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87–403 2014

BITCOIN: EXAMINING THE BENEFITS AND RISKS 

FOR SMALL BUSINESS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

HEARING HELD 

APRIL 2, 2014 

Small Business Committee Document Number 113–064 

Available via the GPO Website: www.fdsys.gov 

SBREP-219 with DISTILLER


Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

BLAINE LUETKEMEYER, Missouri 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JAIME HERRERA BEUTLER, Washington 

RICHARD HANNA, New York 

TIM HUELSKAMP, Kansas 

DAVID SCHWEIKERT, Arizona 

KERRY BENTIVOLIO, Michigan 

CHRIS COLLINS, New York 

TOM RICE, South Carolina 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

YVETTE CLARKE, New York 

JUDY CHU, California 

JANICE HAHN, California 

DONALD PAYNE, JR., New Jersey 

GRACE MENG, New York 

BRAD SCHNEIDER, Illinois 

RON BARBER, Arizona 

ANN McLANE KUSTER, New Hampshire 

PATRICK MURPHY, Florida 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 

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(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Scott Tipton ..................................................................................................... 1 

Hon. Nydia Vela ́zquez ............................................................................................. 2 

Hon. Sam Graves ..................................................................................................... 9 

WITNESSES 

Mr. Jerry Brito, Senior Research Fellow, Mercatus Center, George Mason 

University, Arlington, VA .................................................................................... 3 

Mr. Adam White, Director of Business Development and Sales, Coinbase, 

San Francisco, CA ................................................................................................ 5 

Mr. Mark Williams, Executive-in-Residence, Master Lecturer, Boston University, School of Management, Boston, MA ........................................................... 7 

Mr. L. Michael Couvillion, Associate Professor of Economics, Plymouth State 

University, College of Business Administration, Plymouth, NH ..................... 9 

APPENDIX 

Prepared Statements: 

Mr. Jerry Brito, Senior Research Fellow, Mercatus Center, George Mason 

University, Arlington, VA ............................................................................ 29 

Mr. Adam White, Director of Business Development and Sales, Coinbase, 

San Francisco, CA ......................................................................................... 55 

Mr. Mark Williams, Executive-in-Residence, Master Lecturer, Boston 

University, School of Management, Boston, MA ........................................ 57 

Mr. L. Michael Couvillion, Associate Professor of Economics, Plymouth State 

University, College of Business Administration, Plymouth, NH ..................... 73 

Questions for the Record: 

None. 

Answers for the Record: 

None. 

Additional Material for the Record: 

Journal of Accountancy .................................................................................... 79 

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SBREP-219 with DISTILLER

(1) 

BITCOIN: EXAMINING THE BENEFITS AND 

RISKS FOR SMALL BUSINESS 

WEDNESDAY, APRIL 2, 2014 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Committee met, pursuant to call, at 1:00 p.m., in Room 

2360, Rayburn House Office Building. Hon. Sam Graves [chairman 

of the Committee] presiding. 

Present: Representatives Graves, Chabot, Luetkemeyer, 

Mulvaney, Tipton, Hanna, Huelskamp, Schweikert, Vela ́zquez, 

Clarke, Payne, Meng, and Mclane Kuster. 

Mr. TIPTON. [Presiding] Good afternoon. This hearing will come 

to order. Chairman Graves will be joining us shortly. I will fill in 

for him here in the interim. 

I would like to thank all of our witnesses for taking the time to 

be able to join us here today. 

To be able to gain an advantage in an increasingly competitive 

marketplace, small businesses are looking for innovative ways to be 

able to cut costs and be able to gain access to customers. One small 

way the businesses are doing this is through the use of cuttingedge technologies that can provide efficiencies, and Bitcoins may be 

one of these innovative technologies. 

Bitcoins are a form of virtual currency first introduced in 2008 

that allows users to exchange value digitally through the Internet. 

Despite not being backed by a government or holding any intrinsic 

value of their own, Bitcoins are growing as an alternative payment 

method. This hearing will examine the benefits and risks associated with Bitcoin as a payment system for all small businesses. 

While the origins of Bitcoin remain mysterious, it has grown rapidly in the last few years. Businesses choose to accept Bitcoin for 

many reasons, including to be at the forefront of new technology, 

to attract customers now using Bitcoin, to lower transaction fees 

from credit and debit cards, and to eliminate certain kinds of fraud. 

Despite these advantages, there are numerous risks that small 

businesses should consider before implementing a Bitcoin payment 

system. These risks include volatility of price, security and policy 

uncertainty. Further, recent developments in the Bitcoin industry 

have cast a shadow on its security and sustainability. Hacking attacks have led to the downfall of a leading Bitcoin exchange company, while its use for criminal activity has led to greater scrutiny 

by law enforcement and other federal and state banking regulators. 

We have invited a distinguished panel of experts who will explain what Bitcoin is, and we appreciate that, and how it operates, 

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2 

why it might be a good fit for small businesses and what the risks 

are associated with Bitcoin. We hope that by providing information 

about Bitcoin, small businesses will be in a better position to know 

whether adopting Bitcoin as a payment system might be a way for 

small businesses to be able to gain more customers. This hearing 

will also inform Members as we consider implications of policies affecting the use of virtual currencies. 

With that, I would again like to thank our distinguished panel 

of witnesses for joining us here today, and I now recognize the 

ranking member for her opening statement. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. Good afternoon, 

everyone, and thank you for being here today. 

American entrepreneurship is closely linked to technology called 

innovation. Whether it was the arrival of Google or Facebook, the 

widespread use of smartphone apps or cloud computing, our nation’s entrepreneurs drive many technological developments. Not 

only do small firms help create new technologies that drive growth, 

but they often benefit from new systems and processes. 

The relatively recent arrival of digital currencies is one technology that presents significant opportunity. Just as the Internet 

has empowered entrepreneurs to reach new global markets and 

identify more efficient ways of doing business, digital currencies 

like Bitcoin can save small firms on transaction costs. For a small 

company accepting major credit cards, each card swipe can cost as 

much as one-quarter of a cent in addition to having to return 3 to 

6 percent of sales total to the credit card company. Some credit 

card companies also charge businesses to join the network. By contrast, when utilizing Bitcoin, there is no cost of joining the network. Fees are less than 1 percent. For large retailers and big box 

stores, this cost may sound minor, but among small companies operating on thin margins, those expenditures are up. Moreover, 

should currencies like Bitcoin become widely utilized, they could 

create competitive pressure for conventional financial institutions 

to lower transaction fees in an effort to retain small business customers. 

Beyond allowing small firms to save on transaction costs, 

Bitcoins offer consumers other advantages. For customer seeking 

anonymity, Bitcoins provide more privacy than credit card transactions. Small firms are gradually recognizing the promise of accepting Bitcoins. In 2012, about 1,000 businesses used BitPay, the 

largest processor of Bitcoin payments. Today, more than 13,000 

small businesses in the U.S. employ this service. While most are 

online sellers, one in five are traditional brick-and-mortar operations suggesting the technology is gaining broader acceptance. 

Although this growth sounds promising, a number of unanswered 

questions might be impeding small businesses’ use of Bitcoins. 

Price fluctuation for Bitcoins create complications. Last spring, 

Bitcoin’s dollar exchange rate rose sharply from $50 to $350 and 

then fell to $70. With swings like this, one has to wonder whether 

small businesses will find it difficult to continually price and reprice their products in order to ensure they receive fair compensation from customers. 

There are also security questions. Hacking incidents in 2012 and 

2013 endangered many users’ Bitcoins. More recently, the bankSBREP-219 with DISTILLER

3 

ruptcy of Mt. Gox, one of the largest Bitcoin exchanges, was followed by news that the company has lost hundreds of millions of 

dollars in Bitcoins. For small businesses to fully benefit from this 

currency, customers must be assured their money is safe and cannot be snatched out of cyberspace. It also remains to be seen how 

the IRS’s recent ruling declaring Bitcoin a property as opposed to 

a currency will impact this technology growth. 

In all these areas, the Committee has an obligation to ensure 

small business interests are taking into account. We want small 

firms to benefit from this technology, but we must see to it that 

there are safeguards protecting them and their customers. Likewise, we must see that tax regulatory changes do not preclude the 

use of this currency. 

I expect today’s hearing will help us learn about complex issues 

like this and assist the Committee as it addresses such matters 

going forward. In that regard, I would like to thank our witnesses 

for being here, and I yield the balance of my time. 

Mr. TIPTON. Thank you, Ms. Vela ́zquez. 

If Committee members have an opening statement prepared, I 

ask that they submit it for the record. 

I would like to take a moment just to be able to explain our timing lights. You will each have five minutes for your testimony. The 

light will start out as green. When you get into the danger zone 

is when it moves to yellow. When it gets to the red, if you would 

conclude your statements at that time we would appreciate it. 

So again, thank you, gentlemen, for joining us this afternoon. 

Our first witness is Mr. Jerry Brito, senior research fellow at 

Mercatus Center at George Mason University. Mr. Brito focuses his 

research on technology, Internet policy, copyright, and regulatory 

process. Mr. Brito is the coauthor of Bitcoin: A Primer for Policymakers. 

Mr. Brito, thank you for being here, and I look forward to your 

testimony. 

STATEMENTS OF JERRY BRITO, SENIOR RESEARCH FELLOW, 

MERCATUS CENTER, GEORGE MASON UNIVERSITY; ADAM 

WHITE, DIRECTOR OF BUSINESS DEVELOPMENT AND SALES, 

COINBASE; MARK WILLIAMS, EXECUTIVE-IN-RESIDENCE, 

MASTER LECTURER, BOSTON UNIVERSITY, SCHOOL OF MANAGEMENT; L. MICHAEL COUVILLION, ASSOCIATE PROFESSOR OF ECONOMICS, PLYMOUTH STATE UNIVERSITY, 

COLLEGE OF BUSINESS ADMINISTRATION 

STATEMENT OF JERRY BRITO 

Mr. BRITO. Thank you. Thank you very much, Mr. Chairman, 

members of the Committee. Thank you for inviting me here today 

to comment on Bitcoin’s use for small businesses. 

Virtual currencies and electronic payment systems are nothing 

new. They have existed for decades. So what is it about Bitcoin 

that makes it unique? Bitcoin is the world’s first completely decentralized digital currency, and it is the decentralized part that 

makes it 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 

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4 

PayPal ensuring that transactions between its customers were reconciled. However, by ingeniously solving some longstanding problems in computer science, Bitcoin for the first time makes possible 

electronic transactions that are person-to-person without the need 

for an intermediary between them, just like cash. 

This technical breakthrough presents both potential benefits and 

risks for consumers and small businesses. For example, because 

there is no central intermediary in Bitcoin transactions, fees associated with those transactions are relatively small. Small businesses 

accepting credit card payments often face fees of around 25 cents 

for each card swipe plus 2 to 4 percent of the transaction total. If 

you are a small margin business, those fees can really eat into your 

bottom-line. In contrast, businesses that use a merchant processor, 

like BitPay or Coinbase, pay fees of 1 percent or less on Bitcoin 

transactions. If you are a smaller margin business, that difference 

could mean doubling your profits. 

Another reason small businesses are attracted to Bitcoin is that, 

like cash, all transactions are final. And again, because there is no 

central intermediary, there is no third party that can reverse the 

transaction. This protects small businesses from chargeback fraud, 

which often results not just in the loss of a sale but also in penalty 

fees. And such friendly fraud accounts for 41 percent of all claims. 

And if a merchant has 1 percent of their charges reversed as 

chargebacks, they can often be kicked out of the credit card networks, potentially ending their business. 

And finally, because Bitcoin is decentralized, businesses can now 

accept international payments that were not previously possible. 

There are over 50 countries that traditional payment processors do 

not serve, often because of high fraud rates. Because Bitcoin payments are global and final, doing business with consumers in those 

countries, especially in developing countries is now feasible. 

For consumers, the benefit Bitcoin presents is essentially choice. 

Wishing to encourage its use, merchants frequently offer discounts 

to customers who pay with Bitcoin. This means consumers will be 

able to choose to pay a little more and get the benefits of using a 

credit card, like fraud insurance and airline miles, or they can 

choose to pay a little less by using Bitcoin. For some price-sensitive 

consumers, this could be a very valuable choice. 

Of course, there are also risks associated with Bitcoin. Chief 

among these is Bitcoin’s historic volatility. It has traded from a low 

of pennies when it was first introduced in 2009, to a high of $1,200 

last December, with wild short-term swings. However, there is 

nothing inherent in Bitcoin’s design that naturally makes it so extremely volatile. Its extreme volatility is likely attributable to the 

fact that it is a new currency. Bitcoin is still an experiment, and 

it is still in the process of discovering a more stable price. 

Additionally, as a nascent currency, it is very thinly traded, and 

as a result, a single, large enough trade can affect the exchange 

price substantially. If Bitcoin’s use continues to expand, potentially, 

we could expect to see extreme volatility subside. Additionally, derivatives that allow investors to bet against the price of Bitcoin will 

soon become available and this should help stabilize the price as 

well. 

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5 

The volatility risk is one that a small business faces if it accepts 

Bitcoins directly. It should be noted, however, that small businesses can use Bitcoin entirely as a payment system without ever 

holding Bitcoins. And in fact, this is what most small businesses 

do. Using a merchant service company like BitPay or Coinbase, 

merchants can denominate prices in dollars, not in Bitcoin, and denominate their prices in dollars, accept Bitcoins for payment at the 

current exchange rate, and then immediately convert those 

Bitcoins to dollars, never actually holding a Bitcoin. 

Security is another concern. Because Bitcoin is essentially digital 

cash, securing it is vitally important. There is no intermediary that 

can replace your Bitcoins if they are stolen. As we have seen, however, merchants need not hold Bitcoins, and as interest in Bitcoin 

expands, we are seeing a great deal of innovation and investment 

in secure consumer products. But, this still means that exchanges, 

merchant processors, and other new Bitcoin intermediaries will 

have to earn consumers’ trust just as Visa and PayPal have. 

Like the Internet itself, Bitcoin has the potential to be a platform 

for the kind of permissionless innovation that has driven so much 

of the growth of our economy. And like all emerging technologies, 

Bitcoin also presents risks. The challenge for policymakers is to address those risks while doing no harm to the innovative potential 

of the technology. 

Thank you for your time, and I look forward to your questions. 

Mr. TIPTON. Thank you, sir. 

Our next witness is Adam White, Director of Business Development and Sales at Coinbase. Coinbase is a payment processing 

company for businesses interested in accepting Bitcoin. Prior to 

joining Coinbase, Mr. White served in the United States Air Force 

and was a test pilot for NASA before receiving his MBA from Harvard Business School. 

Appreciate you being here with us today, Mr. White, and look 

forward to your testimony. 

STATEMENT OF ADAM WHITE 

Mr. WHITE. Thank you, Mr. Chairman, Ranking Member 

Vela ́zquez, and other members of the Committee, for the opportunity to appear here today. 

My name is Adam White. I am the Director of Business Development and Sales at Coinbase, a company founded in June 2012, 

with the goal of making it easy for merchants and consumers to 

transact with the digital currency, Bitcoin. More than one million 

consumers use Coinbase as their digital wallet, and as of today, 

there are nearly 28,000 businesses that entrust Coinbase to accept 

Bitcoin payments on their behalf using our payment tools. These 

merchants include large enterprise-level businesses, such as Overstock.com and Big Fish Games, as well as tens of thousands of 

small businesses like Tealet, Tuft and Needle, and Mondo Cellars. 

Prior to my role at Coinbase, I served as a captain in the United 

States Air Force, and am a veteran of Operation Iraqi Freedom and 

Operation Enduring Freedom. 

I would like to begin today by outlining the inherent benefits of 

Bitcoin in commerce, namely the powerful prevention of fraud, the 

reduction of transaction fees, and the monetization of new markets, 

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6 

and how these benefits could be a positive influence on businesses 

of all sizes. 

Bitcoin enables individuals to push payments to merchants without having to share personally identifiable information that can be 

intercepted by criminals and used for fraudulent purposes. This irreversible nature of Bitcoin enables the abstraction of personal information and significantly reduces the risk of fraud, something 

that merchants, card processors, and banks spend billions of dollars per year combatting. With Bitcoin, for example, the target data 

breach that compromised 40 million consumers’ credit card information would not have been possible. Moreover, this irreversibility 

shields merchants from chargebacks. That is, the forced return of 

funds from a merchant to a customer’s bank account and the cost 

associated with managing, defending, and preventing fraudulent 

chargeback claims. 

In response, many card issuers and merchants use fraud detection systems that are overly sensitive to trigger activities, especially in card-not-present transactions common online. Initial estimates suggest that some merchants turn away nearly 8 percent if 

incoming orders due to issues associated with suspicious activity. 

Many of these transactions, however, are, in fact, legitimate. 

Bitcoin prevents the need for risk algorithms and ensures merchants capture 100 percent of their customers’ orders. 

Due to the powerful prevention of fraud and the reduction in the 

number of intermediaries required to process a payment, Bitcoin 

transactions are dramatically less expensive than traditional cardbased payments. Merchants can reduce their electronic payment 

acceptance fees to less than 1 percent when accepting payment in 

Bitcoin. This is especially important for small businesses that sacrifice anywhere between 3 and 5 percent of their revenues in card 

transaction fees. Businesses can use these savings to reinvest in 

their company or return them to consumers in the form of lower 

prices. Moreover, merchants are not subject to a fixed fee per 

transaction, enabling them to forgo minimum transaction limits 

and sell small ticket items profitably. 

Finally, Bitcoin provides the opportunity to monetize new markets by democratizing foreign exchange and enabling frictionless 

cross-border transactions that settle immediately. Many products 

and services are not available for sale in foreign countries because 

the business cannot manage the payment systems needed to support overseas commerce. Because of the borderless and global nature of Bitcoin, a Bitcoin payment made by a customer in New 

York looks identical to a merchant, as a Bitcoin payment made by 

a customer in London, Buenos Aires or Tokyo. There are no individual currency conversion fees associated with Bitcoin payments, 

so merchants can sell low margin items just as profitably abroad 

as they do domestically. The ability to easily begin accepting payments from customers around the world can open up whole new 

markets for merchants and significantly improve topline revenue. 

We see Bitcoin as an extremely powerful technology, and it is our 

goal to bring these efficiencies created by the Bitcoin network to 

the masses. We are encouraged to see the Committee’s proactive 

examination into the topic of Bitcoin as it relates to small busiSBREP-219 with DISTILLER

7 

nesses, and I look forward to engaging in dialogue and answering 

any questions you may have. 

Mr. TIPTON. Thank you, Mr. White. 

Our next witness is Mark Williams, professor of Finance and 

Risk at the Boston University School of Management. Before joining the faculty at Boston University, Mr. Williams worked as a senior trading floor executive, bank trust officer and as a bank examiner for the Federal Reserve Bank. Mr. Williams holds an MBA 

from Boston University School of Business, and a B.S. from the 

University of Delaware. 

Welcome, Mr. Williams, and please begin. 

STATEMENT OF MARK WILLIAMS 

Mr. WILLIAMS. Thank you. I am very happy to be here, and 

thank you for inviting me. In particular, I am very interested in 

Bitcoin, and the reason for that interest really stems from classroom discussions going back to 2011. At that point in time, prices 

were 35 cents, so it was more of a theoretical discussion, but very 

quickly within the classroom it moved from discussion to by 2012 

when Bitcoin prices started to increase by over a dollar to actually 

homework assignments, and then eventually, these homework assignments turned into outright discussions and debate in the classroom. By 2013, the price of Bitcoin by January had increased actually to $13 a coin. Very quickly, in 2013, it escalated from $13 all 

the way up to $1,200. It was remarkable. 

But what was unusual about this price run-up at the peak in 

2013 was the fact that this was a 9,000 percent increase. Nowhere 

on this planet or any planet has there been that sort of price increase. And what that represented to the marketplace in particular 

is the fact that this was a unique product and a unique risk. 

So what I would like to do today is I would like to focus specifically not on the promised benefits of Bitcoin, because we have 

heard enough about that, but I would like to take my discipline in 

risk management, in particular, working on a commodity trading 

floor, and talk specifically about the risks that are associated with 

Bitcoin. In particular, I provided a 30-page testimony which outlines 10 of the specific risks, what I consider to be the top risks associated with Bitcoin. But what I would like to do for the Committee right now is really focus on the top six risks. And I will 

leave this up for the discussion later. 

In particular, the first risk which is very important to look at for 

big businesses and for little businesses is that Bitcoin itself is not 

legal tender. And what I mean by that is the fact there is no legal 

precedence; that is, that individuals and corporations themselves 

have to accept Bitcoin. So as a result, it is a very voluntary commodity. So just as equally as we can turn a light off today, if the 

market decides they do not want to accept Bitcoin anymore, the 

value could drop to worthless. What is very interesting about that 

statement of worthless, we have seen Bitcoin drop already. Since 

its high in December, it has dropped by roughly 60 percent. So 

clearly, this is not a currency. Currencies do not behave like this. 

But what this is is a high risk speculative commodity. 

Since December, what have we seen? We have seen daily price 

movements of up to 10 percent. Can you imagine having currency 

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in your wallet that can move up or down by 10 percent? That 

would be hot currency. If you were worried about it dropping by 10 

percent, you would be selling it very quickly, getting it out of your 

wallet. If you thought it would appreciate, you would hoard it. And 

these characteristics are characteristics that you see in Bitcoin. 

Over 90 percent of Bitcoin is hoarded. What that means is only 10 

percent of what is available trades. 

Increasingly, we have had changes within the marketplace. Last 

week, the IRS came out with a formal ruling and said Bitcoin is 

not currency. What it is, it is property. And what that means is it 

reduces the likelihood of people to use it to spend. It actually gives 

a disincentive. What it increases though is the incentive to hoard. 

So this is the opposite of what you want in a currency. Currencies, 

we collectively use currencies because currencies themselves provide us with the ability to buy things. A $100 bill has not value 

to us to put on the wall, but that $100 bill has value for us to buy 

art that we can then put on the wall. Bitcoin is unusual in that 

regard. The fascination, fixation of investors on Bitcoin is tied directly to it as a commodity, as something to speculate, not as something to use as a transactional currency. 

So what are some of the other risks? There is extreme price volatility that was discussed earlier as well, and with that extreme 

price volatility with daily movements of 10 percent, what that 

means to put it in perspective, Bitcoin is seven times more risky 

than gold, eight times more risky than the S&P 500. In particular, 

it is 15 times more risky than the U.S. dollar. And just for fun I 

will throw this out. If you look at the Argentinian peso, Bitcoin is 

seven times more risky than the peso. 

So as you can see, this is not a currency, but this is a very risky 

commodity. But more importantly, when we think about businesses, businesses, your average business, they actually have profit 

margins of maybe 10 percent, 15 to be liberal. If you have a daily 

fluctuation of 10 percent, what that means is that profit margins 

can be evaporated within a period of days, and that is of concern. 

Two quick more risks that I will bring up to the Committee, and 

that is the asset bubble. Many noted economists have mentioned 

this asset bubble, and we have seen it actually since December 

start to implode. As I mentioned, the price dropped by 60 percent. 

In addition, the number fifth risk is a growing concentration risk. 

We are seeing firms like Coinbase doing a nice job of trying to mitigate the market risk, but what is happening is they are moving the 

risk from let us say 20,000 or 30,000 people to their balance sheet. 

So they are warehousing that risk and there is not a mature market for them to offload that risk. So we have concentrated risk on 

their books. They are thinly capitalized. They are a startup. There 

is no minimum capital requirement. So what should happen if one 

of these or both of these firms were to blow up? Then consumers, 

U.S. businesses would be impacted. 

And then finally, when we think about Bitcoin, there is Bitcoin 

tax which now is a risk. In a sense of using Bitcoin on a daily 

basis, deciding whether to pay, for example, employees or actually 

accepting it as currency, if you are having daily fluctuations of 10 

percent, you can see capital gains very quickly. 

So I thank you for your patience. 

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Mr. TIPTON. Gentlemen, if you would not mind, we apologize. 

Naturally, when we start, we get a vote called. And we want to 

make sure that our last witness has the appropriate amount of 

time and our folks are going to be able to listen. So we will go into 

recess, run over and vote. I believe it is going to be a short vote. 

And should be back in 20 minutes or so. Is that about right? 

So if you do not mind, I apologize, and certainly appreciate your 

patience. 

[Recess] 

Chairman GRAVES. We will go ahead and call the hearing back 

to order, and I now yield to Ranking Member Vela ́zquez for her introduction. 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

It is my pleasure to introduce Professor Michael Couvillion. Professor Couvillion is an associate professor of Economics at Plymouth State University’s College of Business Administration. His 

current research includes asset allocation modeling and alternative 

investment vehicles such as Bitcoin. Additionally, he has worked 

with the Enterprise Center of Plymouth to educate local, small 

business owners in New Hampshire about the advantages and disadvantages of Bitcoin. 

Welcome, Professor. 

STATEMENT OF L. MICHAEL COUVILLION 

Mr. COUVILLION. Thank you very much. And thank you to 

members of the Committee for inviting me. 

I thought I would take a slightly different tact this afternoon and 

not discuss the nuts and bolts of Bitcoin because you have heard 

so many excellent comments about that before. 

My interest in Bitcoin started about three semesters ago when 

one of my best students wrote a research paper in a class on 

Bitcoin. He was a passionate advocate for Bitcoin, and he liked it 

so much he actually put $100 into Bitcoin. He would not tell me 

how many Bitcoins he bought except that it was well under $10. 

So the student has graduate and now I keep getting emails from 

him. ‘‘Hey, check out the price of Bitcoin.’’ Because he bought it, 

I think, about $8, and Bitcoin is worth about $450 right now. So 

he has got a very nice paper profit here. 

So he got me certainly thinking about Bitcoin in a way I had 

never thought about it before. And I began to become interested in 

Bitcoin and opened an account with Coinbase in May of last year. 

I have some data in my written remarks that come from that 

dataset, which is roughly about 10 months, so it is suggestive, it 

is recent, but it is by no means definitive. 

Some of the things I have learned I would like to share with the 

Committee. Coinbase charges a different price if you buy Bitcoin 

than they do if you sell Bitcoin. This is known as the bid-ask 

spread, very similar to the spreads on a NASDAQ stock let us say 

in the stock market. And just for a random day, which was March 

28th—that is last week—the bid-ask spread for Coinbase was 17 

basis points. That is about two-tenths of one percent. By way of 

comparison, the Dow Jones Industrial Average at the same time 

had a bid-ask spread of about 45 basis points, twice as high, and 

the Standard and Poor’s 500 had a bid-ask spread of 32 basis 

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points. So on that day, compared to the stock markets, Coinbase’s 

bid-ask spread was lower. In addition, I have taken a look at the 

trend in the bid-ask spread. The high is 164 basis points, the minimum is zero, and the average is 40. So that is where I got that 

data you will see on the spreadsheet. 

Also, the bid-ask spread has been steadily trending down over 

time and it is a significant trend. So that is important because bidask spreads are an excellent measure of the liquidity of any market. They also have to measure risk because if a market is very 

thinly traded, you will see much larger bid-ask spreads. 

Then, I took a look at the statistics for Bitcoin, asking what kind 

of distribution does it follow? And my conclusions are that the 

Bitcoin price return series, that is the percentage daily change, is 

2P. It has too many small moves and not enough middling moves. 

It is also skewed heavily to the right and that causes a problem 

for using standard or traditional statistical analyses. 

Sorry, is my time up? No, okay. 

Also, I did a comparison of Bitcoin with three other 

invesmtents—short-term global interest rates, the dollar index, and 

the emerging markets currency index, and essentially, I found out 

that none of those models predict Bitcoin. Its price is in essence unpredictable. You cannot with any degree of accuracy project the 

price of Bitcoin more than just a few days in the future. 

Now, that is good if you are a small businessman, and the reason 

it is good is that because the average return to Bitcoin is positive— 

and remember, the price of Bitcoin has risen from about $85 last 

May to about $450 now. It is a bit seductive to a small business 

person because if you were to buy Bitcoin, you would see your 

Bitcoin increase in value. That is only because we have a bullish 

trend lately. The other thing that you will discover is that the 

number of daily moves are fewer than they should be at less than 

10 percent. 

Now, Bitcoin investors, unfortunately, pay for that because while 

the number of 10 percent or more moves is less than it should be 

by approximately roughly 2 percent, if you look at the number of 

15 percent moves, there are more than there should be. There is 

about 2 percent of the observations there and huge moves, which 

we call fat tails, there should be none. In the dataset there were 

six. Three were positive. Three were negative. But there were six 

price moves that would be completely unpredictable based on 

chance. So again, I would like to corroborate what your other witnesses have already told you, that Bitcoin is a very volatile currency. 

In terms of the other technical features, the problem with Bitcoin 

is that we cannot analyze it using the standard tools of finance because the underlying distributions simply does not fit our models. 

And that means it is hard if you are trying to use sophisticated 

techniques like value at risk or covariance matrices. It is hard to 

reach any conclusions that actually work. I realize that small businesses probably will not do that, but even large businesses will 

have difficulty with Bitcoin for that reason. 

I gave a small example of the cost comparison, and Bitcoin works 

at every level from $1 transactions all the way up to $10,000 transactions. Businesses can save money if they use Bitcoin, and that 

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I believe is the single fact that is what is going to drive Bitcoin to 

a successful integration into the marketplace. So there is a slight 

advantage right there. 

Offsetting that, it is difficult for businesses to use Bitcoin because they first have to educate themselves and their employees, 

and then they have to educate at least some of their customers. 

And exactly how do you do a trade using Bitcoin? So there is a 

steep learning curve at first, but once you have managed to get 

your employees and your customers educated, then things go a 

whole lot more smoothly. That is a good role here for the government to encourage confident and detailed education on the part of 

the companies that do a large business in Bitcoin. Because it is so 

new, you have to educate consumers about that, and because there 

is so much risk, they also need to be clearly informed and disclosed 

that this is not an FDIC-insured investment. It is not something 

that you would ever have invested in before. So I did want to make 

that point. 

Finally, I tried to forecast the price of Bitcoin, and my model suggests that the best predictor of the price of Bitcoin tomorrow is 99 

percent of the price today plus $4.73. And that is because there is 

a positive trend in Bitcoin prices. And I have a graph that shows 

that basically in 46 days, the price of Bitcoin could be as low as 

zero or as high as $1,000. That is in 46 days. So it makes it problematic, and I believe that the market for Bitcoin will remain volatile at least for a while unless it achieves mainstream acceptance. 

So having said that, there are a couple of advantages of Bitcoin 

that have not been touched on previously, so I would like to mention them quickly. One is that somehow you can send a message 

using Bitcoin. There is a way where you could say thank you for 

your business or some other message like that. I have no idea technically how that happens. I just know that it is possible. So it represents a different way for customers and businesses to communicate with each other. I find that interesting, particularly if you 

are communicating across the ocean with customers who may be in 

many, many different parts of the world. That is a benefit there. 

The other shoe to drop, so to speak with Bitcoin, is the IRS and 

its announcement recently that they are going to begin to tax 

Bitcoin. A lot of people are very, very upset by that in the Bitcoin 

community because they view it as an announcement that came 

late. 

Chairman GRAVES. Time is expired. 

Mr. COUVILLION. Okay, thank you. 

Chairman GRAVES. I am now going to turn to questions, and I 

will let Mr. Hanna open them up. 

Mr. HANNA. Thank you. 

Mr. Couvillion, you undermine your own argument. The volatility 

alone proves that it is not a storage of value. Your conversation 

about the S&P or say pick a stock that is backed by a company 

with real assets that are in some way attachable, discernible, and 

measurable because you can go to their website, you can go to their 

annual reports, there are a thousand ways to figure out what it is 

you are buying when you buy a company, I find that completely not 

even relevant. This is about a storage of value that is reliable for 

people that they can use and go back to that is not volatile. As a 

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matter of fact, any volatility at all that is more than the dollar depreciating over time or some other currency that fluctuates mildly 

is really, for me, a counterargument. 

But I want to ask Mr. Williams, why do we need an imaginary 

currency? What is there about this that benefits our society or the 

world at large? And in terms of the underground economy, what 

are the effects of this—why do we need an imaginary currency in 

talking about the underground economy? 

Mr. WILLIAMS. Great. So let me do it in reverse order, in regard to the underground economy, in particular. This is a potential 

tool which we have seen already because of Silk Road, to be used 

in nefarious ways. In essence, there are two aspects of Bitcoin that 

make it very dangerous in their wrong hands. And the one is the 

fact that it is anonymous. So that means whoever has it and controls it, owns it. So if you have an account and someone can hack 

it and grab that coin, not only does that criminal own it, but there 

is no way to trace down who took it and there is no way from a 

consumer standpoint to get it back. So in regard to the underground economy, that is one reason why it is a designer currency 

of choice. Now, it is unfortunate because Silk Road has sort of 

painted a very negative picture about virtual currencies. 

The second aspect of this sort of underworld of virtual currencies 

is the fact that Bitcoin also is not only anonymous but it is also 

irreversible. So once that transaction is done, it cannot be pulled 

back. So let us just say it is transferred by mistake to somebody. 

There is no way to get that back unless that person is generous 

and willing to do so. So that is of concern. 

Now, the first question you had, excellent question, and that 

really is what is the benefit? It is questionable in a sense that 

clearly I view the risks much greater at this point in time than the 

benefits. In regard to the price volatility, the fact that my colleague 

to my right can say within 46 days it could be worth zero. Currency 

is supposed to be used for transactional purposes to facilitate business. If you cannot count on currency, business will not be facilitated. What will happen is that will be hoarded and GDP will drop, 

employment will drop, and that is a negative thing for business. 

So what business needs is confidence in the currency that consumers are going to use. And it is not clear to me that confidence 

is there with Bitcoin. 

Mr. HANNA. Do you want a rebuttal, Mr. Brito? 

Mr. BRITO. Thank you. Actually, a couple things. 

I think there is a misperception that Bitcoin is completely anonymous. Bitcoin is not completely anonymous. Cash transactions on 

the other hand are completely anonymous. If I put a bike for sale 

on Craigslist and I get an email from somebody I do not know, we 

meet at a park, I give him cash—— 

Mr. HANNA. But credit cards are not anonymous. I mean, they 

certainly do not have to be. I can trace them. Checks are not anonymous. And frankly, trading in dollars and not paying your taxes 

is actually illegal. So, I mean, there is nothing different about 

Bitcoin than me paying somebody in cash and them not declaring 

it. 

Mr. BRITO. So I was getting to that. Whereas, cash is completely 

anonymous, credit cards are completely identified. Credit card comSBREP-219 with DISTILLER

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pany knows who I am, who the merchant is, the time, the amount, 

all of that. Bitcoin is in the middle. It is between cash and credit 

cards. Because while there is a record captured of every transaction, the amount, we do not know who that is. Now, this is where 

the Bank Secrecy Act comes in, and companies like Coinbase are 

required to keep a record of all of their customers. And so, for example, I have an account with Coinbase. They know my name. If 

there was ever a subpoena related to a particular Bitcoin transaction, Coinbase could turn over my name. 

Mr. HANNA. But it requires a subpoena. 

Mr. BRITO. The same way with a credit card. 

Mr. HANNA. Thank you. Well, right, but credit cards are a lot. 

I got it. 

Thank you, Chairman. 

Chairman GRAVES. Ranking Member Vela ́zquez? 

Ms. VELA ́ ZQUEZ. Thank you, Mr. Chairman. 

Professor Couvillion, last week Iceland announced that it will be 

releasing a variant of Bitcoin called Auroracoin. This is just one of 

many other cryptic currencies that exist in addition to Bitcoin. 

What makes these currencies so different from one another? 

Mr. COUVILLION. Thank you for the question. 

Bitcoin has what we economists call ‘‘first mover advantage,’’ because it was the first successful digital currency and because it has 

an overwhelming market share of, I believe, more than 90 percent. 

It will likely succeed simply because they were there first. There 

are many, many other different types of currencies, and most of 

them are variations on the same, but some offer a few different features than Bitcoin does. 

Ms. VELA ́ ZQUEZ. Do you think that the market can sustain numerous virtual currencies? 

Mr. COUVILLION. No. The parallel I would give is the time in 

the United States when banks printed their own currency before 

the Civil War and we saw ultimately the government had to then 

step in and create a national currency, the dollar. But that is a historical parallel. How good it is, I am not sure. 

Ms. VELA ́ ZQUEZ. Okay. 

Mr. COUVILLION. However, I do think we will see increasing 

use of Bitcoin very, very rapidly. I believe it is in the growth phase. 

Ms. VELA ́ ZQUEZ. Thank you. 

Mr. Williams, in your testimony, you indicate that the Bitcoin financial middlemen, who have multiple business lines, such as 

Coinbase, have an inherent conflict of interest. Can you please 

elaborate why you believe that this is the case? 

Mr. WILLIAMS. Sure. And that is a correct statement. The inherent conflict of interest with financial middlemen like Coinbase 

is on one hand they need to mitigate price risks for customers. So 

what they are interested in doing is being able to once they have 

the coin, is to sell at the highest price. But Coinbase also has another business line and that is selling Bitcoin to customers. Customers have an interest to buy at the lowest price, so just in those 

two business lines there is an inherent conflict of interest. 

Ms. VELA ́ ZQUEZ. What will regulatory oversight do to protect 

consumers in these cases? 

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14 

Mr. WILLIAMS. Right. I would say as regulation seeps into the 

industry pretty quickly, regulators will look at this and say we 

have to actually put a wall up with this conflict of interest. It is 

very significant and it needs to be taken care of. 

Ms. VELA ́ ZQUEZ. Mr. White, how would you respond to this 

criticism? 

Mr. WHITE. Thank you, Ranking Member Vela ́zquez. 

First off, I would say at Coinbase we work very hard to make 

sure our pricing is completely transparent. So it is important to realize that we offer two prices. We offer a buy price and a sell price, 

and those are identical for both our merchant services as well as 

our consumers. So for our consumers that purchase Bitcoins and 

want to sell those Bitcoins, that is the exact same price that we 

offer to our merchants. So that bid-ask spread that Mr. Couvillion 

annotated was about 17 bps, 17 basis points. So we believe it is 

very small and a fair small price. 

There is also in the Bitcoin market, pricing is incredibly transparent. So there are a number of websites out there, one of which 

is Bitcoincharts.com where you can look at the price of Bitcoin 

across a number of the largest exchanges or brokerages and determine if whether or not the price you want to pay for a Bitcoin on 

Coinbase is fair or not. We are held, because of arbitrage, to seek 

that true price as close as possible. 

Ms. VELA ́ ZQUEZ. Okay. Mr. Brito, last week the IRS issued 

guidance that Bitcoin is to be traded as a property rather than currency for tax purposes. What effect will this have on the Bitcoin 

and the business ability to accept it as payment? 

Mr. BRITO. So, I will begin by saying that I am not a tax professional and you should consult one, but I can say the following. It 

is going to introduce some accounting headaches because every 

time that you dispose of a Bitcoin in a transaction, you might be 

subject to capital gains. What does this do for the person who is 

accepting it, which is your question? Maybe nothing. If they are a 

merchant accepting Bitcoins via Coinbase and they choose to never 

hold Bitcoins, they just take dollars, they really do not have to do 

anything with that. That is something that consumers or the person who is spending the Bitcoin is going to have to make that accounting. 

Now, it is interesting that the choice that the IRS faced was 

should the coin be treated for tax purposes as currency or as property. And from what I understand, if the choice had been property, 

it turns out that foreign currencies—sorry, if it had been treated 

as currency, foreign currency transactions have to account for a 

gain when you dispose of your foreign currency, just as if it was 

property. The only difference is that there is a de minimums exemption for currency of $200 per transaction. So in essence, if it 

had been treated as currency, any transaction under $200, you 

really did not have to worry about that accounting. We might hope 

to see that kind of de minimums exemption for property. 

Ms. VELA ́ ZQUEZ. Mr. Williams, would you care to comment on 

that question? 

Mr. WILLIAMS. Well, I view the blow last week with the IRS 

as devastating, in particular to Bitcoin. As I mentioned earlier, 90 

percent of the coins are hoarded, so in that kind of economy, very 

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15 

few coins circulate. So that is not very liquid. We could look at bidask spread. That is only one measurement of liquidity. When we 

add now the IRS ruling last week, that increases and encourages 

consumers to horde more, not less. And as a result, that reduces 

liquidity even more. So it is very concerning. Being the leading financial market in the world, how we view this is extremely important, and it is going to set the tone for other nations as they try 

to regulate this currency as well. 

Ms. VELA ́ ZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman GRAVES. Mr. Chabot? 

Mr. CHABOT. Thank you, Mr. Chairman. 

Just a couple questions. In February, CNN Money ran an article 

regarding the illegal website Silk Road, and it has come up a couple times already in this hearing, and its relationships with 

Bitcoins. In that they wrote, and I quote, ‘‘The Silk Road is primarily used to buy and sell drugs. Bitcoins are the only kind of currency accepted on the site because they are traded electronically 

and are difficult to trace to individuals,’’ as has also been mentioned. That is a direct quote from the CNN Money Report. 

My question is this. If Bitcoin transactions are difficult to trace 

and also are irreversible, how do we prevent Bitcoins from facilitating criminal activity? And I would open that up to anybody who 

might like to address it. 

Mr. BRITO. So I think, again, by applying the Bank Secrecy Act 

and your customer rules to Bitcoin intermediaries, and that is 

something that FinCEN at the Treasury Department has already 

done and we are seeing these new intermediaries complying with 

those regulations. 

Second, I think it is a question for law enforcement and every 

time I have spoken to law enforcement, I have heard law enforcement testify, for example, last November’s hearing before the 

Homeland Security Committee, law enforcement has said that they 

are less concerned about virtual currencies being used for these illicit transactions online than they are about centralized virtual currencies or about cash, indeed. So I think it is a matter of law enforcement doing their job, and they say that they are up to the 

task, and it is a matter of enforcing our existing money laundering 

laws. 

Mr. CHABOT. Thank you. 

Would any of the other members like to address this? Mr. Williams? 

Mr. WILLIAMS. Well, I view the anonymous part of Bitcoin as 

actually being the Achilles heel. The fact it is anonymous, it makes 

it very dangerous, not only for criminal use for also for consumers. 

If these coins are stolen by criminals, they cannot be returned. 

Mr. CHABOT. Okay. Thank you. 

I will go on to another question. Of the number of businesses 

who sell their services or sell their products online, what percentage would you say—and I know it is difficult to know what it is 

for sure—but what percentage would you say of the businesses actually accept in some form Bitcoins for their items? Mr. White? 

Mr. WHITE. I will take that. So at Coinbase, we have roughly 

28,000 merchants that use our payment tools as of today. What is 

interesting to note is the vast majority, and it is difficult to say 

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16 

with any certainty, but by and large probably 95 percent, if not 

more, are small businesses. And these are organizations or individuals that are confronted with high credit card fees, issues with 

chargebacks and financial risk they are just not prepared to handle. And Bitcoin enables them to bypass or avoid a lot of those 

issues. 

Mr. CHABOT. Let me ask you a question. When you say they are 

small businesses, is there a particular type of small business that 

they are in general? 

Mr. WHITE. Absolutely. So right now what we see is Bitcoin is 

an incredibly seamless experience when used online. So in line 

with payment options on a website, it is very simple. Using a 

Coinbase product, you can click out or you can check out in as simple as two clicks. The vast majority of these businesses are 

ecommerce facing companies where they sell their products online 

and accept Bitcoin as a form of payment just with PayPal or credit 

cards. 

Mr. CHABOT. Okay. Now, if you have 28,000 yourself with your 

company, how many others are out there? What percentage are we 

talking of the overall businesses on the Internet? 

Mr. WHITE. So between Coinbase and our competitors, my best 

guess would be there is roughly 50,000 businesses that are accepting—— 

Mr. CHABOT. Altogether you mean? 

Mr. WHITE. Altogether here in the U.S. Correct. 

Mr. CHABOT. And out of how many are we talking about theoretically? Because I know it is pretty hard to know exactly. Whether it is 50,000 out of—— 

Mr. WHITE. The vast majority are going to use a Bitcoin payment processor, like Coinbase, because they want to shield themselves. 

Mr. CHABOT. I am not asking that. I am asking the 50,000 businesses that are actually utilizing Bitcoin now, out of a universe of 

how many businesses on the Internet are we talking about? If anybody else might know that—— 

Mr. BRITO. I imagine it is a very small fraction of businesses, 

small businesses that accept Bitcoin. I imagine it is less than 1 percent. 

Mr. CHABOT. Would you agree with that, Mr. White? 

Mr. WHITE. I would agree. 

Mr. CHABOT. Less than 1 percent. And you would assume over 

time—I would assume you would hope that that would grow substantially over time? 

Mr. WHITE. We are seeing our merchant services grow at about 

10 percent month over month. 

Mr. CHABOT. Okay. Are there online gambling businesses that 

are using this now? And are those any of your folks? 

Mr. WHITE. To the best of my knowledge there are. At Coinbase, 

we do not have the resources to ensure proper compliance with 

those online gambling organizations, so we do not provide Bitcoin 

payment processing services for them. But the thing with Bitcoin 

is you do not necessarily need to use a payment processor like 

Coinbase. An individual could create an online gambling site and 

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accept Bitcoin directly, but that is not something at Coinbase we 

support. 

Mr. CHABOT. Okay, thank you. I see that my time is ready to 

expire so I will yield back. Thank you very much. 

Chairman GRAVES. Ms. Clarke? 

Ms. CLARKE. Thank you very much, Mr. Chairman. And I 

thank our panelists for coming and sharing their expertise with us 

today. 

My first question is to Mr. Brito. In your written testimony, you 

mention there is nothing inherent in Bitcoin’s design that makes 

it naturally volatile. You attribute the current volatility to the fact 

that the currency is new and as such, thinly traded. 

My question is twofold. First, how is it that a currency backed 

by nothing more than market forces, and at the very least, without 

a central authority to intervene in price destabilization amongst 

other regulatory issues, that it is not inherently volatile. And then 

secondly, regarding your explanation on the current volatility, I 

have gathered from your written testimony that you believe time 

and increased trading and use will alleviate current volatility. A 

cynic might suggest that that was an oversimplification at best, or 

further, assumes that Bitcoin is an asset that can only appreciate, 

thus forcing stability. How is that unlike any of the previous bubbles we have seen inflate and pop over the course of the past 20 

years? 

Mr. BRITO. Okay. I appreciate that question. 

So in my testimony, I think what I mentioned was that there is 

nothing inherent in Bitcoin’s design that makes it extremely volatile. Extreme volatility. All currencies are volatile, and Bitcoin is 

certainly a deflationary currency by design. But this extreme volatility that we are seeing probably results from the fact that it is 

thinly traded. If Bitcoin’s economy were to grow and it was much 

more widely traded, and if we began to see derivative products that 

allowed you to hedge against Bitcoin’s volatility, we should see the 

volatility subside. Does that mean there would be no volatility? No. 

Is there a central bank that can intervene and basically introduce 

more money into the money supply to meet demands? No, there is 

none of that. So Bitcoin is still going to have a certain amount of 

volatility, but this extreme volatility is, I guess, what I am addressing. 

Does that mean that I see Bitcoin as only ever increasing in 

value? No. What I am saying is volatility, if Bitcoin’s acceptance 

grows and it begins to be traded more, volatility will subside, but 

it does not mean that it will subside necessarily in an increasing 

fashion. It might just reach hopefully a stable range. 

Ms. CLARKE. Mr. Williams, did you want to comment on that? 

Mr. WILLIAMS. Yes, on a few things. 

So since Bitcoin was created in 2009 and started trading, the volatility the first year was 160 percent annualized. That is just unheard of. Since then it has dropped to 140 percent, so we are still 

in nosebleed territory. That is concerning. 

Structurally, there are three reasons why Bitcoin itself is so volatile. The first is the fact that it is hoarded, and that is, as I mentioned earlier, of concern because hoarding allows you to manipulate the price. 

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The second part, which is very important, is the ownership structure itself is very small. With data that we know so far, at least 

looking at addresses, not knowing ownerships per se, we know that 

roughly 29 percent of Bitcoin is owned by 47 people. So you can 

imagine if 47 people get in a room and say, ‘‘Hey, lets not sell,’’ 

then that sets an artificial floor. 

A third thing, which is extremely important, is the fact that 

when we think about Bitcoin and what is happening here, is not 

only do we have sort of this scarcity of this commodity, and that 

is the third point, but it is scarce in a sense that by the year 2140, 

it maxes at 21 million. So in essence, if you create anything that 

has a scarcity and you hype up demand and you get enough people 

that think this is the next new, new thing, then you are going to 

see prices move and you are going to see high volatility. 

So those are the three structural things that have happened, specifically, that I view is why we have seen such extreme volatility. 

And up until last year, the space rocket went to the moon. This 

year it is coming back down to earth. 

Ms. CLARKE. So the second part to my question was do we see 

this as a bubble? Would you characterize it is such? 

Mr. WILLIAMS. Yes, I would. In December of 2013, I came out 

very strong adamantly saying that this was a bubble. We have also 

seen Alan Greenspan on December 4, 2013, come out and say it is 

a bubble. We saw actually Professor Shiller, a very well-known 

economist from Yale who came out in January. And it was very interesting the way he described this bubble. He said, ‘‘It is not only 

a bubble, it is an amazing bubble.’’ 

More recently, we have also seen additional examples. We know 

bubbles have three phases—growth, maturity, and pop. And we are 

clearly seeing the pop phase right now. 

Ms. CLARKE. I am out of time, but I thank you gentlemen for 

your response. 

I yield back, Mr. Chairman. 

Chairman GRAVES. Mr. Mulvaney? 

Mr. MULVANEY. Sure, let us just continue right there. 

I guess, Mr. Williams, and this is not where I was going, but just 

to follow on your last comment, so what? So what if it is a bubble? 

It is a very small—I mean, this is not like it is the housing bubble. 

It is not like it is a real estate bubble. It is a very, very small piece 

of the economy. Right? So what if it is a bubble? 

Mr. WILLIAMS. Right. So let us go down that road. So if it is 

a bubble, then we have these 47 people that are harmed. There is 

roughly 1,000 people that own roughly 50 percent, so they are 

harmed. But it does not harm a greater population. 

Mr. MULVANEY. Okay. 

Mr. WILLIAMS. However, the problem with that logic is the fact 

that we are talking not about a manufacturer’s manufacturing a 

good; we are talking about currency, which is the lifeblood of economies. We have to rely on currency and trust that currency to have 

effective business. So in essence, if the currency is flawed, then it 

impacts negatively our economy. 

Mr. MULVANEY. Right. But we just established that it is less 

than 1 percent of online trade, so, I mean, it is much to do about 

nothing in terms of the bubble. Right? It might be, it might not be, 

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but I guess in my mind I am hard pressed to see why Congress 

would care if it is a bubble. 

But let us move on to a couple of other things before I get to my 

own questions. 

I had a chance to listen to some of the questions from Mr. 

Chabot, and my question to you, Mr. Brito, for example, would be 

Mr. Chabot was clearly concerned about its use, Bitcoin’s use in illicit activity, whether it be drug sales, online gambling. Is it technologically possible and practically possible to make Bitcoin say as 

safe as the dollar when it comes to those types of transactions? 

Mr. BRITO. You are asking me if I was a criminal would I rather 

use a dollar or would I rather use a Bitcoin? 

Mr. MULVANEY. I guess so. 

Mr. BRITO. And the answer would be no. I mean, I have heard 

this from numerous law enforcement folks who told me you would 

be crazy to use a Bitcoin because there is a permanent record made 

of every Bitcoin transaction. And that is a record that could be 

accessed years from now to tie you back to a particular transaction. 

Is it your name? No, it is not your name. It is a pseudonym. It is 

a Bitcoin address. But there is a permanent record made of that 

transaction. And what we have seen with Silk Road, which is the 

example we all know of an online marketplace for drugs that use 

Bitcoins, is that the FBI successfully took down that website. And 

today, we are seeing one after another of the vendors on that 

website being arrested by the FBI. 

Mr. MULVANEY. Okay. Thank you. 

Let us get to my question then, which is the IRS decision, which 

Ms. Vela ́zquez asked I thought some excellent questions about. 

Start with this, and I will ask everybody to check in on this very 

quickly because I really do not know where you folk stand on this, 

was it the right decision? Was the IRS decision to classify this as 

property and not currency the right decision? We will just go right 

down the aisle. 

Mr. Couvillion, do you want to start? And I will come back. Answer yes or no. We will come back and ask each of you why, but 

I am trying to get a sense of the panel. 

Mr. COUVILLION. No. 

Mr. MULVANEY. Okay. 

Mr. WILLIAMS. Yes. 

Mr. WHITE. I would say no. 

Mr. BRITO. Tentative yes. 

Mr. MULVANEY. Okay. Here is my question. I guess, because 

it looks like—which is a nice thing about having a good panel, you 

get different answers from everybody. It strikes me that it is a way 

to tax the Internet, is it not? Right now, we do not have taxes on 

most of the Internet sales, at least we talk about some of them. We 

are dealing with Main Street fairness and those types of things. It 

strikes me that this is a way to tax Internet trade. But if I cannot 

tax the transaction, I will tax the currency that is used to do it. 

So that is where I am coming from. 

Mr. White, you tell me why you think it is no. Mr. Williams, you 

tell me why you think it is yes. 

Mr. WHITE. Yes. So I think what was surprising was the misalignment between the regulators. Right? Because we had FinCEN 

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come out last year and basically describe Bitcoin as a currency. 

They said companies like Coinbase that operate and provide 

Bitcoin services, please register as a money service business under 

FinCEN, and we followed that guidance. 

Mr. MULVANEY. You are doing that, right? 

Mr. WHITE. We are doing that. Absolutely. 

With the IRS’s recent guidance that now Bitcoin is a property, 

there is a mismatch there between how do you exactly describe this 

asset class? How do you describe Bitcoin? At Coinbase, obviously, 

we are working with our counsel and working closely with the IRS 

to seek additional guidance because what we want to do is enable 

as burdenless as a process as possible for our users to be able to 

transact in Bitcoin. And right now with this guidance it makes 

buying a $2 cup of coffee nearly impossible without additional products and services to track that cost basis. 

Mr. MULVANEY. Mr. Williams, and maybe the chairman will let 

you go a little bit more, but if you could give us your answer as 

to why you think it was the right decision. 

Mr. WILLIAMS. Sure. Well, when we look at Bitcoin itself, it is 

not a currency. To be a currency, it has to be of store value, and 

see it is not of store value at all. It actually destroys value. Second, 

we know it is not stable. 

Mr. MULVANEY. I am sorry. I have to cut you off. Destroys value? If I bought it at a penny and it is worth $450, does that not 

create value? I am sorry, what do you mean it destroys value? 

Mr. WILLIAMS. Right, so with currency, for example, you want 

stability. So you want to be able to put it in your wallet and not 

think about it and then next week use it, not worry about the daily 

price moving. 

Mr. MULVANEY. I have no idea what the name of the currency 

is in Argentina or in Venezuela. Is it still a currency? 

Mr. WILLIAMS. Yes, it is. And earlier I referred to it. Bitcoin is 

seven times more risky than Argentinian peso. 

Mr. MULVANEY. And Venezuela is still a currency? I think you 

see my point is currency, you go through different phases. But go 

ahead. Finish your thought. 

Mr. WILLIAMS. Okay. So we will move on. 

So in regard to another measurement of a strong currency, and 

that is that it is stable, and we are seeing that there is volatility. 

So there is not stability in this currency. But most importantly, 

when we think about a currency, it needs to be liquid, and that is 

that you can get in and get out. And it is not very clear that you 

can get in and out at good execution. 

But let us move it over. So if it is not currency, what is it? And 

that is what the IRS is really helping with. In essence, the IRS is 

saying, okay, well, if it is not currency, what does it look like? Well, 

if we think about a commodity, right. A commodity is something 

that is mined. That is Bitcoin. A commodity is something in particular that actually is stored. It is something that is processed. It 

is something that is resold in the market, and it is something that 

actually has scarcity. Well, that sounds a lot like Bitcoin. So in essence, I see the IRS ruling as moving more towards commodity. At 

least it is calling it a product. So I think we are getting closer to 

the discussion we need to have about what is this. 

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Mr. MULVANEY. Does Mr. White have a valid point about the 

misalignment? Why would he have to know his customer if he is 

dealing in a commodity and not a currency? To you, Mr. Williams. 

No, does Mr. White have a point? Is he right about the misalignment? One part of this government is treating it as currency and 

the other is not. He should not have to know his customer if he is 

only dealing in commodities; right? 

Mr. WILLIAMS. Right. So there is a lot of uncertainty about 

what it is. 

Mr. MULVANEY. Right. 

Mr. WILLIAMS. And so we saw that with the Treasury Department as it came in last year with this announcement with FinCEN, 

for example, and how they are working with money transmitters, 

and we are seeing with the IRS. The picture is getting clearer, but 

yet there is still a lot of uncertainty out there. 

Mr. MULVANEY. Thank you, gentlemen. I appreciate the time. 

I appreciate the chairman’s indulgence in going over a little bit. 

Mr. LUETKEMEYER. There we go. Okay, Mr. Payne, five minutes. 

Mr. PAYNE. Thank you, Mr. Chairman. 

Mr. Mulvaney, the gentleman from South Carolina, was so thorough in his questions, he asked all of mine, so the indulgence for 

additional time probably cost me my questions. So I yield back. 

Mr. LUETKEMEYER. Mr. Payne, if you can think of anything 

in the meantime, let us know. I will be happy to get back to you. 

As we go through the discussions, a lot of times questions pop 

up and we want to make sure you have an opportunity to ask anything that may come up. But I understand. I was sitting here and 

I checked off all my questions. They were being asked as well. 

With that, Mr. Schweikert, you are up next. You have five minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. And Mr. Payne 

just proved he is actually the smartest member of the Committee 

because brevity I think is a sign of being brilliant. And now I am 

going to break that. 

Okay. I want to actually sort of back up a little bit and have a 

conversation that is a little less transactional. And I do not mean 

to move almost ethereal. I sat on actually Monetary Policy a couple 

years ago, and I think we were one of the first meeting where part 

of it went off and we had the discussion of alternative currencies. 

And I almost am uncomfortable using the term alternative currency and more alternative units of value or acceptance and trade. 

What else is on the horizon? You know, Bitcoin appeared, what 

2009? What else is out there? What other alternative exchanges of 

value do you see coming that are going to take advantage of the 

Internet universe? Because you and I can is there and come up if 

we really think it through, you know, tokens in a babysitting exchange are ultimately units of value in exchange. I mean, this is 

not—conceptually, it is not new. But with technology, what is next 

on the horizon? 

Mr. BRITO. So I think one thing that we have been doing here 

is focusing so much about Bitcoin being currency or being money, 

and I think that misses the point. Currency or money has three 

properties. Right? It is a medium of exchange, a store value, and 

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it is a unit of account. Now, Bitcoin probably is not good at all of 

those three, certainly not right now. As Mr. Williams so eloquently 

put forth, it is not a good unit of account. I certainly would not 

want my mortgage or my salary denominated in Bitcoin, and it is 

not a good store value because of its volatility. But what about medium of exchange? Is it a good medium of exchange? And I think 

with the 50,000 merchants, usually all small businesses that are 

accepting Bitcoin today, are telling us that this is a very good medium of exchange. 

Mr. SCHWEIKERT. My question was what is next on the horizon? 

Mr. BRITO. Okay. So jumping from there. 

Mr. SCHWEIKERT. Is there Bitcoin 2? Is there someone that is 

going to take a million bucks of gold and say I am going to produce 

an electronic currency that has a gold peg? What else is next? 

Mr. BRITO. So I think the next thing we are going to see is that 

because Bitcoin at base is simply a ledger that keeps track of value 

being transacted, there is no reason why a Bitcoin has to represent 

only a dollar. A Bitcoin could also represent anything else. An 

ounce of gold, a share of stock, a car. 

Mr. SCHWEIKERT. So you could see a generation—— 

Mr. BRITO. Commodities markets based on Bitcoins. 

Mr. SCHWEIKERT. I want to bounce to Mr. White. The question, what is next on the horizon? 

Mr. WHITE. That is a great question. We see Bitcoin as more 

than just a payment network in digital currency. This is the first 

application of Bitcoin as the protocol. The core technological problem that was solved here has never been solved before, and that 

is the ability to prove and transfer ownership without the need of 

a trusted third party. 

Mr. SCHWEIKERT. Okay. So is there the next generation on the 

horizon? 

Mr. WHITE. Exactly. So Mr. Brito said that you can attach this 

one satoshi, the smallest amount of a Bitcoin worth much less than 

a fraction of a penny to an asset or a stock. So in essence, you 

could provide this ability to trade assets. You could also use it as 

a date timestamp to prove ownership of an idea using the 

blockchain, which is this universally distributed ledger that no one 

central body controls. 

Mr. SCHWEIKERT. Okay. Mr. Williams, that sort of concept, 

what is next on the horizon in this concept? 

Mr. WILLIAMS. Well, if you open the door and you call it a currency, then that is a real slippery slope. 

Mr. SCHWEIKERT. You know of my preference of value of exchange. 

Mr. WILLIAMS. Okay. So if we slam that door shut, then it is 

not a nationless currency. Then you have more control. And then 

what is it? Well, it is a payment system. How is it different than 

ACH? And the question is, well, it is definitely much more sophisticated. ACH happened. This payment system in the 1970s, the Fed 

had a lot of influence over that system, but it still remains to be 

an efficient system. So all of a sudden you have focus now on the 

payment benefits of Bitcoin, and then you have competition within 

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that payment system. And we have a discussion no longer about 

currency. 

Mr. SCHWEIKERT. Do you see something else on the horizon 

that takes this technology that goes to the next level? 

Mr. WILLIAMS. Right. So then—— 

Mr. SCHWEIKERT. Or a commodity pegged to such electronic 

currency or something else? 

Mr. WILLIAMS. Right. So yes, I do. What we will see is more 

asset classes that can be pushed through this payment system. 

Mr. SCHWEIKERT. Okay. And Mr. Couvillion, and my mother’s 

maiden name, please, the same question. What else is next on the 

horizon? 

Mr. COUVILLION. In terms of the next thing on the horizon 

that I think the Committee might be interested in taking a look at, 

there are at least three serious proposals to get approval to launch 

Bitcoin-based exchange traded funds, commonly called ETFs, such 

as the diamonds, the spiders, the NASDAQ cubes. There are more 

than 400 others. If they do get approval to launch these Bitcoin 

ETFs, it may be possible by the end of this year, if you have a selfdirected IRA, to put in effect Bitcoin into your individual retirement. 

Mr. SCHWEIKERT. Or hold a Bitcoin denominated? 

Mr. COUVILLION. Exactly. 

Mr. SCHWEIKERT. In other words, you would look at it just in 

the reverse. 

Mr. COUVILLION. Exactly. And I am not sure that that is a 

wise idea. 

Mr. SCHWEIKERT. Mr. Chairman, I know I am a little over 

time, but there is a fascinating philosophical debate underlying 

here for those of you who are followers of sort of monetary policy. 

Mr. Williams just spoke, a nationless currency or value of exchange. I am not sure that is a bad thing. And in many ways we 

have had it forever. I mean, a gold peg contract. But also something of Bitcoin, yes, it is a challenge to being a reserve currency 

but the benefits we gain as a country being the reserve currency 

is we have minimal transaction costs; correct? 

Mr. COUVILLION. Yes. 

Mr. SCHWEIKERT. And if all of a sudden there is another medium of exchange that no longer has that transaction cost spiff benefit, it also becomes a threat to becoming the reserve currency. 

Let us start with Mr. Williams, just because you and I seem to 

be the farthest outliers from each other. Tell me where I am wrong 

on both those premises. 

Mr. WILLIAMS. Well, you say what is wrong with a nationless 

currency. So we are back—you opened that door that we shut I 

thought earlier, and that was it cannot be a currency. 

Mr. SCHWEIKERT. Then that is why we were—Mr. Williams, 

that is why we were reusing the term ‘‘value of exchange’’; correct? 

Mr. WILLIAMS. All right. So now if this is a value of exchange, 

then it will not compete with nation currency, such as the U.S. dollar. 

E: Well, the fact of the matter is any type of exchange, whether 

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mately is—has inflationary, disinflationary effects on exchanges of 

value and commodities and other things. 

So, and first, let us go through my couple of questions. Let us 

try these. 

Threat to reserve currency if it becomes an efficient means of 

avoiding the exchange cost. Yes? No? 

Mr. WILLIAMS. I do not view it as a threat because of this high 

volatility that we see. 

Mr. SCHWEIKERT. Okay. But if you and I are sitting here a 

decade from now and there is ETFs and others, assuming this concept even survives that long, that volatility would ultimately be 

squeezed away because of the amount of participation. Because 

would you agree that much of the volatility today is because of how 

thin the market is? 

Mr. WILLIAMS. Right. So I would disagree with that. There is 

structural problems and it has less to do with the fact of how thinly 

it is traded. It is actually how it is structured. 

So good question though in regard to looking forward what could 

happen. A competition within currencies. That is what we have in 

the global financial markets. Sometimes the dollar is stronger, 

sometimes it is weaker against other currencies. So if this could 

ever gain that status, then it would be in the mix and be competitive. 

Mr. SCHWEIKERT. But what becomes fascinating there in monetary policy is all of a sudden you would have a currency without 

intervention from a central bank which becomes a fascinating—you 

actually have an honest peg of value compared to—let us be completely honest—pegs of value of currency, nation currency that do 

have a certain level of intervention, and therefore, manipulation. 

Mr. WILLIAMS. So I am going to stir it up a little bit. I have 

made this statement before. So with the U.S. dollar, we have central bankers in the monetary policy you have spoken about and 

they determine how much of the money supply increases or decreases to spur economic growth for our businesses. If we go to a 

Bitcoin-type currency, then the new central bankers is the computer program itself and those miners that mine it. So the question 

is not that central bankers go away but they just are different people. 

Mr. SCHWEIKERT. Yeah. And now you are heading in the direction I was hoping to have the conversation. I am sorry. I told you 

it was going to get slightly ethereal. 

Do we let—Mr. Brito—— 

Mr. BRITO. Yes. 

Mr. SCHWEIKERT.—had one comment and then I thank you. 

You have been very patient with my ramblings. 

Mr. BRITO. I will simply say that this is something that Milton 

Friedman proposed that we should replace humans at a board determining the money supply with a computer that had a set of 

rules and simply determined the money supply based on the algorithm. The thing about Milton Friedman’s proposal is that the computer, you can always go in and reprogram it. A human could always go in and reprogram it with a currency like Bitcoin or another currency. Once you set the algorithm in place and you have 

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comes virtually impossible to change. That algorithm change the 

money supply. 

Mr. SCHWEIKERT. Mr. Chairman, I am one that believes by the 

end of this decade I will see another type of alternative value of 

exchange here, but will we have some collective or others that attach some reserve value or a peg of value or something of that 

which may deal with the stability issue, but it does actually start 

to become both a threat to a country like ours where we carry a 

large deficit and we use certain monetary policy, inflationary policies and others to be able to value back those future payments. But 

in many ways you are seeing I think the tip of an iceberg of a fascinating discussion. 

Thank you, Mr. Chairman. 

Mr. TIPTON. As you can see, Mr. Schweikert is a very, very 

thoughtful member of our Committee. 

Let us go for round two. If anybody has any extra questions, we 

will go through those. We will start with Ms. Clarke. 

Ms. CLARKE. Thank you, Mr. Chairman. I do have one final 

question for Mr. Brito. 

Mr. Brito, you mentioned that one-quarter of Americans who are 

unbanked and underbanked could look to Bitcoin as an important 

new option, and a good number of these unbanked and underbanked individuals are one step away from absolute financial calamity. How would Bitcoin be an effective buttress against the calamity given its valuation swings? 

Mr. BRITO. So I said it could potentially be seen as a new option 

for the unbanked and the underbanked. So the unbanked and the 

underbanked traditionally, they do not have bank accounts. They 

do not have credit cards. They use Payday loans. They have to buy 

prepaid cards. With something like Bitcoin, it allows for them to 

have electronic transactions and perhaps at a much cheaper cost. 

Right? So if you are going to a merchant that is giving you a discount because you are using Bitcoin, you can do that. 

Is that going to happen tomorrow? No, I do not think that is 

going to happen tomorrow. But the beauty of Bitcoin is it is an experiment and its potential is huge. So I think what we need to do 

is allow the experiment to go on. Today, state regulators are coming up with regulations that are consumer protection regulations 

and make sure the Bitcoin businesses are well capitalized, comply 

with disclosure, et cetera, et cetera. We need to make sure that 

those rules are consistent and clear so that we can have these 

products potentially become available to these consumers. Is it 

available today? No. But if we take the view that the risks just outweigh the benefits at all points, and we should not even think 

about this thing, then we are going to—in order to avoid the risks, 

you are going to give up all the potential benefits, and that would 

be a real shame. 

Ms. CLARKE. Thank you, Mr. Brito. Thank you, Mr. Chairman. 

Thank the panelists today. I yield back. 

Mr. TIPTON. Thank you. 

Mr. Mulvaney, do you have any second questions? 

Mr. MULVANEY. Sure, real briefly. 

Continue there, Mr. Brito. In terms of allowing this experiment 

to run its course, how damaging is the IRS decision? 

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Mr. BRITO. So earlier you asked me if I thought the IRS decision was right or wrong, and I said tentatively yes. Let me tell you 

why. The IRS only had a choice between designating it a currency 

or property. Those were its two choices given to it by Congress. 

And so between those two, I think Mr. Williams is right, technically it looked at the thing and it looks more like property. So 

technically, they probably made the correct decision that was available to it. 

Now, it does create this problem that Mr. White was alluding to, 

where potentially now if you want to buy a cup of coffee you have 

to calculate your capital gains. Some folks think it should have 

been treated as a currency because if it were currency, then there 

is a $200 de minimums exemption. Right? So if you are buying 

something under $200, you do not have to worry about capital 

gains. Perhaps it is something that Congress should consider having that kind of exemption for property or perhaps creating a new 

category for virtual currencies to allow the kind of entrepreneurship and development that might get these products out to the 

world. 

Mr. MULVANEY. My staffers mentioned something, again, I 

know a little bit about Bitcoin, mostly on account of the presentation you made to the Monetary Policy and Trade Subcommittee 

on Financial Services. But I do not know that much about it. My 

staffers are telling that Germany has classified it in a very special 

way as a private currency. Is that an option that might be available to us? Is that something that makes sense? 

Mr. BRITO. So I am not a tax expert, as I mentioned before, so 

I am not 100 percent on that. I could look into that. 

Mr. MULVANEY. Mr. Williams, are you familiar with that at 

all? No? 

Mr. WILLIAMS. No. I am not a tax expert either. 

Mr. MULVANEY. Gotcha. And again, Mr. Chairman, so what I 

am hearing is it is classified as something else in other countries, 

so maybe Mr. Brito is onto something that it is not currency and 

it is not property. It is something new. Perhaps not too surprising 

in this 21st century that we have new types of things. So it is 

something we will take a look at. 

Thank you, gentlemen, very much. It is very enlightening. 

Mr. LUETKEMEYER. Yes, Mr. Couvillion, you have a comment? 

Mr. COUVILLION. Yes, I do. I would like to read a very short 

statement from Alistair Nevius, who is the Journal of 

Accountancy’s editor-in-chief for tax matters. 

‘‘The IRS warns that taxpayers who treated virtual currencies inconsistently with the notice before the date the notice was issued 

will not get penalty relief unless they can establish that their underpayment or failure to properly file information returns was due 

to reasonable cause. Many people believe that because the IRS announcement came out three weeks before income tax forms are due 

and because many taxpayers have already filed their income tax 

returns, everyone, at least for this year, should be able to use the 

reasonable cause.’’ 

Mr. MULVANEY. Mr. Chairman, if I may, Mr. Couvillion, if I 

may interrupt, there is no way to do that, is there? What you have 

just read to us says the IRS expects you to treat it—to have been 

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27 

treating it as property from the beginning of time and that if you 

filed, I guess, last year or if you have already filed this year, they 

expect you to pay taxes on it as if it was property. Does small business have the ability to do that? Have they been tracking it as 

property this whole time or have they been treating it as currency? 

Mr. COUVILLION. It can be done. You can go back and audit, 

but it is not something anybody thought we would ever have to do 

two years ago, three years ago, and so it creates a huge paperwork 

burden. Technology can help, but especially this year, many people 

think it is simply unfair to expect taxpayers to amend their returns 

at this late date because the IRS just issued this ruling. 

Mr. LUETKEMEYER. Mr. Brito, not to interrupt, did you not 

mention a while ago that every single Bitcoin transaction is documented so that there would be the ability then, even to buy a cup 

of coffee, be able to go back and recreate a record for an individual’s transactions over the course of a year to see whether they 

gained or lost or whatever? 

Mr. BRITO. Sure. And I also think that the tax consequences for 

this year for consumers, or at least I should say the compliance 

costs are not going to be huge simply because most—the folks who 

are today holding and spending Bitcoins, it is not your grandma. 

It is not your average Joe. It is people who know what they are 

investing in, what they are doing. And they have known that there 

was going to be a tax—an IRS guidance coming out soon. And so 

they have probably filed for extensions, so they are not filing on 

April 15th. They are probably doing that in September. And even 

if that is the case, the IRS is probably not going to audit you for 

very small transactions. It is going to be if you have—if you are 

not declaring capital gains on $20,000 worth of Bitcoin. 

Mr. TIPTON. The rules document the database of transactions. 

Mr. BRITO. The transactions, it is available to anyone. It is online. You can download it. Anybody can download it at any moment. 

Mr. TIPTON. So the IRS has full access to this document or this 

database? 

Mr. BRITO. This database. Yes. 

Mr. TIPTON. Okay. 

Mr. Mulvaney, do you have any other follow ups? 

Ms. Herrera, would you like to ask any questions? 

Okay. I do not have very many. I just have one or two. With regards to hedging Bitcoins, you mentioned a while ago, Mr. Brito, 

they do not do that yet. Is that correct? 

Mr. BRITO. So there are no—to my knowledge, there are no options or exchange traded futures or options available on Bitcoin. 

There are some companies today, some exchanges today that are 

looking to get CFTC approval to offer those. But I think Mr. White 

probably could speak more to how Coinbase might be hedging. 

Mr. LUETKEMEYER. So if they are looking to start hedging, 

would that make it a currency then or would that make it a commodity? 

Mr. BRITO. I do not think the fact that you are hedging against 

a value of something, that alone does not speak to whether it is a 

commodity or currency. 

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Mr. LUETKEMEYER. Okay. Very good. I have no other further 

questions. I certainly enjoyed the conversation here. It is certainly 

thought-provoking to see something like this. I think Mr. 

Schweikert is kind of also on the cusp here of some things. Is this 

today’s currency and 10 years from now there is going to be another Bitcoin 2 or some other entity out there, whatever it is called, 

that will be a new method of transfer of payment. You know, who 

knows? I think as our economies continue to evolve and trade continues to take place, people are going to find ways to trade. From 

the beginning of time we have been bartering and trading. And so 

today’s world is no different. We just use currency right now as a 

traditional way of transacting trades, but that being said, I come 

from rural Missouri. There is still a lot of bartering that goes on 

where I live. You trade this for that and the IRS never knows anything about it. 

So with that, as we close the hearing, I would like to again thank 

all the witnesses for being here and thank you for sharing your expertise, both with the members of this Committee and the small 

business community. I believe that today’s discussion provides valuable information about the benefits and risks associated with 

Bitcoin and other virtual currencies as the government further examines this alternative payment system. 

With that, I ask unanimous consent that members have five legislative days to submit statements and supporting materials for the 

record. 

Without objection, so ordered. 

This hearing is now adjourned. Thank you very much. 

[Whereupon, at 3:08 p.m., the Committee was adjourned.] 

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Written Statement to U.S. House of Representatives Committee on 

Small Business 

Thank you Chairman Graves and members of the House Committee on Small Business for the opportunity to appear here today. 

My name is Adam White and I’m the Director of Business Development and Sales at Coinbase, a company founded in June 2012 

with the goal of making it easy for merchants and consumers to 

transact with the digital currency, bitcoin. More than 1 million consumers use Coinbase as their bitcoin wallet, and as of today, there 

are more than 27,000 businesses that entrust Coinbase to accept 

bitcoin payments on their behalf using our payment tools. These 

merchants include large, enterprise-level businesses such as Overstock.com and Big Fish Games, as well as a myriad of small businesses like Tealet, Tuft & Needle, and Mondo Cellars. 

Prior to my role at Coinbase, I served as a Captain in the United 

States Air Force and am a veteran of Operation Iraqi Freedom and 

Operation Enduring Freedom. I also worked briefly as a consultant 

at Bain & Company and a product manager at Activision Blizzard 

after completing my MBA at Harvard Business School. 

I’d like to begin today by outlining the inherent benefits of 

Bitcoin in commerce—namely the elimination of fraud, reduction of 

transaction fees, and monetization of new markets—and how these 

benefits can be a positive influence on businesses of all sizes. 

Bitcoin enables individuals to push payments to merchants without having to share personally identifiable information that can be 

intercepted by criminals and used for fraudulent purposes. This 

push functionality gives Bitcoin a unique characteristic that eliminates the risk of fraud, something that merchants, card processors, 

and banks spend billions of dollars per year combatting. With 

Bitcoin, for example, the Target data breach that comprised over 

70 million consumers’ credit card information would not have been 

possible. 

Additionally, many card issuers use fraud detection systems that 

are overly sensitive to trigger activities for card-not-present transactions. Initial estimates suggest that some merchants turn away 

nearly eight percent of incoming orders due to suspicious activity, 

many of which could, in fact, be legitimate. Bitcoin payments are 

irreversible, so fraudulent charges are prevented from occurring, 

and as a result, merchants do not bear the risk and cost associated 

with these false declines. 

Due to the elimination of fraud, Bitcoin transactions are dramatically less expensive than traditional card based payments. Merchants can reduce their electronic payments acceptance fees to less 

than 1% when accepting payment in bitcoin. This is especially important for small businesses that sacrifice anywhere between 3–5% 

of their revenues in card transaction fees. Businesses can use these 

savings to reinvest in their company or pass them on to consumers 

in the form of lower prices. Moreover, merchants are not faced with 

SBREP-219 with DISTILLER

56 

a fixed fee per transaction, enabling them to forgo minimum transaction limits and sell small ticket items profitability. 

Finally, Bitcoin democratizes foreign exchange and enables 

frictionless, cross-border transactions that settle immediately. 

Many products and services are not available for sale in foreign 

countries solely because the business cannot manage the payments 

systems needed to support overseas commerce. Because of the borderless and global nature of Bitcoin, a bitcoin payment made by 

customer in New York looks identical to a merchant as a bitcoin 

payment made by a customer in London, Buenos Aires, or Tokyo. 

Moreover, there are no international currency conversion fees associated with bitcoin payments so merchants can sell low margin 

items just as profitably abroad as they do domestically. The ability 

to easily begin accepting payments from customers around the 

world can open up whole new markets for merchants, and significantly improve top-line revenue. 

We see Bitcoin as an extremely powerful technology, and it is our 

goal to bring the efficiencies created by the Bitcoin network to the 

masses. We are encouraged to see the Committee’s proactive examination into the topic of bitcoin as it relates to small businesses, 

and I look forward to engaging in dialogue and answering any 

questions you may have. 

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57 

1Mark T. Williams has only a de minimis financial interest in Bitcoin and no direct investment in Bitcoin-related startups. 

Testimony of Mark T. Williams 1

Banking Specialist, Commodities and Risk Management Expert 

Boston University Finance Department 

To U.S. House of Representatives 

Committee on Small Business 

April 2, 2014 

Hearing 

Bitcoin: Examining the Benefits and Risks for Small Business 

Rayburn House Office Building, 

Washington, DC 20515 

Introduction 

Good afternoon Chairman Sam Graves and other distinguished 

committee members. My name is Mark Williams and for the last 

12 years I have been on the Finance faculty of Boston University 

where I have specialized in banking, capital markets and risk management related matters. In 2010, I wrote Uncontrolled Risk, a 

book about the fall of Lehman Brothers and what caused the 2008 

real estate asset bubble www.uncontrolledrisk.com. Prior to my 

academic career, I was a senior executive for a Boston-based commodity-trading firm and have worked as a field examiner for the 

Federal Reserve Bank in San Francisco and Boston. On occasion, 

I have also been a consultant to small businesses. 

Through my academic and work experiences I have gained a 

strong understanding of how the capital markets function, the role 

of currency, how businesses operate and how unaddressed risks can 

result in financial harm. For the last 18 months, I have closely 

studied, researched, and more recently written on Bitcoin, its structure and its highly-risky nature. 

I appreciate the opportunity to testify today and I view this committee room as an extension of the Boston University classroom. 

My interest and fascination with Bitcoin started in 2011. Initially 

it was part of an in-class lecture, later a homework assignment, 

and ultimately, morphed into a full classroom debate. At that time, 

Bitcoin was trading for 32 cents. Over the last three years, this 

pseudo currency has taken on a life of its own. In 2013 its speculative value increased from $13 to a market high of $1,200. 

Most Recent Events 

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2Market price of $462 on March 30, 2014 ($738/$1,200) = 62 percent. 

3On December 4, 2013, former Federal Reserve Bank Chairman Alan Greenspan indicated 

publically that Bitcoin was a bubble. 4 China on December 5, 2013 declared that Bitcoin was not a virtual currency but a virtual 

commodity. 5Stated on Fox Business May 6, 2013. 

One month or even one week in the Bitcoin world can be equivalent to a decade in other markets. The price risk associated with 

Bitcoin is extreme and unlike any other volatile community. Despite the dramatic rise in 2013, prices have not been a one-way 

space rocket to the moon. Since November 2013, Bitcoin has slid 

by over 60 percent to $462.2 China’s decision on December 5, 2013 

to prohibit its banks and money transmitters from accepting 

Bitcoin was the pin that has begun to prick the Bitcoin Bubble.3

On this date, the world’s second largest economy warned that virtual currencies carry substantial risk.4 Other market disruptions 

have occurred. On January 19, 2014 Alibaba, the Chinese equivalent of Amazon stopped accepting Bitcoin. Two weeks later, Charlie 

Shrem, the Vice Chairman of the Bitcoin Foundation, located a 

stone throw from these Chambers, was indicted by the FBI for 

money laundering. Then on February 6, 2014, Russia declared the 

use of Bitcoin illegal stating that the Ruble was the sole official 

currency. That same week, Mt Gox of Japan, formerly the world’s 

largest Bitcoin exchange, accounting for 80 percent of trading volume, announced it had been hacked, and later disclosed customer 

losses of more than $400 million. The other two major exchanges, 

Bitstamp, located in Slovenia and BTCe, located in Bulgaria, were 

also impacted by this attack. The scale and scope of the Mt Gox 

virtual-bank heist further rattled market confidence, raising new 

questions about safety and the need for basic consumer protection 

standards. In February, cyber hackers broke into Silk Road, the 

defunct deep-web purveyor of illegal goods and services, stealing 

over $2.7 million worth of e-coins, proving that criminals can also 

steal from criminals. 

On March 11, 2014, the U.S. Financial Industry Regulatory Authority released a stern warning to investors about the dangers of 

buying and using virtual currencies. Shortly after, on March 24, 

2014, the Internal Revenue Service dealt a further blow to Bitcoin, 

ruling it is not a foreign currency but should be taxed as property. 

This IRS ruling gives investors with a low-cost basis an added incentive to hoard coins instead of using them for transactional purposes. This further diminishes the already low level of market liquidity. Casting more doubt on the prospects of Bitcoin, on March 

14, 2014, famed investor Warren Buffett stated ‘‘Stay away. Bitcoin 

is a mirage.’’ His comments supported remarks made by Charlie 

Munger, Vice Chairman of Bershire Hathaway a year earlier, when 

Munger declared Bitcoin ‘‘rat poison.’’ 5 Despite these significant 

market disruptions, scandals and pessimistic comments made by 

well-respected investors, Bitcoin promoters continue to trumpet the 

virtues of this volatile, nationless and anonymous currency. Some 

advocates have declared this period as the Bitcoin Revolution 

(2000s), equivalent to the early stages of the internet (1990s). Although I do not view Bitcoin as ‘‘rat poison,’’ this virtual currency 

does pose significant risks to small business owners. These risks 

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need to be carefully evaluated before deciding whether or not to 

venture into these new, uncharted waters. 

U.S. Small Business - Market Innovation 

Small businesses fuel growth. Decisions by owners have broad 

impact. Presently, U.S. small business accounts for over half of private sector gross domestic product and employment. Since the 

1970s, small businesses provide 55 percent of all jobs and 66 percent of all net new jobs. Businesses that are willing to adopt and 

utilize new technology, such as virtual currencies, may gain a distinct competitive advantage (e.g., cost savings, increased sales) over 

their competitors. However, blindly adopting technology without 

understanding the full risk implications can be hazardous to a company’s financial health. Bitcoin is an example of new technology 

that has clear promise, but also poses a multitude of risks for both 

businesses and consumers. 

In my testimony today I will not focus on the promise of virtual 

currencies as I will leave that to the other hearing witnesses. Instead my focus will be on the significant and currently unaddressed 

risks associated with Bitcoin. Sound business and regulatory decisions can only be made when these identified risks and promised 

benefits are examined, and weighed against each other in the light 

of day. 

Once the facts are fully laid out, my hope is to leave this Committee with one simple question to ponder: what net benefits, if 

any, does Bitcoin actually provide to legitimate U.S. small 

businesses? 

How Risky is Bitcoin to Small Businesses? 

This question is best summarized by looking at the disclosure 

statement provided by Coinbase, a San Francisco based money 

transmitter who is servicing an increasing number of the nation’s 

small businesses. As part of the new account set-up process, 

Coinbase describes Bitcoin as a virtual currency that could drop to 

the price of zero. In order to fully assess the risks of Bitcoin, small 

business owners should take note of this particularly revealing disclosure prior to deciding whether or not to accept Bitcoin. Indeed, 

if the U.S. dollar carried a similar risk disclaimer, how many small 

business owners would be willing to use the greenback to conduct 

commerce? 

The 10 Major Risks for U.S. Small Businesses 

In determining whether to accept Bitcoin when selling goods and 

services or for meeting payroll or paying vendors, small business 

owners need to first assess these 10 major risks. If this panoply of 

risk is not fully understood or controlled, it has the potential of exposing a business to greater earnings uncertainty, losses and fraud. 

These 10 major risks are discussed below. 

1. Bitcoin Is Not Legal Tender 

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6 In 2009, annual volatility was approximately 160 percent. Using price data from 2010 forward from Mt Gox, Bitstamp and BTCe, annual volatility through 2014 was approximately 140 

percent. 

Small businesses need to clearly understand that Bitcoin is not 

legal tender. It is not created or supported by a sovereign—it is 

nationless. Unlike the U.S. dollar, there are no laws that require 

businesses or individuals to accept Bitcoin to settle private or public debts. Bitcoin is also not backed by taxing power, ability to assemble an army, assets or other natural resources customarily 

owned or controlled by nation states. In contrast to legal tender, 

the use of Bitcoin is limited to those willing to accept it. Presently 

the group of Bitcoin users is minuscule relative to the U.S. population (1 million out of 317 million). Globally, these numbers are 

even smaller. If businesses or individuals suddenly decide not to 

accept it, Bitcoin will become worthless. 

Extreme Price Risk 

Since inception, Bitcoin has experienced extreme annual price 

volatility topping 140 percent.6 Bitcoin is 7 times more risky than 

gold and 8 times more risky than the S&P 500. Compared to currencies it is 7 times more risky than the unstable Argentinian Peso 

and 15 times more risky than the U.S. dollar. As a result, it could 

be argued that small businesses that blindly accept Bitcoin are not 

actually in commerce but are in the high-risk speculative trading 

business. In contrast to small businesses, a Wall Street trading 

company might be willing to assume the triple-digit price risk 

posed by Bitcoin but only with experienced staff, sophisticated systems, strong controls and a large balance sheet to buffer against 

daily price swings. 

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In a single day, it is not uncommon for Bitcoin prices to move 

by 10 percent. At current price levels, Bitcoin can drop by $50 or 

more in a single day. In December 2013, in a 48-hour period, 

Bitcoin plummeted by 50 percent. Since the November 2013 market 

peak, Bitcoin prices have dropped by over 60 percent. On February 

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7Prices plunged on the BTCe to $102 before rebounding to over $600. 

8 Nelson, Brett, The Most Profitable Small Businesses, Forbes, February 10, 2011. 

14, 2014, during a flash crash, one block of 6,000 coins fell, in seconds, by over 80 percent to $102 before rebounding.7

3. Extreme Price Movements Can Quickly Erase Company Profit 

Margins 

The profit margins of U.S. small businesses are dependent on numerous factors including the nature of the industry, competition, 

location, number of employees, technology employed, cost of capital 

and level of management skill and experience. Although net profit 

margins can be 10 percent or less, more profitable companies earn 

margins in the 15 to 20 percent range. Examples of higher profit 

margin professions include CPAs, chiropractors, and dentists, lawyers, portfolio managers and optometrists.8

Given that the daily price movement of Bitcoin can be as high 

as 10 percent, a small business owner who accepts this form of payment could see profit margins reduced or completely erased in a 

matter of days. 

4. Bitcoin is an Asset Bubble in the Process of Deflating 

Small business owners need to be cognizant of the fact that 

Bitcoin prices were only $13 at the start of 2013 and could easily 

drop to the same low level in the near future. In an efficient capital 

market, capital flows to its highest and best use as investors seek 

a tradeoff between desired risk and desired return. When investors 

receive timely, accurate and transparent information, the likelihood 

of an asset bubble is diminished. However, even in efficient and 

well-developed financial market, it is not uncommon to experience 

bubbles (e.g., Dotcom 2000, Real Estate 2007). 

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All asset bubbles are similar in that they have three phases: 

growth, maturity and pop. However, not all asset bubbles see 

prices collapse during the final phase; sometimes prices deflate 

over an extended period allowing investors to experience lower 

losses and softer landings. Bitcoin entered the growth stage in 

2011, the maturity stage in 2013 and now is in the pop stage. Since 

December 2013 rapid price swings continue to demand that owners 

watch prices on a daily and even hourly basis. If small business 

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9The price dropped once the bubble burst was 99 percent. 

10 BitPay has a four tier customer structure with fees ranging as low as 1 percent of transaction value to monthly fees of up to $3,000 for extremely large transactions. 11Since December 2013, there have been several days where daily intra and inter-day price 

movements have exceeded 10 percent, increasing to 15, 20 percent or more. 

owners are willing to accept Bitcoin they need to stay vigilant in 

monitoring the high probability of a pronounced price collapse. 

In December 2013, when prices were still over $1,000, I indicated 

that Bitcoin could drop to $10 or below (http://cognoscenti.wbur.org/ 

2013/12/05/bitcoin-currency-mark-t-williams). This prediction was 

based on several observations including the underlying option 

value of this new and uncertain technology, price level at the start 

of 2013 and the percentage price drop associated with the 1637 

Tulip Mania Bubble 9. On January 24, 2014, Nobel prize-winner 

economist Robert Shiller stated ‘‘it is a bubble, there is no question 

about it... it’s just an amazing example of a bubble.’’ As articulated 

by Coinbase, as part of its new customer disclosure statement, 

business owners have to be prepared for the chance that Bitcoin 

prices could drop to zero. 

5. Growing Concentration and Bankruptcy Risk to Financial Middlemen 

Increasingly, small businesses, in an effort to avoid the extreme 

price risk of Bitcoin, are using the risk-mitigation services of 

Coinbase and BitPay. However, in relying on these startups, there 

is a growing exposure to concentration and bankruptcy risk. 

Both Coinbase and BitPay, as financial middlemen, accept price 

risk for a fee and allow businesses to receive their most preferred 

currency. Merchants are given a fixed Bitcoin conversion rate 

linked to a window of time. For example, BitPay provides a locked 

price quote for only 15 minutes. The fee for basic entry level service 

is 1 percent of transaction value.10 Customers pay in Bitcoin but 

merchants can elect to receive U.S. dollars. Extreme daily price 

swings have created a niche for Coinbase and BitPay but also have 

created a potentially dangerous level of industry concentration risk. 

It is important to note that Coinbase and BitPay do not eliminate 

overall Bitcoin price risk but simply warehouse this risk on their 

books. This is of particular concern given that these two fledgling 

firms are lightly regulated, thinly capitalized, and not required to 

operate with minimum capital requirements. Without these important safeguards, it is uncertain what this price mitigation guarantee is really worth? Adding to this concentration risk, no derivatives market exists to off-load this significant risk. 

As the number of small business customers increases, the 

amount of Bitcoin price-risk retained by these financial middlemen 

will also grow. For Coinbase or BitPay, a single-day price drop of 

20 percent or a prolonged price decline on a large enough Bitcoin 

position could be financially devastating.11

Coinbase also has multiple business lines that present an inherent conflict of interest. In offering price-risk mitigation and Bitcoinfor-sale services, Coinbase has an economic incentive to sell Bitcoin 

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12Practice of a self-interested firm executing trades in its own account after having advanced 

market information, sometimes trading at the detriment of the customer positions. 13Moore, Tyler, Christin, Nicolas, Beware the Middleman: Empirical Analysis of Bitcoin-Exchange Risk, 2013. 

centive to buy Bitcoin at the lowest market price. Without strong 

regulatory oversight it is unclear how Coinbase effectively balances 

this duel and conflicted loyalty. 

If these financial middlemen were to declare bankruptcy, no 

longer able to honor their obligations, and accounts receivable owed 

to merchants were not paid, such a scenario could be extremely 

costly. 

6. Bitcoin Exchange Bankruptcy Risk 

Business owners can also sell coins and open e-wallets through 

Bitcoin exchanges. Since Mt Gox trading was halted on February 

7, 2014, and its subsequent bankruptcy two weeks later, the bulk 

of Bitcoin trading has been concentrated in the hands of two exchanges: Bitstamp and BTCe. To sell on these exchanges, U.S. 

small businesses must send instructions and trust that their requests will be honored. These exchanges operate under no regulation and are outside of the reach of U.S. regulators. With no regulatory oversight, it is not unusual for certain well connected buyers 

and sellers to gain preferential treatment in terms of price execution. Front-running is not uncommon.12 In a weak corporate governance environment are customer funds adequately protected from 

internal or external fraud? In this ‘‘wild-west’’ atmosphere many 

exchanges have failed. It is estimated that of the 40 Bitcoin exchanges that have been started since the inception of Bitcoin, almost half (18) have failed.13 When exchanges close, customers tend 

to lose everything. In November 2013, GBL, based in Hong Kong, 

closed its doors, costing investors over $4 million. In December 

2013, the European Banking Authority also warned of the dangers 

of other exchanges failing and of the lack of investor protection 

laws. Should one or both of these exchanges go into bankruptcy, 

small businesses that store e-coins on either of these exchanges 

could experience substantial financial exposure. 

7. Bitcoin Use Can Trigger Significant Tax Risk 

Unlike legal tender, Bitcoin has been designated for tax purposes 

as property. This distinction is significant. Unlike legal tender, 

when accepting Bitcoin, business owners can be subject to additional taxes associated with the gains—the difference in value on 

date received versus value on date sold. 

On March 25, 2014, IRS issued a ruling that clarified the tax 

treatment of Bitcoin but, in doing so, created greater uncertainty 

about the e-coin’s future. Bitcoin is now taxed as property and not 

as foreign currency. Any gains in Bitcoin value is taxed as ordinary 

income (as high as 39.6 percent) or at the capital gains (20 percent) 

tax rate. Given the high price run-up of Bitcoin during 2013, there 

are significant tax considerations which also influence the level of 

hoarding versus spending. If an e-coin was purchased for $250 and 

it now trades for $500, the owner is going to be less motivated to 

use it for transactional currency purposes, especially if doing so 

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14 Although the Bitcoin community has indicated that double-spending events are rare, and 

controls against it are strong, merchants still need to be prepared should such fraud be committed. 

would trigger an additional tax event. For holders of Bitcoin, this 

IRS ruling reduces the incentive to use e-coins for transactional 

purposes, reducing transaction flow, market liquidity and price stability. Prior to this ruling, over 90 percent of e-coins were hoarded. 

It is highly plausible this tax ruling will encourage even more 

hoarding. 

Small business owners are now confronted with several other tax 

risks. If they decide to accept and retain Bitcoin, they will need to 

keep records of the market price on the day received and sold. Any 

increase in value from that date forward would be subject to income tax. If a merchant decided to pay its employees in Bitcoin, the 

firm also needs to withhold the required employment tax in U.S. 

dollars. Companies that pay employees in Bitcoin are also subjecting staff to increased tax risk should coins appreciate in value 

or if prices drop. Such a policy, given Bitcoin’s extreme daily price 

volatility, would unfairly penalize employees. 

8. Transaction Fraud Risk - Double Spending 

Under Bitcoin protocol all new transactions are validated 

through the blockchain, a public ledger that is independently 

verified every 10 minutes. Validation is done to avoid a situation 

where a customer is able to fraudulently double-spend this e-coin. 

However, this 10 minute window poses potential risk should two 

businesses be paid with the same Bitcoin. If a double-spending incident occurred during this time gap, the last merchant to report the 

transaction would have little recourse to collect on this payment.14

That merchant would then lose the value of the product or services 

sold. If the customer had used a credit card and not Bitcoin to commit the fraud, the business would have had recourse through the 

credit card company. One way merchants can attempt to mitigate 

this risk is by waiting until a full validation is completed before 

permitting customers to receive goods or services. 

9. Bitcoin Slow Transaction Speed Increases Credit Risk 

Credit cards such as Visa and MasterCard have higher upfront 

charges for small businesses; however, the transaction speed of the 

credit card network is superior to the existing transaction speed of 

Bitcoin. At point-of-sale, it still remains faster and more convenient 

for customers to swipe a card or input the card number on an internet e-commerce site than it is to use Bitcoin. The process of copying 

and pasting an e-coin alphanumeric string into another program 

and waiting for the confirmation is cumbersome and time-consuming. Merchants are also much more accustomed to receiving a 

point-of-sale credit card authorization and receipt within seconds of 

sale. With Bitcoin, merchants remain exposed if they deliver product or services before payment confirmation is fully verified. 

On the existing Bitcoin network, only 7 transactions per second 

can be processed compared to 2,000 transactions on the credit card 

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15 Bitcoin advocates claim that in the future the Bitcoin payment network will be much 

quicker than the existing credit card network. However in 2014, transaction processing time for 

Bitcoin remains much slower as measured in time to confirmation. 16Some businesses to gain maximum control have taken paper copies of private keys and 

placed then in locked boxes, E-wallets can also be taken off line. This control technique is called 

storage. 17These secrecy features also raise the question of what business need these benefits unless 

they have something they want to hide. 

network.15 If the number of Bitcoin transactions on the existing 

network continues to grow, and if the network is not accordingly 

scaled up, small businesses accepting Bitcoin could see transaction 

time lengthened and payment verification slowed. Although inconvenient for customers, to mitigate this risk, merchants may need 

to have customers wait until a transaction can be completely 

verified. 

BitPay, a virtual currency payment facilitator provides small 

businesses with three speed setting to help manage the Bitcoin 

payment confirmation process. At the fastest speed, merchants assume total credit risk if they deliver the product in advance of receiving a completely verified payment confirmation. For small 

transactions like candy, coffee and newspapers this concern may be 

minimal. For larger transactions, the concern for credit risk may 

take precedence over customer inconvenience. This is especially 

true before retail customers are allowed to take possession of merchandise or a product is shipped from an internet-based enterprise. 

10. Risk of E-Wallet Theft Remains High 

Small business owners that decide to accept Bitcoin have to create an e-wallet, and determine whether to store it on one’s own 

personal computer hard drive or relying on a third-party vendor 

such as Blockchain or Coinbase. Third-party vendors that create 

and hold e-wallets perform a deposit-type function. However, unlike banks, these vendors lack regulatory oversight, minimum capital standards and don’t provide consumer protection against loss 

or theft. Once created, e-wallets generate a public and private key. 

Small businesses need to have strong controls in place around the 

storage of e-wallets and of the private key.16 This is particularly 

important given that Bitcoin is an anonymous currency that is irreversible once transferred.17 Bitcoin features make it an ideal target 

for cyber criminals. If an e-wallet is hacked and coins stolen or 

transferred by mistake, they are lost forever. If a computer is infected with a virus, it could wipe out the hard drive and the stored 

value of all e-coins. 

Relying on third-party vendors also has it drawbacks, as it requires confidence that adequate controls are in place to minimize 

the likelihood of cyber-attacks or internal employee fraud. It is not 

uncommon for e-wallet service providers to go out of business. This 

was evidenced by the dramatic and costly Mt Gox bankruptcy in 

February 2014. Last month, Flexcoin, a Bitcoin e-wallet bank, 

based in Canada also folded after being hit by a devastating cyberattack. 

Background 

a) Forms of Payment 

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18The predecessor company to PayPal was founded in December 1999. On October 3, 2002, 

PayPal became a wholly owned subsidiary of eBay. 

Forms of payment in commerce have evolved over many centuries including barter, shells, crude metal coins, precious metal 

coins, leather money, paper money, wampum, gold, gold-backed 

dollars, charge plates, checks, wires, credit cards, debit cards and 

prepaid cards. Each manifestation has occurred in response to consumer demand for more convenient ways to conduct commerce. In 

the process, businesses have expanded and financially benefited. 

Virtual currencies, Bitcoin in particular, are being presented as 

the newest attempt at payment innovation. Bitcoin promoters 

claim it is a safer, faster and cheaper form of payment than existing forms including credit cards. These claims have yet to be fully 

proven. 

b) Facilitating Commerce 

It is widely known that businesses can increase sales by expanding the availability of customer payment options. Credit cards remain the primary form of payment used by consumers when entering brick and mortar businesses or when shopping online. Unlike 

cash or debit cards, credit cards facilitate greater purchasing by delivering a fast, short-term loan to consumers. In a cash only economy, businesses would not sell as many products or services, and 

profits would fall. Credit cards also increase impulse buying. To encourage even greater purchasing, some credit card companies establish reward programs, enhance product warranties and provide 

free loss/damage insurance on products purchased. In addition to 

credit cards, PayPal makes it convenient for customers by providing the option of quickly transferring money from either personal bank accounts or credit cards.18 PayPal has made significant 

inroads into e-commerce, now representing 18 percent of the market or $315.3 million in daily payment activity. 

The cost of processing plastic is higher and small businesses attempt to manage higher fees especially on smaller purchased items 

by imposing credit card minimums or by establishing a cash or 

credit card price. The average cost of credit card transactions to 

merchants ranges from 2 to 3 percent. In the last year, small businesses have also gained greater relief from credit card fees. Since 

January 27, 2013, U.S. merchants have been permitted to pass on 

to consumers a surcharge when using a credit card. Presently, few 

merchants have exercised this right. 

Small businesses have also received meaningful fee relief when 

accepting debit cards. Since the Dodd Frank Act and with the 

adoption of the Durbin Amendment, per-swipe fees have dropped 

by about 50 percent to 21 cents. This cost savings of an estimated 

$8 billion per year has been advantageous to small business. 

c) Credit Cards Fees Come With Merchant Benefits 

Credit cards have fees but with these fees come services and benefits to both merchants and customers. Consumers using credit 

cards are more likely to spend than those who only have cash. 

Business owners at point-of-sale receive instantaneous assurance 

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19 Javelin Strategy & Research 2012. 20McClue, TJ., Why Don’t More Small Businesses Accept Credit Cards, Forbes, August 16, 

2013. 21 IRS requires payment processors to annually file form 1099-k, a record of system transaction history. 

that a card is valid and its owner has sufficient funds available to 

make a purchase. Credit card companies also work with merchants 

to reduce the change of fraudulent purchases. Consumer sales are 

increased through the use of loyalty program, enhanced guarantees 

and damage insurance. As a financial middleman, credit card companies also handle dispute resolution, gathering facts from merchants and customers. The chargeback protection (disputed purchases) also increases the likelihood of credit card use and thus a 

greater number of purchases. 

d) Evolving Payment Landscape - Business Transactions 

Currently, two-thirds of all point-of-sales transactions in the U.S. 

are completed either with credit, debit or gift cards. A little over 

twenty-five percent of sales are completed with cash and this rate 

is projected to decline to only 23 percent by 2017.19 Technology continues to make it easier for merchants to accept credit card transactions as older swipe machines and dedicated phone lines continue 

to disappear. Innovative firms such as Square, WePay and PayPal 

are making it more convenient to accept plastic or to make bank 

account direct transfers. 

There is also significant growth in the use of prepaid cards. In 

2013, Starbucks reported that one-third of the company’s U.S. sales 

or $2.5 billion was conducted through this payment method. Annually, over $65 billion in U.S. sales is conducted through prepaid 

cards. This convenient and inexpensive payment method is projected to double in consumer use in the next two years. 

Most Small Businesses Don’t Accept Credit Cards 

Internet commerce continues to grow rapidly where the preferred 

payment methods are either credit card or the use of PayPal-type 

services. In 2013, U.S. E-commerce sales increased by 17.22 percent to $380.6 billion accounting for 6 percent of total sales. Despite this market trend, more than half (55%) of the nation’s 27 

million small businesses do not accept credit cards.20 Some businesses argue that credit card-related fees (2 to 3%) or PayPal fees 

(2.2. to 2.9%) remain too high, while other small companies prefer 

cash over the transparency and reporting requirements associated 

with the use of credit cards. 

Cash-only businesses also increase the chance for tax under-reporting. The Internal Revenue Service estimated that under-reporting by small businesses represents about $140 billion in annual uncollected taxes. It is also estimated that 56 percent of sole proprietors’ cash receipts are not disclosed for tax purposes. Since 2012, 

the IRS has devoted more resources to address tax under-reporting 

by small businesses.21

Why Small Businesses Might Utilize Bitcoin? 

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22 In March, Newsweek presented facts in an attempt to prove the founder in Dorian S. 

Nakamoto who currently lives east of Los Angeles. When confronted by reporters, Mr. Nakamoto 

denied having any connection with the creation of Bitcoin. 

There are two major reasons why U.S. small businesses might either accept Bitcoin as payment and/or use it for paying employees, 

and vendors: 

1. Illegitimate Purposes - Silk Road, the deep web purveyor of 

drugs, guns and prostitution, accepted payment only in Bitcoin. 

The FBI shutdown Silk Road in October of 2013. The Silk Road 

Case elevated public awareness of Bitcoin as the designer currency 

of choice for the criminally-inclined. The anonymous nature of 

Bitcoin and the fact that transactions are irreversible, make it an 

ideal way for criminals to launder money, buy illicit goods and 

avoid taxation with little chance of detection. 

Legitimate Purposes 

a. Gain Marketing Exposure - Bitcoin has gained increased 

media attention. As a result, more small businesses view accepting Bitcoin as a way to gain market exposure. Posting a 

sign on a door front, on a website or gaining local media coverage increases free advertising and brand awareness. For example, Grass Hill Alpacas, a Massachusetts lama farm and 

purveyor of wool socks, has gained considerable visibility being 

an early acceptor of Bitcoin. 

b. Reduce Transaction Costs and Gain New Customers - 

Bitcoin represents a new possibly less expensive, private payment form to sell goods and services and possibly expanding 

sales by reaching new customers. 

How do Small Businesses Obtain Bitcoin? 

There are four legitimate ways businesses can obtain Bitcoin: 

1. Buying through an exchange (BTCe) or money transmitter 

(e.g., Coinbase) 

2. Accepting as a form of payment for goods and services 

3. Receiving as a gift 

4. Mining coins 

To obtain Bitcoin, assuming there is no interest in mining coins, 

businesses first have to setup e-wallets, either through third-party 

vendors (e.g., Blockchain) or by storing them on the hard drive of 

a personal computer, which then allows for the receiving and sending of coins. 

Additional Background 

There are over 190 virtual currencies traded in the marketplace 

totaling $6.5 billion in stated value. http://coinmarketcap.com/mineable.html. Of these traded e-currencies, Bitcoin, is the dominant 

player representing about $6 billion or 92 percent of this total stated value. 

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23 Bitcoin has not been recognized by any of the G20 countries as meeting the definition of 

currency as it lacks price stability and does not provide a stable store of value. As a result it 

is a speculative virtual commodity with no tangible value. 24The Bitcoin community has argued that this open source unregulated peer-to-peer approach 

is a strong control as it allows a large community of computer scientists, software engineers and 

cryptologists to watch over the system and insure its integrity. 25 However, in practice, as prices have skyrocketed, there has been a greater economic incentive for miners to band together in pursuit of increased profits. As a result, this remains a clear 

weakness in the Bitcoin infrastructure. 

rency’’ produced by solving progressively complex mathematical 

equations.23 The code-protocol for Bitcoin is open source, allowing 

it to be easily viewed, commented on and if a majority of programmers agree, changes are adopted. In this regard, Bitcoin is very 

transparent.24 Bitcoin, the pseudo currency and Bitcoin, the lowcost payment system, are dependent on each other and are inseparable. Bitcoin is the locomotive while the payment system is the 

track that allows it to move back and forth. The Bitcoin infrastructure is decentralized and based on a peer-to-peer structure. Individuals in a multitude of locations, using powerful computers to solve 

pre-determined equations, authenticate e-coins and help keep a 

general ledger of ongoing transactions. A continuous blockchain is 

used and maintained to record Bitcoin ownership. New transactions are authenticated every ten minutes. Unlike in credit card 

transactions, the peer-to-peer network was designed to eliminate 

the need for the financial middleman or the associated fees. These 

individuals verify transactions and provide the backbone control to 

ensure that e-coins are authentic and are not double-spent. As a reward for their efforts, they earn blocks of e-coins. This process is 

referred to as mining and those that do it are called miners. Interestingly, using such terminology also gives the false impression 

that something of tangible value is being created such as gold 

being mined out of the ground. Some enthusiasts have claimed that 

Bitcoin is gold for geeks. Initially, the entry-level barrier to become 

a miner was low. Overtime, this barrier has risen and those who 

are already mining have a competitive advantage and greater market power. 

At first miners were rewarded with 50 coins per block. Initially 

Bitcoin prices were in pennies. More recently, a block is equal to 

25 coins. The block/coin ratio will continue to halve as time goes 

on. It takes approximately 10 minutes to mine a block and approximately 4,000 new e-coins are generated globally per day. Currently 

over 12.3 million Bitcoins have been minted and by year 2140, the 

21 million limit will be reached. A preset quantity limitation creates scarcity which puts upward pressure on price. This is especially true as long as new investors can be recruited to buy newly 

minted e-coins. Although commodity scarcity is dictated by predetermined rules, it is unclear what mechanism or controls are in 

place to guarantee that rules will be followed and that incentives 

to cheat the system will be eliminated. 

Theoretically, the Bitcoin mining and authenticity process is decentralized, keeping collusion between miners to a minimum.25 As 

new e-coins are minted they are added to the blockchain and when 

trades occur, existing e-coins are authenticated against this 

blockchain. As more Bitcoins are mined, the blockchain grows 

longer in complexity and the verification time increases. In FebSBREP-219 with DISTILLER

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ruary 2014, a series of cyber-attacks occurred on the Bitcoin infrastructure, targeting three of the largest exchanges, resulting in significant trading disruption. While the integrity of the blockchain 

remained intact, several third-party vendors were significantly impacted. Mt Gox eventually filed bankruptcy and the other two largest exchanges, Bitstamp and BTCe were immobilized for a week. 

During this attack, markets and Bitcoin prices suffered. 

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