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S. Hrg. 113–516 

BEYOND SILK ROAD: POTENTIAL RISKS, THREATS, 

AND PROMISES OF VIRTUAL CURRENCIES 

HEARING 

BEFORE THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 18, 2013 

Available via the World Wide Web: http://www.fdsys.gov/ 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 
(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

THOMAS R. CARPER, Delaware Chairman 

CARL LEVIN, Michigan 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TAMMY BALDWIN, Wisconsin 

HEIDI HEITKAMP, North Dakota 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

MICHAEL B. ENZI, Wyoming 

KELLY AYOTTE, New Hampshire 

RICHARD J. KESSLER, Staff Director 

JOHN P. KILVINGTON, Deputy Staff Director 

JOHN G. COLLINS, Professional Staff Member 

MICHELLE C. TAYLOR, Federal Bureau of Investigations Detailee 

KEITH B. ASHDOWN, Minority Staff Director 

CHRISTOPHER J. BARKLEY, Minority Deputy Staff Director 

WILLIAM H.W. MCKENNA, Minority Investigative Counsel 

LAURA W. KILBRIDE, Chief Clerk 

LAUREN M. CORCORAN, Hearing Clerk 
(III) 

C O N T E N T S 

Opening statements: Page 

Senator Carper ................................................................................................. 1 

Prepared statements: 

Senator Carper ................................................................................................. 45 

WITNESSES 

MONDAY, NOVEMBER 18, 2013 

Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, 

U.S. Department of the Treasury ....................................................................... 4 

Mythili Raman, Acting Assistant Attorney General, Criminal Division, U.S. 

Department of Justice ......................................................................................... 7 

Edward W. Lowery, III, Special Agent in Charge, Criminal Investigative 

Division, U.S. Secret Service, U.S. Department of Homeland Security .......... 9 

Ernie Allen, President and Chief Executive Officer, The International Centre 

for Missing and Exploited Children .................................................................... 27 

Patrick Murck, General Counsel, The Bitcoin Foundation, Inc. .......................... 29 

Jeremy Allaire, Chairman and Chief Executive Officer, Circle Internet Financial, Inc. ................................................................................................................. 31 

Jerry Brito, Senior Research Fellow, The Mercatus Center, George Mason 

University ............................................................................................................. 33 

ALPHABETICAL LIST OF WITNESSES

Allaire, Jeremy: 

Testimony .......................................................................................................... 31 

Prepared statement .......................................................................................... 114 

Allen, Ernie: 

Testimony .......................................................................................................... 27 

Prepared statement .......................................................................................... 78 

Brito, Jerry: 

Testimony .......................................................................................................... 33 

Prepared statement .......................................................................................... 120 

Lowery, Edward W., III: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 71 

Murck, Patrick: 

Testimony .......................................................................................................... 29 

Prepared statement with attachment ............................................................. 90 

Raman, Mythili: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 63 

Shasky Calvery, Jennifer: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 48 

APPENDIX 

Statement submitted for the Record by U.S. Immigration and Customs Enforcement .............................................................................................................. 146 

Statement submitted for the Record by Sarah Meiklejohn, Ph.D. Candidate, 

University of California, San Diego .................................................................... 156 

Responses to post-hearing questions for the Record: 

Ms. Shasky Calvery .......................................................................................... 160 

Ms. Raman ........................................................................................................ 165 
Page

IV 

Responses to post-hearing questions for the Record—Continued 

Mr. Lowery ........................................................................................................ 171 

Mr. Allen ........................................................................................................... 176 

Mr. Murck ......................................................................................................... 184 

Mr. Allaire ......................................................................................................... 191 

Mr. Brito ............................................................................................................ 195 
(1) 

BEYOND SILK ROAD: 

POTENTIAL RISKS, THREATS, AND PROMISES 

OF VIRTUAL CURRENCIES 

MONDAY, NOVEMBER 18, 2013 

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 3:02 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Thomas R. Carper, 

Chairman of the Committee, presiding. 

Present: Senator Carper. 

OPENING STATEMENT OF CHAIRMAN CARPER 

Chairman CARPER. Well, good afternoon, everyone. Thank you for 

joining us. We especially want to thank our witnesses, panel number one and, somewhere out in the audience, panel number two. 

Mr. Lowery just lost his name plate there. Somebody just go 

around and pick it up please and put it where it belongs. That way 

we will know who you are. 

Senator Bill Roth, whom I succeeded here in the U.S. Senate, 

used to say, many years ago—his advice was, ‘‘Wear a big button 

when you are campaigning so that you will remember your name 

and so will other people.’’ So we want to make sure people remember your name. 

Over the past several months, this Committee has engaged in an 

investigation into the potential implications of virtual currencies. 

During the course of this inquiry, we have examined the issues and 

potential risks and threats that virtual currencies pose, as well as 

some of the potential promises that some believe they can bring. 

In addition, we have explored with several departments and 

agencies throughout our Federal Government how they are approaching virtual currencies as an emerging technology. This has 

included looking at how they are coordinating together to develop 

a ‘‘whole of government’’ approach that is consistent and informed. 

Virtual currencies, perhaps most notably Bitcoin, have captured 

the imagination of some, struck fear among others, and confused 

the heck out of the rest of us, including me. Indeed, based on conversations that my staff and I have had with dozens—maybe 

more—of individuals both inside and outside of government, it is 

clear that the knowledge and expectation gaps are wide. Fundamental questions remain about what a virtual currency actually is, 

how it should be treated, and what the future holds. 
2 

Virtual currency can best be described as digital cash. It is generated by computers, lives on the Internet, and can be used to purchase real and digital goods across the world. 

Some proponents believe that digital currencies can prove valuable to those in developing countries without access to stable financial systems. Others believe it could prove to be a next generation 

payment system for retailers both online and in the real world. 

At the same time, however, virtual currencies can be an effective 

tool for those looking to launder money, for those looking to traffic 

illegal drugs, for those looking to exploit children around the world, 

and the list goes on. 

While virtual currencies have seen increased attention from regulators, law enforcement, investors, and entrepreneurs in recent 

months, there are still many unanswered questions and unresolved 

issues. 

This is not the first time that advances in technology have posed 

challenging questions, challenging issues for policymakers and for 

society as a whole. As we know, technology is dynamic and changes 

quickly. Concepts like e-mail and even the Internet itself were once 

alien and difficult to understand and navigate. Now, most of us can 

read and respond to e-mail on a device we keep in a purse or coat 

pocket and search the Web on multiple platforms. 

I like to use the example that when I first showed up for duty 

here in the U.S. Senate in 2001, for every e-mail that came in to 

us from constituents from Delaware and across the country—for 

every e-mail we received probably 10 to 15 letters. I asked my staff 

a couple of months ago to tell me if that ratio had changed, and 

now for every 12 or 13 e-mails we get, we get 1 letter. And that 

is probably a pretty good metaphor for the situation. 

I will be the first to admit that, like most Americans, I am no 

technical expert in virtual currencies. I think all of you who are 

gathered in this room are. We will see. But hopefully some of our 

panelists are those experts, and we hope to learn a lot from you 

today. What I do know is that a number of smart people both inside and outside of government view this as a major emerging issue 

that is deserving of our attention, and that includes this Committee’s attention. 

The ability to send and receive money over the Internet, nearly 

anonymously, without a third party, has a lot of wide-ranging implications. Our government needs to pay attention to this technology and to understand and, where appropriate, address these 

implications. 

This was made all the more clear last month when Federal law 

enforcement took down and seized an online marketplace called the 

‘‘Silk Road’’ on which many illegal products and services were 

bought and sold via Bitcoin. The most popular products for sale 

were illegal drugs and forged documents, such as identifications 

(IDs) and passports. Other services were also for sale, including 

hacking services. We are told that approximately $1.2 billion in 

transactions were made through the Silk Road. 

This site lived on what is often called the ‘‘Dark Web,’’ also 

known as the ‘‘Deep Web.’’ The Dark Web consists of web pages 

and data that are only available via special software that keeps 

users anonymous. Many sites and data on the Dark Web have been 
3 

deliberately built to be untraceable in order to protect the anonymity of the user, and Silk Road was one of those sites. 

My understanding is that individuals could navigate to Silk Road 

anonymously and use Bitcoin, which can be sent to someone nearly 

anonymously, to make purchases. 

The anonymity of the marketplace and near anonymity of the 

currency made it nearly impossible for law enforcement to track 

and, therefore, made it an attractive place for criminal activity. 

In fact, in the course of our investigation, the Department of 

Homeland Security (DHS) informed us that the suspect who allegedly sent ricin to President Obama in April of this year was also 

a vendor on Silk Road. 

Law enforcement, including the Federal Bureau of Investigation 

(FBI), Immigration and Customs Enforcement (ICE), and the Secret Service, should be applauded for their work in taking down a 

major international criminal enterprise. 

But while Silk Road was perhaps the most well known, it is not 

the only marketplace where illicit goods are bought and sold 

through Bitcoin transactions. Today a number of similar enterprises that accept Bitcoins are still in business, selling weapons, 

child pornography, and even murder-for-hire services. 

While today I suspect we will talk a lot about the well-known virtual currency Bitcoin, there are numerous other virtual currencies 

operating on the Internet today, each with its own set of specific 

features. 

That said, whether it is Bitcoin or any of the other virtual currencies, the Federal Government and society as a whole need to 

come together to figure out how to effectively deal with it. 

Whether or not digital currencies prove to be a boom or a bust, 

I think it is clear that some folks just want a chance to try and 

play by the rules. That is difficult to do if the rules or proper authorities are not clear or if the future is uncertain. It is also difficult if a large number of bad apples are allowed to spoil the 

bunch. 

With that, normally I would turn to my right, and I would say, 

‘‘Dr. Coburn, you are recognized for whatever comments you would 

like to offer.’’ I believe he is traveling back from Oklahoma. I hope 

he will be able to join us at some point during this hearing, and 

that others of our colleagues will, too. We start voting at 5:30, and 

what usually happens on Monday afternoons is Senators are coming in from all over the country, and they will drift in and out of 

hearings like this one. And my hope is that before we are done, a 

number of them will be able to join us. 

I want to take now just a moment, if I can, to welcome and introduce just very briefly our first panel of distinguished witnesses. 

On our first panel, our first witness, in fact, the lead-off hitter, 

is Jennifer Shasky Calvery, Director of the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. As Director of FinCEN, Ms. Shasky Calvery—do you go by 

both names? 

Ms. SHASKY CALVERY. Typically just ‘‘Shasky.’’ 

Chairman CARPER. OK. All right. As Director of FinCEN, Ms. 

Shasky oversees the protection of U.S. financial systems from 

money laundering and other forms of illicit financial activity. Prior 
4 

1The prepared statement of Ms. Shasky appears in the Appendix on page 48. 

to joining Treasury, Director Shasky, served as the Chief of the 

Asset Forfeiture and Money Laundering Section at the Department 

of Justice (DOJ). 

Our second witness has a name I have never heard before, and 

her first name is Mythili, right? Sort of rhymes with ‘‘mightily,’’ 

right? Mythili Raman. Do I have that right? Good. Has your name 

ever been mispronounced? 

Ms. RAMAN. Many times. 

Chairman CARPER. Today. [Laughter.] 

Ms. RAMAN. Not today. 

Chairman CARPER. Oh, good. We will try to keep it that way. 

Ms. Raman is Acting Assistant Attorney General for the Department of Justice Criminal Division. As head of the Criminal Division, Ms. Raman oversees nearly 600 attorneys who prosecute Federal criminal cases across our country. Prior to joining the Criminal 

Division, Ms. Raman served for nearly a decade as an Assistant 

U.S. Attorney for the District of Columbia, our neighbor. 

Our final witness on this panel is Edward Lowery. Mr. Lowery 

is a Special Agent in Charge of the Criminal Investigative Division 

at the Secret Service. Mr. Lowery began his career with the Secret 

Service in 1992 and has been in his current position since February 

2012. In this position, Mr. Lowery directs and coordinates all investigative activities of the agency and the daily operation of the Secret Service investigative offices located throughout the world. Previously Mr. Lowery established and ran the Secret Service’s Cyber 

Protective Initiative and coordinated operations of the Cyber Investigations Branch and the Cyber Intelligence Section. 

Again, we want to thank all of you for your service. We thank 

you for your preparation for today, for your testimony, and for your 

willingness to respond to the questions that will be asked of you 

here and some that will be asked in writing subsequent to this 

hearing. 

With that, Director Shasky, you are recognized. And I do not 

know how long they told you you had to give your testimony. What 

did we say? Seven minutes, but you can go a little longer than that. 

If you go way beyond that, we will have to draw it to a close. But 

you are recognized. Just know that for you and the other witnesses, 

your entire statement will be made a part of the record. Please proceed. 

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

Ms. SHASKY. Thank you. Good afternoon, Chairman Carper. 

Chairman CARPER. Good afternoon. 

Ms. SHASKY. As you mentioned, I am Jennifer Shasky Calvery, 

the Director of the Financial Crimes Enforcement Network, and I 

am pleased to be here today to discuss the important regulatory, 

enforcement, and analytical work we are doing at FinCEN to prevent illicit actors from exploiting the U.S. financial system as technological advances such as virtual currency create new ways to 

move money. 
5 

FinCEN’s mission is to safeguard the financial system from illicit 

use, combat money laundering, and promote national security 

through the collection, analysis, and dissemination of financial intelligence and the strategic use of financial authorities. We work to 

achieve this mission by administering the Bank Secrecy Act (BSA), 

this country’s primary anti-money laundering/counterterrorist financing (AML/CFT) regulatory regime; by sharing the financial intelligence we collect, as well as our analysis and expertise, with 

law enforcement and regulatory partners; and, by building global 

cooperation amongst financial intelligence units throughout the 

world. 

Recognizing the emergence of new payment methods, the potential for abuse by illicit actors, and understanding that AML protections must keep pace with these advancements in technology, 

FinCEN began working with our partners several years ago to 

study this issue. Here is what we learned. 

Illicit actors might decide to use a virtual currency to store and 

transfer value for many of the same reasons as legitimate users, 

but also for some more nefarious ones. Specifically an illicit actor 

may choose to use virtual currency because it enables the user to 

remain relatively anonymous, is easy to navigate, may have low 

fees, is accessible across the globe with a simple Internet connection, can be used to both store and make international transfers of 

value, does not typically have transaction limits, is generally secure, features irrevocable transactions, and depending on the system may have been created with the intent to facilitate money 

laundering; and, finally provides a loophole from AML/CFT regulatory safeguards in most countries around the world. 

Indeed, the idea that illicit actors might exploit the 

vulnerabilities of virtual currency to launder money is not merely 

theoretical. Liberty Reserve—a virtual currency administrator—engaged in a $6 billion money-laundering operation facilitating credit 

card fraud, identity theft, investment fraud, computer hacking, 

narcotics trafficking, and child pornography. And just recently, the 

Department of Justice alleged that customers of Silk Road, the 

largest illegal drug and contraband marketplace on the Internet, 

were required to pay in Bitcoins to enable both the operator of Silk 

Road and its sellers to evade detection and launder hundreds of 

millions of dollars. 

That being said, it is also important to put virtual currency in 

perspective. It has been publicly reported that Bitcoin processed 

transactions worth approximately $8 billion over the last year; 

whereas, the best estimate for the amount of criminal proceeds 

available for laundering throughout the financial system, at least 

in 2009, was $1.6 trillion. 

By way of comparison, in 2012 PayPal processed $145 billion in 

online payments, Western Union made remittances totaling $81 

billion, and Bank of America made $245 trillion in wire transfers. 

Thus, while of growing concern, to date virtual currencies have yet 

to overtake more traditional methods to move funds, whether for 

legitimate or criminal purposes. 

Nonetheless, to address growing concerns, in July 2011, after a 

public comment period designed to receive feedback from industry, 

FinCEN released two regulations which update several definitions 
6 

and provide the needed flexibility to accommodate innovation in 

the payment system space, including virtual currencies, under our 

pre-existing regulatory framework. Then this last March, as a followup to the regulations, FinCEN issued additional guidance to 

further clarify the compliance obligations for those virtual currency 

actors covered by our regulations. 

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

controls in place to harden themselves as targets, and provide certain reports to FinCEN on suspicious and other activity. It is in the 

best interest of virtual currency providers to comply with these regulations for a number of reasons. 

First is the idea of corporate responsibility. Legitimate financial 

institutions do not go into business with the aim of laundering 

money on behalf of criminals. Any financial institution could be exploited for money-laundering purposes, though. What is important 

is for institutions to put controls in place to deal with those moneylaundering threats and to meet their AML reporting obligations. 

At the same time, being a good corporate citizen and complying 

with regulatory responsibilities is good for a company’s bottom line. 

Every financial institution needs to be concerned about its reputation and show that it is operating with transparency and integrity 

within the bounds of the law. Legitimate customers will be drawn 

to a virtual currency or administrator or exchanger where they 

know their money is safe and where they know the company has 

a reputation for integrity. And banks will want to provide services 

to administrators or exchangers that show not only great innovation, but also great integrity and transparency. 

The decision to bring virtual currency within the scope of our 

regulatory framework should be viewed as a positive development 

for this sector. It recognizes the innovation virtual currencies provide, and the benefits they might offer society. Several new payment methods in the financial sector have proven their capacity to 

empower customers and expand access to financial services. We 

want such advances to continue. However, those institutions that 

choose to act outside of the law will be held accountable. FinCEN 

will do everything in its regulatory power to stop abuses of the U.S. 

financial system. 

We have proven our willingness to do just that by using our targeted financial measures under Section 311 of the Uniting and 

Strengthening America by Providing Appropriate Tools Required to 

Intercept and Obstruct Terrorism (USA PATRIOT Act) to name 

Liberty Reserve as a primary money-laundering concern and entering into rulemaking to terminate its access to the U.S. financial 

system. We stand ready to take additional regulatory actions as 

necessary to stop other abuses. 

As the financial intelligence unit for the United States, FinCEN 

must stay current on how money is being laundered in the United 

States so that we can share this expertise with our many law enforcement, regulatory, industry, and foreign partners and effectively serve as the cornerstone of this country’s AML/CFT regime. 

We are meeting this obligation in the virtual currency space as we 

continue to deliver cutting-edge analytical products to inform the 

actions of our many partners. We are committed to remaining at 

the forefront of developments in the days and years to come. 
7 

1The prepared statement of Ms. Raman appears in the Appendix on page 63. 

The administration has made appropriate oversight of the virtual 

currency industry a priority, and FinCEN is very encouraged by 

the progress we have made thus far. 

Thank you for inviting me to testify before you today. I would be 

happy to answer any questions that you may have. 

Chairman CARPER. Thank you so much for being here, for the 

meeting you had with our staff and me last week, and for your testimony. Thank you. 

Ms. Raman, please proceed. 

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

JUSTICE 

Ms. RAMAN. Good afternoon, Chairman Carper, and thank you 

for the opportunity to appear before the Committee today to discuss the Department of Justice’s work regarding virtual currencies. 

At the Justice Department, we look at virtual currencies through 

the lens of criminal law enforcement. We recognize that virtual 

currency systems can be a legal means of exchange. But we also 

recognize that criminals will always seek to take advantage of new 

technologies to commit, further, or hide their crimes. 

Our responsibility as prosecutors is to ensure that we continue 

to enforce the law, even in new technological settings, and to prevent criminals from using those technologies to create zones of impunity. 

As I will describe in my testimony today, the Department of Justice has been aware of the threat posed by the criminal use of virtual currencies for several years. We have already brought several 

important prosecutions involving virtual currencies, and we intend 

to remain vigilant in ensuring that any criminal use of virtual currency systems is aggressively investigated and prosecuted. 

As an initial matter, I should note that virtual currency systems, 

so long as they comply with applicable anti-money laundering and 

money transmission laws and regulations, are not inherently illegal, and they can be appealing to consumers because they can provide cheap, efficient, and convenient means to transfer currency. 

Many of those same features, however, also make virtual currencies appealing to criminals. We have seen increasing use of such 

currencies by drug dealers, traffickers of child pornography, and 

perpetrators of large-scale fraud schemes. Most significantly, we 

have seen evidence that criminals are drawn to virtual currencies 

for two main reasons: first, their perception that virtual currencies 

offer greater anonymity than traditional financial services; and, 

second, the irreversibility of many virtual currency transactions. 

These features can significantly complicate our ability to utilize one 

of the most basic techniques we use in criminal investigations: following the money. 

The Justice Department has long recognized the potential for the 

criminal misuse of virtual currency and launched our first major 

prosecution of an illicit virtual currency service in 2007, when we 

indicted e-Gold and its three principal owners on charges relating 
8 

to money laundering and operating an unlicensed money transmitting business. 

As that indictment alleged, the only information a customer had 

to provide to set up an e-Gold account was a working e-mail address. As a result, e-Gold became a popular payment method for 

sellers of child pornography, operators of investment scams, and 

perpetrators of credit card and identity fraud. At its peak, e-Gold 

reportedly moved over $6 million a day. E-Gold and its owners 

were convicted in 2008. 

Since that time, we have continued to ensure that we aggressively address any criminal misuse of virtual currency systems, especially as those systems evolve and develop. When virtual currency systems fail to live up to their obligations under existing law, 

we take action. Earlier this year, for example, we unsealed charges 

against Liberty Reserve, an offshore virtual currency business, for 

allegedly running a $6 billion money laundering operation, the Justice Department’s largest ever money laundering prosecution. 

As alleged in the Department’s filings, Liberty Reserve became 

a system of choice for cyber criminals and was used in a wide array 

of illegal activity, including credit card fraud, identity theft, investment fraud, computer hacking, and the trade of child pornography. 

As a result of the Department’s actions and the coordination actions taken by law enforcement agencies in 17 countries around the 

world, Liberty Reserve was effectively put out of business, seven 

defendants were charged, and numerous assets were seized. One of 

the defendants pleaded guilty just 2 weeks ago. 

More recently, the Department announced significant steps in its 

investigation of Silk Road, alleged to be one of the largest online 

marketplaces for illegal goods and services, including large quantities of illicit drugs. Allegedly operated by a U.S. citizen living in 

California at the time of his arrest, Silk Road accepted Bitcoins exclusively as a payment mechanism on its site. Charges against Silk 

Road and its administrator were unsealed just last month in two 

different districts. The charges against Silk Road’s operator included drug distribution, attempted witness murder, and attempted 

murder for hire. As part of that takedown of Silk Road, the Department seized over 170,000 Bitcoins valued as of this past Friday at 

over $70 million. 

The Department recognizes that in order to stay abreast of the 

rapidly changing technological environment, we must coordinate 

our enforcement strategy across the Federal Government. For that 

reason, we are working closely with the Virtual Currency Emerging 

Threats Working Group, a variety of law enforcement agencies both 

here and abroad, and, of course, FinCEN. 

From the view of law enforcement, FinCEN’s recent guidance applying anti-money laundering and Know Your Customer requirements to virtual currency exchanges was an important step in safeguarding our collective ability both to deter criminal activity and 

to investigate it successfully when it occurs. 

While there is much more to do, the Department is encouraged 

by virtual currency services that are attempting to comply with 

U.S. law. We will continue to reach out to those services and provide them with training and other opportunities for real discussion 
9 

1The prepared statement of Mr. Lowery appears in the Appendix on page 71. 

about emerging threats, as we have long done with other financial 

services industry participants. 

As the virtual currency industry grows, we will continue to explore how new strategies or legislation can play a role in ensuring 

that virtual currency systems do not become a haven for criminal 

activity. We look forward to working with Congress to ensure that 

law enforcement continues to have the tools necessary to enforce 

the law and protect the public. 

In the meantime, we will continue to aggressively use our existing authorities to deal with those virtual currency systems that do 

not comply with the law and to aggressively prosecute criminals 

who use those systems as part of their criminal schemes. And, of 

course, we will continue to innovate in how we investigate crime 

to deal with whatever changes may come. 

Thank you for the opportunity to discuss the Department’s work 

in this area, and I look forward to answering any questions you 

might have. 

Chairman CARPER. We look forward to asking some questions. 

We very much appreciate your testimony and thank you for joining 

us today. 

Ms. RAMAN. Thank you. 

Chairman CARPER. Mr. Lowery, you are recognized. Please proceed. 

TESTIMONY OF EDWARD W. LOWERY III,1 SPECIAL AGENT IN 

CHARGE, CRIMINAL INVESTIGATIVE DIVISION, U.S. SECRET 

SERVICE, U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. LOWERY. Good afternoon, Chairman Carper. Thank you for 

the opportunity to testify on behalf of the Department of Homeland 

Security regarding the risks and challenges posed by digital currencies and the role of the United States Secret Service in investigating crimes associated with online payment systems. 

Digital currencies have developed and grown over the last 17 

years as part of the continuing integration of information technology (IT) into the financial system. As the original guardians of 

the Nation’s financial payment systems since 1865, the Secret 

Service has continually adapted its investigative methods to keep 

pace with the evolving use of information technology within the financial system. 

Since the founding of e-Gold in 1996, both digital currencies and 

various Internet-based payment processors and exchangers have 

grown to be a significant participant in the global financial system, 

processing tens to hundreds of billions of dollars annually in total 

transaction volume. 

Criminals and other illicit organizations use digital currency. 

These groups seek out those digital currency exchangers and providers that best enable them to conceal their illicit activities. For 

example, Liberty Reserve is alleged to have laundered more than 

$6 billion during its operation before the Secret Service’s joint investigation with ICE and the Internal Revenue Service (IRS) 

Criminal Investigations dismantled it. 
10 

The growth of digital currencies and Internet-based payment systems is expected to continue for the foreseeable future, along with 

the use of these systems in the conduct of criminal activity. 

DHS law enforcement approaches digital currencies within the 

context of its authorities to investigate criminal activity. As a result of Secret Service and ICE investigations, exchangers of digital 

currency have been charged and convicted without operating unlicensed money-transmitting businesses in violation of 18 U.S.C. 

1960 and various State laws. 

Additionally, as a result of our investigations, digital currency 

providers have been charged and convicted for money laundering in 

violation of 18 U.S.C. 1956 and 1957. As FinCEN emphasized in 

March of this year, digital currency administrators and exchangers 

have legal responsibilities under various anti-money laundering 

laws, Title III of the PATRIOT Act, the Bank Secrecy Act, and 

FinCEN regulations. 

DHS law enforcement works closely with interagency, State, 

local, and international partners in conducting criminal investigations in their respective jurisdictions that may involve the use of 

digital currencies, including their use for money laundering purposes. 

In particular, as one of the two Federal law enforcement agencies 

with authority to investigate computer intrusions in violation of 18 

U.S.C. 1030, one of the Secret Service’s strategic priorities is 

proactively investigating transnational organized cyber crime and 

defeating these illicit organizations by arresting their members and 

seizing and dismantling their criminal infrastructure. The Secret 

Service has successfully investigated and arrested numerous leaders of major cyber crime operations. 

For example, the service arrested Vladislav Horohorin, also 

known as ‘‘BadB,’’ in 2010, and earlier this year apprehended five 

individuals allegedly responsible for the largest data breach ever 

prosecuted in U.S. history. Over the past 4 years, the Secret Service has arrested more than 4,500 cyber criminals, preventing over 

$13 billion in losses based on the financial information recovered 

from those criminals. 

Importantly, many of these cyber criminals made extensive use 

of digital currencies as part of their illicit activities. 

As part of its efforts to disrupt and defeat organized cyber crime, 

the Secret Service strategically prioritizes investigations of exchangers and administrators of digital currency that perform a substantial criminal role in facilitating widespread illicit activity. As 

part of these efforts, the Secret Service, in cooperation with other 

law enforcement agencies and interagency partners, has apprehended the providers of both e-Gold and Liberty Reserve, ending 

their operations. 

The Secret Service has also arrested various illicit exchangers of 

digital currency that facilitated criminal activity such as Western 

Express, Incorporated, which was prosecuted by the Manhattan 

district attorney’s office, resulting in 16 individuals pleading guilty 

or being convicted. These cases are discussed more fully in my 

written testimony, and I welcome future opportunities to further 

discuss our investigative work with you and your staff. 
11 

Digital currencies are a tool used by a wide variety of criminals. 

Accordingly, numerous law enforcement agencies investigate illicit 

activity that involves the use of digital currencies. Through the Secret Service’s nationwide network of Electronic Crime Task Forces, 

Federal, State, and local law enforcement collaborate with the private sector and academia to effectively address the challenges that 

criminals’ use of information technology, including digital currency, 

pose to law enforcement at all levels of government. Additionally, 

the Secret Service and ICE are participating agencies in FinCEN 

and work closely with them to ensure regulatory and enforcement 

activities are coordinated, and like all Federal law enforcement, the 

success of Secret Service investigations requires partnering with 

the U.S. Attorneys throughout the country, in addition to the Asset 

Forfeiture and Money Laundering and Computer Crime and Intellectual Property Sections of the Department of Justice’s Criminal 

Division. 

The Secret Service and ICE also partner with other Federal law 

enforcement for joint investigations and participate in the Virtual 

Currency Emerging Threats Working Group. 

While digital currencies may provide potential benefits, they 

present real risks through their use by the criminal and terrorist 

organizations trying to conceal their illicit activity. As such, digital 

currencies challenge law enforcement’s ability to carry out our responsibilities to enforce the law and suppress criminal activity. The 

Secret Service has a long history of adapting its investigative methods to maintain the integrity of the Nation’s financial infrastructure. As a DHS law enforcement agency, we are committed to 

partnering with law enforcement at all levels of government to increase the security of the Nation while addressing the challenges 

posed by digital currencies. The Secret Service will continue to conduct effective criminal investigations to keep America safe and 

prosperous. 

Thank you for the opportunity to testify on this important topic, 

and I look forward to your questions. 

Chairman CARPER. Mr. Lowery, thank you so much and, again, 

our thanks to each of you for your testimony and your preparation 

today. 

In anticipation of this hearing, a week or two ago I was trying 

to get my head around this subject, and I asked my staff to talk 

to me about the early days of the Internet, and how there were a 

number of concerns raised about how it might foster or facilitate 

illegal activities. But there were some who said there could be a 

lot of benefit here as well. And I asked them if that was maybe an 

analogy that was applicable here for virtual currencies. 

Just walk us back in time, if you will, to the early days of the 

Internet when you guys were in middle school, or before that, and 

talk to us about some of the early concerns that we had with this 

criminal activity that can flow through the Internet. At that time, 

we never imagined we would have the kind of commercial activity 

that we are going to see in the coming month as people celebrate 

the holiday season and a lot of commerce that takes place over the 

Internet, a lot of presents sent using the Internet. 

We never imagined anything like YouTube, Wikipedia, or Google 

searches. It is pretty amazing what it has become, the ability to 
12 

download a music video, although in the early days I recall hearing 

a number of concerns about the bad that could flow from the Internet. 

Is this a good corollary or not? And if so, how? And if not, why 

not? And we will just start with you, Ms. Shasky, please. 

Ms. SHASKY. Senator, I believe your analogy is an apt one. So 

often, when there is a new type of financial service or a new player 

in the financial industry, the first reaction by those of us who are 

concerned about money laundering or terrorist finance is to think 

about the gaps and the vulnerabilities that it creates in the financial system and how illicit actors will take advantage of those 

vulnerabilities or gaps. 

But it is also important that we step back and recognize that innovation is a very important part of our economy. It is very important in this country. It is something that we are known for and 

proud of and want to continue. So I think the challenge, at least 

at FinCEN, is for us to balance and have smart regulation that 

both mitigates the concerns of illicit actors operating in our financial system while at the same time minimizing the burden as much 

as we can. We believe that we have done just that with this rule 

by clarifying that virtual currency exchangers and administrators 

fit within our pre-existing regulatory regime. 

Chairman CARPER. All right. Thank you. 

Ms. Raman, same question. Walk us back in time: early concerns, those that were realized, and then some of the potential that 

may have come along through the Internet that perhaps we never 

envisioned. And does that apply here? That example, is that appropriate here? 

Ms. RAMAN. I think as I alluded to in my written testimony, as 

emerging technologies develop and change, as law enforcement we 

remain attuned to the criminal misuse of those technologies. But, 

of course, as you describe it, there are many legitimate uses. And 

as I hope I have also made clear in my testimony, these virtual currency services are not in and of themselves illegal so long as they 

comply with our applicable money laundering laws and our money 

transmission laws and regulations. 

And so I think it is our duty as law enforcement to stay vigilant 

about the criminal misuse of those virtual currency systems while 

recognizing that, of course, there are many legitimate users of 

those services. 

Our experience over the last several years has showed us that 

there is reason for our vigilance and there is good reason for us to 

remain vigilant. Liberty Reserve was the largest money laundering 

case ever brought by the Department of Justice, and that is an important fact. And it reminds us that there is good reason for us to 

remain watchful, an we intend to do that. But we also intend to 

balance that against the need for legitimate users to use those virtual currency systems as they were intended to. 

Chairman CARPER. All right. Thank you, ma’am. 

Mr. Lowery, same question, please. 

Mr. LOWERY. Within the confines of the Secret Service investigations, the Secret Service was enacted to fight counterfeiting at the 

time in 1865. In the Secret Service, the hallmark of our investigations has always been adapting to the changing threat. As I said, 
13 

we started with counterfeiting. We moved into fraud, always defending the Nation’s financial infrastructure. In the 1980s, it was 

access to device fraud when credit cards were starting to become 

a major impact on the financial system, and it naturally segued directly into computer crimes. 

In recognition of that fact, as I mentioned in my testimony, the 

Electronic Crimes Task Force model is widely respected throughout 

the country, and it is the way that the Service stays in tune with 

the changing technology and the threats that can come from the 

Internet. 

Chairman CARPER. All right. A couple of years ago, there was a 

film out called ‘‘Dillinger,’’ and my wife, who is usually not a big 

fan of gangster movies, and I went to a local theater complex in 

Delaware, and one of films showing was ‘‘Dillinger.’’ She said, ‘‘Let 

us go see that.’’ I said, ‘‘OK.’’ And I will never forget one of the 

scenes in the film, Dillinger and his gang, they made their living 

robbing banks, as you know, shooting people up and getting away 

with it. Near the latter part of the film, they were on the run, and 

Dillinger looked up one of his old compadres in the bank-robbing 

business to see if he could not give him a hand. And I remember 

they met, and it looked like the top floor of a big old warehouse 

that had been retrofitted, and he walked in, and there were all 

these guys, a lot of them wearing shirts and ties, on old phones 

making phone calls. And Dillinger said, you know, ‘‘What is going 

on here?’’ And apparently it was a bookie operation, numbers operations and so forth, and the fellow who was running the operation 

said, ‘‘We do not rob banks anymore.’’ And he said, ‘‘You are stupid 

to do that. This is the future.’’ He said, ‘‘This is the future for 

criminal activity, the way to make money.’’ 

And I suspect for some people they see this as the future for 

them to make money through criminal activity, whether it is in 

pornography, child pornography, whether it is in money laundering, human trafficking, any number of activities. 

But we figured out how to deal with those guys in that film, 

wearing their shirts and ties and doing illegal activities, not robbing banks anymore, not certain people anymore. We figured out 

how to deal with that. 

How confident are you that we are going to be able to deal with 

the potential criminal behavior, misbehavior, with this new technology that is before us? Mr. Lowery. And the second part, what 

role does the legislative body—we have three branches of government, but what role does the legislative body—those of us who sit 

in these seats, what role do we have to play to make sure you have 

the resources that you need to meet the dark side of this technology? 

Mr. LOWERY. Well, again, going back to my testimony, the Secret 

Service has investigated many first-of-their-kind investigations. We 

specialize currently in the transnational cyber criminal, the professional criminal that is targeting our financial infrastructure. We 

operate within the confines of the laws that we are entrusted to enforce, predominantly 1028, 1029, and 1030, which would be access 

to the device fraud, identity theft, and computer hacking. 

You spoke earlier about the change, how the crimes have 

changed. I believe that one of the largest changes is the reach of 
14 

the criminal. It used to be that we had to worry about—back in the 

days of early access to device fraud, we had to worry about someone dumpster diving or trying to get an actual image of your credit 

card. Today anyone in the world can reach anyone else in the 

world, and that has changed how we have to enforce our laws. 

Again, we are consistently, aggressively, and strategically investigating, trying to direct our investigations to the highest impact 

within the confines of the existing laws, which I believe there are 

plenty of cyber criminals in prison right now who would agree we 

are pretty effective. 

Chairman CARPER. The second half of my question, and I would 

ask you to respond to it, and then we will turn to Ms. Raman. But 

the three branches of government—Judicial, Executive, Legislative—the role that we are attempting to play today on this Committee is not just an oversight role, although this is a Homeland 

Security and Governmental Affairs Committee, we historically do 

oversight and have for many decades. The Homeland Security piece 

of this Committee is actually newer. It is only about 10 years old. 

But we have a role for oversight. We also have, I think, an obligation or an opportunity here to try to make sure that the Administration is working, maybe with local law enforcement agencies 

across the country, but that they are working in a cohesive, collaborative manner. And I am encouraged to see that that might be the 

case. But what advice would you have for us on the legislative 

side? How can we be supportive and better enable you to do your 

very difficult work as this new technology appears before us? 

Mr. LOWERY. Well, I believe it goes back to—the most important 

part of being able to do this job is the hiring, developing, and retaining of a highly qualified workforce. Obviously you need a technically gifted investigator to follow the trail and to run these international criminals down. So that is always a challenge, especially 

given the current fiscal environment. Any support in that realm is 

definitely appreciated. 

Chairman CARPER. All right. Thank you. Ms. Raman. 

Ms. RAMAN. Your first question was whether we can keep up 

with the changing technology, and I do think that law enforcement 

has proven itself to be nimble and aggressive and willing to work 

together, and not only with agencies here in the United States but 

abroad, in order to effectively combat the threat. 

I mentioned Liberty Reserve before, but it is an excellent example of how our agencies have worked together to take down an 

enormous money laundering operation. We worked together with 

FinCEN and Treasury. They took coordinated action. At the same 

time that law enforcement made arrests here and abroad, we had 

17 other countries working with us for coordinated arrests and 

takedowns. We seized assets on the same day that arrests were 

made, and we took down domain names on the same day that arrests were made. 

So I do think we are nimble enough and creative enough and aggressive enough to be able to combat the threat. That does not 

mean that we are not unaware of the challenges that are posed by 

virtual currency, and there are specific challenges that are inherent 

to virtual currencies that we are remaining attuned to. Anonymity 

is certainly one that we are paying attention to. The fact that some 
15 

virtual currency services may be based in countries that have laxer 

regulatory oversight is of concern to us. There are issues with difficulty in obtaining customer records and a host of other difficulties 

and challenges that go along with investigating global organizations, but I think as our track record shows, we are up to the challenge, and we are continuing to work together to ensure that we 

are innovating as criminals are innovating, and that we stay one 

step ahead of them. 

As for what the Legislative Branch can do, I think as for our 

criminal statutes, we feel confident that the statutes that we have 

available to us, our money laundering statutes, our money transmitter statutes, are broad enough to encompass the activity that 

we have been talking about this afternoon, and, in fact, those statutes are the ones that we used in e-Gold and Liberty Reserve, for 

example. And, of course, to the extent that criminals are using virtual currencies as part of their criminal enterprises, the actual substantive criminal statutes are also applicable. For example, if a 

child exploitation enterprise is trading child pornographic images 

in virtual currency, we should be able to charge that under traditional child exploitation statutes. And so we feel confident that the 

statutes that we have on the books are flexible enough to meet our 

needs. 

That having been said, we are always looking for ways to close 

any gaps that might arise or to close any gaps that we might see 

that we are not seeing right now. And we would be happy to work, 

continue to work with you and your staff to ensure that we let you 

know whenever we need those legislative tools. 

Chairman CARPER. All right. Thank you. 

Ms. Shasky, would you respond to that question as well, please? 

Ms. SHASKY. Sure. 

Chairman CARPER. Actually, the two questions. 

Ms. SHASKY. Thankfully, Congress’ actions in passing the Bank 

Secrecy Act and the USA PATRIOT Act have already given us a 

strong platform to meet the challenge. So we are confident that we 

can meet this challenge, at least in the first instance, using that 

platform. So the Bank Secrecy Act, of course, is this country’s antimoney laundering and counterterrorist financing backbone, which 

we administer at FinCEN. We issue the regulations under that. 

In 2011, when we expanded some of our definitions to enable us 

to have flexibility in going after new payment systems, our hope 

was that these regulations would live with changes in the market. 

What we found is that it has done just that. So as virtual currency 

has come more strongly to the forefront over the last year or 2 

years, that definition has been broad enough for us to encompass 

virtual currency administrators and exchangers in our pre-existing 

regulations under the Bank Secrecy Act. 

And then with the USA PATRIOT Act, Section 311 of that, that 

is the section that gives us the authority at FinCEN to name a foreign financial institution as being of primary money laundering 

concern and to cut it off from the U.S. financial system, and that 

is exactly the provision we used to confront Liberty Exchange, that 

targeted financial authority provided to us by Congress. 

So we feel like we have a pretty good basis on which to act already, but it is hard to predict where the financial system is going 
16 

to go and what tools we might need next, and we would be very 

thankful to continue that conversation with Congress to see if any 

additional tools might be better. 

Chairman CARPER. OK. Thank you. In your testimony, Ms. 

Shasky, you said on page 11, I think, of your original testimony— 

I will just read a couple of sentences from it, if I could. You said, 

‘‘Several new payment methods in the financial sector have proven 

their capacity to empower customers, encourage the development of 

innovative financial products, and expand access to financial services.’’ And you went on to say, ‘‘We want these advances to continue.’’ 

And then you said, ‘‘However, those institutions that choose to 

act outside of their AML obligations and outside of the law have 

and will continue to be held accountable. FinCEN will do everything in its regulatory power to stop such abuses of the U.S. financial system.’’ 

Now, when you talked about several new payment methods in 

the financial sector that have proven their capacity to empower 

customers and encourage the development of innovative financial 

products, maybe expand access to financial services, this is the 

bright line in this technology of virtual currencies. Just maybe give 

us some examples, some concrete examples, if you will, of how 

those have worked out for the good. 

Ms. SHASKY. Sure. I think the one that comes first to mind is 

prepaid access cards. Another area where we have thought not only 

about the illicit—the risks from illicit actors but also the benefits 

that it can offer to consumers. And we have seen many of the 

unbanked use prepaid cards to gain their initial access to the U.S. 

financial system, and many might argue that that has been a positive for society. 

In my own personal experience, I think of online banking and the 

changes that has brought about for me as a consumer and the idea 

of automated clearing house (ACH) where I can now take a picture 

of a check and deposit it into my account. Some of these technological advances make things easier for the consumer, and so those 

would be examples that come to mind. 

But with each of these, we needed to think in the early days as 

they came to market how might criminals use these systems, how 

might they exploit systems, because the fact is any financial service, any type of financial institution can be exploited. Cash is probably still the best medium for laundering money, but the important 

thing is to put measures in place that mitigate that risk. 

Chairman CARPER. All right. I am going to ask each of you to 

take a shot at this question. We have already addressed it to some 

extent, but I want to come back and dive a little deeper, if we 

could. 

The question that I want to get to and I want to come back to 

is whether or not you think that virtual currencies, that would include Bitcoin—fit into our current legal and regulatory framework. 

And we talked a little bit about this and explored it in the last 

question, but come back to me, if you will, with some further 

thoughts on whether you see any gaps in our statutes, any gaps in 

our regulations regarding virtual currencies. So that is part of the 

question. 
17 

The second half of the question, is which agencies do you believe 

need to be at the forefront of the Federal Government’s work on 

virtual currencies? Two questions. And, Mr. Lowery, if you feel up 

to taking this one first, that would be fine. 

Mr. LOWERY. Thank you. So is virtual currency within the existing legal framework? I know obviously, Bitcoin is the currency that 

is part of this discussion today. I can speak within the framework 

of the Secret Service investigations and what we see out there, and 

I think it is important to recognize that within what we see in our 

investigations, that the online cyber criminals, the high-level international cyber criminals that we are talking about have not, by and 

large, gravitated toward the peer-to-peer crypto-currencies such as 

Bitcoin. Again, this is within the confines of what we have dealt 

with. 

The Eastern European cyber criminals that we have developed a 

specialty in have, by and large, gravitated toward a centralized digital currency that is, as my colleague discussed earlier, based in a 

locale that may have less regulatory guidelines, and may have less 

aggressive law enforcement. So that is a distinction that I think 

needs to be made. 

Is the virtual currency within the existing laws? I believe there 

are plenty of opportunities for digital currencies to operate within 

the existing laws and regulations, and as far as the Secret Service 

investigations are concerned, as long as they fit within the laws 

and they comply with existing FinCEN guidance, there would be no 

violation and no reason for the Secret Service to look into it. 

Chairman CARPER. All right. Ms. Raman, would you respond to 

the same question, especially the second half of the question: 

Which agencies do you believe need to be at the forefront of the 

Federal Government’s work on virtual currencies? 

Ms. RAMAN. Starting with that question then first, I think the 

Department of Justice recognized a few years ago that a joint effort 

was needed, and the FBI set up and led the Virtual Currency 

Emerging Threats Working Group, which is now the working group 

that my colleagues here and many other agencies participate in. It 

has borne out to be very fruitful. It is a forum that allows all of 

the agencies that you would want to be at the table—the Treasury 

Department, our law enforcement agencies, even within the Department of Justice, the FBI, the Drug Enforcement Administration (DEA), and other agencies within the Department of Justice, 

prosecutors, we have U.S. Attorney’s Offices, and two sections of 

the Criminal Division, the Asset Forfeiture and Money Laundering 

Section and the Computer Crime and Intellectual Property Section 

participating. Office of Foreign Assets Control (OFAC), IRS, and a 

number of other agencies here in the United States that we think 

are necessary participants and are, in fact, participants. 

We also have foreign law enforcement that participates in that 

group, including the National Crime Agency in the United Kingdom (U.K.), and these are, I think, the most important agencies to 

be at the table. That covers the waterfront in terms of regulations 

and regulatory enforcement and criminal law enforcement. 

There is, of course, room for improvement, and we are always 

looking for additional participants. Even, in fact, last week there 
18 

were additional participants that were invited to join that working 

group. I think it is an excellent—— 

Chairman CARPER. From other countries or from within this 

country? 

Ms. RAMAN. Both, but even last week we thought of an additional 

domestic agency that should be at the table, and we have invited 

them to participate. And so I think it is going to be an evolving 

process. It has proven helpful thus far, and I think we are intending for that to continue to be an important forum in which we can 

talk jointly about what the emerging threats are, what each of our 

agencies can do to coordinate across the government, both here and 

abroad. 

As for the regulations and the laws that cover virtual currencies, 

I feel confident that currently our criminal statutes that we have 

used in our prosecutions thus far have been effective tools. Our 

money laundering statutes have been very effective in our ability 

to prosecute e-Gold and Liberty Reserve, for example. Our substantive criminal statutes, such as our drug trafficking statutes 

and murder statutes, have been effective thus far in being able to 

charge the administrator of Silk Road. And our money transmitter 

statute, which is 18 U.S.C. 1960, has also been used to prosecute 

Liberty Reserve and some of its principals, for example. 

And so I do think that we have the statutory tools, for the most 

part, that we as prosecutors need to get at this kind of criminal activity. But I will say that the Department of Justice over the last 

few years has been proposing and pushing updates to our money 

laundering statutes through the Proceeds of Crime Act and related 

pieces of legislation, and those changes are ones that we continue 

to support. Money laundering statutes have been on the books for 

a long time, and they have been effective. But they can be updated, 

and we have proposed over the years several updates that we continue to support. 

Chairman CARPER. Ms. Shasky. 

Ms. SHASKY. Sure. Taking the questions in turn, FinCEN has 

never opined and still is not opining on whether virtual currency 

is a real currency or a commodity, as those questions are outside 

of our purview. We are the anti-money laundering/counterterrorist 

financing regulator for the Federal Government, and so our regulations spoke to that and only that, and we tried to make that clear 

in our guidance this last March. But this country, like all countries, has an interest not only in protecting our financial system 

from money laundering and terrorist finance, but also protecting 

consumers from fraud, collecting taxes, protecting investors, ensuring economic stability, all things that are a part of our regulatory 

system, but outside of the purview of FinCEN. 

And so, to the extent that this body or others feel that it is appropriate to take those considerations into account with regard to 

virtual currency, we would look forward to working with them to 

make sure we are as coordinated as possible in our actions. 

Chairman CARPER. All right. Thank you. 

You all know about the Government Accountability Office (GAO), 

and I guess a lot of people in this country, most people probably 

have no idea what GAO is or what they do, but they are, as we 

know, a watchdog and sort of the congressional watchdog to make 
19 

sure that we are minding our P’s and Q’s in the Federal Government in a lot of different ways—in the way we run our operations, 

trying to do it in a cost-effective way, broad operations, widely diverse operations. 

Every other year, GAO comes up with something they call their 

high-risk list, and when I first heard about the high-risk list, I 

said, ‘‘What is that?’’ And they said that the high-risk list is a 

whole list of activities designated by or identified by the General 

Accountability Office that waste money. Every now and then I talk 

to constituents, and we talk about what we are doing to try to reduce the budget deficit. And I have people say, ‘‘I do not want to 

pay any more taxes, but if I am going to, I just do not want you 

to waste my money.’’ And one of the things that GAO does, working 

with the Congress, is to identify ways to spend money more effectively, and also to collect monies that are owed to the Treasury 

more effectively. And it is the second half of that function I want 

to talk about. 

The GAO every other year reports to us, along with the help of 

the IRS, on something called the ‘‘tax gap’’—monies that are owed, 

hundreds of billions of dollars that are owed to the Treasury, but 

that are not being collected. In some cases, we have a pretty good 

idea who owes the money, the entities that owe the money. But it 

is a lot of money that goes uncollected. And I would like to say that 

number is going down, but, unfortunately, to my knowledge, it is 

not, at least not yet. 

But what I want to do is, with that as background, just ask you 

this: When I think about the new types of currencies, I wonder how 

they fit into the tax system here in our country. And as you know— 

we just talked about the GAO, but they issued a report, I think it 

was earlier this year, maybe it was in May of this year, which follows my line of thinking, and that is that virtual currencies could 

present a real vulnerability and actually make worse what is already a difficult situation. 

They recommended that the IRS find relatively low-cost ways to 

provide guidance to taxpayers on the basic tax reporting requirements for virtual currencies. 

Let me just ask, do you know the current status of that guidance? And what could we expect it to include? And when can we 

expect it to be released? And I would say, either Ms. Shasky or Ms. 

Raman, if you could tackle that one, I would be grateful. 

Ms. SHASKY. I would be happy to begin with that one. 

First of all, as the financial intelligence unit for the United 

States, one thing FinCEN does, after it collects all of the information that our financial institutions provide to us, is we make that 

available to our partners in law enforcement, not only for the purpose of enforcing our criminal laws but also for the collection of 

taxes. And so we have a very close and longstanding relationship 

with the IRS, both on the criminal side and the civil side, to help 

them do just that. 

In fact, this very last week, we were meeting with them on this 

very topic, virtual currencies, and how to think of that in our joint 

work. So it is something that I know they are taking very seriously. 

When it comes to guidance on virtual currency for taxpayers, I 

know there was the GAO report that suggested that IRS come out 
20 

with some guidance, because there may perhaps be some question 

as to how to treat different uses of virtual currency for the purposes of our tax regime. And while I do not know the details and 

would have to refer you to the IRS to get into great detail, what 

I can tell you and what I do know is that they are working diligently on such guidance, and that—— 

Chairman CARPER. Any idea when we might expect to see it? 

Ms. SHASKY. My understanding is that the GAO report may have 

set forth some deadlines. I think it is usually 60 to 90 days. I can 

tell you they are actively working on it, and it is at the forefront 

of their minds. And I think it will be very useful guidance for the 

taxpayers when it comes out. 

Chairman CARPER. Thank you. 

Ms. Raman, do you want to add or take away anything from 

what Ms. Shasky said? 

Ms. RAMAN. Certainly not take away anything. I would defer to 

the IRS on the status of the guidance, and I am not personally 

aware of the status of the guidance. I will say that the Department 

of Justice was very aware of the GAO report. We took an interest 

in its findings, and we have been in discussions with the IRS about 

some of the findings in the GAO report. 

Chairman CARPER. OK. Thank you. 

Ms. Shasky, I think you said earlier that FinCEN did not opine 

on whether or not virtual currencies are currencies or commodities. 

I would just ask of you, who do you think should be making that 

decision? And a second question would be, beyond who do you 

think should be making that decision, do we need that definition 

to be made in order to enforce the laws and regulations? 

Ms. SHASKY. I am not sure I know who should ultimately make 

that decision. I do know it is outside of the—— 

Chairman CARPER. Do you think it should be Mr. Lowery? 

[Laughter.] 

Ms. SHASKY. I am guessing it should not be Mr. Lowery. In terms 

of the legality of various things, I am sure that Congress has a role 

in determining that. When we start talking about commodities, the 

Commodity Futures Trading Commission (CFTC) comes to mind; 

when we talk about securities, the Securities and Exchange Commission (SEC). 

Regardless of who should be making those determinations, our 

focus at FinCEN was that we know that virtual currency currently 

exists; we know that it is being used to transact payments; we 

know that it has been exploited by some pretty serious criminal organizations. And we want to protect the U.S. financial system, as 

we are mandated to do, from those illicit actors, from laundering 

or moving money for the purposes of terrorism through our U.S. financial system. And so our entire focus has been on how can we 

best do that under our current regulatory scheme, and the nice 

thing is that the regulatory scheme that we have in place has the 

flexibility in it to change as the landscape changes. So, in other 

words, if some part of the industry were to ultimately be defined 

to come under the SEC or the CFTC, our anti-money laundering 

regulations also apply to those areas of the industry. And so, regardless, we are going to make sure that we are taking every miti-
21 

gating step we can to prevent illicit actors from operating through 

the U.S. financial system. 

Chairman CARPER. OK. Mr. Lowery, let me focus a question on 

you, and maybe, if you would like, Ms. Raman. As I think you both 

are probably aware, a few weeks after the Silk Road website was 

taken down by Federal law enforcement, a new Silk Road website 

popped up in its place. And it is hardly alone. Numerous other 

similar marketplaces exist on the Dark Web selling drugs, selling 

weapons, selling child pornography, and in some cases murder-forhire services. 

Whether or not these are real marketplaces or simply some scam 

artist’s idea of a sick joke, it obviously makes people worry and it 

makes people concerned. 

How do we develop a strategy to deal with these sites? And are 

there particular characteristics of these sites that make it more difficult for law enforcement to respond? Would you respond to that, 

Mr. Lowery? And then maybe Ms. Raman. 

Mr. LOWERY. Absolutely. So the online sites. The Secret Service 

in our investigations, once again, we believe there are three infrastructures in place that facilitate the online crimes: 

The Silk Road-type criminal forums, one of the Secret Service 

specialties are on the criminal forums, Eastern European based 

predominantly, that specialize in large-scale trafficking, stolen financial data, and what have you. So there are other of these 

websites that specialize in specific crimes. 

The other part of the infrastructure is the digital currencies, the 

use of digital currencies, predominantly, the digital currencies that 

fall outside of the guidance of FinCEN or outside of U.S. law or in 

countries that obviously, as I said earlier, have less regulatory controls. 

And the third is what we refer to as ‘‘bulletproof hosters.’’ 

Chairman CARPER. Refer to as what? 

Mr. LOWERY. Bulletproof hosting. It is a criminal organization, a 

criminal individual who specifically sets up business in a country 

with very little regulatory or aggressive law enforcement and provides a platform for a tax to be launched against the U.S. critical 

infrastructure. So the Secret Service attacks the problem strategically. We are always looking to identify the individual behind a 

specific crime, the intruder, the large-scale vendor, stolen personal 

data, or what have you. And at times it may be that if we can identify a forum or a digital currency that is within legal reach, within 

reach of U.S. law enforcement—case in point, Liberty Reserve or eGold—then it makes strategic sense to take that out of the equation and disrupt the criminal organization for strategic reasons, 

quite honestly, usually to facilitate the arrest of other individuals 

we are looking at. 

Chairman CARPER. All right. Thank you. 

Ms. Raman, do you want to add anything to that statement? 

Ms. RAMAN. I think the challenge that you are pointing to sometimes really results from anonymity, and it results from many 

criminals migrating to hidden services on the Internet. 

Chairman CARPER. Migrating to what? 

Ms. RAMAN. To hidden services on the Internet. And that has 

been a challenge for law enforcement, but as you have seen from 
22 

the results that we have been able to achieve in the last several 

years, I think we have been able to keep pace with that, and we 

have been able to develop tools and strategies to address it. I think, 

as you mentioned, it can be frustrating to the public to see another 

website pop up after one that seemed similar to it was just taken 

down, I do think, as Mr. Lowery said, that it is incredibly important for us to be taking those steps, not just to disrupt that particular organization but to send a message to the users of those 

websites that they cannot trust those types of websites, that law 

enforcement is watching, and it is not, in fact, anonymous, and it 

is not, in fact, immune from investigation. And that is an important message to send. All of us in law enforcement who pay attention to the results of these takedowns know that the community is 

aware, the criminal community is aware when we take these actions. It is important that we do so. It is important that we put the 

wrongdoers in prison when they deserve it. And it is important for 

us to put these organizations out of business, and I think we have 

been able to do that. 

Chairman CARPER. All right. Well, that was a very encouraging 

addition to Mr. Lowery’s response. Thank you. 

I have another question on domestic job creation that I am going 

to direct to Ms. Shasky. But before I do, my last question will probably fall right after that, and then we will take maybe a short recess and introduce our second panel after that. But sometimes I 

ask a panel that is before us, when we are trying to figure out how 

to develop some consensus to address a significant challenge to our 

country, one of the things I will do—you were very kind to present 

an opening statement, and I appreciate very much your clear, 

straightforward responses to the questions I ask. But I want to ask 

each of you to take a minute or two to maybe give a closing statement and to just reflect on what you said, what others have said, 

some of the questions that we have asked, and some of what you 

heard your colleagues on the panel say. So just be thinking about 

that. 

And while they are thinking about that, Ms. Shasky, I am going 

to ask you this question about domestic job creation. As you know, 

there has been some concern that virtual currency businesses 

might leave the United States and move overseas to jurisdictions 

with a less strict regulatory framework. What, if anything, can the 

United States do to try to keep businesses in this country? What 

are we doing that seems to make sense? What maybe more should 

we do? And along those same lines, is FinCEN engaging with international partners on regulation of virtual currencies? It sounds like 

we are, but if you could expand on that, I would be grateful. So 

those two questions, please. 

Ms. SHASKY. Sure. So, first, in terms of keeping business in the 

United States, I guess I would say that if business is going to leave 

the United States based on perceived or actual regulatory burden, 

I at least believe that they are going to find that gain short-lived. 

Every country, as I mentioned earlier, has an interest in protecting 

its financial system from illicit actors who would launder money or 

move money on behalf of terrorist organizations, in collecting taxes, 

in protecting investors, in protecting consumers from fraud, in ensuring a stable economy. 
23 

And so if this payment system, this virtual currency payment 

system about which we are talking today, is going to survive and 

be a real player, a significant player in the financial system, regulation both at home and abroad is going to catch up, because it has 

to. And so our challenge here is to have smart regulation that both 

mitigates the risks while at the same time minimizing the burdens. 

I feel confident that, at least in the AML/CFT—— 

Chairman CARPER. What does that stand for? 

Ms. SHASKY. Anti-money laundering/counterterrorist financing 

realm, we have managed to do that and met that challenge, and 

I think that is going to be borne out over time. So I think the innovation and the jobs will stay in the United States or at least come 

back to the United States. 

In terms of working with our international partners to ensure 

that we have a kind of consistent regulatory framework on the 

anti-money laundering side worldwide, the Financial Action Task 

Force (FATF) is the international standard-setting body and does 

a good job of ensuring that countries around the world have the 

laws and the regulations in place. My understanding is that they 

are interested in taking up this issue at the FATF, as it is known. 

What I can tell you for sure is that our counterparts abroad have 

been reaching out to us quite a bit to find out what we are doing 

in this regulatory space. 

We managed in this country to be able to act a bit quicker than 

some of our colleagues because we had the broad definitions and 

were able to fit virtual currency within our pre-existing regime. 

Germany was able to do the same thing, so they, too, already have 

regulations on the books. Other countries are trying to figure out 

how they can catch up. 

Chairman CARPER. All right. Thank you. 

Now, while you think about the answer to this last question, I 

am going to let Mr. Lowery and Ms. Raman go ahead and give us 

just a brief closing statement. Ms. Raman, do you want to go first? 

Ms. RAMAN. Well, first of all, I want to thank you for holding this 

hearing. It is encouraging from the law enforcement standpoint to 

have interest in these kinds of issues because they are not easy. 

Although we have had many successes, we have clearly had challenges, too, and it is helpful when we have interest from people like 

yourself and it is helpful when we have questions asked of us like, 

‘‘What can we do to help?’’ There is always something that we can 

do better, and it is helpful to have these dialogues. 

I also think it is encouraging that I have colleagues like the ones 

that are sitting next to me who have been willing to work together 

on these emerging threats. I think we have all approached it in the 

same way, which is that virtual currencies in and of themselves are 

not illegal. We have all recognized that innovation is important, 

and we have all recognized that, like criminals have done for ages, 

this will be another vehicle through which criminals may try to 

launder proceeds or commit additional crimes. 

I feel confident that we have the tools that we need to address 

those threats, and I feel confident that we have the will to address 

those threats. But we need to keep pace with what is going to 

come, and we will remain vigilant. We intend to be as aggressive 

in the years to come as we have been in the last several years. Vir-
24 

tual currencies did not just sneak up on us. As I said in my opening statement, we brought our first indictment in 2007, and so we 

assume that these kinds of threats will continue to emerge and 

change and evolve, and we intend to keep pace. 

Chairman CARPER. All right. Thank you. That was a pretty good 

closing statement. You should do this for a living. 

Ms. RAMAN. It just so happens I do. [Laughter.] 

Chairman CARPER. That is good. I think you found the right job. 

Mr. Lowery. 

Mr. LOWERY. I would echo those statements—— 

Chairman CARPER. In fact, I think each of you have. 

Mr. LOWERY. In closing, as a DHS law enforcement agency and 

a longstanding original defender of the U.S. critical infrastructure, 

I know the Service, working with our partners in law enforcement 

as well as in the prosecution and FinCEN and our international 

partners, will continue to work strategically to remove the gravest 

threats to our infrastructure. It is going to take consistent awareness of the growing threat. We are going to have to adapt, as we 

always have, and we are going to have to handle the international 

issues and what have you, working together overseas. 

I do know U.S. law enforcement is very aggressive and also very 

collaborative with our foreign partners, because we realize that this 

issue cannot be taken care of just by ourselves. 

We will continue to work as we respond to these threats. As a 

part of DHS we will continue to work to disseminate the threats 

through DHS and through our Electronic Crimes Task Forces, 

through our various partners to ensure that the remaining 16 Critical Infrastructure and Key Resources (CIKRs) for the countries’ infrastructure are provided the greatest level of protection. And we 

believe firmly that aggressive law enforcement is a strong part of 

cybersecurity, which will benefit the Nation as a whole. 

Chairman CARPER. Thank you. 

Ms. Shasky, the last word. 

Ms. SHASKY. Thank you, Senator Carper. I would like to thank 

you, as my colleagues did, for convening this very important hearing. I heard a chief executive officer (CEO) of a fairly large bank, 

say recently that having the privilege to be a financial institution 

and be a part of the global financial system is just that—it is a 

privilege. And there is a reason why countries and jurisdictions ask 

you to be licensed to be one of those financial institutions, because 

it also comes with great responsibility. You have greater power in 

your hands as a part of the financial system, and particularly in 

this country with the financial system we have in the United 

States. 

And so while innovation is a wonderful thing and innovation in 

the financial services industry is incredibly important, it does come 

with obligations to have that entre and be able to be a part of the 

U.S. financial system. And one of those obligations is helping to 

protect that system from illicit actors. 

So we believe that the regulations in place have met that balance 

of mitigating the risks while minimizing the burden. In essence, we 

are asking virtual currency exchangers and administrators to do 

three things: 

Register with FinCEN. It is an online form, and it is free; 
25 

Put in place AML protections, controls in place to harden yourself to the likelihood that bad actors will take advantage of your 

system; 

And maintain records and provide certain reports to FinCEN, including suspicious activity reports. It is something that many other 

players in the financial system already do from the smallest Momand-Pop check casher that is on the corner, probably just up the 

street here, to the biggest of the global financial institutions. They 

have all found a way to offer their services while maintaining those 

same protections. And so that is what we are asking of virtual currency providers. We believe it is reasonable given that we have 

seen that virtual currency has, in fact, been exploited by some pretty serious actors. 

That being said, FinCEN is constantly engaged in outreach to industry and have been engaged in outreach with the virtual currency industry. We try to bring different parts of the industry together so that they can learn from each other the best practices, 

for hardening themselves to illicit finance and to share the information we collect from them back with them, so that they can become even better at protecting the U.S. financial system. 

So at the end of the day, we hope we have that balance right. 

We think we have that balance right, but we are committed to continuing the discussions both with industry to see if that is right as 

well as our colleagues on the law enforcement side. Thank you. 

Chairman CARPER. Thank you. This has been a thought-provoking presentation and discussion. It has been encouraging as 

well. I am going to use—this is probably a stretch of an analogy, 

but I want to try to make it fit. I serve on a Committee called Environment and Public Works, and we wrestle all the time with the 

need to clean up our environment and to put in place the kind of 

regulatory structure, legislative structure, combination of laws and 

regulations and enforcement, that enable us to breathe the air and 

drink the water and do so without fear. 

I always like to say we do not have to make false choices, and 

say: We have to choose between a stronger economy and a clean 

environment. I think that is a false choice. And one of the questions that has been rattling around in my mind as we drill down 

on this subject, is it possible to reap the benefits, including the economic benefits, of this virtual currency, but at the same time clean 

up the kind of misbehavior, criminal behavior, that we all know is 

out there and is a concern to all of us? 

Just as I have become convinced over the years it is possible to 

have a strong economy, a stronger economy and a cleaner environment, I am encouraged that maybe it is possible to have the benefits of a virtual currency or virtual currencies, and to actually be 

able not to facilitate, but to hold down the kind of criminal activity 

and criminal involvement that we have talked about here today. 

So thank you for giving us both sides of the story, and we are 

going to have, I suspect, a chance to work with you some more, and 

my hope is that you will feel free to come back and tell us, informally or formally, what the Legislative Branch of our government 

needs to be doing to make sure that whatever potential there is 

here for our economy and for consumers is actually realized, while 
26 

we tamp down on that illegal behavior, criminal behavior that we 

all want to eliminate. 

So I am going to just call a very short recess while we change 

up the cards. I am going to need to take a phone call from one of 

my colleagues, and we will probably resume in about 2 minutes. 

But thank you all very, very much for joining us. 

Now we will just take a short recess. 

[Recess.] 

Ladies and gentlemen, I am going to ask you to find your seats. 

It looks like we have our witnesses lined up, and we thank you for 

joining us today. 

I am told that we are still going to start voting at 5:30, so that 

will probably be a hard stop for this panel. But let me take just 

a moment, if I could, to introduce each member of this panel, distinguished witnesses, as my notes here say, distinguished witnesses. Thank you. 

The first witness is Ernie Allen, who is the President and Chief 

Executive Officer of the International Centre for Missing & Exploited Children (ICMEC). Mr. Allen also serves as co-chair of the 

Digital Economy Task Force, which was developed to focus on the 

benefits and risks surrounding the digital economy and is led jointly by the International Centre for Missing & Exploited Children 

and Thompson Reuters. 

Our next witness is Patrick Murck, General Counsel for Bitcoin 

Foundation. The Bitcoin Foundation works to standardize, to protect, and promote Bitcoin. Mr. Murck is also the principal and 

founder of Engage Legal. His expertise extends across the legal and 

regulatory issues governing the use of Bitcoin, virtual economies, 

and alternative payment systems. Previously Mr. Murck worked in 

business and legal affairs at the tech company BigDoor, as an attorney at a D.C.-based law firm, and also as an international investigative journalist. 

Our third witness is Jeremy Allaire. Mr. Allaire is the founder 

and CEO of Circle Internet Financial, a startup company focused 

on promoting mainstream adoption of virtual currencies. A serial 

Internet entrepreneur, Mr. Allaire also serves as founder and CEO 

of Brightcove, one of the largest online video platforms in the 

United States. 

And our final witness is Jerry Brito. Mr. Brito is a senior research fellow at the Mercatus Center at the George Mason University and Director of the Technology Policy Program. Mr. Brito also 

serves as an adjunct professor of law at George Mason University. 

His research focuses on technology, Internet policy, copyright, and 

on the regulatory process. 

Good afternoon and welcome to each of you. Your entire testimonies will be made part of the record, and as I said to the first 

group, you are welcome to summarize, if you would like, and try 

to keep your comments to about 7 minutes. If you go way beyond 

that, I will have to rein you in. Otherwise, we will be just fine. 

Mr. Allen, why don’t you lead us off? Thank you. 
27 

1The prepared statement of Mr. Allen appears in the Appendix on page 78. 

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

Mr. ALLEN. Thank you, Chairman Carper. As you mentioned, we 

have launched a Digital Economy Task Force with Thomson Reuters, the global media and information company. That was created 

as a result of a conference we brought together in June with private sector leaders and government officials to look at this larger 

problem. The task force that is working on this issue today includes the Bitcoin Foundation, the Tor Project, the Gates Foundation, the Brookings Institution, the Cato Institute, Vital Voices, law 

enforcement leaders from around the world, and many others. Our 

goal is to bring people together and work toward reasonable, balanced, effective solutions that protect the promise of the digital 

economy while addressing its misuse. And our task force will issue 

its final report in February. 

Let me begin by saying we are enthusiastic about the potential 

of virtual currencies and the digital economy for social good, particularly in helping to bring about financial inclusion for the 2.5 

billion adults on the planet today without access to banks, credit 

cards, and the mainstream financial system. 

However, as you have pointed out today, there are risks. Our primary concern is the migration of child pornography, child sexual 

exploitation, trafficking, and other criminal enterprises to this new 

economy, and we believe it is happening for three primary reasons: 

The first is anonymity; the second is that this is an economy that 

belongs to no nation and is overseen by no central bank; and, third, 

we believe that most countries have not yet begun to apply existing 

law and regulations to virtual currencies at the exchange level, the 

point at which virtual currencies are traded for dollars, euros, 

pounds, or yen. 

Over the past year, I have consulted with law enforcement experts and financial experts around the world about this issue, and 

they advise as it relates to our core concern, which is the exploitation of children, that child pornography is currently being created 

and disseminated using anonymizing technologies and using virtual currencies for payment. 

They hasten to add that it is at a lower threshold of volume than 

drugs and other criminal goods; however, they call the use of these 

technologies for child pornography significant because they principally involve the actual producers of the content who are producing content using anonymizing technology and using virtual 

currencies for payment. 

In August, the Irish owner of Freedom Hosting, which the FBI 

had called ‘‘the largest facilitator of child pornography on the planet,’’ was arrested. Freedom Hosting maintained servers for a number of the so-called deep web child pornography sites—Lolita City, 

PedoEmpire, the Love Zone, and others—all of which accepted digital currencies for payment. 

To shut down Freedom Hosting, law enforcement exploited a vulnerability in the site to penetrate its anonymity and expose the 

Internet Protocol (IP) addresses of the users. 
28 

Regarding Bitcoin, all the transactions are visible and transparent. The challenge for law enforcement is to go from that transaction to an actual person. 

The primary challenge that we have learned in our consultations 

with global law enforcement today is growing Internet anonymity. 

A recent headline read, ‘‘There’s A Secret Internet For Drug Dealers, Assassins and Pedophiles.’’ This so-called deep web includes 

sites like Silk Road, but it also includes sites for the purchase of 

weapons and counterfeit currencies and stolen credit cards and assassins and child pornography sites. All of these sites accept digital 

currencies for payment. 

What I hear most from law enforcement today is frustration. The 

primary investigative technique I have been told that law enforcement around the world is using to investigate these operations is 

infiltration. But infiltration is expensive, it is time-consuming, and 

it is often ineffective. 

And while there are some arrests, the research indicates that 

most of the arrests are of those who use the anonymizing technology improperly and leave a trail. They connect to a non-anonymous IP address providing a trail to follow. And even the Silk Road 

arrest involved an offender who made a series of mistakes that 

made it possible for him to be identified. 

My concern is, with the absence of existing law enforcement 

tools, we are not catching the truly sophisticated, the most highrisk organized criminal offenders. 

Through our task force, one of the things that we are doing is 

exploring new techniques, including clustering Bitcoin transactions 

to identify patterns, and we hope to learn from the techniques that 

were utilized by law enforcement to penetrate Freedom Hosting. 

For the future, the pace of innovation will quicken. There will be 

new technologies, and the intensity of the effort to achieve total 

Internet anonymity will increase. 

You asked, ‘‘What can Congress do?’’ I think there are four 

things. 

First, you can ensure that existing law and regulation focusing 

on the point at which virtual currencies are being exchanged for 

conventional currencies are used. 

Second, you can press for global cooperation. Digital economy 

funds flow globally, network to network, not nation to nation. This 

is a problem that the U.S. Government cannot solve alone. 

Third, you can ensure that the response of government to the 

fragile, emerging, high-risk but high-reward area is not so draconian that the effect is simply to push these enterprises out of the 

United States into countries where there is little or no regulation. 

And, finally, you can help us address the core challenge: Internet 

anonymity. For all of its importance in protecting political dissidents, journalists, and others, we are very concerned that an environment not be allowed to prosper in which child exploiters and 

traffickers can operate with no risk unless they make a mistake. 

Three years ago, the then-Secretary of State Hillary Clinton in 

her remarks on a free Internet said, ‘‘On the one hand, anonymity 

protects the exploitation of children. And on the other hand, anonymity protects the free expression of opposition to repressive governments.’’ She added, ‘‘We should err on the side of openness 
29 

1The prepared statement of Mr. Murck appears in the Appendix on page 90. 

while recognizing there are going to be exceptions.’’ That is our 

challenge, Mr. Chairman, to determine how anonymous the Internet can be. From the perspective of government and law enforcement around the world, we feel that absolute Internet anonymity 

is a prescription for catastrophe. 

Thank you, sir. 

Chairman CARPER. Thank you, Mr. Allen. Very good testimony. 

Mr. Murck, welcome. 

TESTIMONY OF PATRICK MURCK,1 GENERAL COUNSEL, THE 

BITCOIN FOUNDATION, INC. 

Mr. MURCK. Good afternoon, Chairman Carper. I am pleased to 

have the opportunity to speak with you today. My name is Patrick 

Murck. I am general counsel for the Bitcoin Foundation. I am a 

founding member of the Bitcoin Foundation, and I have been an executive in legal and business development for a number of digital 

currency companies. Additionally, I serve on the Board of Directors 

for the BitGive Foundation, a fledgling charitable organization for 

the Bitcoin community. 

The Bitcoin Foundation is a member-driven nonprofit representing a global constituency of businesses and individuals contributing to the overall Bitcoin ecosystem. Our membership is comprised of many of the top companies, entrepreneurs, and technologists working to make Bitcoin a success. The foundation’s mission is to promote, protect, and standardize the use of distributed, 

decentralized currencies and to free people to transact on their own 

terms in the global economy. 

Having said that, there is no Bitcoin company that manages or 

controls the software or its operation. The software is built and 

maintained by a community of volunteer open-source software engineers and a distributed network of transaction processing, often referred to as ‘‘mining.’’ At its most basic level, Bitcoin is an Internet 

protocol. It is like e-mail for money. 

The Bitcoin protocol operates a decentralized store of value and 

an open and transparent payment network that is secure, efficient, 

and low cost. The Bitcoin network can operate without any thirdparty intermediaries and is a highly innovative global financial system unto itself. 

In the near future, the Bitcoin protocol will also facilitate advanced payment services, and experiments are currently underway 

to provide additional non-financial services, like property management and identity verification. 

Open and participatory systems like Bitcoin will produce many 

economic and social benefits. These systems can reduce exploitation 

of vulnerable populations the world over and here in the United 

States by providing a safe and private store of wealth in addition 

to a global transaction network that cannot be corrupted or abused 

by those who would seek to exploit or harm others. 

Financial exclusion is a U.S. problem. It is not just a problem for 

the global South. There is a rising tide of unbanked and underbanked people right within our borders. This is important because 
30 

access to financial services directly correlates to increases in dignity, liberty, and self-determination. 

Bitcoin can help move people trapped in a cash-based informal 

economy into a globally connected digital economy. At the same 

time, we acknowledge that, like any technology, there is a potential 

for abuse of this system. Bitcoin can be used for illicit purposes, 

and the law enforcement community may have to develop new 

methodologies for interdicting and investigating criminal activity 

on the network. This does not mean that it will be any harder to 

prevent the misuse of the Bitcoin network than existing financial 

systems. 

As we heard in earlier testimony, in Bitcoin’s short history, law 

enforcement and regulatory agencies have had a string of notable 

successes already. Rather than belabor the overwrought headlines 

about misuse of Bitcoin in the digital economy, we should be congratulating the law enforcement community on their hard work 

and skill in adapting investigative techniques to an increasingly 

digital and openly networked world. Keeping the Bitcoin network 

safe is all of our responsibility, and industry-led efforts are underway to help prevent abuse. 

Like you, Mr. Chairman, we are looking beyond the Silk Road. 

When the alleged operator of that black market website was arrested, the markets expressed relief and optimism with a long and 

sustained rally in the price of Bitcoin. 

Decentralized currencies like Bitcoin have a different risk profile 

from centralized currency systems. Central control of the transaction ledger allows bad actors to shroud their activities. Decentralized systems with open ledgers are inherently transparent and may 

prove too difficult for use in any large-scale and sustained illicit activity. 

As we address law enforcement concerns, we must bear in mind 

that because of this open and transparent architecture, we need to 

consider the privacy of law-abiding individuals. As it turns out, the 

blockchain, which is Bitcoin’s public ledger system, may be so revealing that the larger problem with Bitcoin is not anonymity for 

criminals, but the difficulty law-abiding people have maintaining 

their own privacy. 

Bitcoin is not some magical cloaking device that simply allows 

criminals free rein, nor does Bitcoin pose a unique or unsolvable 

threat to the law enforcement and regulatory community. The use 

of Bitcoin is not unregulated. In fact, Bitcoin service providers operate in heavily regulated business environments with deeply entrenched competitors. 

For these potential competitors, be they banks, payment networks, financial service companies, Bitcoin also represents an opportunity for them to start innovating again. These institutions already have a deep understanding of the controls and risk management necessary to safely handle Bitcoin transactions and secure 

consumer Bitcoin accounts. Instead, what we have seen is a 

chilling effect through the banking industry as Bitcoin companies 

try and gain bank accounts. 

The United States has a strong interest in maintaining its place 

as a global leader in developing cutting-edge technology and 

spreading individual freedom and liberty around the world. The 
31 

1The prepared statement of Mr. Allaire appears in the Appendix on page 114. 

digital economy is poised to be a driver of significant job creation 

and economic growth. 

Fostering the development of a legitimate Bitcoin business in the 

United States also is the best preventive measure we can take to 

keep good actors in the system. Applying consistent rules and regulations that encourage technological experimentation is critical to 

a vibrant, entrepreneurial community. This Committee’s work is 

undeniably helpful in charting a safe and sane regulatory environment for the digital economy in general and Bitcoin specifically. 

As one entrepreneur and member of the Bitcoin Foundation put 

it succinctly, ‘‘If you give us clear rules, we will follow them and 

we will build jobs.’’ Development of clear rules appears to be happening faster at the Federal level than at the State level. 

Having said that, we are encouraged by early signs of leadership 

from States like California and Georgia. We believe a healthy and 

respectful dialogue between key stakeholders will help ensure that 

the substantial benefits of the digital economy are met while mitigating many of the risks. 

In particular, we would like to thank FinCEN for opening up a 

dialogue with the Bitcoin community and for demonstrating leadership on this issue at both the Federal and State level. 

The Bitcoin Foundation looks forward to continuing this open 

dialogue and thanks the Committee for allowing us to participate 

in this hearing. 

Chairman CARPER. Thank you, Mr. Murck. Mr. Allaire. 

TESTIMONY OF JEREMY ALLAIRE,1 CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, CIRCLE INTERNET FINANCIAL, INC. 

Mr. ALLAIRE. Chairman Carper, thank you for hearing my testimony this afternoon. My name is Jeremy Allaire, and I am the 

founder and CEO of Circle Internet Financial, a recently launched 

financial services company aimed at facilitating payments and 

money transfers using global digital currency such as Bitcoin. I 

have been building Internet software platforms and online service 

companies for 20 years, having founded and helped to lead multiple 

global public companies, with products used by hundreds of millions of consumers and hundreds of thousands of businesses globally. 

I am here to testify because I believe that digital currency represents one of the most important technical and economic innovations of our time. Specifically, digital currency introduces advancements in electronic payments and money transfers, potentially materially lowering costs for businesses around the world, decreasing 

fraud risk for consumers and merchants, increasing consumer privacy, and expanding the market for consumer financial products on 

a worldwide basis. 

As this technology moves from early adopters into mainstream 

acceptance, it is critical that Federal and State governments understand how Bitcoin fits into existing regulatory guidelines and how 

to apply them to digital currency. These should uphold consumer 

protections associated with fraud and privacy risks, ensure that 

criminals and bad actors find it increasingly difficult to utilize 
32 

these platforms, and provide income tax clarity to consumers and 

businesses that conduct business using digital currency. 

It is very clear that over the past 20 years the Internet has been 

at the center of global economic innovation. Open platforms have 

transformed communications, media, software, education, commerce, and retail, but for a variety of reasons, the technology and 

business models around finance have been insulated from similar 

transformations. This same open platform approach in digital currency, specifically Bitcoin, presents an opportunity for the same 

level of innovation and advancement in forms of currency, trade, 

and payments that we have seen brought to bear on other industries. 

I do not think there is much debate that we need to see innovation and transformation in banking and finance, not just reform 

and remediation. Specifically, our payment systems are inefficient 

and very much built upon systems and processes that predate the 

Internet. The result is higher costs for consumers, lower margins 

for business, and less efficient economic interaction. And in many 

cases, our financial systems have excluded enormous bases of consumers who remain unbanked or underbanked. The combination of 

ubiquitous Internet-connected mobile devices and digital currency 

presents a tremendous opportunity to expand access to financial 

services on a worldwide basis. 

Payments and money transfers are still operating in the preInternet era. Today we can communicate with almost anyone in the 

world, including in video format, at no cost. We have instant access 

to an enormous amount of the world’s knowledge, also effectively 

at no cost. We have instant access to more media than we ever 

imagined was possible, again, almost at no cost. Yet to send money 

between friends and family, whether across the table or across the 

planet, takes days and costs a significant amount in transaction 

fees. To accept payments, merchants must bear significant fraud 

risk; consumer privacy is often threatened; and likewise it takes 

days for a merchant to actually receive money from an electronic 

payment, not to mention the widely perceived high costs of transaction fees. 

So what are we at Circle specifically doing about this? At Circle, 

we are building online services for consumers and businesses to be 

able to easily use digital currency and specifically Bitcoin. For consumers, we intend to enable them to easily purchase, store, send, 

receive, and make payments using Bitcoin. And for businesses, we 

are providing tools to help them easily accept digital currency payments. 

We are fully committed to complying with all applicable laws and 

regulations and establishing comprehensive risk management protocols. We have registered with FinCEN as a money transmitter 

and are actively seeking appropriate licenses from U.S. State financial authorities. We are developing our platforms to provide very 

high levels of security for our users and employing industry-leading 

approaches to customer identity verification, fraud remediation and 

anti-money laundering, designed in partnership with leading regulatory advisors and experts. 

I want to talk for a minute, though, about some of the risks inherent in digital currency platforms such as Bitcoin. 
33 

1The prepared statement of Mr. Brito appears in the Appendix on page 120. 

First of all, as has been made amply clear from earlier testimony, 

I want to emphasize that I believe that U.S. regulators and law enforcement are justifiably focused on the potential use of digital currencies to finance criminal activities, including terrorism. But in 

addition to FinCEN’s guidance and the appropriate requirement 

that Bitcoin operators implement Bank Secrecy Act provisions, it is 

also a risk if the government does not support innovative companies gaining access to U.S. banking institutions, which will drive 

companies offshore and overseas. 

Another risk is that businesses’ adoption of digital currency will 

be hampered without clarification from the IRS on income generated from sales denominated in digital currency, and such guidance is also needed to thwart potential tax evaders. Without clear 

guidance on consumer protections required of Bitcoin operators, 

consumers and businesses could be defrauded through inadequate 

systems and risk management procedures around customer funds. 

Another risk is that the United States falls behind in this critical 

emerging economic innovation. Regulatory uncertainty could hold 

back American companies from participating in driving digital currency innovation. Indeed, today a Bitcoin exchange in China has 

become the largest single trading exchange in the world, followed 

by exchanges in Japan and Europe. We need to uphold and support 

our incredible history in America of supporting technical innovation 

and entrepreneurship. 

In terms of U.S. regulation, it appears to me that Federal and 

State regulators seem to have ample statutory authority to adopt 

regulations and take enforcement actions as necessary to protect 

consumers and ensure responsible conduct in the world of Bitcoin 

commerce and that enforcement actions to date have been constructive. We stand ready to assist them in their ongoing efforts to 

adapt their regulatory tools to new digital currency. 

I believe we are at the forefront of another 20-year journey of 

Internet-led transformation, this time in our global financial systems, and there is a real opportunity to foster that economic 

change while simultaneously putting in place the safeguards that 

only government can enable. 

Mr. Chairman, that concludes my prepared testimony. I would be 

happy to answer any further questions. 

Chairman CARPER. Thank you, sir. That was very helpful testimony. Thanks. 

Mr. Brito, please proceed. Welcome. We are delighted that you 

are here. 

TESTIMONY OF JERRY BRITO,1 SENIOR RESEARCH FELLOW, 

THE MERCATUS CENTER, GEORGE MASON UNIVERSITY 

Mr. BRITO. Mr. Chairman, thank you for having me here today. 

We are here today to discuss virtual currencies in general, but it 

is Bitcoin in particular that has so many interested in this topic. 

But online virtual currencies are nothing new. They have existed 

for decades, from World of Warcraft Gold to Facebook Credits to eGold. And neither are online payments systems new. PayPal, Visa, 

and Western Union Pay—these are all examples. So what is it 
34 

about Bitcoin and similar cryptographic currencies that makes 

them unique? 

Whatever one may think about Bitcoin’s prospects for enduring 

value, it is safe to say that it is a remarkable technical achievement. Bitcoin is the world’s first completely decentralized digital 

currency, and it is the decentralized part of that sentence that is 

really unique. Prior to Bitcoin’s invention in 2009, online currencies 

or payment systems had to be managed by a central authority, 

whether it was Facebook issuing Facebook Credits or PayPal ensuring that transactions between its customers were reconciled. 

However, by solving a longstanding conundrum in computer science 

known as the ‘‘double spending’’ problem, Bitcoin for the first time 

makes possible transactions online that are person to person, without the need for an intermediary between them, just like cash. 

This technical breakthrough presents potential benefits for consumers and the economy as well as challenges to law enforcement. 

For example, because there is no central authority in Bitcoin transactions, there are little to no fees associated with those transactions, which especially benefits small businesses and price-sensitive consumers. And because Bitcoin is not a proprietary platform 

run by a single company but instead it is an open network, entrepreneurs need no permission to experiment or to innovate new 

products and services. 

On the flip side, law enforcement has long relied on financial 

intermediaries to help them detect, prevent, and investigate illegal 

transactions. Because Bitcoin transactions can have no intermediaries, and because Bitcoin transactions are not necessarily 

tied to identities, it is not surprising that we have seen Bitcoin employed in criminal transactions. In particular, Bitcoin has been 

used for the sale of drugs and in malware that holds one’s data 

hostage. It is also not difficult to imagine how the technology could 

be employed in money laundering. 

Emerging technologies often present both great potential benefits 

as well as real risks. For example, 3D printing can be used to 

cheaply make prostheses and life-saving medical devices, but also 

undetectable firearms. Domestic commercial drones have the potential to revolutionize agriculture and shipping, but could also be 

used for stalking. The challenge for policymakers is to address the 

risks posed by emerging technologies while doing no harm to the 

innovative potential of that technology. 

In many cases where emerging technologies pose risks, there are 

already laws and regulations of general applicability that address 

many of those risks without the need for new laws targeted at the 

specific technology. This is the case with Bitcoin. While Bitcoin 

transactions do not require intermediaries, one must still acquire 

Bitcoins by exchanging dollars, and merchants that accept Bitcoins 

will very often use Bitcoin payment processors. Indeed, there is a 

fast-growing ecosystem of startup exchanges, payment processors, 

and wallet and escrow services that make up Bitcoin’s burgeoning 

infrastructure. Each of these are already subject to regulation as 

money transmitters, including State licensing and FinCEN registration, as well as Know Your Customer and suspicious activity 

report requirements. 
35 

More to the point, serious criminals looking to hide their tracks 

are more likely to choose a centralized virtual currency run by an 

intermediary willing to lie to regulators for a fee, rather than a decentralized currency like Bitcoin that, as a technical matter, must 

make a record of every transaction, even if pseudonymously. While 

the online black market Silk Road, which used Bitcoins, is estimated to have generated less than $200 million in drug sales, the 

centralized digital currency Liberty Reserve is believed to have 

laundered more than $6 billion related to credit card fraud, identity 

theft, computer hacking, and child pornography. The reason Liberty Reserve, and not Bitcoin, was the payment system of choice 

for criminals online is that it was designed and managed by its creators to avoid Know Your Customer and reporting rules and to 

evade subpoena. 

As a result, the path forward that can best confront risks while 

ensuring that we can reap Bitcoin’s beneficial potential is to allow 

the Bitcoin network and its surrounding infrastructure to develop 

by making sure that entrepreneurial innovators can easily comply 

with existing regulation. The alternative, promulgating special regulations for virtual currencies or otherwise making it more costly 

to operate legitimately in the space, could have two unintended 

consequences. First, it might mean ceding the network to exclusively illegal use and forgoing any visibility that law enforcement 

could otherwise gain into the activities of compliant firms. And, 

second, the United States could lose its head start in what may be 

the next big breakthrough industry if it establishes a regulatory regime that hampers Bitcoin while other countries, like China, Canada, and Germany look for ways to develop workable regulatory 

frameworks for Bitcoin. 

Finally, as regulatory and law enforcement agencies seek to 

apply existing laws to Bitcoin, they will face the challenge that 

Bitcoin is not a company with an easily identifiable executive, but 

instead it is an open-source project and a community. The Bitcoin 

Foundation is central to that community, but it does not encompass 

the whole community. So as new guidelines and procedures are developed, policymakers should make sure to engage the community 

and solicit comments from the public to ensure that they benefit 

from a wide range of perspectives. 

Thank you for your time, and I look forward to your questions. 

Chairman CARPER. Thanks very much for joining us today and 

for that testimony. 

If you were here during the testimony of the first panel, you 

heard me indicate that one of the things I like to do to address an 

issue like this, around which there is not a great deal of consensus, 

is to use these hearings as an opportunity to see if we can develop 

some. And I thought we made a little progress with the first panel, 

and I am hopeful that we can replicate that with this second panel 

of witnesses. 

Toward that goal, let me just ask you to reflect on what you have 

heard from your colleagues on this panel, and just tell me and the 

staff members that are here and whoever is watching on television 

here in the Capitol or outside the Capitol, where do you see the 

agreement among the four of you. The perspectives you shared 
36 

with us—the opinions that you shared with us, where do you think 

there is general agreement? 

Second question, where do you think there is not agreement? 

And how do we go about reconciling that lack of agreement, if we 

can? Mr. Allen, do you want to go first? 

Mr. ALLEN. Senator Carper, I think there is broad-based agreement about the potential of a digital economy and virtual currencies. I think there is absolute agreement that there is enormous 

potential for social good and that this is an emerging technology 

that needs to be protected. 

I also think there is clear agreement that we cannot just ignore 

the misuse and that the misuse of a digital economy and virtual 

currencies jeopardizes the viability of virtual currencies in the 

longer run. So I do not think there is disagreement at all on those 

points. 

As it relates to area—and I also do not think there is disagreement on the need for basic regulation using the existing tools: the 

application of AML, the application of money transmitter laws at 

the exchange level, Know Your Customer, those kinds of provisions. 

I think maybe the greatest challenge, the greatest area that we 

have to grapple with is how do we enforce the enforcement techniques to deal with the misuse while preserving the potential long 

term and the fact that this truly is a global phenomenon. This is 

something that we are just beginning to adress—the FinCEN guidance on this was just issued in March of this year. The FATF guidance that Director Shasky talked about, the Financial Action Task 

Force, their guidance on this issue was just issued this summer, I 

think in July. 

So my sense is that most of the world is not applying money 

transmitter laws, is not applying any money laundering principles. 

So I think the question of how we get from here to there regarding 

an area that there is not great knowledge and understanding about 

is really the issue that the four of us would have to grapple with. 

Chairman CARPER. Thank you. 

The same question, Mr. Murck, if you would, please. Where do 

you see consensus agreement? Where do you see a lack of that? 

And how do we go about reconciling that lack of agreement or consensus? 

Mr. MURCK. I will take the second part first. I do not know that 

I heard a lot of disagreement or anything that we would generally 

disagree with from this panel or even really from the first panel. 

I was heartened by that. I think that Ernie is correct that, as we 

move forward, I think that an open dialogue is good so that as 

those disagreements do crop up—and they likely will—we can address them quickly and in a safe and sane way. 

As to where we have agreement, I think what I heard from the 

other panelists is there is a real need to create on-ramps into the 

traditional financial system, that by creating those on-ramps, especially here in the United States, you help to protect the system 

from abuse. 

The biggest obstacle to that happening today is not from regulation or from law enforcement. It is from the ability of businesses 

in the space to get bank accounts and to be integrated into the 

banking system. 
37 

There is currently a chill in the banking system and in the banking industry that is preventing businesses from getting just simple—even simple checking accounts. There are stories that if you 

have the word ‘‘Bitcoin’’ anywhere in your name or your documentation, your application will be immediately placed in the circular file, as it were. 

So I think there is a need to create some leadership within the 

banking industry to make sure that these companies are onboarded 

into the traditional system where some of the protections are in 

place already and the illicit activity can be detected and rooted out. 

Chairman CARPER. Good. Thank you. Mr. Allaire. 

Mr. ALLAIRE. I would like to echo some of the other panelists’ 

comments. Clearly there is consensus here around the innovation 

that we see the potential for financial inclusion. I think there is 

consensus that many of the regulatory frameworks and tools are 

sufficient and being applied appropriately. I think there is consensus that the open nature of this technology, its development, its 

use, and its oversight, is a very positive framework. 

I do think that there is some tension around the question of the 

balance between anonymity and privacy and whether there are 

new laws that are required to end the possibility of anonymity on 

the Internet or to address that in some way. I think, as I stated, 

in my comments, we are very focused within our business on having very deep levels of identity verification, and so we view that as 

critical. But others within the digital currency world, particularly 

within geographies that do not have the same kinds of regulatory 

regimes, may not. And are there other things that we need to be 

thinking about, other tools that we need to be thinking about for 

law enforcement that can address some of those issues? So I think 

that arena needs additional and careful consideration. 

Chairman CARPER. All right. Thank you. Mr. Brito. 

Mr. BRITO. So I think there certainly is broad consensus among 

the panel up here, and I was very heartened to hear the first panel’s message, and I think we have a lot of consensus. I will pick 

two issues just to give you an answer. 

First, where is there agreement, I was very interested in listening to the gentleman from the Secret Service who said that, in fact, 

it is centralized currencies that pose the greatest risk as far as 

money laundering and other illicit uses, and that decentralized currencies like Bitcoin, because of their nature, were not a greater 

risk. I think that was a great point of agreement there. 

To pick a point of disagreement, Ms. Shasky took issue with the 

idea that U.S. businesses might move overseas seeking a better 

regulatory environment, and I think her suggestion was that if 

somebody leaves the United States seeking lax regulatory treatment, they are going to find it eventually. It is going to catch up 

with them. And I think the danger is not that somebody who is trying to facilitate an illicit business is going to leave the United 

States. The danger is that real hard-working entrepreneurs who 

are looking to comply just do not find a regulatory environment 

that is amenable here. And that is something that we do not want 

to let stretch for too much time. 

Chairman CARPER. OK. Thank you. I want to go back to Mr. 

Allen. I think you mentioned the guidance issued earlier this year 
38 

by FinCEN, and I am going to probably ask Mr. Allaire to lead off 

and respond to this question. But they issued their guidance earlier 

this year, I think back in the spring, and they stated that virtual 

currency exchangers and administrators would need to register as 

money service businesses and apply for money transmitter licenses 

in the 48 States that require such licenses. 

I want to ask you just to focus on this with me for a little bit. 

I am going to ask you—and some of you have already alluded to 

this guidance and given it some thought, but I just want you to 

give me your thoughts on this guidance from FinCEN. Do you believe that the approaches are a good fit for virtual currency exchanges or other virtual currency-related businesses? And, Mr. 

Allaire, I am told that your company has registered with FinCEN 

and has applied for money transmitter licenses in a couple of 

States. So could you, if you would, just offer the first response. 

Mr. ALLAIRE. Sure. I think a business that is going to handle 

consumer funds, store and manage those, and is going to interact 

with the banking system should be compliant with the rules that 

have been set forth through the Bank Secrecy Act to protect consumers and ensure that bad actors are not able to operate. So I 

think in general we very much think that these are appropriate 

guidelines, and I think the digital currency business from an entrepreneurial perspective may be different than other prior Internet 

businesses. Two guys can build a photo-sharing app and put it up 

on the Web and get a billion users. I do not think it is appropriate 

that two guys should be able to build a financial services business 

and operate that without a sufficient investment to protect consumers and protect society. 

And so I do believe that the bar needs to be higher for financial 

services businesses in the United States, and that it is not realistic, 

which I think some in the entrepreneurial community would like 

to see regulation which does not require that level of compliance. 

I do not think that is realistic. 

When I founded the company and sought capital to build this 

company, we understood that the bar was higher and we raised 

sufficient capital to be able to launch our product and service in a 

compliant manner and hire the professionals and staff and put in 

place the systems and protections that were critical. So we think 

it is appropriate. There are challenges with how many transmission licenses are granted in the United States, the broad number of States, the divergent approaches that each State might take, 

and I do think that creates cost and complexity and could be argued to be an unnecessary regulatory burden. But that is the system that we have, and that is the system that we are pursuing and 

operating within. 

Chairman CARPER. Good. Thanks. Others on the same issue, Mr. 

Allen, do you want to—— 

Mr. ALLEN. Yes, just briefly, Senator Carper. I agree with Mr. 

Allaire totally, and what I think is most appropriate about the 

FinCEN guidance is that it is focused at the exchange level. It does 

not apply to users, it is an application of basic money transmitter 

law, and I think it is an appropriate use of the existing law, and 

I think it is a reasonable approach. 
39 

I agree with him that one of the great challenges is creating consistency and uniformity because of our Federal system and the fact 

that there could be 50 different approaches. But that is not unique 

to this issue. 

Chairman CARPER. OK. Thank you. 

Mr. Murck, any thoughts, please? 

Mr. MURCK. Yes, the 50-State money transmitter license regime 

has come up. I do think that States have an interest in protecting 

their consumers. At the same time, it is a bit burdensome and it 

has slowed down progress in the United States; I do not know what 

the answer to that question is. I know in the European Union (EU) 

they have a system of reciprocity where they have a minimum 

threshold for each country, and if you attain a license in one country, you can passport it to other countries as well. Perhaps that is 

a framework that would work here. But that would be best left to 

the Legislative Branch. 

Chairman CARPER. All right. Thanks. 

Mr. Brito, any thoughts? 

Mr. BRITO. One small point regarding the FinCEN guidance. I 

think it is very clear as it applies to exchanges and to administrators of centralized virtual currencies. I think it is less clear when 

it applies to users, for example. The guidance says that you are not 

required to register with FinCEN if you are acquiring, say, Bitcoin 

in order to buy goods or services. But let us say, for example, 

that—my mother is from Spain, and recently I helped her send 

money back home, and it cost 5 percent of the total amount. What 

if I was buying Bitcoin simply to remit money overseas as, could 

be one of the great potential benefits to allow remittances to the 

Third World and to other countries? That is not covered by the 

FinCEN guidance. 

So I think the guidance could use further explanation, and I 

think if FinCEN were to put any further clarification up to public 

comment, they would, I think, get all the wrinkles out. 

Chairman CARPER. OK. Thanks. 

Let me go back to you, if I could, Mr. Allen. I understand that 

your organization, International Centre for Missing & Exploited 

Children, was one of the forerunners in bringing together private 

and public stakeholders to talk about virtual currencies. If you 

would, first a couple questions. Who was involved in your working 

group? And why did you form it? 

Mr. ALLEN. Mr. Chairman, we formed it because several years 

ago we had a very positive experience in bringing together financial 

industry leaders around the fact that the mainstream financial system, the mainstream payment system, credit cards, were being 

used for the purchase and distribution of child pornography. I 

called the chairman of a major credit card company and said, ‘‘How 

is this possible?’’ And he said, ‘‘We do not know what these transactions are for. If you can find for us, show us where the merchant 

bank is, where the account resides, this is an illegal use of the payment system, we can stop the payments, we can shut down the accounts. 

So we brought together coalitions in North America, Europe, and 

Asia and had enormous positive impact. There was a dramatic decline. But as I began to talk to law enforcement and other leaders 
40 

around the world, what we determined was that we did not end it. 

We just moved it. And we were seeing evidence of a migration of 

these kinds of illegal operations into this new economy. 

And so in an effort simply to try to understand it better and determine if it was a problem, to use that same model to bring leaders together, private sector leaders together to try to develop 

shared commonsense solutions, that is why we joined with Thomson Reuters to create this task force. And it includes the Bitcoin 

Foundation, it includes the Tor Project, it includes the Gates Foundation and the Brookings Institution, the Cato Institute, Vital 

Voices, a human rights group. It includes multiple law enforcement 

groups and representatives. 

The intent was to bring people together, better understand the 

problem, and search for common ground, and so that has been our 

process. 

Chairman CARPER. Let me just follow that up, and you have 

partly answered this question, but I want to ask it anyway. But 

just share with me a bit further what you have been able to learn 

from the dialogue that you facilitated, especially as it pertains to 

the exploitation of children around the world. 

Mr. ALLEN. I think we have really learned a lot in a short time. 

One of the challenges is most of the evidence is anecdotal, because 

relatively few cases are actually being made, as we have talked to 

law enforcement. I talked about that earlier in terms of the absence of investigative techniques to probe these kinds of things. 

But I think we have learned that there is broad-based interest 

in searching for and finding reasonable solutions that work. We 

have learned, I think, as was pointed out earlier, that the digital 

economy is far broader than Bitcoin. So the issues we are focusing 

on are not just Bitcoin but, for example, there are 22 million users 

today of Russia’s WebMoney. We have talked about Liberty Reserve and the case that was made there, $6 billion in illegal money 

laundering. 

So I think we are discovering it is a complex issue, but I think 

it is one that is addressable, and I think the most encouraging 

thing to me is I now believe it is addressable using many of the 

tools and laws that we already have in place; that one of the biggest challenges for policymakers is simply to increase the level of 

awareness so that countries around the world will begin to use the 

tools they already have. 

Chairman CARPER. Well, that in part is why we are having this 

hearing. Good. 

I was talking with a fellow who goes to the same church as we 

do back in Delaware the other day. He is in the auto business, sells 

a lot of cars. He has dealerships, sells a lot of cars in our State. 

And he was talking about the work of the Consumer Financial Protection Bureau (CFPB) established a couple of years ago, hopefully 

to look out for the interests of consumers throughout this country 

in a lot of different ways. But I want to focus just a little bit on 

consumers, if we could. 

I have been told that virtual currencies pose a number of questions as to their use by consumers, and I have maybe two questions, but the first is—maybe we should go down the panel, or go 

up the panel. Mr. Brito, we will start with you. And if you will, just 
41 

give us some of your thoughts on whether virtual currencies have 

sufficient protections built into them for consumers. And do virtual 

currencies raise any additional new issues for consumer protection? 

For example, do we need to do anything to better protect consumers from fraud or to protect consumer privacy as a result of 

these virtual currencies? 

Mr. BRITO. I think that this is a very nascent industry and is 

still trying to find its way. As a result, that means that the folks 

who are, at this point, participating in this economy really have to 

try hard to participate in it. So these are not your average consumers, just yet, jumping into this space. 

So at this point I think it gives regulators some time to learn 

more about the technology and learn more about what the industry 

players are doing to address these concerns and whether the existing consumer protection laws are enough. 

As far as opportunities, what is interesting about especially decentralized digital currencies is that they provide a new choice for 

consumers. Today, if you want to use electronic payments, you are 

probably going to be using a credit card or something like PayPal, 

and that comes with fees, sometimes high fees, and those fees are 

important because they provide things like insurance. If your identity is stolen or if something that you receive is not what you ordered, you can always have the charge reversed. 

Decentralized digital currencies are alike in that there is nothing 

to reverse, but that also means that there are very little fees. So 

this now presents a new choice for consumers. They can choose insured but more expensive or not insured but less expensive. That 

is a new choice for consumers that was not there before. 

Chairman CARPER. OK. Thank you. Mr. Allaire. 

Mr. ALLAIRE. I think there are many issues around consumer 

adoption of digital currency. I will touch on a couple of them. 

We emphasize that Bitcoin as a digital currency offers great potential to lower the fraud risk that both consumers and merchants 

face on a day-to-day basis when we conduct payments. When we 

go into a restaurant and give our credit card out or when we enter 

that information online, we are effectively giving out the keys to 

our bank account to every counterparty that we interact with. And 

so it should not be a surprise that we have seen dramatic growth 

in the amount of identity theft and specifically financial information, private financial information being stolen and sold on black 

markets and used for nefarious reasons. 

Protocols like Bitcoin reduce that risk because the keys to your 

bank account, the keys to your money are never transmitted, and 

that is one of the brilliant aspects of the design of the system. And 

so there is real potential to lower occurrences of financial fraud in 

consumer transactions and increase consumer privacy as a result. 

So I think those are really key benefits, but there are risks, 

clearly, for consumers. I think one risk—and this is one that we 

take very seriously as we look at this—is increasingly, because of 

ease of use, consumers that want to take advantage of things like 

Bitcoin are using online services that essentially host their Bitcoin 

on servers or on the Internet. And because Bitcoin itself, the mechanism by which funds can be used, is based on keys that we then 

in turn would store, there is a real risk around the security of 
42 

funds, and we have seen occurrences just in the past weeks of 

startups who did not have appropriate levels of security around 

those funds, and those funds were effectively stolen. 

And so I think there is really critical requirements around the 

safeguarding of funds, the custodianship of these keys and best 

practices and methods to employ that. I think industry is driving 

forward on that, but I think that is a key issue that the CFPB may 

take a look at. 

The flip side, which is this question of what I would call merchant fraud, which is the chargeback scenario—you did not get the 

product, you got the wrong product, someone had inappropriately 

used your account—I think that there are methods for addressing 

that within the technology of Bitcoin today and within improvements that are coming in upcoming versions of Bitcoin, mechanisms to create refunds to consumers, mechanisms to provide 

greater transparency around what you are paying for. And there 

are mechanisms even that are not well understood, I think generally, but which will become available where funds can be held in 

escrow until a product has been delivered to a consumer. So there 

are ways to address some of that merchant fraud risk as well, and 

I think you are going to see industry participants pushing forward 

on that in the coming months and years. 

Chairman CARPER. OK. Thanks. 

Mr. Murck, any thoughts? 

Mr. MURCK. Yes. Thanks for the question. There are consumer 

protection issues in the Bitcoin space, and I will reserve my comments strictly to Bitcoin and decentralized currencies. 

When you look at Bitcoin especially, we have not even released 

Version 0.9 yet, so we are not on Version 1.0. It is very much still 

an experimental currency, and it should be considered a high-risk 

environment for consumers and investors at the moment. 

That is changing over time as businesses like Mr. Allaire’s and 

others’ are coming into the space and building the service layers on 

top of the Bitcoin protocol to make it safer for consumers to move 

in. Those service layers are both technological—Bitcoin has been 

referred to as ‘‘programmable money,’’ so you can build in layers 

of escrow and dispute mediation and things like that right into 

your payment structure, which is a very interesting concept as 

most of the laws that exist for consumer protection in the payment 

space were built around traditional methods where those were not 

possible. So potentially you do not need as much regulation on the 

consumer side in the long term to the mid-term as this system 

grows up. 

In the short term, consumers should be aware that this is a highrisk environment and that potentially it is not quite ready for mass 

consumer adoption today. That time is coming, but it is not here 

yet. 

Chairman CARPER. Thank you. Mr. Allen. 

Mr. ALLEN. The other panelists are the experts, so I do not think 

I have much to add other than to say one of the groups we met 

with on this were central bankers and financial industry leaders, 

and they clearly view, as I think the other panelists do, virtual currencies as akin to cash. So there is no Federal Deposit Insurance 

Corporation (FDIC), there is not that level of protection. So I think 
43 

it has to be viewed as high risk, and I think the points that the 

other panelists made about the fact that consumer protections are 

part of a work in progress, but certainly something that we need 

to be very much aware of. 

Chairman CARPER. OK. In anticipation of this hearing, I was 

asking the members of our staff to tell me a little bit about where 

did Bitcoin come from, who was the creator, who were the creators; 

and I am told that the protocol was developed either by maybe a 

programmer or by a group of programmers that go by the name— 

I think it is Satoshi Nakamoto. Is that correct? 

[No verbal response.] 

OK. And with all the money and attention that has been given 

to Bitcoin, it just seems strange to me that either this individual 

or this group would choose to remain anonymous. 

What do we know about this person or what do we know about 

this group? Does it matter that his, her, or their identity remains 

a mystery? Who wants to go first? Mr. Murck, do you want to go 

first? Go ahead. 

Mr. MURCK. I will go ahead and field that one for everybody. 

[Laughter.] 

So, yes, Satoshi Nakamoto is the pseudonym for the creator or 

creators—he, she, they—who developed the Bitcoin protocol and released the original white paper, the spec for the Bitcoin protocol 

into the world, in addition to the original code base, that was then 

open-sourced to the entire community. This person or group of people has since left the scene, as it were. At least, if not more than, 

half of the code base from that original code has already been rewritten. While I think everybody is grateful for that incredible contribution, at this moment in time, who Satoshi is is largely irrelevant to the story of Bitcoin going forward. And I think that was 

intentional and possibly why a pseudonym was chosen in the first 

place. 

Chairman CARPER. All right. Anybody want to add to that, 

please? Mr. Brito. 

Mr. BRITO. I just want to address that it is a little strange that, 

Bitcoin, we do not know who the creator is, and so that often conjures up the idea that there is some risk here that we have not 

seen. 

Chairman CARPER. You do not think it was Al Gore, do you? 

[Laughter.] 

Mr. BRITO. He has never denied it. 

But I think the key thing to emphasize is that Bitcoin, especially 

the code base, is open source. That means it is completely open and 

auditable and available to anybody to look at. And, in fact, many 

very smart programmers and cryptopgraphers have looked at it 

and have given it their seal of approval. And as Mr. Murck said, 

more than half of the code base has been written by others than 

Satoshi at this point. So, I am pretty confident that the software 

is what it says on the tin. 

Chairman CARPER. All right. We are just about to start voting 

over in the Capitol, so I think we will wrap it up. I just want to 

say—I love to quote Albert Einstein. Not all my colleagues do, but 

he said some just really memorable things. One of the things he 

said, ‘‘In adversity lies opportunity.’’ God knows there is plenty of 
44 

adversity with respect to these virtual currencies that we have 

talked about. It is not just potential, it is not just possible. It is 

real. And we need to be not just mindful of that but vigilant to 

make sure that we contain it and eliminate it where we can. 

I only know one quote that is attributable to Mrs. Einstein, and 

I find it sort of relates to my efforts to try to get my head around 

this whole issue of virtual currencies and Bitcoin. Mrs. Einstein, 

who probably was quite brilliant in her own right, was once asked 

if she understood her husband’s theory of relativity, and she allegedly responded, ‘‘I understand the words but not the sentences.’’ 

When I first started trying to understand what this was all 

about, I sort of felt like Mrs. Einstein: I understand the words but 

not the sentences. But with the help of our first panel and all of 

you on the second panel, and with the help of my staff and a lot 

of other folks that have come by to brief us, I am starting to understand more than just the words, but a few of the sentences, too. 

And that is really why we wanted to hold this hearing today, to 

better understand what is going on here, the pitfalls that come 

from this technology, but also the potential value toward society, 

to consumers, and to businesses. 

I said earlier I thought the first panel gave us a lot of thoughtprovoking information. I thought they were very thoughtful. But it 

is also encouraging. It was encouraging. And I find that that has 

been true here with this panel as well. So for that, we thank you. 

And on behalf of my colleagues who are not here, who are flying 

in from all over the country right now in order to make this 5:30 

vote, I thank you. They do not know I am thanking you, but I will 

thank you in their absence. Someday they will thank me for thanking you, I hope. But we have a bit of a shared responsibility here 

in trying to figure out how to make this work so that we minimize 

the bad that can flow from it and maximize the good. 

With that, I think we will wrap it up here, and I am going to 

just note that the hearing record will remain open for 15 days— 

that is until December 3 at 5 p.m.—for the submission of statements and questions for the record. I suspect we may have a few 

from me. When you receive those questions, I would just ask that 

you respond to them promptly. 

Again, to our staffs, especially John Collins, who first brought 

this to me months ago, I want to thank our staffs, both the majority and minority staff, and for you and for our first panel for joining us today, and for the work that you have done in helping to 

enlighten us a bit on this subject. 

With that, we are adjourned, and thank you so much. 

[Whereupon, at 5:30 p.m., the Committee was adjourned.] 
(45) 

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Æ