender from current-day virtual 

currencies. 

I encourage virtual currency issuers to create payment systems rules for their own 

systems and harbor some hope that issuers will compete to offer system rules that 

match the needs of the individuals and businesses who participate. Payment systems rules often precede full government regulations by long periods of time. Examples include traveler’s cheques and bank wire transfers, and more recently automated clearing house transactions governed by the National Automated Clearing 

House Association and electronic checking processing systems that use ECCHO Operating Rules. New payments methodologies regulated too soon often do not receive 

the same levels of innovations. The primary example I can cite was based on a report by the Board of Governors of the Federal Reserve System following the enactment and implementation of the Electronic Fund Transfers Act in the late 1970s. 

The alternative to provider-created system rules may be more government regulation. This gives providers a choice between self-regulation for these specific customer protection purposes or more government regulation. I imagine they will give 

self-regulation careful consideration. 

Payments systems that have not established transparent and uniform system 

rules normally suffer a worse fate: so few individuals or businesses will use them 

that they wither for lack of investors and of income. This happened to some extent 

in the United States to early offerors of ‘‘electronic money,’’ including Mondex and 

Digicash, despite talented senior management and significant investments. Consumers did not adopt them so merchants did not adopt them—in part because neither group was certain of their rights if they adopted them. 

Recommendation 5: Ignore the claims that any regulation of virtual currencies will halt innovations or that innovators deserve freedom from regulations 

that apply to other payments systems and their providers, and their wishes for a 

single Federal licensure system. 

I urge Members to resist the ‘‘we’re new so don’t regulate us at all’’ arguments 

that you’ve heard since the advent of electronic commerce. Payments are payments 

and stored value is value storage. The ‘‘don’t regulate us or you will stifle innovation’’ arguments did not persuade many as digital money, prepaid cards, payroll 

cards and other new products appeared in markets and they offer no reason to 

abandon existing prudential regulation now. 

There also is no reason to reward ‘‘innovators’’ with freedom from regulations with 

which their ‘‘real world’’ competitors must comply. That would provide anti-competitive advantages to certain new entrants for which no justification appears. 

Recommendation 6: Monitor the development of virtual currency providers 

in case they transform their products into commodities or securities and, if this happens, then decide whether regulating their products under the applicable regulations makes more sense. 

Bitcoins’ values have been highly volatile over the past year. This volatility looks 

like price volatility associated with commodities and securities; bitcoin prices seemingly move separately from the values of the world’s major currencies. If other virtual currencies demonstrate this market freedom from legal tender currencies, this 

may be the signal that a reconsideration of type of regulation to be applied from 

regulation as payment systems to regulation as commodities or securities. 

Recommendation 7: Leave room for nondepository and depository providers 

of payments products to innovate in the virtual currency space. 

It is important not to rush new laws or regulations following negative publicity 

from a new technology when existing laws regulate issuers prudentially and clarity 

in enforcement of AML regulations can allow some space for innovators in the virtual currency space. I was delighted to read last week that the New York State Department of Financial Services was considering offering a BitLicense. Careful development of licensure standards will help develop stable payments products. As I have 

mentioned, virtual currency technologies can produce secondary, distributed computing and database applications that could yield enormous benefits to domestic and 

cross-border commerce. 

Recommendation 8: Ask for a study of virtual currencies to be carried out 

by the Federal Reserve Board or the Department of the Treasury or fund a study 

pursuant to the Federal Advisory Committees Act by an inter-agency task force and 

industry participants. 


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9Supra, note 6. For more information about this report, see supra, note 8. 10This system has features of fractional reserves that our banking system depends on, as well 

as of bonding or comparable requirements to ensure completion of transactions in the event of 

provider failure. The Board of Governors of the Federal Reserve System also establishes reserve 

requirements for depository institutions on an annual basis, in Regulation D. 11For a brief discussion of this period in bank and payments regulation in the United States, 

see Broome & Markham, supra, note 2 at 1–28. 

The Subcommittees sponsoring today’s hearing should ask for a study by the 

Board of Governors of the Federal Reserve System or the Department of the Treasury of virtual currencies, the potential for innovations and efficiencies they may 

offer more broadly, and the kinds of risks—to price stability, financial stability, payment system stability, reputational risks and for users—identified in an October 

2012 report by the European Central Bank entitled ‘‘Virtual Currency Schemes.’’9

Another option is for Congress to authorize and separately fund an inter-agency 

working group to produce a study of how the various Federal agencies involved in 

payments, regulating of banking, commodities, securities and law enforcement. 

Regardless of which agency leads the study, the work should be organized under 

the Federal Advisory Committees Act so that all industry segments can be included. 

Part IV: Responses to Other Questions Posed by the Committee 

A. Issues implicated in cross-border payments and cross-border trade and finance 

Monetary policy is one of the concerns cited by the European Central Bank in its 

2012 report on Virtual Currency Schemes. But that report did not discuss enforcement of collateralized debt obligations. 

Virtual currency transactions could render finance transactions nontransparent so 

that current and potential providers of financing might not be able to ascertain their 

relative priorities to assets that underlie those trade transactions. The United 

States will want to follow closely developments that frustrate creditors’ claims to inventory or other assets if the obligor fails to complete payments for goods that it 

has purchased here or abroad. 

The trend away from bank-issued letters of credit to supply chain financing not 

involving banks—indeed including financing provided by logistics suppliers—has not 

yet degraded the ability of sellers, buyers or their financers to monitor cross-border 

trade transactions. This may be because logistics suppliers of supply chain finance 

enjoy hard-earned reputations as honest participants delivering the goods they carry 

and collecting payments if required on behalf of senders. But the potential for trade 

finance disruption still exists. 

B. Possible regulatory models for providers of payments products and systems 

In addition to the current State prudential regulation of virtual currency providers and to Treasury’s comprehensive registration, AML and economic sanctions 

regulations applicable to money services businesses, we have a number of potential 

models for regulating, requiring registration or supervising and examining providers 

of virtual currencies. I mention these more for future purposes than for any need 

I perceive at this point, but the eventual use of alternative regulatory models depends in large measure on how the products offered as ‘‘virtual currencies’’ work in 

fact. 

For example, State prudential regulation of money transmitters is framed to ensure that competent transaction execution. Those who take funds from one person 

with a promise to deliver them to a second person need to have the capacity to do 

just what they promise—to pay in the manner, in the time, and to the person that 

the first person instructed them to pay. 

Prudential regulation by States establishes qualifications for providers—depository and nondepository providers they license to do business with their own residents, and establishes a system of reserves or bonds or both so that funds will be 

available to complete transactions on those persons’ parts.10 State licensing and 

bonding requirements are cited by many entrepreneurs as a reason why virtual currencies are not attracting the widespread uses and investor funding that entrepreneurs seek. However, without these State requirements, the prospect of value 

disappearing—as it apparently has with the disappearance of the bitcoin exchange 

in China—likely would rise and injure users of these products. 

State prudential regulation began in the late 18th Century when Massachusetts 

and New Hampshire prohibited unincorporated banks from operating.11 New York 

State followed them with its prohibition in 1804. Some States banned banking—period. These included Texas until 1904, and Iowa, Arkansas, Oregon and California 

before the Civil War. State laws also established ‘‘safety deposit’’ systems and have 

regulated them. Items in safety deposit boxes are not immune from asset freeze orVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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12Francois R. Velde, Bitcoin: A primer, Chic. Fed Letter No. 317 (Dec. 2013) (copy on file with 

the witness) (describes the operations of bitcoins and, particularly, its unique methods for controlling two challenges of digital money—controlling the creation and avoiding duplication of 

units). 

ders issued by courts, or seizure by the IRS. States have been regulating money 

transmitters since the advent of the telegraph. 

The regulation of safe-storage systems is even more ancient, beginning with the 

Knights Templar and Vatican as lenders in the pre- and early-Renaissance periods, 

and with the Silver Vaults in London and lenders in Belgium, the Netherlands, and 

Florence whose services contributed to the early Renaissance flows of commerce and 

modern trade. I mention safety deposit systems because of the similarities they 

have, and that their predecessors had, to products such as e-Gold, and even bitcoins. 

Some of these contemporary products are more like commodities to be bartered than 

they are true ‘‘currencies.’’12

Alternative regulatory schemes for virtual currencies include commodities and securities regulation. The securities model offers advantages such as registration and 

requirements for disclosing material events that may affect the value of the security 

or the health of its issuer. 

One reason to consider commodities or securities regulatory schemes for virtual 

currencies that do not track the movements of legal tender currencies is evidence 

that investors are speculating in these currencies. To the extent that virtual currencies seem to be used more for speculative purposes and less for transaction execution, the nonpayments models of regulations present feasible alternatives. 

V. Conclusion 

I applaud the Subcommittees for holding this important hearing and urge them 

to continue to watch developments in virtual currencies. Thank you again, Chairman Merkley and Chairman Warner, and Ranking Members Heller and Kirk, for 

this opportunity to share my views with your Subcommittees. I will be pleased to 

take questions. 

PREPARED STATEMENT OF MERCEDES KELLEY TUNSTALL

PARTNER, PRACTICE LEADER, PRIVACY AND DATA SECURITY GROUP

BALLARD SPAHR LLP

NOVEMBER 19, 2013

INTRODUCTION 

Chairman Merkley, Ranking Member Heller, and the Members of the Subcommittee, I am Mercedes Kelley Tunstall, a Partner at Ballard Spahr LLP and the 

Practice Leader of our firm’s Privacy and Data Security Group. My testimony today 

reflects my personal experience with the virtual currency industry and represents 

my own opinion. My testimony does not necessarily reflect the opinions of Ballard 

Spahr LLP or our clients. 

Thank you for this opportunity to testify about the present and future impact of 

virtual currency. I work directly with multiple clients that offer their own forms of 

virtual currency. I also advise large banking clients on how to interact with virtual 

currencies as well as how to structure their programs and services as to avoid being 

treated as virtual currency. I have spoken extensively on this topic during Webinars 

and other public forums, and I have been quoted frequently by the press. I will focus 

my remarks today on the important steps that the virtual currency industry and 

Federal regulators should take in order for virtual currency to have a commercially 

viable future. 

THE NEXT GENERATION OF VIRTUAL CURRENCY 

In only a few short years, Bitcoin may have become the most well-known virtual 

currency today, but Bitcoin has also demonstrated a number of weaknesses that the 

next generation of virtual currency should be careful to address. 

I. Bitcoin ≠ Integration 

Bitcoin has built its reputation and structured its virtual currency around being 

both antigovernment and anti-establishment. Although this reputation may be attractive to a certain type of consumer, the structure has limited, and will continue 

to limit, Bitcoin’s adoption by a wider population. Due to Bitcoin’s reputation, large 

financial institutions view the currency as being unreliable and therefore not able 

to meet their safety and soundness requirements. If a virtual currency could be reliable, then financial institutions may very well incorporate the currency as a solution 


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to certain problems faced. For example, virtual currency could be attractive to large 

financial institutions if the fees associated virtual currency transactions, including 

the exchange fees, are lower than the fees accompanying other payments methods 

(e.g., interchange fees). The next generation of virtual currency should figure out a 

way to better align with existing payment methods, or virtual currency will never 

be able to move from a ‘‘niche’’ into the mainstream. 

II. Virtual Currency ≠ Anonymity 

One of the most frequently cited advantages of virtual currency is the increased 

privacy and anonymity associated with using bitcoins. However, even Bitcoin is not 

completely anonymous as a public record of each Bitcoin transaction is electronically 

recorded. In order for the industry to continue maturing, the next generation of virtual currencies should dispel the perception that an important element of using virtual currency is the ability for an individual to engage in online transactions with 

complete anonymity. 

In a transaction involving hard currency, the two parties to the transaction may 

not know each other, but in order for the currency to be handed from one person 

to the next, the two people must see each other and be in each other’s presence (or 

have a proxy to do the same for them). 

This transaction is hardly anonymous, and yet many have compared Bitcoin 

transactions to cash exchanges between strangers and referred to such exchanges 

as being anonymous. Instead, the distinction is that such cash transactions can 

occur without being recorded by any financial system or government and without 

the involvement of middlemen such as banks. As such, bitcoins, like cash, have been 

used in transactions to perpetrate fraud, money laundering, and other illegal activities. Unlike hard currency, however, technological solutions could be developed to 

track the digital exchange of virtual currency so that the transaction is not conducted through a middleman. Bitcoin and other virtual currency providers have a 

responsibility to prevent criminal activity and to comply with anti-money laundering 

and other laws. The next generation of virtual currencies must address the ability 

of individuals to use virtual currency to engage in illegal activities anonymously or 

the Congress, the Federal agencies, or the courts may take action, which could result in harmful consequences to the industry’s overall growth. 

III. Bitcoin = Commodity or Bitcoin ≠ Commodity 

Bitcoin displays some features that allow Bitcoin to function like a commodity, 

such as the self-imposed limit of 21 million bitcoins and the volatility of the value 

of bitcoins. However, Bitcoin does not presently comply with current securities or 

commodities laws and regulations. In order for banks to work with virtual currencies, those virtual currencies either need to comply with or protect against 

commoditization. Unless the next generation of virtual currencies can resolve the 

question as to whether virtual currency should be considered a commodity, the industry will remain characterized by volatility. Without further stabilization, mainstream adoption of virtual currency remains unlikely. 

REGULATORY CERTAINTY 

As the virtual currency industry matures, regulatory certainty will also be needed 

to ensure a future for this industry. 

I. Legal Definition of Virtual Currency 

The virtual currency industry would benefit greatly from guidance from the Federal Government as to the legal definition of virtual currency. Although it is clear 

from the Legal Tender Cases of the 1870s and 1880s that virtual currencies can legally operate in the United States of America, it is unclear as to what regulations 

could and should apply to virtual currency. 

The Commodity Futures Trading Commission and the Securities Exchange Commission have both examined Bitcoin-related issues and determined that there are 

times when the currency operates as a commodity/security, but beyond that, there 

is no existing legal framework that addresses the unique features and functionality 

of virtual currency. 

II. Financial Crimes Enforcement Network 

Existing FinCEN guidance has offered much-appreciated guidance for the industry and related players, but as the industry continues to mature, additional guidance will be needed on how to integrate virtual currency into the existing financial 

ecosystem, especially with regard to compliance with anti-money laundering requirements. 


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III. Electronic Fund Transfer Act / Federal Reserve Board Regulation E 

Currently, consumer protections contained in financial regulations such as the 

Electronic Funds Transfer Act and its implementing regulation, Regulation E, do 

not apply to virtual currencies. Therefore, unauthorized transactions involving virtual currency have no recourse—once the currency is gone, it is gone, just as surely 

as when someone swipes bills from a wallet. Due to the electronic nature of virtual 

currencies, consumers may not understand the reasons for the disparate protections 

conferred on the use of these disparate payment forms. If consumers are unable to 

embrace virtual currency as a safe, effective means to conduct online (and even offline) transactions, industry growth will be stalled. 

CONCLUSION 

Thank you again for the opportunity to testify on these important issues. I would 

also like to express my appreciation to your staff for all their assistance in preparing for this hearing. 

I would be happy to address any specific questions that the Members of the Subcommittee may have for me.

Mercedes Tunstall 

Biography 

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. 

Ms. Tunstall has substantial experience working with clients to develop new financial products and services, including mobile wallets, virtual currencies, and prepaid cards. These engagements typically include negotiating agreements with technology vendors, reviewing technical designs, drafting customer communications and 

agreements, and advising on potential regulatory and privacy and data security concerns. 

She also works with clients from a spectrum of industries on mobile and other 

ecommerce initiatives, privacy and cybersecurity issues, and the use of social networking sites for marketing, customer service, and crowdsourcing purposes. 

Before joining Ballard Spahr, Ms. Tunstall was lead counsel for Global Marketing 

and Deposits at Ally Financial. She also worked in-house for Bank of America, 

where she managed all legal aspects of e-commerce, and at HSBC, where she managed consumer financial services litigation. 

Ms. Tunstall was a Staff Attorney at the Federal Trade Commission, where she 

investigated and litigated the Commission’s first Internet hijacking case, among 

other Internet fraud matters. 

PREPARED STATEMENT OF ANTHONY GALLIPPI

COFOUNDER AND CEO, BITPAY

NOVEMBER 19, 2013

Thank you Chairmen Merkley and Warner, and Ranking Members Heller and 

Kirk, and Distinguished Members of the Committees for the opportunity to speak 

with you today. 

My name is Tony Gallippi and I am the Cofounder and CEO of BitPay. I graduated magna cum laude from Georgia Tech with a degree in Mechanical Engineering. BitPay is a startup company with 16 fulltime employees, based in Atlanta. 

I appreciate the Members for their interest in the commercial and international 

trade uses of digital currencies, and more importantly, the opportunities for digital 

currencies to create jobs in America and to increase America’s exports. Since Bitcoin 

represents the dominant market share of virtual currencies, my testimony will focus 

on Bitcoin specifically and not on any of the alternative virtual currencies. 

Our company, BitPay, was started in May 2011 and we have been operating for 

over 2 years now, which makes us pretty old in the Bitcoin space. During this time 

we have acquired over 12,000 merchants to accept bitcoin with our service. Our 

merchants include many small and medium-sized businesses in every State, who accept bitcoin side-by-side with credit cards and other forms of payment. 


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Most online payments today are made with credit cards, but credit cards were 

never designed for the Internet. Credit cards were designed in the 1950s, and they 

still function the pre-Internet age. Last year, over 12 million people became victims 

of identity theft, mostly from shopping online (source: https://

www.javelinstrategy.com/news/1387/92/1). Businesses lose over $20 billion per 

year due to payment fraud (source: http://www.lexisnexis.com/risk/downloads/assets/truecostfraud2013.pdf). The banks don’t take responsibility for the fraud. If you 

are a business owner, it is your fault that you took a stolen credit card, even if the 

bank approved it. Credit Card fees are discriminatory the highest fees are paid by 

the smallest mom-and-pop businesses and the lowest income consumers. Bitcoin is 

a cheaper, faster, and more secure payment system. 

Background on Merchant Acquiring 

Even though we deal with bitcoin, our business model of merchant acquiring is 

fairly traditional. Merchant Acquiring began in the 1950s with credit cards, and the 

big marketing push to get businesses to accept credit cards as payment. Over the 

years, companies such as First Data, TSYS, Fiserv, and others would emerge with 

new tools for merchants. These companies are typically not household names. They 

operate behind the scenes, facilitating merchant payment acceptance as a businessto-business service. Most consumers, even when making a payment through one of 

these service providers, don’t even know that these companies exist. 

Fast forward 40 years to the 1990s with the launch of the worldwide Web and 

the first Web browser. Businesses could build a Web site to reach customers, but 

how could they take a payment from a Web page? It was the mail-order companies 

who figured it out first. If they could accept a credit card over the phone, then perhaps they could also accept a credit card over the Internet. Companies like 

Cybersource and Authorize.net built payment gateways for processing credit cards 

over the Internet, and today, 20 years later, credit cards are still the most widely 

used form of payment over the Internet. 

Differences between Credit Cards and Bitcoin 

Credit cards are ‘‘pull’’ transactions. The shopper provides their account number, 

and secret credentials that the business can use to pull money from their account. 

The problem is that the same credentials to pull money one time can be used to 

pull money many more times by that same business, or by anyone who has these 

credentials. This is the fundamental design problem with credit cards, and it is the 

root cause of the identity theft and fraud that we see today. 

Think about that for a minute. Why would you ever give someone full access to your $20,000 line of credit to pay them $20? 

Because of this design flaw, security around credit cards is massively expensive. 

Apple has iTunes, with over 500 million credit card numbers stored on file. The cost 

and risk of securing this data is enormous. Visa alone spends $200 million a year 

on fraud prevention. They are throwing big money at the problem and it is not 

working, because every year fraud remains very high. 

In 2009, Bitcoin was invented. Bitcoin takes everything we know about the Internet, Security, and Cryptography, and builds a payment system designed for the 

Internet. 

Bitcoin is an open standard, an open protocol, and an open source payment network. Nobody owns the network, and nobody controls the network. All of the users 

collectively own the network, its rules, and its ledger. 

Anyone can use bitcoin or build an application on top of bitcoin. Bitcoin is much 

like the Internet itself, where anyone can use the Internet and build an application 

on top of the Internet. And because Bitcoin is borderless, a business can receive a 

payment from China just as easily as they can receive it from someone in the same 

room. Bitcoin payments are ‘‘push’’ transactions, which are very different than credit 

cards. If I want to pay someone, I push them the exact amount I want to give them. 

The recipient does not get my account number, they do not get my secret credentials, and they do not get any permission to ever pull money from my account. Only 

I can push out a payment. Bitcoin works similar to email, and text messages. Text 

messages are a push transaction. You cannot pull an email from me or a text message from me, only I can push the message to you. Bitcoin works the same way, 

for payments. 

BitPay is a Bitcoin Merchant Acquirer 

At BitPay, our role in the bitcoin ecosystem is very close to that of the traditional 

merchant acquirers in the credit card space. We act as an agent of the payee, to 

help merchants clear and settle transactions over the bitcoin network. Merchants 

could accept bitcoin directly, but automating this is very difficult, and most merVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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chants choose to use our software and service rather than try to figure it out themselves. 

BitPay has a strict Know Your Customer (KYC) policy to verify all of our merchant applications. We need to know who our merchants are and what they are selling. We only want the good actors using our service. We routinely audit our merchants, and we suspend and terminate those who violate our Terms of Use. A copy 

of BitPay’s Merchant Terms of Use is attached in Exhibit A. 

BitPay also follows all Bank Secrecy Act (BSA) guidelines to prevent, detect, and 

report suspicious activity. Our strict policies to comply with laws and protect our 

brand have earned BitPay the reputation as a leader and well respected company 

in the payments space. 

BitPay is not a bitcoin exchange, but we use nearly all of the bitcoin exchanges 

around the world to manage our own asset allocation. We do not act as a broker 

dealer to facilitate trades, and we also do not offer any bitcoin services for consumers. Consumers do not need to store funds with BitPay, they can simply pay 

the merchant invoice from whichever bitcoin wallet they choose to push the payment from. In the near future, our service will be more integrated into the merchants branding and checkout experience. 

Bitcoin protects Consumers from Identity Theft 

For consumers, Bitcoin is another choice of payment which is voluntary to use. 

One of the main reasons why a consumer would choose to pay with Bitcoin is that 

Bitcoin can reduce, if not completely eliminate, the risk of the consumer becoming 

a victim of identity theft. Identity theft happens when a criminal gets access to the 

victim’s account number and credit card credentials, and uses those credentials to 

make unauthorized purchases. When using Bitcoin, the consumer never needs to 

provide their identity to make a payment, so there is no identity information to 

steal, and no risk of identity theft. Bitcoin is a massive win for consumers, saving 

12 million people per year the expense and hassle of dealing with the fallout of identity theft. 

Consumers will be educated of the different ways in which they store their 

bitcoin. It functions more like cash, where if you lose it, it’s gone. The funds are 

locked in the private key, which defines the ownership of the asset. Consumers can 

create many wallets with varying levels of convenience and security. The technology 

is being developed, and consumers will be educated on data security and proper 

data backups to ensure proper use of the technology. If consumers understand how 

bitcoin works, they should be allowed to use it. 

Bitcoin protects Businesses from Payment Fraud 

For businesses, Bitcoin can also stop the $20 billion/year fraud problem. When 

your business receives a bitcoin payment, it’s confirmed, and it’s yours. It cannot 

be reversed or taken away from you. Businesses can now reach customers in emerging markets, where they could not collect payments from before. Credit cards for online businesses don’t really work beyond 8 or 10 countries, so most businesses simply choose not to sell internationally not because their Web site can’t reach, or their 

shipping company can’t reach, but only because they can’t take the payment. 

It is the small mom-and-pop businesses that are most excited about Bitcoin, and 

represent most of the adoption today. The businesses who accept Bitcoin are now 

opening up new markets, and creating more exports, and more jobs in America. If 

the United States doesn’t allow our businesses to accept bitcoin and create more 

jobs and exports, then countries like Germany and China certainly will. 

Bitcoin’s limitations 

Bitcoin does have limitations that will keep it a small player in the payments 

space for quite some time. Compared to credit cards, Visa’s payment network can 

handle 20,000 transactions per second, worldwide. Bitcoin can handle seven. Not 

seven thousand, but seven transactions per second. Today, the average rate on the 

bitcoin network is one transaction per second. So compared to the collective networks of credit cards, debit cards, payment cards, ACH, and wires, there are 50,000 

times more transactions taking place on traditional networks than on the bitcoin 

network. 

Bitcoin also has some limitations on its usability. The global money supply of 

Bitcoin is worth around $5 billion. Compare this with the global M2 money supply 

of around $70 trillion, there is 15,000 times more money in the world in traditional 

currencies than in bitcoin. 

Bitcoin’s potential for nonmonetary use 

Even though it’s small, Bitcoin has invented something previously thought to be 

impossible. Many times when parties transfer assets to each other, they are trading 


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a digital representation of an asset. The asset itself settles 13 days later. With 

Bitcoin, it is now possible to transfer an asset remotely, and immediately settle the 

transaction, with no counterparty risk. That type of instrument has never existed 

before. 

The possibilities of this instant worldwide settlement are very interesting. And 

this is where the real potential for Bitcoin exists. The Bitcoin blockchain, which is 

the public accounting ledger of bitcoin, is a large property rights database. It can 

handle quadrillions of individual asset accounts, with a full chain of custody every 

time an asset is transferred from one party to another party. 

If you want to energize the housing market, think of Bitcoin. The biggest upfront 

costs for consumers trying to buy a home are the closing costs, which include fees 

for deeds, titles, stamps, title insurance, and other redundant tasks to record the 

sale in different record books. Bitcoin can replace thousands of dollars in closing 

costs with a single transaction that costs 5 cents. By reporting deeds and titles on 

the blockchain, the information would be public record forever, for pennies, and 

eliminate the need for title insurance. 

The property rights aspect of Bitcoin can go one step further, to create smart 

property. This can be used for purchases like cars, where if a loan is attached to 

the car, the ownership of the car can be transferred back to the lender in case of 

default, or if the loan is paid off the owner would have full ownership of the car, 

and then they can transfer it to whomever they want. 

Bitcoin Risks 

Bitcoin does have risks. Criminals use cell phones, criminals use email, and criminals use dollars and banks. Many businesses like BitPay, offering innovative services on top of bitcoin, share the Committee’s goals to protect consumers from fraud, 

and keep the criminals away from our businesses. 

The Board of Governors of the Federal Reserve System acknowledged that virtual 

currencies ‘‘may pose risks related to law enforcement and supervisory matters,’’ but 

‘‘there are also areas in which they may hold long-term promise, particularly if the 

innovations promote a faster, more secure and more efficient payment system.’’

Bitcoin Regulation 

Guidance from the IRS, Department of Treasury, Department of Justice, and SEC 

has all established that bitcoins are legal, and that those dealing with them must 

simply follow existing tax laws and antimoney-laundering regulations. 

In the 1990s when the Internet was in its infancy, Congress took a wait-and-see 

attitude to let the Internet develop. Where would Social Media and other free apps 

be today if in the 1990s we required licenses for the Internet, and taxed Internet 

access as if it was a Telecom? 

In 1995, the National Science Foundation lifted its strict prohibition of commercial enterprise on the Internet, and immediately companies like Amazon, Ebay, and 

Dell were born. Americans will benefit from a similar openness and wait-and-see approach to Bitcoin. 

Bitcoin Regulation outside the United States 

Bitcoin by design is borderless, like the Internet itself. Businesses using bitcoin 

are forming every day, at a pace not seen since the expansion of the worldwide Web 

in the 1990s. There is a tremendous amount of capital, resources and effort being 

spent to create innovation in finance. 

We don’t believe that new legislation or regulation around bitcoin is needed. The 

rules for consumer protection and antimoney laundering already exist today. 

Germany has declared Bitcoin to be ‘‘private money’’ and other countries are 

working to categorize Bitcoin and Bitcoin-related services into regulatory frameworks that exist today. Bitcoin is a technology with tremendous cost savings for 

businesses and consumers. Bitcoin is a more secure, faster, and more affordable option for transferring funds. If America is the leader in Bitcoin technology, America 

will create more jobs and more exports. 

Bitcoin is Disruptive 

Bitcoin is a disruptive technology. Bitcoin will not replace the dollar, or the euro, 

or gold, but it will certainly disrupt existing financial services and their fee structures. Today banks charge many fees to consumers: overdraft fees, overlimit fees, 

interest fees, application fees, monthly fees, authorization fees, processing fees, ATM 

fees, maintenance fees, minimum balance fees, late fees, and even fees to send your 

paper statement in the mail. With bitcoin, users can handle many of their daily payments needs themselves and avoid the bank fees, so banks relying on fee revenue 

could be impacted the most by virtual currencies. 


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Most IT systems used by banks and financial services today were built in the 

1970s. They were designed well before the Internet and they lack many of the technical innovations that other industries use today. Bitcoin could offer immediate cost 

reductions and technical advancements to our financial institutions, particularly in 

the areas of interbank settlement, international transfers, and foreign exchange. 

The current 13-day settlement times on many types of transactions can be reduced 

to 13 seconds. 

Bitcoin is a technology with tremendous cost savings for businesses and consumers. Bitcoin is a more secure, faster, and more affordable option for transferring 

funds. If America is the leader in Bitcoin technology, America will create more jobs 

and more exports. 

Conclusion 

In conclusion, today Bitcoin is in its infancy. It is much like the Internet in the 

early 1990s. Thanks to Congress’s protection, the Internet was allowed to evolve and 

develop, and today it has greatly improved our lives. 

If we look 10–20 years in the future, we will see many companies built upon 

bitcoin-related technology. We want those companies to be based in America, creating jobs in America, and building a revenue base and tax base in America. 

The original application of the Internet was commerce, with companies like Amazon and Ebay. Over time, the killer apps for the Internet emerged, and these apps 

were not the original application. Search, Social Media, and Big Data are all powerful industries built on the Internet, and where would all of the free applications like 

Social Media be today if the early Internet was pigeonholed, overly regulated and 

required expensive telecom licenses? 

I commend the Committee for recognizing the real, practical uses of virtual currencies and the potential future applications of this technology. Thank you for the 

opportunity to speak today.

Appendix A BitPay Merchant Terms of Use 

These Merchant Terms of Use (the Terms) govern your use of the products, services or any other features, technologies or functionalities (the Services) provided by 

BitPay, Inc. (BitPay, we, our, or us) through BitPay’s Web site, API or through any 

other means. You and your mean the merchant to which we will be providing the 

Services and the person signing below or otherwise agreeing to the Terms on behalf 

of the merchant. Please read the Terms carefully; by using the Services, you agree 

to the Terms and confirm that you accept them. 

The Services. We are a Bitcoin payment processor—we enable you to accept 

bitcoins as payment for goods or services, and process Bitcoin payments that you 

receive from your customers. We are not a Bitcoin exchange, Bitcoin wallet, or a 

place to purchase Bitcoin. By using the Services, you authorize us to receive, hold 

and disburse funds on your behalf and to take any and all actions that we think 

are necessary or desirable to provide the Services and to comply with applicable law. 

Registration 

Generally. In order to use the Services, you must open a BitPay account. 

When you open an account, we will ask you for contact information such 

as, for instance, your name, mailing address, phone number, email address, 

and Web site. The information that you provide at the time of account opening must be accurate and complete, and you must inform us in a timely 

fashion of any changes to such information. We may require additional information about you (including any person signing below or otherwise 

agreeing to the Terms on behalf of the merchant) such as, for instance, your 

date of birth, tax identification number or Government-issued identification, 

and we may also obtain information about you from third parties, such as 

credit bureaus and identity verification services. We have the right to reject 

your account registration, or to later close your BitPay account, if you do 

not provide us with accurate, complete and satisfactory information.

Merchant Tiers. BitPay imposes daily transaction processing limits on merchants. When you register for a BitPay account, you will be required to select the limit (the Tier) that will apply to your BitPay account, and to provide us with the documentation necessary to qualify for that Tier. A description of the Tiers, as well as a list of the documentation required to 

qualify for each, is available on our Web site. If your business is a High 

Risk category, as determined by BitPay, you will be required to qualify for 

the ‘‘Trusted’’ Tier in order to use the Services. We will not begin to process 

payments on your behalf until we have reviewed the documentation that 

you provide, in accordance with applicable law. If you wish to change to a 


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Tier with a higher limit, you must provide us with the additional required 

documentation. We will not approve your request to change Tiers and permit you a greater processing volume unless and until we have reviewed 

your documentation to our satisfaction. Please also refer to Section 3.1, 

‘‘Daily Transaction Volume; Tiers.’’

Guarding your Password. You will choose a password when registering. 

You are responsible for maintaining the confidentiality of your password 

and account. You are fully responsible for all activities that occur using 

your password or account. Please notify us immediately of any unauthorized use of your password or account or any other breach of security. We 

will not be liable for any loss that you may incur as a result of someone 

else using your password or account, either with or without your knowledge. You may not use anyone else’s password at any time.

Prohibited Accounts. Use of the Services is subject to the laws and regulations of the United States regarding the prevention of terrorist financing 

and antimoney laundering. You agree and acknowledge that your use of the 

Services would and will comport with such laws and regulations, including, 

without limitation, the sanctions programs administered by the Office of 

Foreign Assets Control of the United States Department of the Treasury. 

Your Sales.

Daily Transaction Volume; Tiers. You agree to adhere to the transaction 

processing limits applicable to your Tier. You agree that, if you exceed that 

limit, BitPay has the right to hold the over-the-limit funds until you have 

provided us with the additional documentation required to qualify for the 

next Tier, and until we have had the opportunity to review such documents. 

We will take additional measures if you exceed your limit. If you are a 

‘‘Trusted’’ merchant, you may create an unlimited value of invoices (see Section 8.1), although you will only receive payments from us up to the specified limit. If you are not a ‘‘Trusted’’ merchant, you may not create a value 

of invoices that exceeds your specified limit.

Invoices and Records. You must keep all records needed for fulfilling the 

merchandise to the purchaser and providing any post-sale support to the 

purchaser. If the sale of the item requires any government registration of 

the sale, you are responsible for such registration.

Customer Verification. You are solely responsible for obtaining any information required of those who purchase your goods or services. For instance, 

if applicable law prohibits a sale to persons under the age of 18 years, you 

must ensure that a purchaser is at least 18 years of age. Similarly, if applicable law requires that a purchaser’s identity be verified, you must verify 

the purchaser’s identity. We will not be responsible for your failure to adequately verify your purchasers’ identities or qualifications.

Representation and Warranties. Your use of the Services is subject to 

several important restrictions. Specifically, you represent and warrant to us 

that:

(a) Your use of the Services will not contravene any applicable international, Federal, State or local law or regulation, including applicable 

tax laws and regulations, and that your use of the Services will not violate the laws of the United States of America.

(b) Your use of the Services will not relate to sales of (i) narcotics, research 

chemicals or any controlled substances, (ii) cash or cash equivalents, including derivatives, (iii) items that infringe or violate any copyright or 

trademark, (iv) ammunition, firearms, explosives, weapons or knives 

regulated under applicable law, or (v) any services which compete with 

BitPay.

(c) Your use of the Services will not relate to transactions that (i) show the 

personal information of third parties in violation of applicable law, (ii) 

support pyramid or Ponzi schemes, matrix programs or other ‘‘get rich 

quick’’ schemes, (iii) are associated with purchases of annuities or lottery contracts, layaway systems, offshore banking or transactions to finance or refinance debts funded by a credit card, (iv) are associated 

with Money Service Business activities, as defined by the Financial 

Crimes Enforcement Network of the United States Department of the 

Treasury, or (v) provide credit repair or debt settlement services.


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(d) Your use of the Services will not involve gambling or any other activity 

with an entry fee and a prize, including, but not limited to casino 

games, sports betting, horse or greyhound racing, lottery tickets, other 

ventures that facilitate gambling, and sweepstakes, unless you have obtained our prior approval and you and your customers are located exclusively in jurisdictions where such activities are permitted by law.

(f) You have the right, power and ability to enter into and perform under 

these Terms.

Our Right to Reject. We reserve the right to decline to process a sale if 

we believe that it violates these Terms or would expose you, other merchants, purchasers, or other parties to harm. If we reasonably suspect that 

your BitPay account has been used for an illegal purpose, you authorize us 

to share information about you, your BitPay account, and your account activity with law enforcement.

Our Right to Inspect. We may ask for permission to inspect your business 

location, in connection with your use of the Services or specific transactions. 

If you refuse our request, we may suspend or terminate your BitPay account. 

Third Parties. 

Your Use of Third-Party Services. In using the BitPay Web site or the 

Services, you may be offered services, products and promotions provided by 

third parties. If you decide to use these third-party services, you do so at 

your own risk and are solely responsible for reviewing, understanding and 

complying with the associated terms and conditions. We expressly disclaim 

any liability for the third-party services and are not responsible for the performance of the third-party services or servicers.

Security. We have implemented security measures designed to secure your 

information from accidental loss and from unauthorized access, use, alteration or disclosure. However, we cannot guarantee that unauthorized persons will never gain access to your information, and you acknowledge that 

you provide your information at your own risk, except as otherwise provided by applicable law.

How we Collect, Use and Share Information. In order to provide the 

Services, we may share information about you and your BitPay account 

with third parties, including but not limited to your bank and purchasers.

Our Ownership of the Services and the BitPay Website. You agree 

and acknowledge that we own all right, title and interest to and in the 

Services, the associated software, technology tools and content, the BitPay 

Web site, the content displayed on the Web site, and other materials produced by and related to BitPay (collectively, the BitPay IP). You are only 

permitted to use the Services and the BitPay IP to accept and receive payments, according to these Terms. When you accept the Terms, we grant you 

a personal, limited, revocable and nontransferable license to use the BitPay 

IP, without the right to sublicense. You shall not rent, lease, sublicense, 

distribute, transfer, copy, reproduce, download, display, modify or timeshare 

the BitPay IP or any portion thereof, or use the BitPay IP as a component 

of or a base for products or services prepared for commercial sale, sublicense, lease, access or distribution. You shall not prepare any derivative 

work based on the Company IP, nor shall you translate, reverse engineer, 

decompile or disassemble the Company IP.

Advertising. By mutual consent, we may publish your corporate name, 

artwork, text and logo (Merchant Content) on the BitPay Web site and 

promotional materials to acknowledge you as our customer. You represent 

and warrant to us that you have the right to provide the Merchant Content 

to us, and that the use, copying, modification and publication of the Merchant Content by us: (a) will not infringe, violate or misappropriate any 

third party copyright, patent, trade secret or other proprietary rights, (b) 

will not infringe any rights of publicity or privacy, and (c) will not be defamatory or obscene or otherwise violate any law. 

Fees & Settlement. 

Invoice Generation and Exchange Rate Guarantee. To create an invoice, you may post a request to BitPay to collect a specific amount in your 

local currency, such as dollars or euros, or in Bitcoin. BitPay will pull the 

exchange rate and provide the Bitcoin payment instructions to the purVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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chaser. We guarantee the exchange rate to you as long as the purchaser 

pays within the proper time window after the invoice is created. Invoice 

timeout information is clearly displayed on each BitPay invoice. While we 

guarantee the exchange rate as long as the purchaser pays within such 

time window, you agree that you assume the volatility risk of your local 

currency or Bitcoin, as applicable. For instance, if you ask us to collect USD 

$150, and the purchaser sends the payment within the time window, we 

guarantee you will receive exactly USD $150, minus our fee, but do not 

guarantee the value of the U.S. dollar.

Fees. We charge a processing fee on all transactions. The proceeds payable 

to you will equal the amount of the invoice (assuming that we have received 

the full amount of the invoice from the purchaser), unless you agree to accept less than the amount of the invoice, minus the processing fee. We reserve the right to change our fees and will give you 30 calendar days’ prior 

notice of any fee increase. Your continued use of the Services after we notify you of any increase in our fees constitutes your acceptance of such 

change. Current pricing information is provided on the BitPay Web site at 

https://bitpay.com/pricing.

Methods of Settlement. We will clear the payments over the Bitcoin peerto-peer payment network and post the balance to your accounting ledger, 

according to your preference settings.

The debits and credits to your accounting ledger are funds temporarily held 

by BitPay until settlement to your bank account can take place. You can 

receive a settlement in your local currency, in bitcoins, or in a mixture of 

both. You assume volatility risks of the currency in which you choose to be 

settled. If you choose to keep bitcoins, then you assume the volatility risk 

of the Bitcoin value.

Settlements in Local Currencies. Direct deposit to a bank account in a 

local currency is available to merchants located in certain countries. Please 

refer to Please refer to https://bitpay.com/bitcoindirectdeposit for a list of 

those countries. If you wish to receive direct deposit, you must provide us 

with valid bank account information and keep such information current. We 

will send a direct deposit to your bank account to clear out your accumulated balance. Minimum settlement amounts apply; please refer to https:/

/bitpay.com/bitcoindirectdeposit for information related to minimum settlement amounts and deposit frequency.

Your Bank Account. You must provide us with written notice at least 1 

business day prior to closing your bank account. If you wish to continue to 

receive direct deposits, you must provide us with information for a substitute bank account. You are solely liable for all fees and costs associated 

with your bank account and for all overdrafts. You authorize us to initiate 

electronic credits to your bank account at any time, as necessary to process 

your transactions. We will not be liable for any delays in receipt of funds 

or errors in bank account entries caused by third parties.

Settlements in bitcoins. Payments in bitcoins are sent to the Bitcoin address of your choice, at least once per calendar day. BitPay does not operate 

a Bitcoin wallet and funds must be moved to your wallet address.

Certain Deferrals. If we need to conduct an investigation or resolve any 

pending dispute related to your BitPay account, we may delay settlement 

or restrict access to your funds while we do so. Additionally, we may delay 

settlement or restrict access to your funds if required to do so by law, court 

order or at the request of law enforcement.

Account Statements. On demand, we will provide you with a statement 

detailing your account transaction and settlement history. Should you identify an error in the statement, you must notify us of such error within 30 

calendar days. 

Refunds and Adjustments. 

Refund Procedures. In the event that you wish to issue a refund to a 

purchaser, BitPay can handle this. You can decide to issue a partial refund 

or the full amount of the initial purchase.

You can also decide whether to issue the original amount of the invoice in 

your local currency or in the number of bitcoins paid. If you do not have 

enough funds in your BitPay account to cover the refund, BitPay may require you to deposit bitcoins into your BitPay account to cover the refund 

to the purchaser. Any required currency conversion during the refund procVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6621 S:\DOCS\87095.TXT SHERYL

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ess will be calculated at a spot rate determined by BitPay, following the 

guidelines found here: https://bitpay.com/bitcoin-exchange-rates.

Disclosure of Your Refund Policy. Merchants are required to have a 

clear refund policy for their customers. We recommend you refund the 

amount of the initial purchase in the currency in which the item was 

priced.

Purchaser Complaints. Purchasers filing complaints about a purchase 

will be forwarded to you for resolution. BitPay reserves the right to terminate accounts which receive excessive complaints. 

Account Termination. 

Your Right to Close Your Account. You may close your BitPay account 

at any time. You will still be obligated to us for any fees incurred before 

the closure and we will remit to you funds not yet paid to you and associated with preclosure sales. If your account balance is below our documented 

minimum transfer amount, you may be responsible for any transactions 

fees that may be incurred in the funds transfer.

Our Right to Close or Suspend Your Account. We may terminate these 

Terms and close your account, at our discretion, upon notice to you via 

email or phone communication. We may also suspend your access to the 

Services if we suspect that you have failed to comply with these Terms, 

pose an unacceptable fraud risk to us, or if you provide any false, incomplete, inaccurate or misleading information. We will not be liable to you for 

any losses that you incur in connection with our closure or suspension of 

your account.

Effect of Account Closure. If your BitPay account is closed, you agree: 

(a) to continue to be bound by these Terms, (b) to immediately stop using 

the Services, (c) that the license provided under these Terms shall end, (d) 

that we reserve the right (but have no obligation) to delete all of your information and account data stored on our servers, and (e) that we shall not 

be liable to you or any third party for termination of access to the Services 

or for deletion of your information or account data.

Indemnification. You agree to indemnify BitPay, its affiliated and related 

entities, and any of its officers, directors, employees and agents from and 

against any claims, costs, losses, liabilities, damages, expenses and judgments of any and every kind (including, without limitation, costs, expenses, 

and reasonable attorneys’ fees) arising out of, relating to, or incurred in 

connection with any claim, complaint, action, audit, investigation, inquiry, 

or other proceeding instituted by a person or entity that arises or relates 

to: (a) any actual or alleged breach of your representations, warranties, or 

obligations set forth in these Terms; (b) your wrongful or improper use of 

the Services; (c) the products or services sold by you through the Services, 

including but not limited to any claims for false advertising, product defects, personal injury, death or property damage; or (d) any other party’s 

access or use of the Services with your account information. 

No Warranties. WE PROVIDE THE SERVICES ON AN ‘‘AS IS’’ AND ‘‘AS 

AVAILABLE’’ BASIS, AND YOUR USE OF THE SERVICES IS AT YOUR OWN 

RISK. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, WE 

PROVIDE THE SERVICES WITHOUT WARRANTIES OF ANY KIND, WHETHER 

EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, WARRANTIES 

OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT). WITHOUT LIMITING THE FOREGOING, WE DO NOT WARRANT THAT THE SERVICES (AND OUR WEBSITE): WILL OPERATE ERROR–

FREE OR THAT DEFECTS OR ERRORS WILL BE CORRECTED; WILL MEET 

YOUR REQUIREMENTS OR WILL BE AVAILABLE, UNINTERRUPTED OR SECURE AT ANY PARTICULAR TIME OR LOCATION; ARE FREE FROM VIRUSES 

OR OTHER HARMFUL CONTENT. WE DO NOT ENDORESE, WARRANT, 

GURANTEE OR ASSUME RESPONSIBILITY FOR ANY PRODUCT OR SERVCE 

OFFERED OR ADVERTISED BY A THIRD PARTY THROUGH THE SERVICES 

OR THROUGH OUR WEBSITE, AND WE WILL NOT BE A PARTY TO NOR 

MONITOR ANY INTERACTIONS BETWEEN YOU AND THIRDPARTY PROVIDERS OF PRODUCTS OR SERVICES. 

Limitation of Liability. IN NO EVENT WILL WE BE LIABLE TO YOU OR 

ANY THIRD PARTY FOR ANY DIRECT, INDIRECT, SPECIAL, INCIDENTAL, 

CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES OR ANY LOSS, 

THEFT, DISAPPEARANCE, OR DAMAGES FOR LOST PROFITS, LOST REVENUES, LOST DATA OR OTHER INTANGIBLE LOSSES THAT RESULT FROM 


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THE USE OF, INABILITY TO USE, OR UNAVAILABILITY OF THE SERVICES, 

REGARDLESS OF THE FORM OF ACTION AND WHETHER OR NOT WE KNEW 

THAT SUCH DAMAGE MAY HAVE BEEN INCURRED. IN NO EVENT WILL WE 

BE LIABLE TO YOU OR ANY THIRD PARTY FOR ANY DAMAGE, LOSS OR INJURY RESULTING FROM HACKING, TAMPERING, VIRUS TRANSMISSION OR 

OTHER UNAUTHORIZED ACCESS OR USE OF THE SERVICES, YOUR BITPAY 

ACCOUNT, OR ANY INFORMATION CONTAINED THEREIN. IN NO EVENT 

WILL OUR LIABILITY FOR ANY DAMAGES ARISING IN CONNECTION WITH 

THE SERVICES EXCEED THE FEES EARNED BY US IN CONNECTION WITH 

YOUR USE OF THE SERVICES DURING THE 6 MONTH PERIOD IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO THE CLAIM FOR LIABILITY. THE FOREGOING LIMITATIONS OF LIABILITY SHALL APPLY TO 

THE FULLEST EXTENT PERMITTED BY LAW IN THE APPLICABLE JURISDICTION. 

Miscellaneous. 

Taxes. You are responsible for determining any and all taxes assessed, incurred, or required to be collected, paid, or withheld for any reason in connection your use of our software and services (Taxes). You also are solely 

responsible for collecting, withholding, reporting, and remitting correct 

Taxes to the appropriate tax authority. We are not obligated to, nor will we 

determine whether Taxes apply, or calculate, collect, report, or remit any 

Taxes to any tax authority arising from any transaction.

If in a given calendar year you receive (i) more than $20,000 in gross 

amount of payments and (ii) more than 200 payments, BitPay will report 

annually to the Internal Revenue Service, as required by law, your name, 

address, tax identification number (such as a social security number, or employer identification number), the total dollar amount of the payments you 

receive in a calendar year and the total dollar amount of the payments you 

receive for each month in a calendar year.

Privacy Policy. Please see our Privacy Policy for information regarding 

how we collect and use information. The Privacy Policy is part of these 

Terms, so please make sure that you read it.

Assignment. You may not transfer or assign these Terms, or any rights 

granted by these Terms. You agree and acknowledge that we may assign 

or transfer these Terms.

Severability. Should any provision of these Terms be determined to be invalid or unenforceable under any law, rule, or regulation, such determination will not affect the validity or enforceability of any other provision of 

this Agreement.

Waivers. Our failure to assert any right or provision in these Terms shall 

not constitute a waiver of such right or provision, and no waiver of any 

term shall be deemed a further or continuing waiver of such or other term.

Entire Agreement. These Terms, including the Privacy Policy referenced 

herein, represent the entire understanding between us and you with respect 

to the matters discussed. Headings are included for convenience only, and 

shall not be considered in interpreting these Terms.

Notices. You agree to accept communications from us in an electronic format, and agree that all terms, conditions, agreements, notices, disclosures 

or other communications that we provide to you electronically will be considered to be ‘‘in writing.’’

Governing Law; Arbitration. These Terms will be governed by and construed in accordance with the laws of the State of Georgia without reference to conflict of law or choice of law provisions, and applicable Federal 

law (including the Federal Arbitration Act). If a disagreement or dispute in 

any way involves the Services or these Terms and cannot be resolved between you and us with reasonable effort, the disagreement or dispute shall 

be resolved exclusively by final and binding administration by the American 

Arbitration Association (AAA), and will be conducted before a single arbiter 

pursuant to the applicable Rules and Procedures established by the AAA. 

You agree that the arbitration shall be held in the State of Georgia, or at 

any other location that is mutually agreed upon by you and us. You agree 

that the arbiter will apply the laws of the State of Georgia consistent with 

the Federal Arbitration Act, and will honor and agree to all applicable statutes of limitation. You agree that, unless prohibited by law, there shall be 

no authority for any claims to be arbitrated on a class or representative 


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basis, and arbitration will only decide a dispute between you and us. Arbitration proceedings must be initiated within 1 year after the disagreement 

or dispute arises. If any part of this Arbitration clause is later deemed invalid as a matter of law, then the remaining portions of this section shall 

remain in effect, except that in no case shall there be a class arbitration.

Amendment. We may update or change these Terms from time to time. 

Except as otherwise provided in these Terms, we will notify you of any 

changes by electronic mail or by posting a link to the amended Terms on 

our Web site. If you continue to use the Services after we provide notice 

of such changes, your continued use constitutes an acceptance of the 

amended Terms and an agreement to be bound by them. If you do not agree 

to the amended Terms, you must close your BitPay account and discontinue 

your use of the Services.

Force Majeure. Neither you nor we will be liable for delays in processing 

or other nonperformance caused by such events as fires, telecommunications, utility, or power failures, equipment failures, labor strife, riots, 

war, nonperformance of our vendors or suppliers, acts of God, or other 

causes over which the respective party has no reasonable control; provided 

that the party has procedures reasonably suited to avoid the effects of such 

acts.

Survival. The provisions of Sections 2.2, 3.3, 3.4, 4.2, 5, 6, 7, 8.1, 8.5, 8.7, 

8.8, 9 (including all subsections), 11, 12, 13, and 14.7 shall survive the termination of these Terms.

You agree that the person signing below has the authority to sign the Terms and 

to bind you, and you acknowledge and agree that you: (a) have read and understand 

the Terms; (b) intend to form a legally binding contract; and (c) will abide by all 

the Terms. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM 

JENNIFER SHASKY CALVERY 

Q.1. I want to start off with a question about the Silk Road. In the 

case of the Silk Road, it was the FBI that was able to target, and 

eventually bring down the major players in the case. I have been 

told that a new ‘‘Silk Road’’ emerged just a month after the former 

Silk Road was shut down. In fact, the site administrator of this 

new site who goes by the moniker, ‘‘Dread Pirate Roberts’’ wrote, 

‘‘It took the FBI two and a half years to do what they did . . . but 

4 weeks of temporary silence is all they got’’. 

Can you tell me what, if anything FinCen can and does provide 

to law enforcement in monitoring illicit actors such as those using 

the Silk Road? Is there coordination between FinCen, other financial regulators and law enforcement in these cases?

A.1. As mentioned in my written testimony, shortly after we issued 

our March 2013 guidance on virtual currency, FinCEN also issued 

a Networking Bulletin on crypto-currencies to provide a more 

granular explanation of this highly complex industry to law enforcement and assist in following the money as it funnels between 

virtual currency channels and the U.S. financial system. Among 

other things, the Bulletin addresses the role of traditional banks, 

money transmitters, and exchangers that come into play as intermediaries by enabling users to fund the purchase of virtual currencies and exchange virtual currencies for other types of currency. 

The Networking Bulletin has proved especially useful in the context of Silk Road because, as the Department of Justice has alleged, customers of Silk Road were required to pay a decentralized 

virtual currency to help both the operator of Silk Road and its sellers evade detection and launder hundreds of millions of dollars. Beyond the Networking Bulletin, FinCEN delivers its expertise to law 

enforcement on an ongoing basis by directly collaborating on criminal investigations, producing an ongoing series of analytical reports, and conducting training on the evolution in thevirtual currency sphere. 

Equally important to our ongoing efforts to deliver expertise to 

our law enforcement partners is FinCEN’s coordination with our 

regulatory counterparts to ensure they are kept apprised of the latest trends in virtual currencies and the potential vulnerabilities 

they pose to traditional financial institutions under their supervision. In addition, FinCEN plans to work with our law enforcement partners to produce a Webinar on FinCEN requirements for 

the virtual currency community.

Q.2. Is there or should there be a task force within the Administration or between Federal financial regulators to determine what 

risks are posed by virtual currencies and to contemplate possible 

coordination and collaboration of efforts?


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A.2. While not labeled ‘‘taskforces,’’ the Administration has established a number of high level virtual currency working groups that 

encompass the entire spectrum of regulatory and law enforcement 

agencies with technical expertise in virtual currency benefits, risks, 

threats, and vulnerabilities. The various working groups studying 

virtual currencies all approach the topic from different perspectives, which brings together a diversity of mandates, skill sets, and 

operational concerns on the subject matter. This approach fosters 

strong coordination and collaboration, and positively challenges 

opinions and informs the outcome of each working group’s findings 

and deliverables. To help foster this interagency synergy, FinCEN 

continues to maintain a strong nexus with its external partner 

agencies in sharing multi-faceted knowledge bases and observations.

Q.3. Who do you see as taking the lead role in the U.S. Government in monitoring and reporting illicit activities being done 

through virtual currencies?

A.3. Since the issue of virtual currency is an Administration priority, the Administration itself is already taking a leading role by 

providing the necessary guidance and direction to ensure all relevant departments and agencies are maximizing their abilities and 

resources to safeguard the U.S. financial system from illicit activities posed by this emerging payment method. Through this guidance, those agencies at the operational level, such as FinCEN, leverage their equities and expertise to disrupt illicit activities conducted through virtual currencies.

Q.4. Knowing that a new ‘‘Silk Road’’ emerged just a month after 

the former Silk Road was shut down is there a way to ultimately 

bring down a particular site such as the Silk Road—and to eliminate users from creating another?

A.4. Since the circumstances surrounding the Silk Road matter are 

primarily a law enforcement concern, I would have to defer to my 

colleagues at the Departments of Justice and Homeland Security 

for their perspectives on permanently shutting down such criminal 

enterprises. However, for our part, FinCEN uses its existing regulatory authorities to disrupt and dismantle virtual currency exchanges in relation to and in conjunction with criminal investigations. Such was the case in May 2013, when FinCEN named Liberty Reserve—a Web-based virtual currency provider specifically 

designed and frequently used to facilitate money laundering in 

cyber space—as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act. 

FinCEN also strives to stay current on how money is being 

laundered in the United States, including through new and emerging payment systems like virtual currency and what investigative 

resources may be available, so that we can share this expertise 

with our many law enforcement partners to positively contribute to 

ongoing and future investigations. We meet this obligation by 

drawing from the knowledge we have gained through our regulatory efforts, use of targeted financial measures, analysis of the financial intelligence we collect, independent study of virtual currency, outreach to industry, and collaboration with our many partners at all levels of Government.


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Q.5. There are some academics & policymakers that have suggested that the ‘‘Know your Customer’’ rule should apply to virtual 

currencies. What are your thoughts on this?

A.5. FinCEN’s Customer Identification Program (CIP) rule applies 

to specific types of financial services providers, including depository 

institutions and securities broker-dealers. Because these entities 

originate and maintain what can be long-term relationships with 

their customers, it is imperative that they know who their customers are and the types of transactions that are consistent with 

their profile. Moreover, we believe that this current CIP rule already acts as an important choke point for virtual currency providers, since as my written statement illustrates, banks are oftentimes either the originating or terminating point for virtual currency transactions. 

FinCEN works hard to strike the correct balance between smart 

regulation and industry burden, and at this time we believe mandating a CIP rule for virtual currency providers would be problematic, both from a privacy and cost/benefit perspective. It would require information collection and retention from every customer, 

even for one-time transactions, without generating the net tangible 

benefits realized from CIP obligations borne by other financial institutions.

Q.6. Just last week, the Federal Election Commission seriously 

considered letting candidates and committees accept bitcoins as inkind contributions. Do you think since this is a Federal agency, 

that it gives legitimacy to our Government recognizing this virtual 

currency—or at least bitcoins, as a valid currency?

A.6. Since FinCEN’s mission and mandate falls outside the scope 

of monetary policy, as a practical matter we do not offer opinions 

or perspectives on the validity or legitimacy of Bitcoin or any other 

virtual currency. However, as a store of value with funds transmission capabilities, FinCEN does focus on Bitcoin’s potential to be 

exploited for money laundering or terrorist financing, and our focus 

on these vulnerabilities will continue to grow in concert with virtual currency’s popularity, acceptance, and expanded use both domestically and internationally. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM 

PAUL SMOCER 

Q.1. Ms. Tunstall notes in her testimony that ‘‘virtual currencies 

could be attractive to large financial institutions if the fees associate with virtual currency transactions, including the exchange 

fees, are lower than the fees accompanying other payments (i.e.,

interchange fees). What do you anticipate would give mainstream 

financial service providers and other electronic payment systems 

the comfort to enter into the digital currency space?

A.1. At this time, we are not seeing financial institutions moving 

to digital currencies. This can mostly be attributed to the number 

of potential fraud and security risks due to the lack of oversight of 

the entities participating in this space. Once the currencies are 

able to prove their ability to operate in a safe environment with the 


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ability to mitigate their risks, we may see a move to virtual currencies.

Q.2. Do you believe that, as with mobile payments and other new 

technologies, companies will become more comfortable with digital 

currencies in other countries before working to adopt them in the 

United States?

A.2. Often the reason these new technologies are adopted in other 

countries is their lack of banking and consumer protection regulations. This allows companies to experiment more with new technologies. Given the mature regulatory environment in the United 

States, we are likely to see a delay in the adoption of these types 

of technologies. Though, by having this delay, we will be able to 

make sure technologies protect consumers and ensure the safety 

and soundness of our financial markets.

Q.3. Where do you think the financial services industry is in terms 

of its own understanding, appreciation or lack thereof for virtual 

currencies?

A.3. The financial services industry has watched this market grow 

since its inception, so I think there is an understanding of virtual 

currencies. We continue to identify ways to leverage the currency 

meet consumer needs while ensuring appropriate protections. This 

we are still trying to understand and will require much more time 

to make sure we get it right.

Q.4. Is there a working group, taskforce or public-private group 

that industry is participating with to develop best practices or 

standards? Do you think there is a willingness of industry to participate with Government on such taskforces to study and better 

understand how to promote the good within the industry and further hamper the bad?

A.4. I am not aware of any existing efforts to develop best practices 

or standards. The sector would be willing to participate with the 

Government as this area expands. We’d be happy to facilitate any 

discussion that may need to take place. 

RESPONSE TO WRITTEN QUESTION OF SENATOR KIRK FROM 

SARAH JANE HUGHES 

Q.1. In your testimony, you recommend that we retain the current 

division of regulation between the States and the Federal Government—with prudential regulation of the nondepository providers of 

new payments systems with the States and retaining the antimoney laundering, anti-terrorism and economic sanctions regulations with the Federal Government. How do States ensure that 

they are coordinating the oversight of these new developing industries with other States and also that the Federal Government is 

able to track the illicit activities in new technologies such as virtual currencies?

A.1. Thank you, Senator Kirk, for this interesting question. 

I remain persuaded that the current division of regulatory authority between the States and Federal Government that I mentioned in my testimony is the correct alignment of responsibilities 

for licensure, supervision and examination of nondepository proVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00078 Fmt 6604 Sfmt 6604 S:\DOCS\87095.TXT SHERYL

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viders, including providers of virtual currencies. Looking back at 

the record that FinCEN has had over the past decade in connection 

with the regulation of emerging payments systems for AML purposes, FinCEN has shown a careful development and articulation 

of standards for stored value devices and, more recently, for virtual 

currencies. I certainly think, and FinCEN Director Jennifer 

Calvery Shasky did not dispute, that FinCEN has all of the authority it needs to continue to monitor, supervise and issue guidance 

for virtual currencies consistent with its mandate from Congress. 

Although no representative from OFAC testified at the November 

19, 2013 hearing, based in part on my knowledge of and confidence 

in OFAC’s remarkable staff, I would think OFAC also has all of the 

authority it would need to handle the enforcement of economic 

sanctions against any virtual currency provider or exchange that 

violated U.S. economic sanctions law. 

The prudential regulation of nonbank providers of financial products and services has long been the province of the States. The 

States generally assign responsibility for prudential regulation and 

supervision of nonbank providers to the same agency or department that serves as the prudential regulator for State-chartered 

banks and credit unions, as well as nondepository providers. In Illinois, the Department of Financial & Professional Regulation has 

responsibilities for all of these providers. In Indiana, the Indiana 

Department of Financial Institutions performs these functions. 

And, in New York, the newly renamed Department of Financial 

Services, has these responsibilities, as well as prudential regulation 

and supervision of insurance companies. 

These departments and agencies have powers—not unlike those 

of Federal bank regulators—to examine the books and records of 

the providers they license and to impose corrective action measures 

on their licensees that are comparable to the powers exercised by 

Federal bank regulators. They also tend to have more ‘‘boots on the 

ground’’ and regular contact with nondepository providers than a 

Federal agency is likely to provide. This was made clear to me 

early in my career when I worked for the Federal Trade Commission, which had jurisdiction over 1.5 million nondepository providers of consumer credit products, including a far more decentralized consumer credit reporting industry than today, and about 20 

attorneys nationwide to handle their compliance with Federal consumer credit protection laws. 

The various State regulators work bilaterally and regionally with 

each other and have for many decades, including their regional 

compacts that presaged interstate banking and branching in the 

1980s. At the national level, the widely regarded Conference of 

State Bank Supervisors with which Members of the Committee are 

familiar provides a variety of services to State bank supervisors. 

Prominent among their more recent services is a multi-State licensing service, in response to the Secure and Fair Enforcement of 

Mortgage Licensing Act of 2008 (SAFE Act), that handles licensing 

of mortgage originators and additional types of nondepository providers at the request of the States. States have been joining this 

service in the past year, and not only for mortgage originators but 

also for other nondepository providers. With the type of successes 


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this program has had, I am firmly of the view that Congress should 

not fix what is not broken. 

Moreover, and thinking specifically about virtual currencies, 

without a widespread adoption of a payment system—and virtual 

currencies are not yet widely adopted—it is too early to add regulatory requirements for them. A more measured approach, such as 

FinCEN has taken with respect to its guidance to virtual currency 

participants in 2013 and 2014, has the benefit of addressing emerging areas of concern in a new payment mechanism and allowing 

suitable innovations to occur. The current approach—of registration with FinCEN and licensure from the States—is more than 

adequate regulation of the emerging field of virtual currencies at 

this time in my opinion. FinCEN’s work is complemented by State 

‘‘money transmitter’’ licensing and prudential regulation for providers of virtual currencies, mobile payments, and PayPal, just to 

name a few examples with which readers of the hearing’s proceedings are likely to be familiar. 

Several reporters have pressed me for ideas about what types of 

‘‘consumer protections’’ Congress should adopt for virtual currencies. I have told each what I said in my prepared testimony: 

that it is early days for regulating virtual currencies for consumer 

protection purposes beyond the FinCEN and State-based regulations already in place. I would expand my prepared testimony to 

highlight that ‘‘early days’’ occasionally last a long time. For example, travelers’ checks were first issued about 100 years ago. Only 

in the 1980s did the States begin to include them under State payments law, their versions of Article 3 of the Uniform Commercial 

Code. Similarly, ‘‘wire transfers’’ closely followed the advent of the 

telegraph but were not governed by law—as opposed to bilateral 

contracts or system rules until the 1980s. 

Additionally, so far, we have few examples of problems with 

bitcoins transactions. This was truer 6 months ago than it is 

today—following announcement of exchange closures or disappearances, or of freezes on withdrawals for customers by exchange operators. 

In the United States, and also elsewhere in the world, governments have decades of examples of ways to regulate payments, including electronic payments. So, I would like to see us use existing 

laws and frameworks, including system rules, bilateral contracts, 

and State law prudential regulation as well as the steps FinCEN 

has already taken before we write new rules for currencies that, 

like those of the mid-1990s, might sound great today and be gone 

tomorrow. 

Last, if the United States were to move beyond our current mix 

of registration with FinCEN and compliance with licensure and 

prudential regulation by the States, and whatever bits of ‘‘law’’ in 

the United States cover the type of problem being seen, we may 

have to recognize that a domestic solution may not suffice in an 

arena that includes significant players abroad. With more than 50 

percent of the bitcoins held in exchanges whose ‘‘locations’’ are 

abroad, domestic consumer protections could prove too difficult for 

consumers to enforce, but their expectations of enforcement help 

would have been raised. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM 

ANTHONY GALLIPPI 

Q.1. Is BitPay synonymous with a Paypal but for Virtual Currency?

A.1. BitPay is strictly a merchant service, so a better analogy 

would be the ‘‘First Data’’ or the ‘‘Authorize.net’’ of virtual currency. BitPay does not have any consumer facing products. The 

company only clears and settles payments for merchants who want 

to accept virtual currency as a payment option.

Q.2. Is BitPay registered as a Money Service Business (MSB) with 

FinCen?

A.2. FinCEN’s guidance that ‘‘virtual currency’’ is a type of money 

and should be treated like ‘‘real currency’’ is a step in the right direction. We have always worked under the impression that virtual 

currency is money, so we are glad that FinCEN now agrees with 

that position. 

The heart of FinCEN’s guidance recommends that activities 

which are classified as Money Services Businesses (MSB) or Money 

Transmission Businesses (MTB) should be applied equally to both 

real currency and virtual currency. Therefore activities such as remittance and check cashing would be regulated whether the type 

of money is real or virtual. 

We should pay close attention to footnote #10 of the March 2013 

FinCEN guidance, which states:

10 FinCEN’s regulations provide that whether a person is 

a money transmitter is a matter of facts and circumstances. The regulations identify six circumstances 

under which a person is not a money transmitter, despite 

accepting and transmitting currency, funds, or value that 

substitutes for currency. 31 CFR § 1010.100(ff)(5)(ii)(A)–

(F).

Looking up the six exemption circumstances in 31 CFR § 

1010.100(ff)(5) will return the following:

(ii) Facts and circumstances; Limitations. Whether a person is a 

money transmitter as described in this section is a matter of 

facts and circumstances. The term ‘‘money transmitter’’ shall 

not include a person that only:

(A) Provides the delivery, communication, or network access 

services used by a money transmitter to support money 

transmission services;

(B) Acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service 

through a clearance andsettlement system by agreement with the creditor or seller;

(C) Operates a clearance and settlement system or otherwise 

acts as an intermediary solely between BSA regulated institutions. This includes but is not limited to the Fedwire 

system, electronic funds transfer networks, certain registered clearing agencies regulated by the Securities and 

Exchange Commission (‘‘SEC’’), and derivatives clearing 


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organizations, or other clearinghouse arrangements established by a financial agency or institution;

(D) Physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such 

business, such as an armored car, from one person to the 

same person at another location or to an account belonging 

to the same person at a financial institution, provided that 

the person engaged in physical transportation has no more 

than a custodial interest in the currency, other monetary 

instruments, other commercial paper, or other value at 

any point during the transportation;

(E) Provides prepaid access; or

(F) Accepts and transmits funds only integral to the 

sale of goods or the provision of services, other than 

money transmission services, by the person who is 

accepting and transmitting the funds.

We have highlighted exemptions (B) and (F) which describe the 

activities performed by BitPay. The IRS has defined rules for 

classifying Payment Processors, or Payment Settlement Entities 

(PSE) in 2008 with the Internal Revenue Code 6050W. This ruling 

and others clearly state that Payment Processors and Payment Settlement Entities are not Money Transmitters. 

BitPay has a contractual agreement with our sellers for transaction processing, clearance, and settlement of funds that arrive for 

a given merchant account. BitPay does not have any contractual 

agreement with any sender of funds, and does not engage in any 

activities that would be considered Money Transmission activities.

Q.3. You are obviously on the forefront of these technologies—do 

you think that it is the anonymity or the privacy that is so attractive to virtual currencies? Would it not make more sense to ensure 

privacy (account information, etc.) but not grant total anonymity? 

Where is the industry heading on the issue of anonymity?

A.3. Bitcoin transactions and the Bitcoin network operate differently than traditional banking products. With a traditional 

banking product, the user expects a level of privacy where their 

bank is not broadcasting all of the users transactions to the outside 

world. With Bitcoin, every transaction is broadcast to the whole 

world, and remains public record on the Bitcoin blockchain indefinitely. The public blockchain is the cornerstone of Bitcoin. 

Because every transaction is public record, users of Bitcoin must 

maintain their privacy. This is important for both individuals and 

businesses. For example, if a company is paying one of their suppliers with bitcoin, the company will not want their competitor to 

be able to reverse engineer their funds flows. Another example is 

an employee that receives payment from his employer in bitcoin 

has an expected level of privacy where his employer cannot see 

where the money is spent. 

Given all of the benefits of bitcoin and virtual currencies, we 

think that the anonymity is not the main factor driving its adoption (because it is not really anonymous). All of our businesses clients prefer bitcoin because it is a far lower risk and lower cost form 


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of payment, compared to credit cards and the other options they 

have today.

Q.4. Ben Lawsky, the Superintendent of the NY Department of Financial Services was recently interviewed talking about the hearing that his department planned to hold on reviewing interconnection between money transmission regulations and virtual currencies and possibly considering a ‘‘BitLicense’’ specific to virtual 

currency transactions and activities. While he said that he did not 

think that this license and regulation would kill the industry he 

also noted that it was not his intent. Do you think that this is 

something that would potentially kill or severely impede this industry?

A.4. Money Transmission activities are currently regulated by the 

States. I think the existing laws are adequate. If a company is 

doing Money Transmission or Money Service activities, they need 

a license. If they are not doing those activities, they do not. The 

key criteria to determine whether an activity is considered money 

Transmission, as outlined by FinCEN and the States, covers two 

requirements: 1) is the consumer at risk of loss? and 2) is the product coming out the other end a form of money or currency? In addition, I feel that any type of license that would be discriminatory toward one type of business would probably impede the industry.

Q.5. While Tor was created by the U.S. Government and has been 

used in the past for good purposes—such as anonymizing financing 

of revolutions against tyrannical oppressive regimes, do you believe 

that it (Tor) is still necessary?

A.5. We believe Tor has a right to exist and people have the choice 

to use that product or use a different Web browser.

Q.6. Just a little over a week ago, there was a report from an Aus- tralian man that he had 4,100 bitcoins, worth more than $1.1 million, stolen from him. This alleged theft is one of the largest since 

Bitcoin was created 4 years ago. I know that Bitcoin developers 

and others have worked to put into place safe guards and have 

worked to prevent incidents such as this—but with this recent 

event can you tell us how progress on that front is going?

A.6. The security around Bitcoin is extremely important. New features such as multi-signature transactions will greatly reduce the 

risk of thefts. With a multi-signature transaction, funds are locked 

with a minimum of 3 keys (could be more) and a minimum of 2 

keys are required to move the funds. If a hacker were to gain access to one private key, they could not steal the funds. We believe 

the technical solution of multi-signature will solve this problem, 

and I expect its use to be more widespread in 2014, reducing thefts.

Q.7. Is there a working group, taskforce or public-private group 

that industry is participating with to develop best practices or 

standards? Do you think that there is a willingness of industry to 

participate with government on such taskforces to study and better 

understand how to promote the good within the industry and further impede the bad actors?

A.7. We share the Committee’s goals to develop best practices and 

prevent the bad actors from using our service. Many lessons and 

practices from the banking and credit card industry apply to virVerDate 0ct 09 2002 17:04 Jul 17, 2014 Jkt 000000 PO 00000 Frm 00083 Fmt 6604 Sfmt 6604 S:\DOCS\87095.TXT SHERYL

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tual currencies, and those practices are being adopted. There are 

several groups that are working to bring these experiences into the 

startup companies: The Bitcoin Foundation and DATA are two that 

our company is involved with. I believe the many years of experience that our banks and processors have in compliance and 

antimoney laundering policies will greatly assist the startup companies. 


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