Monday, November 18, 2013

Day 1, Senate hearings: Bitcoin jumps from $650 to $750, USD (and Congress) is left in the dust

"What is called the dark web, also known as the deep web... (was) deliberately built to be untraceable, to protect the anonymity of the user." Sen. Tom Carper, Nov. 18, 2013 on CSPAN3, during the introduction to today's hearing on decentralized virtual currency.
As was to be expected, the panel's regulators in government focused on the worst possible imaginable crimes that they could dig up, attempting to connect them to bitcoin and other virtual currencies, in order to try to portray virtual currencies in an unfavorable light.  Interestingly, at no point during the hearing did any of the regulators who gave testimony make reference to decentralized virtual currency - in fact, their testimony completely failed to truly mention it or attempt to put it in a coherent sentence - nor did they acknowledge that such decentralized currencies are already beyond the control of governments.

Time and time again, courts in the United States have ruled to protect the right to anonymity.  One such case, in 1995, cited by Electronic Frontier Foundation in its defense of anonymity, included a decision by the US Supreme Court that "protections for anonymous speech are vital to democratic discourse," asserting that anonymous speech "exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular:  to protect unpopular individuals from retaliation... at the hand of an intolerant society."  In point of fact, today, Monday Nov. 18, 2013, the Electronic Frontier Foundation scored a significant victory that is now resulting in the release of hundreds of pages of documents from the government about the use of the unconstitutional Patriot Act, the use of which by government is currently being challenged in the courts.
Faced with this fact - and beyond any law on the books or interpretation of any law by the US Supreme Court, the fact that the strongest of decentralized currencies today is now immune to government attack -- the only thing that regulators in the hearing could do was to ignore and evade discussion of the most meaningful financial development to arrive on the scene in the United States since the production of the first US dollar.  Even a strong equilibrium attack run cheaply by governments against the bitcoin network would ultimately fail to do anything other than delay transactions for a day or two -- it would not be able to shut down the distributed, decentralized bitcoin network. And so, with grim faces, the regulators on today's panel did the only thing they could: ignore the decentralized virtual currency issue entirely.  The discussion was not a total loss, though: the second group of panelists (notably, none of whom were regulators) did not fail to take the opportunity to discuss decentralized virtual currency.

Here follow the most notable quotes from first the regulator panel, with the rest of the panelists' remarks shown in the order of the time they appeared:

Jennifer Shasky Calvery, Director of US Treasury's FinCEN:
"We work to achieve (our) mission by implementing the Bank Secrecy Act... Illicit actors might decide to use virtual currency... (it's) relatively anonymous.... does not typically have transaction limits.... may have been created to facilitate money laundering..."
"(This) is not nearly theoretical..." (References Liberty Reserve, Silk Road)
"It is also important to put virtual currency in perspective... Approximately 8 billion dollars in transactions (in virtual currency) over the past year."
"It is in the best interest of virtual currency users to comply with (our) regulations..."

Of course, anyone who is serious about their bottom line will not comply with additional burdensome regulations.  People are at this moment pursuing development of bitcoin anonymity solutions, including but not limited to, CoinJoin and DarkWallet (the latter of which has already exceeded its funding goal). In a day's time, the CoinJoin fund to support the development of strong cryptographic anonymity solutions has jumped from 16 BTC to over 31 BTC - a growth in value, at present prices, roughly equivalent to a collective donation by multiple individuals over a day's time of $10,000 USD (approximately doubling the amount the account already had). Exchanges that might face additional burdensome regulation will simply jump outside of USA borders, or locate on newly developing "offshore business platforms" which are maintained out at sea. If exchanges find that the regulatory environment makes it too tough for them to operate through websites, they can now fully distribute their bitcoin exchanges and related markets, so that no matter where they are in the world, they will never be able to be shut down due to the nature of decentralization.  Thus, it is not in the best interest of virtual currency users to, in the words of Jennifer Shasky Calvery, "comply."
It is in our interest to do what we please, either as individuals or associations, inside or outside the confines of today's 'nation-state of antiquity.'

Mythili Raman, Acting Assistant Attorney General, Criminal Division:
"Virtual currencies are not inherently illegal.... We have seen criminals are drawn to virtual currencies..."
(Discusses e-gold and convictions obtained in 2008, and Liberty Reserve money laundering prosecution)
"We will continue to aggressively use our authority... to investigate.... virtual currency systems."

Edward Lowery, Special Agent-in-Charge, Secret Service - CID
"Criminals and other illicit organizations use digital currency.... For example, Liberty Reserve..."
"DHS law enforcement pursues digital currency..."  "in violation of 18 USC 1960 (1956 and 1957)... various anti-money-laundering laws... the Patriot Act, and FinCEN regulations."
Made reference to "transnational organized cybercrime" and the apprehension of "5 individuals," and "more than "4,500 cybercriminals... Many of these criminals used digital currency..."
(References the end of e-gold and Liberty Reserve)
"These cases are further discussed in my written testimony."  "Thank you for the opportunity to testify on this important topic, and I look forward to your questions."

(At this time in the testimony, bitcoin was valued at $635, and climbing.)

Sen. Tom Carper referenced the impact of the internet on being able to make purchases in ways that had not previously been available.  Jennifer Shasky Calvery mentioned that the first thing that regulators often think about is vulnerability, but mentioned that innovation is important and suggested developing "smart regulation" that she felt would help the system without hindering it.

As previously mentioned, none of the regulators testifying bothered to mention the inherent threat to the nation-state posed by the use of decentralized virtual currency.  None of them even bothered to get into mentions of the term "decentralized virtual currency," nor did they explore in the hearing what it actually is.

(At this time in the hearing, which was taking the tone of a McCarthyesque investigation of virtual currency use, around 12:38 PM Pacific, bitcoin reached a value of $USD 640, and continued to climb.)

Sen. Tom Carper:
"We figured out how to deal with those guys.... who are not robbing banks anymore... (refers to white collar criminals). How confident are you that we'll be able to deal with the potential criminal behavior, misbehavior, that is before us?... to meet the dark side of this technology?"  (Question posed to Edward Lowery, Special Agent-in-Charge, who attempted, but failed to answer this question. Mr. Lowery did not specify anything that government could do to control decentralized virtual currency such as bitcoin.)

Edward Lowery:
"Hiring, developing, and retaining a highly qualified workforce... (is needed) to run these criminals down."
(This elicited a brief sigh and a moment of silence from Sen. Tom Carper, who no doubt was contemplating his inability to meaningfully fund such a workforce, given Congress's limitations.)

Mythili Raman:
"Liberty Reserve.. is an excellent example of how multiple agencies have worked together... 17 countries working with us on coordinated.. takedowns, (including seizure of) domain names..."
She did not mention how she could successfully stop or limit use of decentralized virtual currency.
"Money laundering statutes, money transmitter statutes are broad enough (for us)."
"We feel confident that statutes we have on the books (are meeting our) needs."

Jennifer Shasky Calvery:
(Mentions Patriot Act and Bank Secrecy Act.)
"Our hope was these regulations would live with changes in the market... It's done just that... That definition has been broad enough for us to encompass virtual currency... exchange(s)."  "We would (like to work with Congress) to see if any additional tools might be better."

(AML (anti-money laundering) provisions are mentioned.)

Jennifer Shasky Calvery:
(Waxes realistic.) "the unbanked... use.. prepaid cards..." (Characterizes this as a benefit to society in terms of the ability to introduce the unbanked to the US economy"
"Cash is still the best medium for laundering money"

Senator Tom Carper:
"Do you see any gaps in our regulation... Which agencies do you see need to be in the forefront?"

"Bitcoin was part of what.... (we're looking at today)" "The high-level cybercriminals have not, by and large, gravitated towards virtual currency.. such as bitcoin."
"(They) have gravitated towards (more) centralized currenc(ies).."
"As long as they comply with existing FinCEN guidance," they are not considered illegal, concluded Lowery.

(At this time in the hearing, around 12:55 PM Pacific, bitcoin reached a value of $USD 660, and continued to climb.)

Mythili Raman:
"DOJ has proposed changes... (references AML) that we continue to support."

Jennifer Shasky Calvery:
"Protecting consumers from fraud, collecting taxes... (is) outside of the purview of FinCEN."

(At this time in the hearing, bitcoin (BTC/USD) continued to rise, litecoin continued to rise, the LTC/BTC pair continued to rise, and the FTC (feathercoin)/BTC continued to rise.)

Sen. Tom Carper:
"Are virtual currencies, currencies or commodities, and who should be making that decision, and do we need that decision to be made?"

-Jennifer Shasky Calvery
"I'm guessing Mr. Lowery would not be (that person to make that decision.)"  "Congress (should have a voice in that process.)"

Described three types of online sites...(which he felt are) "facilitating criminal activity"
"Silk-road type criminal forums.."
"The digital currencies, the use of digital currencies that fall outside US law"  (At this point, Mr. Lowery was obviously frustrated, since he knew that use of decentralized virtual currencies does not run afoul of US law.)
"Bulletproof hosting - a criminal individual who specifically sets up... in a place outside US, and launches attacks against... US infrastructure"

Of course... If we locate our resources outside of US jurisdiction, it must only mean that we are going to attack US infrastructure.  Isn't that right, Mr. Lowery?  Fortunately, it seemed like Sen. Tom Carper wasn't buying that argument.

Mythili Raman
"(T)he challenge arises from anonymity"
"it can be frustrating to the public to see another website popup after one that is similar to it is taken down"
"Law enforcement is watching, it is not in fact anonymous, that is an important message to send."
"It's important we put the wrongdoers in prison..."

Mythili Raman, in fact, was right that the challenge arises from anonymity.  Only with anonymity solutions now being developed and presented to the public can the nation-state effectively be challenged by large numbers of ordinary citizens.  It's nice that law enforcement is watching, but ultimately, it is anonymity solutions (at such time when they are broadly adopted by all or made part of decentralized virtual currency protocols) that will overcome the power of the nation-state, which relies on threat of sanctions and state-sponsored violence to force people to cooperate.  Anonymity provides people with a choice, and that is why anonymity solutions will continue to be developed, enhanced, and ever-more-broadly used.

Jennifer Shasky Calvery:
"If this virtual currency payment system is going to be a real player in the financial system, regulation at home and abroad is going to catch up, because it has to."
"I think the innovation and the jobs will stay in the US, or come back to the US"

On that latter point she is wrong, for as people recognize there is a benefit to operating overseas, they will do so and will find ways to remain outside the reach of the US - which in its pursuit of laws such as SOPA, CISPA, and the TPP - is one of the worst offenders of internet freedom, alongside China and Russia.

"As a defender of US critical infrastructure... (we'll) continue to work strategically to remove the gravest threats to our infrastructure... We'll have to hurdle the international issues and what have you, working overseas..  (We're) very collaborative with our foreign partners... DHS will continue to work to disseminate the threats through DHS... (Continued, rambling incoherently)"

Jennifer Shasky Calvery:
"There's a reason countries and jurisdiction ask you to be licensed... because it comes with a great responsibility... While innovation is a wonderful thing, it does come with obligations.... One of those obligations is helping to protect the system from illicit actors.... we're asking virtual currency exchanges to do three things... Get licensed with FinCEN.... Harden (your infrastructure)... Provide... suspicious activity reports to FinCEN... That's what we're asking of virtual currency providers."

Sen. Tom Carper:
"This has been a thought-provoking presentation and discussion."

(A change in the panel occurs during the hearing recess.  At the time of the beginning of the hearing recess, bitcoin was at $740 USD.)

It was evident at this time that regulators were at a complete loss as to what to do in terms of addressing the progress of decentralized virtual currency, including bitcoin.  Their complete failure to address this at the hearing has a good side and a bad side:  The good is that bitcoin and decentralized virtual currencies will continue unimpeded in their progress.  The bad side is that any regulation or law that is developed in the near future, will in all likelihood be generated by a group of uninformed, largely incapable Congressmembers and federal agency staff.  The upshot is that at the first mention of additional regulation, more startups and even existing firms will head overseas (outside of US jurisdiction) to minimize their liability.

Sen. Tom Carper re-opened the hearing and gave a bio of Jerry Brito.  I am guessing Sen. Carper had no idea what was coming when he introduced Mr. Brito.

Ernie Allen, President and CEO of the Int'l Center for Missing and Exploited Children, spoke.  "Our primary concern is the migration of child pornography, child sexual exploitation, and trafficking.... He described the primary problem associated with virtual currency use as "anonymity."  He also mentioned that the extent to which virtual currencies are used for drugs, which he described as at a numerically larger amount of trade than that which is associated with virtual currency use for child pornography.
He was the first in the hearing to actually discuss at length what is known as "the deep web," and described "frustration" of law enforcement.  "Research indicates that most of the arrests are of those who use the anonymizing technology improperly, and leave a trail."  He referred to the arrest of the Silk Road operator as an example of someone who used anonymizing technology improperly.  "For the future, the pace of technology will quicken.... total internet anonymity will increase."  He suggested "global cooperation" as a solution, pointing out "this is a problem that the US government cannot solve alone."  And, he suggested that the effects of any regulation should be "not so draconian that (the regulations) push virtual currency (businesses) outside of the US" to areas where they are not as regulated.  His remarks were (for the most part) rather insightful. He continued:

"On the one hand, anonymity protects (abuse) of children... On the other hand, anonymity protects (people) from abusive regimes."  He concluded by suggesting "absolute internet anonymity is a prescription for catastrophe."

At this point, however, Mr. Allen failed to add who internet anonymity would be a catastrophe for.  Anonymity, when it becomes available and accessible to most people around the world, will be a catastrophe for governments, especially those operating in the future in a manner where they rely on a combination of taxes and state-sponsored court action (and state-sponsored use of force) to impose their will on others.  It will not be a catastrophe for most of humanity, that will evolve to use it in a way that will create a new public good managed by a growing number of individuals and associations, instead of governments.

Patrick Murck, who sits on the Bitcoin Foundation as General Counsel, spoke next.
"Keeping the bitcoin network safe is all of our responsibility, and developments are underway to prevent its abuse."
"Decentralized systems with open ledgers are inherently transparent."
"The blockchain is so open that the problem (is not) anonymity, but rather, (the difficulty posed for) individuals using the system (to maintain their) privacy."

Mr. Murck mentioned a "safe and sane" regulatory environment that he desired to be produced as a result of the Committee's use, and suggested California and Georgia were good models for regulation of bitcoin.

He failed to mention the fact that most bitcoin users, including most core developers of bitcoin, are now rejecting "Coinvalidation" proposals discussed by the Foundation and leaked to the general public, and he failed to mention that the introduction of the failed Coinvalidation proposals resulted in renewed effort to develop anonymity solutions for bitcoin, such as CoinJoin.

Jeremy Allaire, Circle Internet Financial CEO, spoke next.
"Open platforms have transformed" our systems at all levels, he suggested.  "This same open platform -- especially bitcoin," he said, provides an opportunity of unprecedented "innovation."  "In many cases our (existing) financial systems have excluded" many.  He alluded to the fact that bitcoin would now change this.

(At this point in the hearing, at 1:50 PM Pacific, bitcoin was at $712 with expected orders potentially raising the price to $750.)

He suggested, however, that there were safeguards that "only government can enable."  As has previously been explained in this and the prior blog post here, he was wrong.)

And then, Jerry Brito stood up to testify.

"What is it about bitcoin?," he said.
"It is the world's first completely decentralized virtual currency."

Mr. Brito thus announced to the Senate the death of the nation-state as we now know it.

"Bitcoin allows transactions that are person-to-person, without the need for an intermediary... (and) without a central authority."

"The challenge for policymakers is to prevent risks... without the need for new laws."
"Serious criminals looking to hide their tracks are more likely to look for a centralized (currency) (operated by someone who) is willing to lie to regulators for a fee."
"The path forward... is to allow bitcoin to develop, by allowing developers to comply with existing regulation."
"Thank you for your time and I look forward to your questions."

Sen. Tom Carper:
"Where do you see the agreement among the four of you?  Where do you think there is not agreement, and how do you go about reconciling it?"

Ernie Allen:
"This is an emerging technology that needs to be protected.. At the same time, we can't ignore its misuse."  He suggested there is agreement with operating on the basis of "existing rules," and indicated that "this is truly a global phenomenon."

Patrick Murck:
"I don't disagree with anything from this panel or the previous panel."
Suggested the creation of "on-ramps" into the "existing financial system," and referred to a "chill" that prevents many businesses from doing bitcoin startup with the assistance of banks.  Emphasized that he would like to see that change.

Jeremy Allaire:
"Many of the regulatory tools....are sufficient."
"I do think there is some tension around... anonymity and privacy... whether new laws are required to end the possibility of anonymity in the internet."

Jerry Brito:
"There is broad consensus...."
On agreement, Jerry Brito agreed that centralized currencies were the greater risk.
On disagreement, he suggested that bitcoin developers may not actually leave the US as of now - but the danger, he suggested, is that many ordinary businesses "will (eventually) not find a regulatory environment that is amenable, here (in the US)."

Patrick Murck, on regulation:
"The 50-state money transmitter" regulation, with different licensing requirements in each state, is "burdensome."  He suggested a different framework that could be proposed by Congress (that might apply across the board to mitigate what many agree has become a fractured and difficult money transmitter framework, particularly for exchanges).
He later mentioned that mediation protocols can be built right into the payment structure of currencies such as bitcoin.

Jerry Brito:
"These are not your average consumers just yet jumping into this virtual space."
"As far as opportunities: What's interesting about decentralized virtual currencies is they provide a new choice for consumers."

Jerry Brito really nailed it in all of his comments to the Senate Committee.  The fact that bitcoin presents an investment opportunity is not its key draw.  Ultimately, the fact that it literally empowers people who want to make their transactions without an intermediary (and even create and maintain their own currency) to have a choice.  The presence of this choice will ultimately lead individuals and associations to leave the concept of the nation-state (particularly as an actor that manages their affairs) behind, as they increasingly become collective participants in the management of what becomes a new public good.

Sen Tom Carper:
"What do we know about Satoshi Nakamoto?"

Patrick Murck:  "This person or group of people created the protocol, code base.... this person or group of people has since left the scene...  (The code has changed) (by 50% since then.) Who Satoshi is is largely irrelevant at this point, and that was intentional.  (That's why a) pseudonym was used."

Sen. Tom Carper:
"You don't think it was Al Gore, do you?"

Sen. Tom Carper quoted Einstein in closing:
"In adversity lies opportunity."

I couldn't agree more, Mr. Carper -
and I'll raise my glass today to celebrate an end of the nation-state as we know it.


(At the close of the hearing today, bitcoin was valued at $713.)
(The hearing will remain open for the record, until Dec. 3rd, for people to submit comments and statements.)
(You can review the hearing and the written testimony here, and you can comment on it here.)
(Tomorrow, on Tuesday, Nov. 19, 2013, the US Senate Banking Committee hearing on virtual currencies will be covered and analyzed on this blog.  One of those who will give testimony is Mr. Anthony Gallippi, co-founder and CEO of BitPay, Inc. - a company that I have a merchant account with, that facilitates my receipt of bitcoin payment or donations from people who enjoy this blog.)

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