[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE DISRUPTER SERIES: DIGITAL CURRENCY AND BLOCKCHAIN TECHNOLOGY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
MARCH 16, 2016
__________
Serial No. 114-126
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Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Chairman Emeritus Ranking Member
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
JOSEPH R. PITTS, Pennsylvania ELIOT L. ENGEL, New York
GREG WALDEN, Oregon GENE GREEN, Texas
TIM MURPHY, Pennsylvania DIANA DeGETTE, Colorado
MICHAEL C. BURGESS, Texas LOIS CAPPS, California
MARSHA BLACKBURN, Tennessee MICHAEL F. DOYLE, Pennsylvania
Vice Chairman JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio DORIS O. MATSUI, California
CATHY McMORRIS RODGERS, Washington KATHY CASTOR, Florida
GREGG HARPER, Mississippi JOHN P. SARBANES, Maryland
LEONARD LANCE, New Jersey JERRY McNERNEY, California
BRETT GUTHRIE, Kentucky PETER WELCH, Vermont
PETE OLSON, Texas BEN RAY LUJAN, New Mexico
DAVID B. McKINLEY, West Virginia PAUL TONKO, New York
MIKE POMPEO, Kansas JOHN A. YARMUTH, Kentucky
ADAM KINZINGER, Illinois YVETTE D. CLARKE, New York
H. MORGAN GRIFFITH, Virginia DAVID LOEBSACK, Iowa
GUS M. BILIRAKIS, Florida KURT SCHRADER, Oregon
BILL JOHNSON, Ohio JOSEPH P. KENNEDY, III,
BILLY LONG, Missouri Massachusetts
RENEE L. ELLMERS, North Carolina TONY CARDENAS, California
LARRY BUCSHON, Indiana
BILL FLORES, Texas
SUSAN W. BROOKS, Indiana
MARKWAYNE MULLIN, Oklahoma
RICHARD HUDSON, North Carolina
CHRIS COLLINS, New York
KEVIN CRAMER, North Dakota
7_____
Subcommittee on Commerce, Manufacturing, and Trade
MICHAEL C. BURGESS, Texas
Chairman
JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey Ranking Member
Vice Chairman YVETTE D. CLARKE, New York
MARSHA BLACKBURN, Tennessee JOSEPH P. KENNEDY, III,
GREGG HARPER, Mississippi Massachusetts
BRETT GUTHRIE, Kentucky TONY CARDENAS, California
PETE OLSON, Texas BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas G.K. BUTTERFIELD, North Carolina
ADAM KINZINGER, Illinois PETER WELCH, Vermont
GUS M. BILIRAKIS, Florida FRANK PALLONE, Jr., New Jersey (ex
SUSAN W. BROOKS, Indiana officio)
MARKWAYNE MULLIN, Oklahoma
FRED UPTON, Michigan (ex officio)
(ii)
C O N T E N T S
----------
Page
Hon. Michael C. Burgess, a Representative in Congress from the
State of Texas, opening statement.............................. 1
Prepared statement........................................... 3
Hon. Tony Cardenas, a Representative in Congress from the State
of California, opening statement............................... 4
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, opening statement......................... 5
Prepared statement........................................... 6
Hon. Fred Upton, a Representative in Congress from the State of
Michigan, prepared statement................................... 100
Witnesses
Jerry Brito, Executive Director, Coin Center..................... 7
Prepared statement........................................... 10
Juan Suarez, Counsel, Coinbase, Inc.............................. 20
Prepared statement........................................... 22
Jerry Cuomo, Vice President, Blockchain Technologies, IBM........ 35
Prepared statement........................................... 37
Paul Snow, Chief Architect and Co-Founder, Factom, Inc........... 47
Prepared statement........................................... 49
John Beccia, General Counsel and Chief Compliance Officer, Circle
Internet Financial............................................. 53
Prepared statement........................................... 55
Dana V. Syracuse, Counsel, BuckleySandler, LLP................... 64
Prepared statement........................................... 66
Matthew Roszak, Chairman, Chamber of Digital Commerce, and Co-
Founder, Bloq, Inc............................................. 74
Prepared statement........................................... 76
Submitted Material
Letter of March 14, 2015, from Ryan Zagone, Director of
Regulatory Relations, Ripple, to Mr. Upton and Committee
Members, submitted by Mr. Burgess.............................. 101
THE DISRUPTER SERIES: DIGITAL CURRENCY AND BLOCKCHAIN TECHNOLOGY
----------
WEDNESDAY, MARCH 16, 2016
House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 11:50 a.m., in
room 2123 Rayburn House Office Building, Hon. Michael C.
Burgess (chairman of the subcommittee) presiding.
Members present: Representatives Burgess, Lance, Bilirakis,
Brooks, Schakowsky, Cardenas, and Pallone (ex officio).
Staff present: Leighton Brown, Deputy Press Secretary;
James Decker, Policy Coordinator, Commerce, Manufacturing, and
Trade; Graham Dufault, Counsel, Commerce, Manufacturing, and
Trade; Melissa Froelich, Counsel, Commerce, Manufacturing, and
Trade; Giulia Giannangeli, Legislative Clerk; Paul Nagle, Chief
Counsel, Commerce, Manufacturing, and Trade; Olivia Trusty,
Professional Staff Member, Commerce, Manufacturing, and Trade;
Dylan Vorbach, Deputy Press Secretary; Michelle Ash, Democratic
Chief Counsel, Commerce, Manufacturing, and Trade; Christine
Brennan, Democratic Press Secretary; Jeff Carroll, Democratic
Staff Director; Caroline Paris-Behr, Democratic Policy Analyst;
Timothy Robinson, Democratic Chief Counsel; Diana Rudd,
Democratic Legal Fellow; and Matt Schumacher, Democratic Press
Assistant.
Mr. Burgess. The Subcommittee on Commerce, Manufacturing,
and Trade will now come to order. I will recognize myself 5
minutes for the purposes of an opening statement.
OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
I want to welcome all of our witnesses. Good morning, and
welcome to the next hearing in our Disrupter Series. Today we
will be examining digital currency and blockchain technology.
This technology has the potential to disrupt a whole host of
industries from financial services to manufacturing, supply
chain management, and to health care records, by infusing
transparency and trust in traditionally closed systems.
This is a new technology. The White Paper describing the
first public blockchain application, Bitcoin, was published in
2009, and already there has been a billion dollars in capital
investment over 1,000 firms, most of which are startup
companies.
Having seen the development of email, development of the
Internet, transitioning of the United States economy to the
digital space in the last two-and-a-half decades, I am
interested to hear from our panel about what the development of
blockchain technology means for the next 25 years of global
commerce.
Bitcoin is the best-known digital currency and a good case
study for the disruptive nature of the blockchain. The Federal
Reserve Bank of Chicago highlighted how Bitcoin's blockchain
solves two basic issues with digital currency, by controlling
the creation and avoiding its duplication. Bitcoin limits an
individual's ability to copy and paste new money files to
double spend--we do that in the Federal Government sometimes--
to double-spend digital wealth through advanced cryptographic
signatures.
The solution Bitcoin presents to currency may also be
applied to other asset cases, including intellectual property,
mortgages, and other property records. In a way, it provides a
way to create singular possession online, mimicking possession
in the physical world, but with a transparent and immutable
ledger recording of the possession along the way.
While there have been issues through the development and
growth of Bitcoin, including some of the Mt. Gox issues, the
technology has withstood the stress of growth to date. In the
same way that the Internet has transformed communications, the
adoption of blockchain technology has the potential to disrupt
digital asset transfers.
Cyber security is at the forefront of this subcommittee's
activities in this Congress. It is fascinating to see the
possibility of another technological revolution on the horizon
that could help address the trust and security issues that are
a daily challenge for individuals and companies in every sector
of the United States economy.
However, to serve as an alternative to today's settlement
mechanisms, the technology must demonstrate the scaleability
needed to handle the volumes of transactions to flow through
United States firms on a daily basis. I do hope our panelists
will discuss their work and address the concerns about the
viability of the blockchain moving forward.
I have heard about many potential use cases for this
technology, including digital health records, where security
and immutability are necessities. I would be interested to hear
how blockchain technology could help individuals gain control
over their health records and transparency into how those
records are created and shared.
Today's witnesses represent a variety of interests in
digital currency and blockchain technology industries. We will
hear about what consumers can do today using digital currency.
We will also hear about consumer protection issues that may
develop. Even more exciting is the potential for consumer
benefits that have yet to be realized for the firms that
leverage the blockchain.
Currently, a number of regulatory bodies at the State and
Federal level have weighed in or are considering action around
Bitcoin and other blockchain applications. While there are
serious concerns to be addressed with the anti-money laundering
effects for digital currency, we should also be cognizant of
the future applications of the blockchain technology that may
improve transparency in both the public and private sectors.
These future applications could be stifled if the regulatory
environment becomes too burdensome on small companies trying to
leverage this new technology.
Once again, I want to thank all of our witnesses for taking
time to inform and educate us about the applications and future
potential of digital currency and blockchain technology. I
certainly look forward to a thoughtful and engaging discussion.
[The prepared statement of Mr. Burgess follows:]
Prepared statement of Hon. Michael C. Burgess
Good morning and welcome to the next hearing in our
Disrupter Series. Today we will be examining digital currency
and blockchain technology. This technology has the potential to
disrupt a whole host of industries from financial services to
manufacturing supply chain management to health care records by
infusing transparency and trust into traditionally closed
systems.
This is an incredibly new technology--the whitepaper
describing the first public blockchain application, Bitcoin,
was published in 2009. And already there has been $1 billion in
capital investment to over a thousand firms, most of which are
start-ups.
Having seen the development of email, the Internet, and the
transitioning of the U.S.'s economy to the digital space in the
last two and a half decades, I am interested to hear from our
panel about what the development of blockchain technology means
for the next 25 years of global commerce.
Bitcoin is the best known digital currency and as a good
case study for the disruptive nature of the blockchain. The
Federal Reserve Bank of Chicago highlighted how Bitcoin's
blockchain solves the two basic issues with digital currency:
controlling its creation and avoiding its duplication. Bitcoin
limits individual's ability to copy and paste new ``money
files'' to double spend or accumulate ``digital wealth''
through advanced cryptographic signatures. The solution Bitcoin
presents to currency may also be applied to other asset cases
including intellectual property, mortgages, and other property
records. In a way--it provides a way to create singular
possession online, mimicking possession in the physical world,
but with a transparent and immutable ledger recording the
possession along the way.
While there have been issues through the development and
growth of Bitcoin, including the Mt. Gox issues, the technology
has withstood the stress of growth to date. In the same way
that the Internet transformed communications, the adoption of
Blockchain technology has the potential to disrupt digital
asset transfers. Cybersecurity is at the forefront of this
subcommittee's activities this Congress. It is fascinating to
see the possibility of another technological revolution on the
horizon that could help address the trust and security issues
that are a daily challenge for individuals and companies in
every sector of the US economy.
However, to serve as an alternative to today's settlement
mechanisms the technology must demonstrate the scalability
needed to handle the volume of transactions that flow through
U.S. firms on a daily basis. I hope the panelists will discuss
their work to address concerns about the viability of the
blockchain moving forward.
I have heard about many potential uses cases for this
technology, including for digital health records, where
security and immutability are necessities. I would be
interested to hear how blockchain technology could help
individuals gain control over their health records and
transparency into how those records are created and shared.
Today's witnesses represent a variety of interests in
digital currency and Blockchain technology industries. We will
hear about what consumers can do today using digital currency.
We will also hear about consumer protection issues that may
develop. Even more exciting is the potential consumer benefits
that have yet to be realized for firms that leverage the
blockchain.
Currently, a number of regulatory bodies at the State and
Federal level have weighed in, or are considering action,
around Bitcoin or other blockchain applications. While there
are serious concerns to be addressed with anti-money laundering
efforts for digital currency, we should also be cognizant of
future applications of the blockchain technology that may
improve transparency in both the public and private sector.
These future applications could be stifled if the regulatory
environment becomes too burdensome on small companies trying to
leverage this new technology.
I thank the witnesses for taking the time to inform us
about the applications and future potential of digital currency
and blockchain technology. I look forward to a thoughtful and
engaging discussion.
Mr. Burgess. I will yield back my time and recognize Mr.
Cardenas of California as the ranking member of the
subcommittee.
OPENING STATEMENT OF HON. TONY CARDENAS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Cardenas. Thank you very much, Mr. Chairman. I would
like to thank all the witnesses for coming forward today to
help enlighten us about your views on what we are going to talk
about in this hearing today. In this hearing, we are looking at
digital currency and blockchain terms that don't often enter
every conversations. Although with today's Metro shutdown, the
ride-hailing services using the blockchain may have helped
people get here to work today.
As we continue this subcommittee's Disrupter Series, we
again run into the same key question--how must yesterday's
rules evolve to fit today's technology. Digital currency like
Bitcoin lacks many of the features we usually associate with
traditional money like the U.S. dollar. It doesn't come in
paper bills. It is not issued or guaranteed by a Government.
Electronic transactions with digital currency may not require a
bank to serve as an intermediary.
Digital currency has not been widely adopted in part
because it has several changes. Digital currencies lack some of
the protections provided for more traditional financial
products. The value of currencies like Bitcoin has fluctuated
wildly. Few merchants accept them at this point. Meanwhile,
digital currencies have become associated with illegal
transactions such as money laundering, ransomware, and the sale
of illicit goods and services.
If digital currencies are to be widely accepted at
legitimate payments, they need to provide sufficient safeguards
for their users, and they need to come under an adequate
regulatory regime to address unlawful use, particularly in
terms of money laundering and financing of terrorism. But
digital currency is really just our entry point for discussion
of a more fundamental innovation--blockchain.
Blockchain is this concept of a digital public ledger to
track transactions. It is an innovation that can have many
different applications. Blockchain could have many other
applications beyond digital currency. Proponents talk about
blockchain's ability to cut out intermediaries. In some cases,
this could be helpful.
At the same time, we need to think about what we may be
losing in the process of cutting out this middleman. For
example, in financial transactions, the middleman is the bank,
and banks have rules and reporting requirements they must
follow to prevent money laundering and financing of terrorism.
If the bank is cut out, we need alternative means to detect
such activity.
While blockchain is theoretically transparent as an open
ledger, permissioned blockchain, where the ledger is private or
invitation-only, could potentially enable anti-competitive
activity. These are not arguments against blockchain. Rather,
they are challenges for developers to address as innovation
moves forward. Developers have a responsibility to protect user
privacy, stop fraud, and prevent use of their products for
illegal activity.
Carrying out these responsibilities may look different than
it did for earlier products, but let's be clear. Compliance
with rules to protect consumers or protect our security is not
an inconvenience. It is a necessary part of participating in
our economy. One of our roles on the subcommittee is to wrestle
with how new technology affects consumers and interests with
the law.
States are already figuring out how to regulate these new
products and markets. Federal agencies are monitoring digital
currency markets. These efforts require understanding the
unique attributes of these new technologies. As we start
examining this new space, I hope our witnesses can help inform
our discussion and provide answers on not only how blockchain
can be used but also how these uses interact with rules to
protect consumers and protect security.
With that, I welcome our witnesses, and I look forward to
the testimony today.
Mr. Burgess. The Chair thanks the gentleman. The gentleman
yields back.
The Chair recognizes the gentleman from New Jersey, Mr.
Pallone, 5 minutes for your opening statement, please.
OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Pallone. Thank you, Chairman Burgess. While some
members surely have heard of Bitcoin, few have likely heard of
the recordkeeping software underpinning it called blockchain.
Today we will have the opportunity to explore the benefits and
risks of using crypto-currency sometimes referred to as virtual
or digital currencies. We also will get an understanding of the
benefits and risks of the blockchain for financial and
nonfinancial uses.
Whether using Bitcoin, the most well-known and widely used
crypto-currency, or another one, peer-to-peer digital
transactions have the potential to reduce fees and wait times
for consumer purchases. In addition, crypto-currencies can
offer advantages to underbanked and unbanked populations,
especially in regions where state-backed currency is
consistently unstable and traditional financial services are
less accessible. They also may offer users increased privacy in
comparison to traditional payment methods.
However, at the same time crypto-currencies raise important
issues that should be explored, they are not legal tender, and
their value is not guaranteed by any central authority.
Therefore, they have proven to be vulnerable to price
volatility, deflation, and hacking. In addition, many existing
consumer protections, such as requirements that banks have
systems in place to limit consumer loss and detect money
laundering, may not apply to crypto-currencies.
For example, current law ensures that you are not
responsible for unauthorized credit card charges over $50. No
such protections exist for purchases made with crypto-currency.
Also, digital payments can be irreversible, making simple
consumer transactions like returns and chargebacks more
complicated or impossible.
While originally created for crypto-currency, the
recordkeeping technology, blockchain, has gained enormous
interest in the last few years with more than $1 billion raised
in venture capital so far. In the financial sector, firms are
looking at placing stock and bond trades on the blockchain. In
the nonfinancial arena, the full range of possibilities may be
endless. Blockchain is being tested for possible applications
in health care, green energy, copyright, and voting, to name a
few.
The blockchain can automate contracts, making them faster
to complete. They can increase transparency in property rights
disputes and help protect intellectual property. And, in many
sectors, the blockchain may improve privacy protections, reduce
human error, and lower administrative costs.
Just as with crypto-currencies, blockchain raises important
issues for us to explore. Some experts have pointed out that
permission blockchains, in which only vetted and approved users
can participate, may use anti-competitive tactics or price-
fixing that would violate antitrust regulations. Others have
suggested that the blockchain is too rigid for many potential
applications. It does not include the necessary flexibilities
to ensure consumers have basic rights, such as the ability to
resolve disputes.
So I just want to reiterate that consumer protections must
be considered as these new technologies are developed. I look
forward to hearing from all of our witnesses about the current
and future uses of crypto-currencies and the blockchain, and
the consumer protections that go with them hand in hand.
And, again, Mr. Chairman, I thank you, and I yield back the
balance of my time.
[The prepared statement of Mr. Pallone follows:]
Prepared statement of Hon. Frank Pallone, Jr.
Thank you, Chairman Burgess. While some members surely have
heard of Bitcoin, few have likely heard of the recordkeeping
software underpinning it called the blockchain.
Today we will have the opportunity to explore the benefits
and risks of using cryptocurrencies, sometimes referred to as
virtual or digital currencies. We also will get an
understanding of the benefits and risks of the blockchain, for
financial and nonfinancial uses.
Whether using Bitcoin, the most well-known and widely used
cryptocurrency, or another one, peer-to-peer digital
transactions have the potential to reduce fees and wait times
for consumer purchases. In addition, cryptocurrencies can offer
advantages to underbanked and unbanked populations, especially
in regions where state-backed currency is consistently unstable
and traditional financial services are less accessible. They
also may offer users increased privacy in comparison to
traditional payment methods.
However, at the same time, cryptocurrencies raise important
issues that should be explored. They are not legal tender, and
their value is not guaranteed by any central authority.
Therefore, they have proven to be vulnerable to price
volatility, deflation, and hacking.
In addition, many existing consumer protections, such as
requirements that banks have systems in place to limit consumer
loss and detect money laundering, may not apply to
cryptocurrencies. For example, current law ensures that you are
not responsible for unauthorized credit card charges over $50.
No such protections exist for purchases made with
cryptocurrency. Also, digital payments can be irreversible,
making simple consumer transactions like returns and
chargebacks more complicated or impossible.
While originally created for cryptocurrency, the record-
keeping technology--blockchain--has gained enormous interest in
the last few years, with more than one billion dollars raised
in venture capital so far. In the financial sector, firms are
looking at placing stock and bond trades on the blockchain. In
the nonfinancial arena, the full range of possibilities may be
endless--blockchain is being tested for possible applications
in health care, green energy, copyright, and voting, to name a
few.
The blockchain can automate contracts, making them faster
to complete. They can increase transparency in property rights
disputes and help protect intellectual property. And in many
sectors, the blockchain may improve privacy protections, reduce
human error, and lower administrative costs.
Just as with cryptocurrencies, blockchain raises important
issues for us to explore. Some experts have pointed out that
permissioned blockchains, in which only vetted and approved
users can participate, may use anticompetitive tactics or price
fixing that would violate antitrust regulations. Others have
suggested that the blockchain is too rigid for many potential
applications, and does not include the necessary flexibilities
to ensure consumers have basic rights such as the ability to
resolve disputes.
I want to reiterate that consumer protections must be
considered as these new technologies are developed. I look
forward to hearing from all of our witnesses about the current
and future uses of cryptocurrencies and the blockchain and the
consumer protections that go with them, hand-in-hand. Thank you
and I yield back.
Mr. Burgess. The Chair thanks the gentleman. The gentleman
yields back.
Seeing no other members present who wish to give an opening
statement, the Chair would like to remind members that,
pursuant to committee rules, all members' opening statements
will be made part of the record.
And, again, we want to thank our witnesses for being here
with us this afternoon, for taking their valuable time to
testify and educate the subcommittee. Today's witnesses will
have the opportunity to summarize their opening statement,
followed by a round of questions from members. Our witnesses
for today's panel hearing include Mr. Jerry Brito, Executive
Director at Coin Center; Mr. Juan Suarez, counsel at Coinbase;
Mr. Jerry Cuomo, Vice President of Blockchain Technologies at
IBM; Mr. Paul Snow, Chief Architect at Factom; Mr. John Beccia,
General Counsel and Chief Compliance Officer at Circle Internet
Financial; Mr. Dana Syracuse, former Associate General Counsel
of the New York Department of Financial Services at
BuckleySandler LLP; and Mr. Matthew Roszak, Chairman of the
Chamber of Digital Commerce and co-founder of Bloq,
Incorporated.
We certainly appreciate you all being here today. We
recognize the significant expertise that is before our panel
today. We will begin the panel with you, Mr. Brito, and you are
recognized for 5 minutes for an opening statement.
STATEMENTS OF JERRY BRITO, EXECUTIVE DIRECTOR, COIN CENTER;
JUAN SUAREZ, COUNSEL, COINBASE, INC.; JERRY CUOMO, VICE
PRESIDENT, BLOCKCHAIN TECHNOLOGIES, IBM; PAUL SNOW, CHIEF
ARCHITECT AND CO-FOUNDER, FACTOM, INC.; JOHN BECCIA, GENERAL
COUNSEL AND CHIEF COMPLIANCE OFFICER, CIRCLE INTERNET
FINANCIAL; DANA V. SYRACUSE, COUNSEL, BUCKLEYSANDLER, LLP; AND
MATTHEW ROSZAK, CHAIRMAN, CHAMBER OF DIGITAL COMMERCE, AND CO-
FOUNDER, BLOQ, INC.
STATEMENT OF JERRY BRITO
Mr. Brito. Mr. Chairman and Ranking Member, members of the
committee, my name is Jerry Brito, and I am the Executive
Director of Coin Center, an independent nonprofit research and
advocacy center that is focused on the public policy issues
facing crypto-currencies like Bitcoin and Ethereum. Our mission
is to be a resource to policymakers and members of the media
who want to learn more about digital currency technology and to
develop legal research that meets the policy challenges this
technology presents.
I want to thank you for inviting me to participate in this
hearing. I would like to provide some background on the
technology we are discussing. I would also be happy to answer
any technical questions that you might have or to explain some
of the regulatory activity that we have seen to date.
Now, digital currencies are nothing new. They have existed
for decades from Microsoft points to Facebook credits to
airline miles, and neither are online payment systems new.
PayPal, Visa, Western Union Pay, these are all examples. So
what is it about Bitcoin and similar cryptograph-based
currencies that make them unique? Bitcoin is the world's first
completely decentralized digital currency, and it is the
decentralized part that makes it unique.
Decentralized means that there is no issuer, no central
authority, and there is no company, no building, no server.
Before the invention of Bitcoin, for two parties to transact
online, to transact electronically, always required a trusted
third party, someone like PayPal or Bank of America.
Why was that? Well, what would an online transaction have
looked like without a trust intermediary? Let's think first
about a cash transaction where no third party is needed. If I
hand you a $100 bill, you now have it and now I don't, and we
can verify that the transaction has taken place by looking at
our hands.
If we try to do that online, what would that look like?
Well, we would have to represent the $100 billion digitally,
and we would have to basically create a $100 digital file, and
I would attach that $100 file to a message, much like I might
attach a photo or Word document to an email, and I would send
it to you.
You would then have the $100 file, but what about me? When
I email a Word document to you, is a document deleted from my
computer? No. I retain a perfect digital copy. So if it was a
$100 file, I would retain the perfect digital copy of that same
$100 bill, and I could send it to a second person or a third
person or a fourth. This is what computer scientists call the
double-spending problem, and we solve that problem by employing
trusted third parties like PayPal.
When I send you $100 using PayPal, I don't communicate
directly with you. Instead, I ask PayPal to deduct that amount
from my balance on their ledger and add it to yours. This
means, however, that we must each have an account with the same
party that we trust. Bitcoin's invention is revolutionary,
because for the first time the double-spending problem can be
solved without the need for a third party. Bitcoin does this by
distributing the necessary ledger among all the users of the
system, via a peer-to-peer network.
Every transaction that occurs in the Bitcoin network is
registered in a distributed public ledger which is called the
blockchain. The global peer-to-peer network, composed of
thousands of peers, takes the place of the intermediary. You
and I can now transact online without an intermediary.
Now, why would one use Bitcoin instead of a traditional
payment system? There are many reasons, but chief among them is
because if there is no intermediary transaction costs can be
lower, making Bitcoin transactions cheaper and faster than some
existing systems. And perhaps more importantly, though, Bitcoin
allows for new kinds of transactions that were never before
feasible, including micro transactions, self-executing
contracts, and other innovations.
Bitcoin is an open network protocol. This means that unlike
PayPal or a credit card network, you don't need permission to
join and transact. As a result, Bitcoin is an open platform for
innovation, just like the Internet itself. In fact, Bitcoin
looks today very much like the Internet did in 1995.
So some dismissed the Internet then as a curiosity, but
many could see that such an open platform for innovation would
allow for world-changing applications to be built on top of it.
Few in 1995 could have foreseen Facebook or Skype or Netflix,
but they could see that all the building blocks were there for
some amazing innovations. Bitcoin is like that today. We can't
conceive yet what will be the killer applications on Bitcoin
and open crypto-currencies, but it is pretty obvious the day
will come.
Bitcoin faces some challenges, however, and chief among
them is regulatory uncertainty, especially at the State level.
If we think back again to the early Internet, it was not until
the Government made it clear that it would pursue a light-touch
regulatory approach that Internet innovation really took off.
Bitcoin today is in need of similar commitment from
Government. Therefore, as you consider regulatory policies that
affect this infant technology, you should take care to measure
their impact on continued innovation. If you need any further
assistance as you consider digital currencies, please do not
hesitate to contact us at Coin Center. Again, our mission is to
build a better understanding of these technologies and to
promote a regulatory climate that preserves the freedom to
innovate using blockchain technologies. We are more than happy
to connect you with the appropriate academics, experts, and
practitioners in the space.
Thank you for your time, and I look forward to your
questions.
[The prepared statement of Mr. Brito follows:]
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Mr. Burgess. The Chair thanks the gentleman.
Recognize Mr. Suarez for 5 minutes for your opening
statement, please.
STATEMENT OF JUAN SUAREZ
Mr. Suarez. Chairman Burgess, Ranking Member, and members
of the subcommittee, thank you very much for the opportunity to
testify this morning on the role that virtual currency may play
in disrupting today's financial services landscape.
My name is Juan Suarez, and I am counsel for Coinbase, the
world's leading retail Bitcoin exchange platform. Coinbase was
founded in early 2012 with the simple goal of becoming the
easiest place to buy and sell Bitcoin. At the time of
Coinbase's founding, one Bitcoin cost less than $10, virtual
currency had not entered the mainstream, and little to no
venture capital had been invested into the industry.
Today, 4 years later, one Bitcoin is valued at several
hundred dollars, several leading online merchants accept
Bitcoin as a means of payment from customers all over the
world, and over $1 billion of venture capital has been invested
into the space. We believe the rapid emergence of Bitcoin,
together with other decentralized virtual currencies, is
attributable to certain core characteristics that naturally
orient the technology towards innovation and free and open use.
These characteristics include the following. First,
decentralized virtual currencies are, by definition,
distributed, meaning that perfect strangers may transact
securely online without requiring the involvement of a trusted
intermediary or a proprietary infrastructure. Second, virtual
currencies are openly accessible via Internet-connected devices
anywhere in the world. And, third, decentralized virtual
currencies typically operate via an open source software
protocol, and any software developer can build and
independently own applications that facilitate new and
innovative interactions among users.
These characteristics are strongly reminiscent of the early
Internet, which began as an open network with modest
underpinnings. They grew to revolutionize commerce and the way
we communicate and which contributed untold billions or
trillions of dollars to the United States economy.
Virtual currency, in our view, has the same promise. It has
the fundamental capacity to expose entrenched financial
services to unprecedented competition, to bring about new
efficient and global consumer financial products, and, by
virtue of very low marginal transaction costs, to unlock entire
new industries never before realized.
Today we are still in the very early stages of virtual
currency. The most widely adopted use of virtual currency thus
far has been as an asset class for investing savings or for
trading, but there are a great many additional applications of
virtual currency with enormous promise.
And to just give you two examples, first, simply, as a
means of payment for a good or service. Bitcoin rails have
several advantages relative to customary online payment
methods. Bitcoin is truly global, so a merchant can immediately
accept payment from customers worldwide. Bitcoin is a push
payment method. A merchant need not collect, and a customer
need not provide sensitive payment credentials to settle a
transaction.
This reduces proliferation of a customer's personal
information and reduces the risk of catastrophic data breaches.
And as a push payment, like handing over cash, there can be no
fraudulent reversals, which cost online merchants billions of
dollars in avoidable losses each year. This translates into
savings.
Today, prominent payment processors that have integrated
Bitcoin payment rails advertise processing fees less than one-
third the cost of fees charged by those same processors to
process card transactions. A second use case is remittance for
peer-to-peer payments. Bitcoin and derivative technologies
enable transactions that can be processed and settled at a cost
of pennies, in some cases even less.
As of the time of this testimony, the fee associated with
an average Bitcoin transaction is in the range of approximately
10 cents or below. That means a consumer can send, for example,
$100 worth of Bitcoin anywhere in the world for just a few
pennies. Today that same transaction would cost consumers
around the globe on average more than $7 using conventional
remittance services.
These and many other applications of virtual currencies are
being actively pursued by thousands of developers all around
the world, and we anticipate enormous innovation and growth in
the virtual currency economy in coming years. And through the
hard work of companies like Coinbase, together with core
development teams, we can ensure that this innovation occurs in
a safe and secure manner with cooperation among industry,
consumer protection agencies, policymakers, and law
enforcement.
Thanks very much, and I look forward to any questions you
may have.
[The prepared statement of Mr. Suarez follows:]
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Mr. Burgess. The Chair thanks the gentleman.
Mr. Cuomo, recognized for 5 minutes for your opening
statement, please.
STATEMENT OF JERRY CUOMO
Mr. Cuomo. Good morning, Chairman Upton, Ranking Member
Pallone, Chairman Burgess, Ranking Member Schakowsky, and
members of the subcommittee. My name is Jerry Cuomo, and I am
the Vice President for Blockchain Technologies at IBM. And
thank you very much for the opportunity to testify this
morning.
We at IBM believe that blockchain is a revolutionary
technology. With blockchain we can reimagine many of the
world's most fundamental business interactions, and at the same
time open the door to new styles of digital interactions that
we have yet to even imagine. You are wise to include blockchain
in your study of disruptive technologies, because blockchain
has the potential to vastly reduce the cost and complexity of
getting things done across industries, Government agencies, and
social institutions.
I also want to tell you what blockchain is not. It is not
Bitcoin, the crypto-currency. While blockchain is the core
technology that enables Bitcoin to operate, it can be used for
entirely different purposes. Whereas Bitcoin operates as an
anonymous network, blockchain can be used as a trusted network
to handle interactions with known parties.
It is our strong feeling that the benefits of blockchain
are realized in its broadest use, across the broadest set of
industries, from supply chain to trade settlement, from tax to
land deeds, birth certificates and social security. This
morning my testimony makes four points, which I will summarize
now.
The first point is about how blockchain changes the game.
At the center of a blockchain is the notion of a shared ledger.
Think of this as one of those little black accounting books.
However, this book has seemingly magical properties. You see,
members of a blockchain network each have an exact copy of the
ledger. New entries in the ledger are instantaneously
propagated throughout the network. Therefore, all participants
in an interaction have an up-to-date ledger that reflects the
most recent transactions, and the transactions, once entered,
cannot be changed.
Now, let me tell you why and how blockchain actually
changes the game. Transactions can now be settled
instantaneously versus in days. Cost is reduced due to
elimination of middlemen. And because of how these transactions
are stored on the ledger, the chances of tampering and
collusion are greatly reduced.
My next point is blockchain technologies must be made
enterprise-ready. The core blockchain technology must focus on
security and privacy concerns that arise within enterprise use
cases. In addition, computer systems and networks must be
architected so they scale up and can handle immense volumes of
transactions. Simply put, we in IBM are openly working with a
group of industry collaborators to build a new blockchain from
the ground up, with privacy, confidentiality, scaleability, and
auditability, front and center. This is what enterprise-ready
means, which leads me to my third point.
Blockchain must be open. For blockchain to fulfill its
potential, it must be based on nonproprietary technology. And
doing so will encourage broad adoption and ensure compatibility
and interoperability of systems. Specifically, this enterprise-
ready blockchain must be built using open source software with
a combination of liberal licensing terms and strict governance.
Only with openness will blockchain be widely adopted and enable
innovation.
We are participating with over 30 industry players in the
Hyperledger Project led by the Linux Foundation to create an
open, enterprise-ready blockchain.
And my last point is blockchain will greatly benefit from
Government participation. Blockchain holds the promise of
enabling more effective interactions between Government and
business. For example, working as an invited member of an
enterprise blockchain, Government agencies could be able to
better collaborate in financial and commercial systems, and
spot potential problems before they become critical, regarding
everything from tax to land use.
So it is critical that U.S. companies and Government
agencies lead the world in demonstrating the potential of
blockchain.
Now, I should add that blockchain isn't the answer to
everything. There will be situations where it will improve
efficiencies, but there will be others where it is simply not a
good fit. Furthermore, we should not underestimate the
technical and organizational challenges of building and
adopting blockchain systems.
Blockchain is a classic emergent technology, but it is so
strikingly different from what people are used to that many
leaders are adopting a wait-and-see attitude. Now, we applaud
judicious caution, but now is the time to quickly assess the
potential of blockchain and begin experimenting. Therefore, we
urge Congress and the Obama administration to study and
discover the best uses of blockchain for the U.S. Government.
We also want to pay attention to regulatory approaches to
maximize its potential while protecting the interest of
citizens. Blockchain may have begun its existence as the
underpinning of the crypto-currency, but now it stands in the
open, a powerful tool ready to serve business and society.
And thank you again for your invitation and I would be glad
to answer any questions you have.
[The prepared statement of Mr. Cuomo follows:]
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Mr. Burgess. The Chair thanks the gentleman.
Mr. Snow, you are recognized for 5 minutes, please.
STATEMENT OF PAUL SNOW
Mr. Snow. Thank you, Chairman Burgess and members of the
subcommittee for the opportunity to testify before you today. I
am Paul Snow, the Chief Architect of Factom, a protocol to
provide blockchain solutions to a wide range of problems above
and beyond simple currency transactions.
Let me do something strange here. I am a developer, and so
I am going to talk to you about what a blockchain really is
and----
Mr. Burgess. Mr. Snow, I hate to interrupt. Just be sure
your microphone is on. I think----
Mr. Snow. You know, I might be on now. Do I need to reset?
OK.
Well, I am going to do something strange here, and I am
going to try to help you guys be developers like I am. I am
going to actually explain to you what a blockchain is. OK?
First and foremost, if you don't understand hashing
functions, you will never understand blockchains. Now that is
scary, so let me tell you what a hashing function is. Any piece
of data at all--a picture, a video, even your signature, your
address--any piece of data at all can be mathematically
constructed to create a very small fingerprint, and that
fingerprint is unique for that piece of data.
If I make one little change to that data, I will get a
completely different fingerprint, and no fingerprint of any two
data sets, no hash of two different data sets, has ever
matched. This is called no collisions. There is no collisions.
So fingerprint, certain data. Change it, break the fingerprint.
Now, we talk about blockchains, so what is a block? Well,
block is a lot of data. It is a lot of transactions, but it
could also be records, it could be records for a mortgage, it
could be the process by which you validate a land title in a
land titling system. It is just a bunch of data.
Now, we make blocks. We take a bunch of this data, and we
put it together. That is a block. And guess what we do to it?
We hash it. Now, what have we done when we hashed it? We have
created a block of data you never get to change again, because
if you change it, you will break the hash.
Now, what do we do with a hash? Well, we will put it in the
next block, and then we will collect some more data. Now, that
is the chain in blockchain. It is a chain of blocks completely
tied down and secured against any modification in the future by
the hash that is in the next block in the chain. And as I
progress and collect more data, nobody gets to change the past,
and that is really the magic of blockchain.
So what can I do with blockchains? I can do a lot of stuff.
Can I secure a lot of data? Well, yes, because there is this
other trick we can do with hashes, and that is we can have a
tournament. How many of you have been to a tournament before?
Have you ever seen a tournament bracket? You can follow your
team all the way from the beginning, competing against
thousands of other teams, all the way to its winner slot. Your
team always wins, right? All the way to the winning slot, and
all I have to consider is that team and the games it plays in.
I don't have to look at all of those other participants.
Ms. Schakowsky. Can Cub fans do that, too?
Mr. Snow. What is that?
Ms. Schakowsky. Can Cub fans----
Mr. Snow. Cub fans, yes, they can. Sometimes the chain is a
little shorter.
So the idea is I can take a ton of data, and I can create
one--I can combine--instead of games that are hashes, I can end
up with one hash at the end that secures a ton of data, and
there is a small path to any piece of data that proves that
data hasn't changed. I don't have to look at everything.
Factom is built on that. That is the protocol that I am
building, and I build a collection of these Merkle Trees, these
tournament brackets, for data that is collected, and I place
that hash in a public witness. And the public witness in this
case is Bitcoin blockchain, because it has the most secure data
structure on the planet right now.
But we can also go put it in IBM's Hyperledger or in
Ethereum or many other blockchains, and we create a basis by
which you can write an application that runs in the context of
a private chain within all the security that we need for some
applications. And it can access vast sums of data, like weather
data, like transactions on exchanges, huge sets of data, and
prove that that data is historically correct and accurate. And
that is basically the power of the blockchain is to create
histories that you can trust that can be validated and verified
and can be used across many different systems.
And I will be happy to answer any questions anybody has.
And if you want to apply as a programmer, I can certainly talk
to you about that, too. Thank you very much.
[The prepared statement of Mr. Snow follows:]
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Mr. Burgess. Yes. Not likely. Mr. Beccia, you are
recognized for 5 minutes, please. The Chair thanks the
gentleman.
Mr. Beccia is recognized.
STATEMENT OF JOHN BECCIA
Mr. Beccia. Thank you, Chairman Burgess, Ranking Member
Schakowsky, and members of the subcommittee. My name is John
Beccia, and I am General Counsel and Chief Compliance Officer
for Circle Internet Financial. We are a consumer company
focused on making payments more secure, safe, and simple.
Circle is a member of the Electronic Transactions
Association, the leading trade association for the payments
industry. I am grateful to be part of the subcommittee's
Disrupter Series. The blockchain represents one of the most
important technical innovations of our time. It has potential
to impact myriad industries, retail, media, health care,
Government, and energy, but today I am going to focus, really,
on how the blockchain can impact financial services, talk a
little bit about the benefits, risks, and the regulatory
environment.
There is no question that payments can be improved.
Traditional payments are controlled by networks that charge
fees for transactions and have cumbersome processes that are
subject to data breaches. Digital currency holds promise to
improve payments, since there is no central authority and the
value is stored across a distributed network.
So what are the benefits? For consumers, it can be used in
a variety of transactions. It can be used to split a lunch tab
with your co-workers, a mother sending funds to a daughter in
college, or someone sending money to a relative overseas.
Digital currency makes these transactions simple, less costly,
and secure, and it also provides instant access to funds. It
also offers privacy, because on the blockchain personal
information is not disseminated.
Digital currency has the ability to reach unbanked and
underserved communities. Cross-border transactions are offered
at a fraction of the cost of typical remittance fees. Merchants
also like this technology because of the benefits. It is not
subject to interchange fees, chargeback risks, or the liability
of storing customer information.
Blockchain technology is still in its infancy. While there
are over 12 million people with digital wallets, more than
100,000 merchants accepting Bitcoin, and nearly 200,000 daily
transactions, the majority of consumers are still learning
about the benefits of Bitcoin. Like any other technology on the
Internet, adoption is going to take some time.
At Circle, we believe that money should be exchanged
freely, the same way people exchange other information over the
Internet, whether it is photos, messages, et cetera. Our social
payments application allows consumers to make payments in
multiple currencies on the Circle platform and to anyone
anywhere in the world on the blockchain. It also is done in a
fun mobile experience that uses tools like GIFs, emojis, and
photos.
Incubation and blockchain testing among firms of all sizes
is really setting the stage for the expansion of financial
products, economic growth, and job creation. Now, there are
some risks associated with digital currency, and I am sure you
have heard about those risks, and the industry has worked very
diligently to address those risks.
First, digital currency is subject to money laundering.
Unfortunately, global AML laws are updated and really should be
revised to account for 21st century technology. The transparent
nature of the blockchain, however, provides us some more
transparency to detect illicit activity. The industry has
created risk management systems which are really innovative and
have collaborated quite a bit with Government to address these
risks.
Second, which I believe is important to this committee,
consumer education and protection is vital. The CFPB and the
FTC have issued advisories on digital currency. Companies in
this space should have disclosures to provide clear language
about fees, risks, obligations, and dispute resolutions.
Consumers need to know their funds are secure, and that is why
our customers have FDIC insurance protection if they are
holding dollars in their account, and we have also secured
private insurance for those customers who are holding digital
assets.
Third, those digital assets really need to be protected, so
companies like us who are acting as custodians need to have
best-in-class protocols to ensure that we are protecting
digital assets whether they are online or offline. And that is
why we support the White House's recently announced Cyber
Security Action Plan and feel that companies should work to
make sure that all financial transactions are safe.
The regulatory environment for digital currency has evolved
quite a bit over the last couple years. For companies like
Circle, we need to be registered as a money transmitter at the
Federal level as well as licensed State by State. Whereas
States like California have pending legislation on digital
currency, New York has created their own BitLicense, and that
was finalized last year.
We are currently the one and only company that does have a
BitLicense, and we take that responsibility very seriously. In
addition, the Conference of State Bank Supervisors are coming
out with regulatory principles, or have come out with
principles, in an attempt to provide clarity among the States.
While we are encouraged by the regulatory framework, there
is work to be done. Regulatory uncertainty and/or regulatory
arbitrage makes it difficult for businesses to utilize this
service and for consumers to feel confident in the service. We
also encourage Congress to consider more efficient charter
choices, both the digital currency-based firms as well as
FinTech firms in general.
Disruption in payments is happening now. The lessons
learned from digital currency and financial services can be
applied to other industries, and we look forward to discussing
that with you in question and answers.
Mr. Chairman, this concludes my testimony. I look forward
to answering any questions you may have. Thank you.
[The prepared statement of Mr. Beccia follows:]
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Mr. Burgess. The Chair thanks the gentleman.
Mr. Syracuse, you are recognized for 5 minutes.
STATEMENT OF DANA V. SYRACUSE
Mr. Syracuse. Mr. Chairman, Ranking Member Schakowsky, I
thank you for inviting me here to speak today. My name is Dana
Syracuse. I am counsel at BuckleySandler LLP, and I am the
former Associate General Counsel of the New York State
Department of Financial Services, which is the principal
financial services regulator in New York State.
While I was there, I was responsible for helping to lead
several initiatives, including bringing enforcement matters
against some banking institutions for AML/BSA failures and
violations of OFAC sanctions programs, helping to lead the
department's effort in the area of cybersecurity, and also
helping to lead the department's efforts in the area of
regulation of emerging payment systems, including Bitcoin,
blockchain, and my current practice at BuckleySandler focuses
on these same areas.
For the sake of clarity, I want to break out what the
regulatory environment looks like in the area of the payment
system around Bitcoin, separate and apart from blockchain. I
agree with my fellow panelists that the Bitcoin payment system
really is revolutionary and has the power to bring into the
financial fold the unbanked, the underbanked, and those who may
not have the benefit of a modern banking system.
It also has the possibility of being the catalyst of
driving the modernization of our Apollo era payment system into
one that is faster, less expensive, and more reliable. But the
challenges faced by regulators in this new era is going to be
how to create the appropriate guard rails that protect
consumers, prevent money laundering, and impose proper
cybersecurity standards while at the same time not hindering
innovation.
In New York, with the drafting of the BitLicense, where we
came out was not regulating Bitcoin, not regulating the
underlying blockchain protocol, but rather taking a functional
approach and regulating those who are acting as financial
intermediaries, meaning those who are put, in essence, in a
position of trust. So that includes the law companies,
exchangers, and transmitters.
And because of the kinds of functionality that they were
offering, the regulation, therefore, imposes certain
capitalization requirements, anti-money laundering
requirements, cybersecurity, which I think the importance of
cannot be understated, and the other challenge is how to do
this while at the same time continuing to help foster
innovation.
And that is why the BitLicense has an on ramp for smaller
companies, and it is something that I would encourage any other
States or regulatory bodies that choose to step into this area
also include, because the fact of the matter is, you know, this
is an area that has a tremendous amount of innovation, and it
is, I believe, unreasonable and could be a hindrance to
innovation to potentially saddle companies like that without
outsized compliance functions that may not necessarily equate
with the potential dangers that are there.
I also believe that a uniform approach would--across all
the States would be a good goal. The Uniform Law Commission has
an effort underway right now, and Mr. Beccia mentioned the CSBS
model framework as another example.
Now, turning to blockchain, you know, there is--the
blockchain is the underpinning backbone architecture on which
different applications can be built, Bitcoin being the most
well-known. There is significant interest in the way banks and
clearinghouses and exchanges may use blockchain to transform
existing business models, whether they be through closed
systems or on the public blockchain.
Significant time and money is being spent in understanding
this. While blockchain is new, the kinds of functionalities
that are going to come out of it--securities clearing, identity
management--those are not. So the question that needs to be
asked is, you know, when these new functionalities arise, is
there an existing regulatory framework that already answers the
question or meets the concerns, if it is for protection
concerns, the AML concerns, that Government and regulators
could potentially have.
The other important thing to take away from this is that
regulation around the blockchain protocol itself would be a
hindrance to innovation. It is ill understood right now,
companies that are doing some of the creative work in there
haven't reached I would call it market adoption yet sufficient
to say that it is worth the candle of potentially saddling them
with burdens that they don't need.
In conclusion, you know, regulation in the area needs to be
smart. It needs to be the result of study. And I thank you and
look forward to your questions.
[The prepared statement of Mr. Syracuse follows:]
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Mr. Burgess. The Chair thanks the gentleman.
Mr. Roszak, you are recognized for 5 minutes for an opening
statement, please.
STATEMENT OF MATTHEW ROSZAK
Mr. Roszak. Good morning, and thank you, Chairman Burgess
and the distinguished subcommittee for the invitation to
testify today. I would also like to commend your staff for the
thoughtful engagement going into today's hearing.
My name is Matthew Roszak, and I am pleased to be here on
behalf of the Chamber of Digital Commerce where I serve as
chairman. The Chamber is the world's largest trade association
representing the blockchain industry. Through education,
advocacy, and working closely with policymakers, regulators,
and industry, our goal is to develop a pro-growth legal
environment that foster innovation, jobs, and investment.
I am from Chicago, and I have been working as a venture
capitalist and technology entrepreneur for 20 years, deploying
over a billion dollars of capital and founding a dozen
companies during my career. I have also invested in over 20
blockchain companies through my firm, Tally Capital, and more
recently I co-founded a software company called Bloq, with Jeff
Garzik, a technology visionary and core developer of Bitcoin.
Blockchain technology has captured the imagination of
thousands of innovators around the world and created what I
call a generational opportunity for entrepreneurs and
investors. That translates into once in a lifetime. So think
railroads, automobiles, telephony, and the Internet. It has the
potential to play on that scale or even greater. From the
recent covers of the economists and Bloomberg, if it feels like
you are reading about blockchain everywhere, well, it is
because you are, and there is a good reason for that.
The technology of money has evolved over the centuries from
shells, wampum, salt, tally sticks, gold, and paper currency,
to bits and bytes. Today banking and finance are in the process
of being redefined as blockchain technology is creating an
entirely new operating system for money and poised to be one of
the most important inventions in the history of finance.
Trusted intermediaries will soon be disrupted and
decentralized peer-to-peer networks will blossom reducing tons
of friction and saving billions in transaction costs while
unlocking financial access to the entire world, yet we are
still in the early days akin to the dial-up phase of the
Internet.
In terms of Bitcoin's State of the Union, and taking a
famous quote from Charles Dickens' A Tale of Two Cities, ``It
was the best of times, it was the worst of times.'' This very
much applies to Bitcoin today. Despite some of the sensational
headlines, investment and innovation in this industry has grown
at an incredible pace. Venture capital surpassed a billion
dollars last year, with some of the best and brightest
entrepreneurs and professionals from Silicon Valley to Wall
Street to K Street all racing in, along with over 100,000
merchants accepting Bitcoin for goods and services.
Bitcoin is indeed alive and well. And also named companies,
such as Citibank, Deloitte, Foxconn, IBM, PwC, Microsoft,
NASDAQ, and many more have all dedicated significant resources
to exploring blockchain technology.
I would also like to highlight a challenge the Bitcoin
community is currently facing. Something tells me this
committee might be able to relate. Making decisions in a
decentralized system is not easy. Bitcoin is experiencing
significant growing pains as the number of transactions are
increasing exponentially. This is a clear indicator of
Bitcoin's success and a testament to its global adoption.
Now, the challenges reside in how to best increase the
throughput of the system in order to support greater
transaction volumes. Unlike a Government or company, there are
no members of Congress in Bitcoin, nor a CEO or board. That is
all purpose-built and part of the fundamental power and beauty
of Bitcoin's math-based composition.
However, when there is friction in decision-making, that
gridlock can sometimes be overwhelming, if the debates, fights,
and passions involved are in many ways a feature of the system
and not a bug. There is an opportunity on the horizon to create
an open forum for building consensus with more constructive
ways to outline goals, priorities, and risks, which would serve
as an important barometer for stakeholders in the ecosystem.
And there are plenty of well-known platforms to draw from,
including W3C, ICANN, Wikipedia, Linux, and even the United
Nations, where certain best practices can be explored and
leveraged.
Extremely talented and brilliant people have solved some of
Bitcoin's toughest problems. These statesmen usually work as
volunteers, purely out of love for the technology. Through
their Herculean efforts, the system's features, security, and
especially its resilience have all improved dramatically. The
system stresses, heals, learns, and evolves.
In conclusion, the amount of financial and intellectual
capital being poured into this ecosystem, I see incredible
promise and opportunity, especially with hundreds of startups
betting their lives on blockchain, and believe this new
technological frontier has the potential to benefit society and
industry with privacy, security, and the freedom of conveyance
of data, which in my mind ranks up there with life, liberty,
and the pursuit of happiness.
Thank you very much.
[The prepared statement of Mr. Roszak follows:]
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Mr. Burgess. The Chair thanks the gentleman and thanks all
of our witnesses. We will move into the Q&A part of the
hearing. Each member will have 5 minutes, and we will go one
round and perhaps longer. We may have a series of votes that
interrupts us, but let me recognize myself for 5 minutes.
Mr. Syracuse, very fascinating testimony from all of you,
but yesterday a situation was brought to my attention where
someone was--a crime was committed, and the crime was committed
using something called ransomware, which I did not know about
until yesterday. It is a fairly interesting technology that I
guess criminals have developed, and the payment was instructed
to be made in Bitcoins.
Now, it wasn't like a bag of Bitcoins be taken down to the
wharf and left under a boat. It was, you know, where do you go
with this stuff? And when I questioned, you know, ``Well, why
don't you just follow the digital trail?'' he was like, ``You
can't do that.'' So can you kind of enlighten me and the
subcommittee on what are saw of the law enforcement aspects
here?
Mr. Syracuse. Sure. I mean, I think that there are a couple
of things going on in that story. You know, firstly, virtual
currency, Bitcoin, it is highly traceable. There are services
in place that regulators and law enforcement have and need to
educate themselves of if this is going to be regulated that
allow one to follow using blockchain forensics, the flow of
funds from one exchange to another or from wallet to wallet.
The issue also is, at a certain point, that person is going
to need to exit and get Fiat out. So that speaks to the
importance of making sure that the exchanges--the entry points
and the exit points, the on ramp and off ramp--are regulated.
And also, that story, it is less about virtual currency and
Bitcoin.
You know, Bitcoin is used as cash, which can be used in
criminal enterprise. They kind of outlawed that, but it is a
story about cybersecurity, and a larger conversation that needs
to be had around regulation in that area and creating proper
standards there.
Mr. Burgess. You know, maybe I have watched too many crime
dramas on TV, but it seems like Clint Eastwood would have put
an ink cartridge into the bag of money that stained the dollar
bills, so that anyone knew when they were pushed across the
counter that this guy is the criminal. Is there any way
technologically to attach that sort of detection device to the
Bitcoin transaction?
Mr. Syracuse. I think that there are coins that are known
now that have been used in criminal enterprises that are, in
essence, marked. But, yes, they can be programmed in such a
way. But the key thing is to make sure that these blockchain
forensic tools are being utilized, so you could follow it, so
you could trace the funds.
Mr. Burgess. Well, you know, again, that was interesting.
That case just literally came before me yesterday as we were
preparing for this hearing today.
Mr. Brito, did you have something you wanted to add to
that?
Mr. Brito. Sure. One thing to keep in mind about
ransomware, which is a very serious problem, is that it
predates Bitcoin and decentralized digital currencies. We have
seen ransomware as far back as 20 years, and what makes
ransomware possible today is three things.
It is a breach of a computer. Essentially, you get hacked.
Number two, cryptography. Essentially, your files on your
computer aren't encrypted, so you no longer have access to
them. And, number three, it is a payment method. So in this
case it is Bitcoin. So you can pay the person who is in ransom.
Of those three things that are necessary for ransomware,
encryption and digital currencies have incredible potential,
you know, good uses, right? So cryptography is what keeps our
bank balances safe. Digital currency, as we have talked, is
what makes it possible.
The third component, though, the breach, the hack, the lack
of cybersecurity, that is where the real concern is. And I am
happy to say that, in conjunction with the CDC, Coin Center and
a lot of the companies in this space have created something
called blocktion lines, which is a public-private forum between
law enforcement and the companies in this space to begin to
discuss and educate law enforcement about how they can do this
kind of tracking to, you know, get the bad guys.
Mr. Burgess. Are there places a criminal can go, countries
to which they can go, where these traceability aspects are
muted or disrupted?
Mr. Brito. So the traceability of the coins, as it were, on
the network cannot be compromised. You can still trace the
coins. The problem is that the off ramp and on ramp may be in a
country that is not cooperating with law enforcement in other
countries. But that, again, is an issue not of Bitcoin's issue,
of cooperation between law enforcement.
Mr. Burgess. Mr. Suarez, just briefly let me ask you, how
do you determine the value of a Bitcoin? Is it all one unit
size, or are there various sizes?
Mr. Suarez. Well, the value of Bitcoin is determined in the
same way that the value of really any kind of digital asset or
commodity is determined, which is effectively through supply
and demand. And so the price of Bitcoin on the coin-based
platform today, which is probably something in the low $400
range, is really just a function of how many people are willing
to purchase Bitcoin and how many people are willing to sell it.
To your question about fractions of a Bitcoin, the reality
is you can transfer fractions of a Bitcoin, very tiny fractions
of a Bitcoin, just as easily as you can a full Bitcoin, or many
Bitcoin. And that opens up very exciting possibilities.
So, for example, one of the issues I think that was
discussed today is the concept of micro payments online where I
can viably send you two pennies worth of value or 10 pennies or
50 cents worth of value because I am going to tip you because I
like a comment that you made on my Internet form, for example.
And that is not a technology or that is not a payment form that
is viable today, because the cost of those smaller payments
would exceed the value of that transfer. So we can transact in
tiny fractions of a Bitcoin.
Mr. Burgess. That is very interesting.
The Chair recognizes Ms. Schakowsky of Illinois, 5 minutes
for questions.
Ms. Schakowsky. Thank you, Mr. Chairman. I apologize for
being late. I did get to hear most of the testimony.
I wanted to ask questions about consumer protection also
and financial fraud and abuse. There is all kinds of
protections set up to guard against financial fraud and abuse
through traditional currency transactions. Banks can flag
suspicious activity and limit withdrawals, which make it harder
for a thief or a fraudster to empty out our bank accounts.
And I understand that those kinds of checks may not be in
place for digital currency, but I did--and another example
would be that the consumer protections required by the Truth in
Lending Act may not apply to loans or credits of digital
currency, raising questions about transparency and about
fairness.
So, Mr. Syracuse, I wanted to ask you, you have experience
in the public sector and in this kind of regulation. If a
consumer needs to contest a purchase made, for example, with
Bitcoin, say the product they bought is defective or the
service was never performed, are they protected in the same
ways that they would have been if they had used a credit card
or a debit card?
Mr. Syracuse. Not necessarily. But depending on what
exchange or what facilitator they are using, they may have
those policies in place. You know, I would be curious to--the
answer is not necessarily.
Ms. Schakowsky. Not necessarily. And are those kinds of
risks, then, disclosed? Do consumers----
Mr. Syracuse. Yes.
Ms. Schakowsky [continuing]. Make assumptions, do you
think?
Mr. Syracuse. Yes. So under the BitLicense, there are
certain enumerated disclosures that need to be made. So
disclosures about volatility, disclosures about the
irreversibility of a transaction, they have to be made.
Ms. Schakowsky. And in what form--you know, I get all of
these privacy disclosures and all of these things that just say
``punch agree'' if you agree?
Mr. Syracuse. Well, that is the issue is at what point does
one kind of turn a blind eye to it? And then the other issue
is, in this digital environment, you know, how much information
can one actually absorb in that little screen? You know, I
think that there should be a conversation around what consumer
protection looks like in the digital age as our banking
functions shift from brick and mortar to an increasingly mobile
environment. I think it is going to be kind of a necessary area
to roll up our sleeves.
Ms. Schakowsky. And what are those things, other ways that
the digital currency exchanges and wallets can be better
protected, and what would that look like? Sure. Mr. Snow, sure,
and then Mr.----
Mr. Snow. I would like to change the conversation just a
little bit, because it is in fact true that digital currency
is--what am I trying to say? Nonreversible, yes. It is a
nonreversible transaction. But blockchains do have the
potential for the consumer to have a much more assured
understanding of what they are purchasing.
So let me tell a really short story about a friend of mine
who builds computer parts on a sideline. He is retired, so now
he spends hours and hours in a bedroom building little kits. It
is what intel engineers do, I guess.
And one of his parts, if it is not an authentic part, the
whole board that he creates, bricks, it kills itself. And he
can work at it, beat on it, and bring it back to life, but his
customers get really upset if it has a nonauthentic part on his
board. So he bought a bunch of chips from Alibaba, you know,
the Chinese eBay sort of thing, and they assured him he was
getting valid chips. And he put them on the board, and they
weren't valid.
And then when he goes to their consumer protection group,
the manufacturer always wins. Therefore, he just had to go find
some more parts and replace all these chips.
Now, here is where the blockchain can help you. Because you
can create a public notified ledger of where parts came from,
the manufacturer of the real genuine part could have put on a
chain, ``These are parts I have sold to Company X.'' And
Company X could put on that same chain that it sold these parts
to Company Y.
And then Company Y could be the guy that my engineer friend
is talking to, and he says, ``I want authentic parts,'' and
they say, ``Yes, you have these three parts. And, see, they are
in this chain, and I can cryptographically prove that there is
a path of legitimate parts that came from the manufacturer to
this guy, and he is about to sell them to me.''
Now, others would say, ``Well, he could turn around and
still send you the bogus parts, right?'' But, see, the trick
is, when the next customer said, ``Sell me some parts,''
Company Y would have already said, ``He sold the legitimate
parts to my friend.'' He would have to represent the real parts
as clones.
And so you are in a position where we can create audit
trails for consumers that exist in places well beyond our
jurisdictions to prove that when you are buying goods and
services, drugs, food, that it is coming from where it is
stated that it is coming from, and limit the ability of
middlemen to pass off clones and knockoffs as the real product.
Now, that doesn't help at the refund level.
Ms. Schakowsky. I am going to--we are going to--we are
about to----
Mr. Snow. It does help to----
Ms. Schakowsky [continuing]. Get a gavel here, because we
have gone over time. So I hear you saying, though, that you
can--we can build into the creations of consumer protections,
but I am not convinced that we don't need some assurances,
outside regulations, some sort of framework that we all agree
to, and I think the conversation, unfortunately, can't continue
now.
But I think that is the conversation we need. How do we do
it? And maybe some of it is embedded and some of it is imposed.
Thank you.
Mr. Burgess. The gentlelady yields back. The Chair thanks
the gentlelady.
Mr. Lance, 5 minutes for questions.
Mr. Lance. Thank you, Mr. Chairman.
What privacy concerns should the public consider when the
public is thinking about buying digital currency? To the panel
in general, anyone who would like to respond. Yes.
Mr. Beccia. So I would just note there is a couple of
things that come up in terms of privacy in digital currency.
First, there is a lot of questions about the anonymity of
digital currency, and, you know, digital currency does offer
benefits to consumers. It offers financial privacy.
So when you are doing a digital currency or Bitcoin
transaction, you are not giving over your credit card
information or your personal information in that transaction.
So if you are buying something on a merchant that accepts
Bitcoin, like at Overstock.com, that is just a cryptographic
type of code that you are providing them and not that personal
information.
So it is actually a benefit in terms of from a consumer
perspective. But on the flip side, where regulators look at it
and are concerned as far as the anonymity, and so not
understanding either where that money is going or who that
customer is. And so what we kind of do to mitigate the risks
are, obviously, similar to any other financial service, we have
to really know who our customers are.
And so we have detailed AML programs, and we look at the
unique risks of our customers. Our customers are mostly online
customers. They are customers from multiple countries, and they
are conducting digital currency transactions, which are a
little more complex. So we need to create systems that are a
little more technically advanced to address that.
Mr. Lance. Thank you. At the moment, the public can invest
in gold or silver or currencies. Does the public have the
ability to invest in these digital currencies? Yes?
Mr. Suarez. Yes, Congressman. So absolutely. So one of--the
platform we operate, for example, will allow customers to
establish a coin-based account, indicate how many Bitcoin they
want to purchase, and then to send us money to settle a
purchase transaction.
And so the simple answer to your question is, yes, there is
an existing retail platform that allows customers to purchase
Bitcoin.
Mr. Lance. And the price fluctuates, I presume, as is true
of any other currency?
Mr. Suarez. That is exactly right. And so most of our
customers today, at least at Coinbase in the United States, are
attracted to the volatility of Bitcoin, because they are
investing effectively in an asset whose value they anticipate
will go up. And so a lot of savings energy is being poured into
that.
Obviously, there are many more applications of virtual
currency beyond that, but that is the initial use that we see.
Mr. Lance. Thank you. Are there differences between a
public blockchain and a private blockchain? Mr. Cuomo?
Mr. Cuomo. Yes, I will take that one. So I think when we
typically think about blockchain, we associate Bitcoin. But the
interesting thing is that the blockchain is a design pattern
that can be applied very broadly.
And when we start to apply it to managed things of value--
that can be land deeds, any kind of certificates, birth
certificates, death certificates, contracts--things that are
managed by, let's say, regulated environments, it is attractive
to start thinking about a blockchain that is permissioned. All
right? Not just anonymous, right?
And the beautiful part about the blockchain architecture is
it allows for this. And the way I am thinking about it is a
dial, right, where you can dial in at one level very tight
permissions, so think about it as a membership club. To get in,
you have to at the door show them your ID card and you are
allowed to come into the room and transact.
But a permissioned blockchain could also be permissive,
right? You can open it up and be somewhat liberal. For example,
two parties exchanging carve-in numbers may have a certain
level of permission to exchange cars with one another. Maybe
one is an auto manufacturer; maybe the other is an auto dealer.
But the Department of Motor Vehicle--and you might only be
able to see those cars that pertain to you, right? So you will
have permission to only see the things on the blockchain that
are relevant to your transactions. But the Department of Motor
Vehicle, when it came in through the door of the club, of the
car club so to speak, it was given broader permissions as an
auditor in that blockchain network. So it can see more, and it
can actually be able to provide an auditing service.
Mr. Lance. Thank you. I certainly know who IBM is,
BuckleySandler. These other entities, are these new to our
commerce in this country? Bloq? Factom? Coinbase? Are these
relatively new organizations?
Mr. Snow. We are a really, really old blockchain company of
about 2 years.
Mr. Lance. I see.
Mr. Snow. It is a very new space. Most of us are fairly
new.
Mr. Lance. I see. Thank you. My time has expired.
Thank you, Mr. Chairman.
Mr. Burgess. The gentleman yields back. The Chair thanks
the gentleman and recognizes the gentleman from Florida, Mr.
Bilirakis, 5 minutes for questions, please.
Mr. Bilirakis. Thank you, Mr. Chairman. Appreciate it so
very much. Thanks for holding the hearing as well.
Mr. Roszak, many have raised concerns regarding the
potential for terrorism financing due to the ability of users
to make anonymous transactions. Address that, please.
Mr. Roszak. Criminals----
Mr. Bilirakis. Address the concerns, yes.
Mr. Roszak. Yes. Criminals have always been early adopters
of the newest technology, whether that goes back to the days of
NASCAR and having a faster car or cell phones or the Internet
or, in this case, digital currencies being used for terror
finance and money laundering.
As we have heard on this panel, the traceability of digital
currencies is more and more profound. The Chamber of Digital
Commerce co-founded the Blockchain Alliance, and we are working
with law enforcement to help them provide the forensics and
tracing for certain issues that come about with those use
cases. But those are the very fringe use cases, and, quite
frankly, digital currencies, especially Bitcoin, is not a great
use of funding for criminal activities like that.
Mr. Bilirakis. Thank you. Anyone else wish to address that?
Yes, please. We will go here--down here.
Mr. Brito. Sure. I would add that to date we have not seen
terrorist financing using digital currency, although it
absolutely is a possibility. What we see instead is the use of
prepaid cards and other centralized methods that can truly
guarantee anonymity, and we see the Director of the Financial
Crimes Enforcement Network at the Treasury Department testify
before Congress in a hearing about digital currency that cash
is still the number one way that folks launder money and
conduct terrorist financing.
Mr. Bilirakis. Who else? Briefly, please.
Mr. Syracuse. I would also just add that, you know, it is
probably more of a concern in the traditional banking
environment. I know that when I was with New York DFS we
brought major enforcement actions against banks for failing to
follow sanctions programs.
And also, you know, to date, the virtual currency
community, the Bitcoin community--the ones that are licensed
have been very responsive, and the figure that I heard to date
was that something like 5,000 suspicious activity reports had
been filed. So to the extent that you are dealing with a
regulated institution, hopefully it is capturing bad activity.
Mr. Bilirakis. Go ahead, please.
Mr. Snow. One thing to understand is Bitcoin is a public
ledger, and so the larger your organization is, the more
transactions you have. The more transactions you have, the more
ability forensics has to look at the blockchain and see the
picture of your organization. This means that Bitcoin
blockchain is decidedly a terrible use for large criminal
organizations.
And this came out in the Department of Justice's digital
currency conference that they had last year at the Federal
Reserve Bank in San Francisco, and the FBI and numerous
agencies stood up and said basically, ``We can dig these
organizations out of the blockchain. So we really would like
them to use it. We can capture them.''
I do think that individuals, small fry, might get through a
lot easier with digital currency, but the larger the
organization, the more opportunity to trip up and the more
opportunity to catch them.
Mr. Bilirakis. Thank you very much. Very informative. Next
question, again for Mr. Roszak, what advantages are there for
consumers to utilize Bitcoin and other digital currencies,
rather than traditional ways to send and receive assets today?
Mr. Roszak. Bitcoin, for example, is used for a variety of
use cases, both as a currency and a store of value. From a
currency standpoint, it could also be used for micro
transactions. So think of a nickel going over the Internet is
expensive today. Using Bitcoin or digital currencies, it is
very cheap, very efficient, secure, and fast. And a nickel
might not sound like much, but a nickel from 50 million people
starts to add up. Part one.
Part two, remitting money around the world is a very
expensive endeavor, time-consuming endeavor. Right now, the
remittance industry is about a half a trillion dollars in size.
That can get turned upside down with remittance saving lots of
money and putting that back into the global economy.
Mr. Bilirakis. Thank you. Next question, why is the price
of Bitcoin so volatile and is there fluctuation in purchasing
Bitcoin? Or does fluctuation occur for the funds already
purchased and available in a consumer's eWallet? I know that
the chairman addressed this to a certain extent, asked this
question, but yes.
Mr. Roszak. Fundamentally, Bitcoin is in a price discovery
phase, and it is a supply and demand dynamic. And we are still
in the early days of Bitcoin. There is 15 million, plus or
minus, Bitcoins outstanding today. It has got a market value of
about 400, so it is a $6 \1/2\ billion currency today.
On a relative basis, that is small. But if you look at
historically, it has been one of the better performing
currencies on the plant. And as you have heard, the amount of
investment and innovation that has been planted in this
industry is still yet to be seen. And so we are at the front
end of this.
Mr. Bilirakis. Thank you. You wish to----
Mr. Beccia. I was just going to point out a similar thing,
that it is a supply and demand issue. And it is a fact that,
really, the users are using it or looking at it as early
adopters more as an asset rather than a currency or a payment
vehicle. And I think long term, as we see more people using it
for payments, which I think is really the use case, we will see
a greater stability in the price and we won't see as much
volatility.
But in the meantime, I think that for consumers it is
important for companies in this space to, one, educate
consumers about the price volatility, and then do things to
make sure that those risks are mitigated.
So as I mentioned earlier, for example, a company like
Circle, we allow our users to also hold their value in U.S.
dollars, which is not subject to volatility, but still have the
benefits of making transactions on the blockchain. So there
will be different innovations that will take out the price
volatility, but I think long term, from an economic
perspective, we will see less fluctuations.
Mr. Roszak. One final point in terms of financial access.
So buying a cup of coffee or a pair of jeans here in DC with
Bitcoin is not going to change our lives. But if you are a
soccer mom in Brazil, a goat herder in Ghana, or a taxi driver
in Indonesia, you have a super computer in your pocket, and you
could buy Bitcoin, and that allows you to participate in the
global economy. So financial access is a huge driver of digital
currencies globally.
Mr. Bilirakis. Thank you very much.
Mr. Burgess. The gentleman's time has expired.
The Chair recognizes the gentlelady from Illinois for
redirection.
Ms. Schakowsky. Thank you. Mr. Syracuse, I wanted to ask
you a couple more questions. In your testimony, you stated that
regulators should focus on the uses of blockchain rather than
their underlying technology. In New York, you led the process
of developing the BitLicense program, as you stated in your
testimony, and this process focused on the use of Bitcoin for
digital currencies and included a two-day hearing with a wide
range of stakeholders.
So what were some of the issues that were discussed in your
hearing?
Mr. Syracuse. I think at the hearing there were discussions
of, obviously, the technology, how does it work, the extent to
which Bitcoin, the currency, should be regulated and what
different aspects of the ecosystem should be regulated.
And the result of that was this kind of functional
approach, which was figuring out what are the traditional
functionalities that kind of fall within the jurisdiction,
which would mean financial--those offering financial services
and financial products.
Ms. Schakowsky. But were there existing laws that covered
or----
Mr. Syracuse. No.
Ms. Schakowsky [continuing]. Could cover?
Mr. Syracuse. So this is another one of the debates which
was whether or not to put virtual--to regulate this area under
existing money transmission law or create something new. And
where New York came out was that for our law, our New York
State money transmission law, would only govern transmission of
money from Point A to Point B and wouldn't capture the exchange
companies or the wallet companies.
Now, that is not to say that other States would be able to
capture that kind of functionality under their own money
transmission laws.
Ms. Schakowsky. And have some of the other States been
doing that or not?
Mr. Syracuse. Some other States are. Some other States are.
So I believe North Carolina, New Hampshire, and a handful of
others are attempting to do that. And that is a perfectly valid
approach.
Ms. Schakowsky. What factors unique to digital currencies
did the department think were important in developing new
regulations?
Mr. Syracuse. Well, the way we initially kind of got
interested in it was we were getting inquiries from our money--
the money transmitters that we regulated saying, ``Is this
money? What should we do with it?'' And then that kind of
launched our inquiry. So we sent out subpoenas, we started
meeting with numerous members from industry, law enforcement,
academics, and the thing that was interesting was the way these
new service providers were popping up in the ecosystem.
And then we started wrestling with, well, what are the
anti-money laundering concerns? What are the consumer
protection concerns? Cyber security, you know, the BitLicense
weaves in a cybersecurity provision. New York State now is
trying to lead the effort in having a nationwide conversation
about regulation in cybersecurity. That is a very important
factor.
Ms. Schakowsky. Absolutely. Mr. Beccia, earlier you seemed
to want to make a point and didn't have time. I wondered if you
wanted to say anything now.
Mr. Beccia. I thought the consumer protection point was
very important, and so just to give you a little more of a
flavor of what companies in the space are looking at. I think,
obviously, from a State standpoint, States like New York and
others, and that are regulating this either as money
transmission or from a separate licensing perspective, have
right in their regulations very detailed consumer protection
protocols, whether it is disclosures to marketing materials at
the point of sale, dispute resolution, and whatnot. And so we
are very, very cognizant of those.
I think also there is protections for customer funds, which
are vital, and so every State--we have to segregate our
customer funds, we have to have surety bonds for funds, and
things like that.
At the Federal level, I think the CFPB and the FTC are very
engaged here, and so they have issued warnings and advisories.
They have started to collect complaints on their portals. And I
would expect to see more regulations in terms of disclosures
and things that are important and things that are--you know,
you see at more traditional financial services and apply them
to digital currency.
But I think, really, the big picture here is that, you
know, we operate in a regulatory environment that is very
similar to financial services. We are still the one and only
company that has received a BitLicense, and so I can tell you,
having gone through that process, it was almost like getting a
bank charter. And so New York took a very thoughtful approach
and was very thorough in terms of things that Mr. Syracuse
mentioned, the very important risks, which are AML, consumer
protection, and cybersecurity.
And so I think, you know, not only do we have those which
are similar to financial services, but on top of that they are
really dealing with the specific risks for this industry.
Ms. Schakowsky. Thank you. Thanks all of you.
Mr. Burgess. The gentlelady yields back. The Chair thanks
the gentlelady.
We do have a series of votes on, but I wonder if I could
just go down the panel and ask for your thoughts on what is
going to be the game changer that consumers see, what
application of blockchain technology. Mr. Brito, we will start
with you, and then we will just work down the line.
Mr. Brito. Sure. I think if I knew, I would be out building
it and making a fortune. So----
Mr. Burgess. Wait a minute. Wait. You are not suggesting
this isn't a productive use of your time.
Mr. Brito. No.
Mr. Burgess. Being in front of the United States Congress.
Come on. This is where I live my life. Please proceed.
Mr. Brito. That said, you know, as with the early Internet,
I think the killer applications are going to come from left
field, maybe things that we can't expect. But if I had to take
a guess today, I would say it is going to be in areas where
technology excels and does things that our current payment
system and our current sort of asset systems do not do. And to
me those are micro transactions and macro transactions.
So the ability to have very, very small payments that today
our existing payment systems do not allow to be efficient or
economic. Imagine, you know, if you think about the web, the
business model of the web is essentially either charging you a
monthly big fee, for video, for audio, for articles, or showing
you advertising.
The only reason we have that choice of business models is
because we can't pay directly a few pennies for this one
article or this 5 minutes of audio. This technology for the
first time makes it possible.
The other is macro transactions, really big cross-border
payments that today are expensive and take a long time because
of the expense and inefficiency in the corresponding banking
system.
Mr. Burgess. Mr. Suarez.
Mr. Suarez. Thanks, Mr. Chairman. That is a great question,
and I also don't know the answer to that. But when I think
about some of the core attributes of what substantialized
virtual currency offers, for example, you can engage in a
transaction without having to disclose your confidential
payment credentials, and so there are security advantages
there.
The cost--as Mr. Brito was just mentioning, it opens up
opportunities for all sorts of micro transactions that are, you
know, just economically not possible using credit cards. And
you think about the global scale of this, which is like the
Internet. Anyone can plug into it. Literally, anyone in the
world can develop applications on top of the Bitcoin protocol.
You start to appreciate the enormous potential.
So I think a lot of the opportunity lies in micro payments.
There are people working on technology to allow micro payments
in browser, and that is what Mr. Brito I think was getting at,
where you can visit a Web page and automatically transact a
micro payment to click through to read something rather than
having to view ads or have a pay wall.
There are enormous potential, as my colleagues have
discussed, in terms of using it as a clearance or property
transfer mechanism. And so I am not sure which of those is
going to take off, but it is going to be something I think very
impactful.
Mr. Burgess. Very well.
Mr. Cuomo.
Mr. Cuomo. Yes. Thanks for the question. Great question.
You know, I think for every one payment, coin-oriented use
case, there are thousands of nonpayment, noncoin-oriented use
cases. So what really captures our imagination at IBM are some
of the use cases that might happen around things like Internet
of things where they intersect with everyday life.
So think about insurance and liability. Think about the new
autonomous vehicles, self-parking vehicles out there. So who is
liable if a self-parking vehicle crashes? All right? So I think
what we can give back to our citizens is finer grain with the
blockchain, finer grain liability insurance, such that when you
are in control of the car, it is immutably recorded on the
blockchain that you are in control, you are driving.
And when the software takes over in your car and starts
parking, that is immutably placed on the ledger, such that if
an accident occurs while, you know, the car is self-parking
perhaps, the manufacturer is liable or the person who wrote the
software. So when you start thinking beyond coins, you know,
what the possibility is, it is just amazing.
Mr. Burgess. Mr. Snow, and let's be brief because I have
only got a couple minutes left before I have to go vote.
Mr. Snow. Well, you are beginning to know me, because maybe
I am not always brief. I do believe that the idea that you can
know the history and the history can't be changed and you can
distribute that to all corners of the earth will create new
ways to organize projects and companies and efforts.
And so you will see a dramatic reduction in the overhead of
corporate oversight essentially to create products, goods, and
services to people. It is basically distribute everything, and
what that looks like I will----
Mr. Burgess. We will have to wait and see, won't we?
Mr. Snow [continuing]. Like everyone else, I don't know.
Mr. Burgess. Mr. Beccia.
Mr. Beccia. Yes. So very quickly, thank you, Mr. Chairman.
So when you think about the early days of the Internet and how
long it takes for real innovation to evolve, I think you are
going to see the same thing here, but it is really exciting. I
think when you look at the payment space and you look at the
risks, you look at the regulations that are needed, it is
amazing where we have come even in a short period and where we
can go.
But I am really also excited about the other use cases. So
when you think of having real estate transactions,
recordkeeping systems for those, for securities, for smart
contracts, things like that, I think, you know, there is
endless possibilities there.
Mr. Burgess. Wonderful. Mr. Syracuse.
Mr. Syracuse. I think my fellow panelists have touched upon
most of the salient points, exchanges, the ability in
insurance, the ability in big data to put ownership of one's
identity and credentials information into their own hands, so
it is an asset that they are able to then leverage.
But I think the truth is, the people that know the answer
to this question are probably sitting in a dorm room at MIT or
a dorm room in another part of the world, and the key thing for
us is to make sure that nothing that, you know, we do as
regulators will prevent or hinder that, and will create an
environment where that can grow.
Mr. Burgess. Yes, Mr. Roszak.
Mr. Roszak. We have heard a lot of great use cases for the
movement of money, digital currencies, tokenization of assets.
And one of the greatest assets that can be employed into this
new railroad is digital identity, how we manage that identity,
the privacy, the security, and make each transaction unique,
whether you are buying something at the convenience store or
applying for a job or going to the hospital or applying for a
mortgage.
Each of those interactions takes a different part of your
digital identity, and this technology enables you to really
take control of that and do that privately and securely.
Mr. Burgess. Since the observation was made that someone in
a dorm room right now is maybe working on that, whatever that
next technology is, I will just offer that at some point in the
future to have my individual medical records only accessible by
me, but the larger, the identified data available to
researchers, FDA, whoever wants to study the cross-
hybridization between this medication and cardiovascular
disease, the Vioxx story from several years ago might have been
very, very apparent had that capability been available.
I want to thank all of you. You know, some mentioned the
Internet of things. I have just got to tell you, when we had
the Internet of things hearing, we had things here. When we had
the drones hearing, we had drones here. I was so looking
forward to finding out whose face was on the Bitcoin, and I
still don't know even after the end of this hearing.
But seeing as there are no further members wishing to ask
questions, I again want to thank our witnesses for being here.
Before we conclude, I would like to submit the following
document for the record by unanimous consent: a letter from
Ripple. Without objection, so ordered.
[The information appears at the conclusion of the hearing.]
And pursuant to committee rules, I remind members they have
10 business days to submit additional questions for the record.
I ask our witnesses to submit their responses within 10
business days upon receipt of those questions.
Without objection, the subcommittee is adjourned.
[Whereupon, at 1:20 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Fred Upton
Our Disrupter Series continues as we focus on digital
currency and blockchain technology, just another example of how
innovative uses of technology are powering the economy into the
future. From executing smart contracts to settling money
transfers in minutes instead of days, millions of folks in
Michigan and across the country could see the blockchain
transform how they engage in everyday commerce in the next few
decades.
The exciting aspect about this technology, however, is that
it can do much more than impact currency, it has the potential
to affect almost every industry that relies on intermediaries
to establish trust between two parties that want to do
business. This can change how folks sell their car, sign a
mortgage, or share music.
Back home in Michigan, startups are raising millions in
venture capital to grow their blockchain-based businesses. For
example, BTCS, headquartered in Troy, Michigan, raised $4.25
million in 2015 to develop its transaction verification
services business on the Bitcoin blockchain.
In the manufacturing space, supply chain management
continues to challenge companies' internal management functions
as well as recall effectiveness. Given that the blockchain
shows everyone in the network the current state of any asset
and that asset's history on the blockchain, tracking a
particular good around the world from port-to-port is now
possible and the information trustworthy, which can help
improve logistics for the auto industry.
In the public sector, blockchain technology could
positively disrupt voting, compliance, and real-time reporting.
The applications for blockchain technology are truly
incredible. Everywhere there is an asset transfer, the
blockchain can bring transparency and trust. As with any
emerging technology, it is important to understand the risks
and benefits to consumers and I hope our panel can speak to
these issues for digital currency and future blockchain
applications.
I thank Chairman Burgess for continuing the Disrupter
Series and highlighting the positive impact that emerging
technologies, like the blockchain, are having on our economy.
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