Day 2, Senate hearings: Bitcoin climbs in use, Congress Fails To Comprehend Bitcoin (Again)

"Bitcoin is an open standard, an open protocol, and an open source payment network.  Nobody owns the network, and nobody controls the network.  All of the users collectively own the network, its rules, and its ledger."- from Statement of BitPay CEO Anthony Gallippi, before the Subcommittee on National Security and International Trade and Finance and the Subcommittee on Economic Policy of The United States Senate Committee on Banking, Housing, and Urban Affairs, during the hearing on 'The Present and Future Impact of Virtual Currency,' November 19, 2013 

"Now we are engaged in a great Civil War, testing whether that nation, or any nation so conceived and so dedicated, can long endure. (...) It is rather for us to be here dedicated to the great task remaining before us (...) that government of the people, by the people, for the people, shall not perish from the earth." - Abraham Lincoln, Gettysburg Address, Nov. 19, 1863 

As today's Senate hearing on virtual currencies began, bitcoin rose to $704 USD, and continued to climb.





Jennifer Shasky Calvery, FinCEN Director repeated her testimony of yesterday:
"FinCEN will do everything in its power" - (repeating almost word for word her previous written testimony submitted at the Nov. 18 Senate hearing on virtual currencies)

David Cotney, Massachusetts Division of Banks, Bank Commissioner:
(Paraphrased:  "Help! I think State licensing should be used to try to control bitcoin! Please agree?")
Key words used by Mr. Cotney:
AML, FinCEN, IRS, Enforcement, State Supervision, Forgery
"37 States were able to ensure that customers were made whole" - (he blathered on further)

For the second day in a row, the agency staff and regulators testifying completely failed to even mention or address decentralized virtual currency, choosing instead to harp endlessly about how they felt additional regulation would somehow work (even if they couldn't show that it would do anything at all).

Sen. Mark Warner:
"Maybe it's just a protocol."
He seemed to have understood bitcoin far better than the agency staff did.

At this point in the hearing, bitcoin rose to over $706 USD, and continued climbing.

Sen. Mark Warner:
(Referring to Congress's behavior and US fiscal policy generally:)
"We seem to be jeopardizing America's status as a reserve currency."

Sen. Jeff Merkley:
"You're not truly anonymous, there is an encrypted version of who owns what (...) Can that encryption be broken?  (...) We've had this series of reported crimes (...) pyramid schemes, hacking (....) these are not small dollar items (...) How does this all work? If there is a public ledger, how does one actually steal bitcoin?"

Jennifer Shasky Calvery:
"I don't know if there is anyone out there who can break the code... it is as strong encryption as exists.... I don't know the type of cryptology that is used."

Sen. Jeff Merkley:
"Fascinating that this system is robust enough... to (go on) for this long... without... breaking down."

(A link is provided here showing a real-time numerical approximation of robustness of the bitcoin network.)

Sen. Dean Heller:
"When did FinCEN first start to take notice of this?"

Jennifer Shasky Calvery:
"Back in 2007, in the e-gold case, we put out our view that it fell under money transmitting by FinCEN"

Sen. Dean Heller:
"What percentage of users... are (engaging in) illicit uses?"

Jennifer Shasky Calvery:
"We would have no way to know that."

Sen. Dean Heller:
"What does government do with those bitcoins?" (Refers to Silk Road seizure.)
Jennifer Shasky Calvery indicated the government may sell the bitcoins.
"Why the volatility?"
David Cotney struggled to answer this question, but failed to answer it.
Sen. Heller continued: "Increasing in volume in China, etc... why is this?"
David Cotney didn't know.
Jennifer Shasky Calvery suggested bitcoin would be a better place to "store value" and that's why people across the world are adopting it.

Sen. Heidi Heitkamp:
"I'm going to take this away from the illegal and discuss what's happening here."
"There are a tremendous number of challenges by not categorizing it."
"A bitcoin being used to buy a pie.  (...) How do you deal with this when it becomes a more widespread method of transmission?"

(I'm betting Sen. Heitkamp will enjoy the upcoming BitPay testimony, that occurs later in this hearing.)

Jennifer Shasky Calvery:
"From the limited perspective (of AML), it's not as important... Regardless of whether it's a commodity or a currency or a security, those basic protections will follow however we define it."

Jennifer Shasky Calvery forgot that it is bitcoin users that define and develop the bitcoin system, and not governments, as governments are not empowered to change the protocol even if governments become users of bitcoin.  Each user is intended to be equal, based on the way the bitcoin system is currently developed.  Various core developers and others - at present, a pool of nearly 150 contributors - spend time working on the bitcoin code - which, as an open source development, means that the code and any proposed changes to it can be seen by anyone. Thus there are no governmental actors who can reach in and change it, though they can certainly try (any and all proposals are seen by the user base), and any changes that occur to its code can only be finalized and become effective with the consensus of the user base (this is especially true in the case of bitcoin, as it is a decentralized virtual currency, and changes to it can be accepted or rejected by any user, which gives any user in the world the power to effectively refuse to implement that which they do not like in favor of some other bitcoin-based code project or wallet option).  Additionally, since the bitcoin code has spawned additional cryptocurrencies, numerous other decentralized virtual currency developments take place entirely outside of and beyond bitcoin, and in each case, users and developers decide how to proceed.  Decentralization and choice places bitcoin systems (and any other similar decentralized virtual currency system) effectively beyond the reach of modern governments. This 'decentralization and choice,' coupled with the exponentially increasing pace of anonymity developments designed for bitcoin and available to anyone for free, such as CoinJoin, DarkWallet, and Zerocoin, e-mail anonymity developments such as Darkmail, decentralized markets, decentralized social communication developments, and well-designed virtual private networks such as Cryptostorm Darknet [which you can pay for in bitcoin]) signals the end of the nation-state as we now understand it.  The transition to a 'new public good' will take time, but it will happen - just as monarchies once fell to a wave of revolutions across the world, producing the modern nation-state and concepts of citizenship, so too will the nation-states of today be forever altered, and in many cases they will fall, due to the changing concept of citizenship and the newfound abilities of people all over the world.

Sen. Heidi Heitkamp:
Expressed some confusion about the value of the pie and whether or not sales tax would have to be collected on 700 dollars due to the high value of bitcoin when a pie is bought with bitcoin.  Asked, "are you going to pay capital gains on it?"

Sen. Warner:
"Many folks lack faith in central banks"

(Very factual.)

Sen. Jerry Moran of Kansas mentioned he has posted this to reddit and had gotten over 120 responses, most of them thoughtful. He mentioned the concept of 'jurisdictional arbitrage,' and then asked, "What's the downside to our country and the economy if our country is the heavy regulator and other countries are not?"

(An excellent question, no doubt prompted by his exploration of the issue on reddit.)

Jennifer Shasky Calvery:
"If businesses leave the United States, based on... regulatory burden, they're going to find the benefits short-lived."

I submit that Ms. Shasky Calvery is wrong, and that people, migrating across the internet and various geographies, will force governments to compete with each other - those governing bodies who offer the least regulation will win.  The overall benefit to people who migrate their content overseas (or who simply decentralize it completely [discussion], a method which would distribute the location of the same content across many nations and even across oceanic sites (like this one, or this one) outside of any nation's jurisdiction) is tremendous, and cannot be ignored.  Since we are already doing this, and it is relatively easy to do (I myself now have decentralized content (though not this particular blog) hosted completely outside of the United States), nothing that Ms. Shasky Calvery says will change that, and any additional regulation will drive more of us to continue to make the choice to leave the nation-state behind as we move forward.

Paul Smocer, President of BITS, testified.
"Virtual currency exists outside of traditional (financial systems).  We are beginning to see bitcoin (being used broadly for) goods and services.  (Made reference to WordPress accepting bitcoin as payment, and to politicians in the United States now being able to accept bitcoin, as per FEC determinations.)  "Digital currencies can help (oppressed citizens) in oppressive regimes.... Cryptographic protection (offers benefits), realtime payments and micropayments.... and opportunities to serve the underbanked and oppressed..."
"Without government funding or support, (virtual currencies) are subject to volatility..."
(Referred to problem of people not being able to retrieve bitcoin if key lost or if it is stolen)
"Risk to consumers:... There is a continuing challenge to their... use."

Sarah Jane Hughes, University of Indiana Maurer School of Law, Commercial Law Fellow:
Mentioned her father worked in cryptography during WWII.
"We need to be cautious not to chill those innovations.... regulations...(should be) as flexible as possible."
"It's incredibly important that we enforce our anti-money laundering and anti-terrorism... laws.."
(Described Gramm-Leach-Bliley protections as important for consumers)
"We have no way of knowing today what will be the second-stage innovations.." (Spoke briefly to potential for development beyond the known bitcoin protocol, unknown innovations of the future)
"If (something is) anti-competitive, it's anti-consumer."
"Don't buy the Wild West argument." (Suggested that the US should try to regulate bitcoin.)

Mercedes Kelley Tunstall, Ballard Spahr Law Firm,
Privacy and Data Security Group Practice Leader
"It is like a lot of things that have happened in the past."
Referred to older cases on US currencies, and that we have a "long history, long legal precedent" that describes how to handle alternative currencies.
"Bitcoin was really designed to not integrate with our financial ecosystem."
"As a result, financial institutions in the United States... view bitcoin as being unreliable."
"There's this sense that because it's virtual currency, it has to be anonymous... but if I'm going to take it from you, I have to see you or know something about you."
"Taking out the middleman, bank involvement... In order to address virtual currencies... the anonymity part of it, let's let that go."

Mercedes, I have so much to say on this, but rather than blather on about it, I'll just leave that to the excellently written post by Electronic Frontier Foundation in its support of anonymity.
(By the way, if you'd like to support the Electronic Frontier Foundation, you can do so with bitcoin.)

Anthony Gallippi, Founder and CEO of BitPay, Inc.:
"We've been operating for two years now, which makes us pretty old in the bitcoin space."
He referred to the 12,000 merchants (various of) which have been recently featured by BitPay.  (Disclosure: This blog has a merchant account, EdgedSolo, which is one of those featured by BitPay.)
"BitPay also follows all Bank Secrecy Act guidelines.."
"Bitcoin does have some limitations... Compared to credit cards, Visa... can handle 20,000 transactions per second... Bitcoin can handle (just) 7 per second... (but does so) with no counterparty risks... If you want to energize the housing market, think of bitcoin... high closing costs?... bitcoin can replace thousands of dollars in closing costs with a single transaction that costs five cents."
"Congress took a wait and see attitude (to watch the development of) the internet of today.  Where would we be (if Congress pursued) licensing of (those who were to use or connect to) the Internet?"
"Bitcoin is in its infancy, much like the internet of the 90s."
His comments seemed to suggest that regulators essentially should leave bitcoin alone, much as they did with the internet, to allow it to develop.
He was asked about fees he collects for the BitPay service:
"Our transaction fee when we started was 1%... our marginal cost was low... We now charge (a monthly fee) for those who want all the transactions they want (without additional cost beyond the monthly fee)."
(Note: A standard BitPay account is available for free with a per-transaction fee of 1%, a Professional level account enables zero transaction fees for $30 per month.))

Sen. Jeff Merkley asked more about what bitcoin is.

Paul Smocer responded that he felt bitcoin is really three things:
"A currency... a depository system.. A payment system"
(Referred to anonymity of users and their wallets, suggesting that this was not a significant concern.)

Sen. Dean Heller:
"What if someone.. cornered the market on bitcoins?"

Mr. Gallippi:
"Right now, the number one exchange is in China... America is not a leader right now in the liquidity in exchange of bitcoin."

Sen. Dean Heller:
"What stops a bank from adopting their own virtual currency?"

Mercedes Kelley Tunstall:
"Nothing..."

(Side note:  A 'Bitcoin Bank' was recently launched, offering its users a 6% return on deposits.)

Sen. Dean Heller:
"Are you familiar with other virtual currencies?

Mercedes Kelley Tunstall:
"There are a number of virtual currencies which are based on bitcoin and which try to fix some of the issues.. There is a virtual currency called Ripple... based on the premise that we are existing in a financial ecosystem.."

Sen. Mark Warner:
"Much as we saw telecoms in developing countries skip the wired and go right to wireless.. couldn't you see these virtual currencies operating faster in the... underdeveloped world?"

Ms. Tunstall suggested that bitcoin proliferation is dependent upon the robustness of the developed worlds' financial institutions.  This showed that she does not yet understand bitcoin very well. Bitcoin is not dependent upon any financial institution, and never has been, but rather, is based on the widespread adoption of a decentralized code base.  As any user's information can be backed up any number of ways, even with the option of backing up the user's wallet to a printed record on a single piece of paper, it is clear that bitcoin is not reliant upon financial institutions, nor is it reliant upon or traditional systems that support those institutions.  In many countries, people use handheld wireless devices to access the internet. The spread of mobile payment systems through wireless networks, even in financially poor regions of the world, presents options that Ms. Tunstall did not evidently want to elucidate upon.

Sen. Mark Warner stated, "as a politician who has a Second Life avatar, that got my attention for a nanosecond" in reference to discussion of regulation online and the concept of people doing transmissions of financial data "off the grid," as he put it.

Sarah Jane Hughes suggested that "If we regulate, we do legitimize... That is a risk."
She continued:
"Right now, it looks like all the risks fall on the users"

Senator Heitkamp:

"What's wrong with that?"

Exactly, Senator Heitkamp.  Nothing is wrong with that, we can deal with it ourselves -
without governments.
Sen. Heitkamp:
"We think about how we are going to fix it or facilitate it, when really we should just leave it alone."

She is exactly right.

Sen. Charles Schumer... "I have a different perspective, as you know, than Senator Heitkamp."
"New York sits in many ways as the nexus of (what's happening today) in finance."

And that's what bitcoin is changing, Sen. Schumer.  We're taking that power away from you and others like you, and we're giving it back to the people to deal with as they see fit.

At 2:10 PM Pacific, the hearing closed and bitcoin was valued at that time at just over $669 USD.

This hearing will be considered open for 7 days for anyone to provide comment on it to the National Security and International Trade and Finance Subcommittee of the US Senate's Committee on Banking, Housing, and Urban Affairs.  The Subcommittee has not yet accomplished development of a page that would allow you to send them e-mail, but its members can be contacted via the fax number shown at bottom of the hearing page.

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Recommended reads:
The BitPay Directory - launched today (the blog you are reading right now - EdgedSolo - is featured in it, to find it there, use EdgedSolo as a search term; for another nice merchant listing, use Muzzle as a search term.)
Thunderbeast Suppressors (A personal favorite)
BitcoinWisdom - Excellent BTC/USD chart for real-time observations
Bitcoinium - Tracks numerous bitcoin exchanges on your Android device (with price notifications you set)
Realtime Bitcoin - Free entertainment: watch bitcoin transactions visualized in real time
Banker in Vietnam Sentenced to Death for Fraud
Bank Records Sought in Offshore Tax Inquiry (Bitcoin + anonymity solutions: Better than Banks)
Banks to Curb Traders' Use of Chat Rooms (Meanwhile, chat rooms alive and well on bitcoin exchanges)
US Investigates Currency Trades By Major Banks
Obama initiative spawns identity-based 'greenlist,' or 'coinvalidation' proposal (These government proposals have been rejected by bitcoin core developers and the user base, which prefers CoinJoin and similar anonymity developments. CoinJoin has now been implemented in bitcoin's blockchain.)
CoinJoin as it appeared on bitcointalk prior to its current implementation
Trustless Bitcoin Mixing Here at Last (Note:  This has now been decentralized)
Bitcoin hits record high - NPR
Piper: A Rasbperry Pi powered Bitcoin Paper Wallet Printer (with Electrum integration!)
Paysafe vouchers for Bitcoins in Germany
Panel (one of various panels developing at this time) to discuss Future of Internet Governance - Internetsociety.org
Bitcoin surges, gold falls - Zerohedge
Bitcoin couple travels the world using virtual cash - WSJ
Bitcoinera.net - a 'Bitcoin Bank'
Anthony Gallippi (Founder and CEO of BitPay) - Written Testimony of Nov. 19, 2013 to the Senate
EPIC Win:  EPIC forces DHS to disclose its 'internet kill switch' plans
Trollbox Archive - Graphs the relationship of 'trollbox' or exchange chat mentions to actual price surges
Unobtainium (I thought this was just some vague reference to Avatar, but apparently it's real)
USA Fails to Adapt to Bitcoin Trading, Cedes any potential dominance it could have exercised
A few reasons why the value of bitcoin is skyrocketing (this is not a complete list)
LTC/CNY chart from fxbtc.com (It's important to watch litecoin volume in China if you are trading using BTC and / or LTC.)
Bitcoin Armory Run on Raspberry Pi and Ubuntu
How to make an offline bitcoin wallet using Armory
Why holding for long time and not jumping the gun is generally advisable -some traders' thoughts on how to handle your 'risk capital'
The World's First 3-D Gun that was Printed with METAL - Now available to you
US Agencies Admit Bitcoin has Benefits
New York State Regulators Demonstrate their Lack of Functional Brain Cells
Commentary on Decentralized vs. Centralized Currency Use - Coindesk
Feds Reveal What they Think About Bitcoin (As expected, DHS comments are medieval in nature)
Congress Nervous About This Whole Bitcoin Thing - Forbes
The Maker of Myst Discusses: Obduction
Forced Decryption:  Unconstitutional - by Electronic Frontier Foundation - in amicus brief for court
A Few Thoughts on the DOJ Brief in the Lavabit Case - by Orin Kerr, on Volokh.com
What Happens to Officers and Employees of USA Who Engage in Oppression Under Color Of the Law - from US Code library at Cornell Legal Information Institute