Tag Archives: Bitcoin Foundation

Senate Committee Listens to Bitcoin Experts, Expresses Open-Mindedness

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Expert Witnesses Ask Government to Enable Innovation

Today, a select group of U.S. officials and expert witnesses convened in Washington to discuss the current challenges facing law enforcement and regulatory agencies before the U.S. Senate Committee on Homeland Security and Governmental Affairs, in a hearing called “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies”.

Senator Tom Carper, a Democrat from Delaware and Chairman of the Homeland Security and Governmental Affairs Committee, presided over the hearing.

 Senate Committee Hearing Patrick Murck Bitcoin Foundation

Bitcoin Like the Early Internet

Senator Carper opened his first question by comparing Bitcoin and digital currencies to the early days of the Internet. When the Internet was first growing in popularity, a lot of people jumped to concerns about cyber crimes, consumer protection, and privacy. But no one, at the time, could have imagined some of the achievements, from Google search to YouTube videos to connecting the world through social networks. Sen. Carper asked the first panel to comment on this comparison.

The panel, composed of representatives from FinCEN, the Attorney General, and the Secret Service, called the comparison relevant. There is a lot of innovation that can come from digital currencies. Governmental bodies need to stop crimes without stifling progress.

“We want to operate in a way that does not hinder innovation,” said Jennifer Shasky Calvery, Director of FinCEN, It’s important to “strike a balance,” she said.

Mythili Raman, Assistant Attorney General for the Criminal Division, added “virtual currency services in and of themselves are not illegal, so long as they obey laws.” She said that her group recognizes that there are legitimate uses of digital currency services.


Who Moves Faster? Criminals or Law Enforcement

Senator Carper also asked the panel how equipped and capable they felt in chasing digital currency criminals. “How confident are you that we will be able to deal with the potential criminal behavior in virtual currencies?” he asked. And, “What role does the legislative body have to play to make sure you have the resources you need?”

Edward Lowery of the Secret Service explained that law enforcement agencies have been successful in stopping virtual currency related crime. The Secret Service, in particular, has investigated many first-of-their-kind criminal activities.

Liberty reserve was called out as the largest money laundering case ever. Silk Road was mentioned as well.

Lowery made an important clarification that, although Bitcoin is in the spotlight, the predominant Eastern European cyber-criminals have not gravitated toward Bitcoin, but rather toward digital currency in locales with less aggressive laws.

Raman also asserted confidence. “We’re nimble and aggressive enough to keep up with the threat,” she said. But added that they are not ignorant to the challenges such as anonymity, working with other countries who have differing degrees of the law, and so on.

Bitcoin for Good

With so much emphasis on financial crimes, Sen. Carper asked for examples where digital currency has worked for the good?

Some of the examples provided included serving the unbanked or underbanked in our society through structures like stored value cards. Also online banking was called out as a way to make business more efficient and therefore better for the consumer.

Raman stated that there is “plenty of opportunity for virtual currency to operate within existing laws.” With respect to addressing financial crimes, we just need to “keep pace” and “remain vigilant.”

Bitcoin Experts Encourage Government to Build Supportive Environment for Innovation

In the second panel, Bitcoin experts from the Bitcoin Foundation, Circle, and George Mason University commented on what was needed to encourage innovation and consumer protectionism.

Patrick Murck, General Counsel for the Bitcoin Foundation, gave an overview of Bitcoin in his opening statement, calling it “like email for money” and “programmable cash.” He emphasized that while we think about Bitcoin as solely a currency now, it could have wide-spread benefits to non-financial services applications like identity verification and property management.

Murck said that Bitcoin can reduce exploitation of underbanked people, even in the U.S. where financial exclusion is a problem. “Access to financial services directly correlates to increases in dignity and self-liberation,” said Murck. Bitcoin can help move people from being unconnected to connected via the digital economy.

Law enforcement may need to develop new methodologies, Murck said while at the same time complimenting the examples of success in adapting to increasingly digital and connected world.

Murck said that the Bitcoin Foundation is “looking beyond the Silk Road,” adding that the markets (the price of Bitcoin) expressed relief when the Silk Road owner and operator was arrested.

Related: The Fall of Silk Road


Who is Bitcoin?

There was some confusion expressed by Sen. Carper about who originally created Bitcoin and who manages it.

“It wasn’t Al Gore, was it?” joked Carper, to which Jerry Brito from the George Mason University Mercatus Center jested back, “he hasn’t denied it!”

Fundamentally, Sen. Carper wanted to know what the risk was in that the original author of Bitcoin, Satoshi Nakimoto, has remained anonymous.

Mr. Murck explained that the Bitcoin Foundation exists to serve the Bitcoin ecosystem, but there is no Bitcoin company.

Bitcoin is decentralized and therefore is inherently transparent, making it difficult for sustained illicit behavior.

While everyone is grateful for the work of Satoshi Nakimoto, said Mr. Murck, more than half of the original codebase has been rewritten. Mr. Brito added that because the protocol is open-source, some of the top technical minds have scrutinized it.

“At the moment, whoever Satoshi is seems largely irrelevant.” said Mr. Murck, adding that maybe that was by design.

Jeremy Allaire adds the Entrepreneur’s Perspective

Jeremy Allaire, veteran entrepreneur and CEO of the newly formed Circle Internet Financial, provided a perspective on the challenges of growing new Bitcoin businesses.

Senate Committee Hearing Jeremy Allaire Circle

Mr. Allaire confidently asserted that digital currency, and Bitcoin in particular has the potential to decrease business costs, decrease fraud risk, and increase consumer privacy. In short, it’s a game-changer.

He added, “it’s important that federal authorities understand how [Bitcoin] works.”

Mr. Allaire explained that the Internet had been at the center of global innovation in recent decades, especially thanks to open platforms, but financial services have been largely insulated until now. “The same level of advancement can be achieved with Bitcoin,” said Allaire.

For his part, Mr. Allaire’s new high profile startup, Circle, intends to fully comply with all applicable laws, has registered with FinCEN and is applying for licenses with states.

Read: Circle, A High Profile Bitcoin Startup, Raises $9M with Seasoned Team

Mr. Allaire suggested that there are risks of not moving fast enough as regulators. While US regulators and law enforncement are justifyable focused on bad actors, there is “also a risk if government doesn’t enable new startups to drive financial services innovation.” The US could fall behind on innovation, he said, explaining that the largest Bitcoin exchanges are now in China and Europe.

Regulatory Tools are Sufficient

It seemed like the areas of greatest agreement were three-fold.

First, everyone on the panel agreed that Bitcoin has the potential for incredible innovation. Second, regulatory bodies must understand the digital currency in a swift manner. And third, the existing regulatory tools are sufficient to govern the use of Bitcoin.

Mr. Murck gave an example of how businesses that even have the word “Bitcoin” in their description are getting bank account applications rejected due to fear and uncertainty about a currency that is only 4 years old.

Mr. Brito compared Bitcoin to 3D printing, saying that 3D printing can be used for good, but it can also be used to create illicit guns. We must understand that the positives outweigh the risks.

With respect to the financial services regulation as it exists, Mr. Allaire acknowledged that the “bar needs to be higher for financial services in the U.S.” He compared the creation of a Bitcoin exchange to a photo sharing app like Instagram. “It’s not appropriate for it to be as easy for financial services,” said Allaire, explaining that Circle raised the appropriate capital upon launch to secure licenses and hire experts.

Mr. Murck made reference to the reciprocity framework in the EU, offering that legislators could look at that as a model. This framework allows businesses to more swiftly get licensed in an EU country if they have been licensed by at least one EU country already.


Wrapping Up: Quoting Einstein and Mrs. Einstein

In closing the two-panel session, Senator Tom Carper quoted Albert Einstein and his wife

Einstein was known to have said, “in adversity lies opportunity,” which Sen. Carper felt was an apt analogy to the current state of Bitcoin.

With respect to his own understanding of the digital currency, he quoted Mrs. Einstein who, when asked of her familiarity with her husband’s work on relativity, responded, “I understand the words, but not the sentences.”

Senator Carper said that he is trying to understand and wants to find solutions that minimize the bad while maximizing the good.

You can watch the 2.5 hour session in entirety on C-SPAN.

The price of Bitcoin rose sharply to $650 following the conclusion of this public hearing.

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Coin Validation Causes Controversy Among the Bitcoin Community

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Tracking System Proposes New Regulatory Power over Bitcoin

As the digital currency Bitcoin has grown in popularity and price, the increased attention has also brought about threats of regulation and control that could stifle the growth and the original purpose of a semi-anonymous, decentralized protocol.

This week, that threat is in the form of a new company called Coin Validation, at least in the eyes of the avid Bitcoin community.

Coin Validation is a private company founded in 2013 which interfaces with United States government and regulatory bodies in order to facilitate the legal, regulated, and compliant operation of Bitcoin-based money service businesses in the US. Coin Validation aims to provide Bitcoin businesses with a service and guide for operating and remaining compliant in US regulated markets.

More specifically, Coin Validation aims to build a database of real identities connected to Bitcoin wallet addresses, with the goal of finding and weeding out nefarious or illegal activity. The company believes that they can help grease the skids of regulation by offering a solution for business owners to opt in to the tracking program which the government can monitor.

Coin Validation was founded by three individuals: Matt Mellon, former chairman of the New York Republican Party Finance Committee, Alex Waters, former CTO of Winklevoss-backed BitInstant, and Yifu Guo, a young entrepreneur and owner of Avalon who has made a fortune selling Bitcoin mining equipment.

Coin Validation Team

Photo by Forbes. Read more about Coin Validation at Forbes.com

Fear and Controversy Among Bitcoiners

The news of this proposal comes at an interesting time. Bitcoin has soared to its highest price ever, over $400, and mainstream media is all over it. The anonymous drug marketplace Silk Road was seized by federal authorities, and yet a Silk Road 2.0 popped up less than a month later. And the government is holding hearings next week to discuss the key risks and opportunities with Bitcoin business leaders in Washington.

Bitcoin was born in 2009 as a counter-culture vehicle. It was created by a person, or group, that no one has ever met and only goes by the pseudonym Satoshi Nakamoto. The system was designed to allow for commerce and trade without trust or government control. Anarchists and libertarians immediately fell in love with the crypto-currency and its perfect design.

But as the Bitcoin economy has grown, now over $5 billion, the currency has moved from the archives of Reddit into the pages of the Wall Street Journal, and more sophisticated players have entered the market to try to sustain growth. One of these is the Bitcoin Foundation, a non-profit organization that “standardizes, protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide.” Another is the for-profit startup Circle Internet Financial, founded by veteran Jeremy Allaire.

Read: Circle, A High Profile Bitcoin Startup, Raises $9M with Seasoned Team

Some of the early adopters of Bitcoin, however, seem to resent these new organizations like a child resents his or her parents at a certain age.

“What uniqueness about Bitcoin will be left if it remains no more an open source currency? It will turn useless and won’t serve the actual purpose that Satoshi made it to” wrote one user on a Bitcoin forum.

Another user wrote, “BOYCOTT anything that places control of bitcoin to any authority (Verisign, US FinCEN, Bitcoin Foundation or Anything) – instead of being a very decentralized payment network and digital currency.”

Other users have provided more of an academic criticism of the Coin Validation scheme. In addition to tracking, there is a proposal to “taint” Bitcoins that have been used by bad actors, creating what is called a redlist. Think of this like confiscating money used in a drug deal. Here is an explanation of redlisting by Mike Hearn, an integral member of the Bitcoin Foundation.

Consider an output that is involved with some kind of crime, like a theft or extortion. A “redlist” is an automatically maintained list of outputs derived from that output, along with some description of why the coins are being tracked. When you receive funds that inherit the redlisting, your wallet client would highlight this in the user interface. Some basic information about why the coins are on the redlist would be presented. You can still spend or use these coins as normal, the highlight is only informational. To clear it, you can contact the operator of the list and say, hello, here I am, I am innocent and if anyone wants to follow up and talk to me, here’s how. Then the outputs are unmarked from that point onwards. For instance, this process could be automated and also built into the wallet.

The problem with using a redlist lies in the way bitcoins are fungible by design. Tainting bitcoins should simply take them out of the economy, but instead sophisticated criminals could use Bitcoin laundering services to exchange tainted bitcoins with clean units, and the tainted currency could end up in the wallet of an unsuspecting consumer who would end up holding the bag.

Overall, it creates an additional layer of complexity possibly tied to a central authority on what is an elegant, decentralized protocol.

Who Would Benefit from Coin Validation?

The biggest benefit from a Coin Validation concept at scale would come to Bitcoin exchanges, like Coinsetter, Mt.Gox, and Bitstamp. Each of these exchanges require users to jump through hoops to validate their identity, and run the risk of aiding criminal activity if their exchanges are used for laundering or illegal trade. A Coin Validation scheme would pass the buck from the exchanges to a centralized system of trust.

Another group that might benefit is small businesses that want to accept Bitcoin for payment. Currently, any merchant who starts accepting Bitcoin has similar risks to those facing exchanges. Would a service that certifies Bitcoins and Bitcoin wallets make this easier? Surely. But would it make payment processing more expensive? Undoubtedly.

Coin Validation’s proposal is not too dissimilar from some of the early services to come to the Internet, like SiteAdvisor or TRUSTe. The goal of those services was to help consumers know whether a website was trustworthy or not. Coin Validation wants to do the opposite, help businesses and governments know if customers are trustworthy.

What’s Next?

It’s unclear how much momentum Coin Validation has, and it’s also unclear whether the U.S. Government cares about the concerns of the most vocal Bitcoin purists.

One thing is clear though: any attempt to centralize authority on Bitcoin will be met with fierce resistance from early adopters. And it’s important to remember that early adopters happen to be the same people who control Bitcoin mining, the critical step in providing liquidity and sustainability to the currency.

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FinCEN Gives Early Guidance on Bitcoin Regulation

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Regulation on Bitcoin Heats Up in Washington Meeting

On Monday, the Bitcoin Foundation met with FinCEN, the crime enforcement division of the U.S. Department of the Treasury, as well as regulators and law enforcement officials.

Patrick Murck, general counsel for the Bitcoin Foundation, prepared a presentation on Bitcoin for agencies including the FBI, IRS, Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Secret Service.

Bitcoin Regulation

According to a report by the Wall Street Journal, FinCEN made a statement after the meeting giving preliminary guidance on the matter.

“Fincen’s recent guidance concerning virtual currencies made clear that virtual currency administrators and exchangers that provide services within the U.S. must register with Fincen as money-services businesses and that they share similar regulatory responsibilities with other financial institutions,” said Jennifer Shasky-Calvery, director of the Treasury Department’s Financial Crimes Enforcement Network, in a statement after the meeting.

This activity comes on the heels of other regulatory interest in Bitcoin, including Germany’s ruling that Bitcoin is private money, Thailand’s guidance that Bitcoin is illegal, New York’s Department of Financial Services sending subpoenas to 22 Bitcoin companies, and the U.S. Senate launching its own inquiry.


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Federal Judge Rules Bitcoin is Money in Ponzi Scheme Case

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Bitcoin is Money SEC Ponzi Scheme Ruling

Bitcoin is Money, Say Federal Judge

A few weeks ago, we covered the story of Trendon T. Shavers, a Texas man charged by the SEC with running a Bitcoin ponzi scheme. Now labeled the “Bernie Madoff of Bitcoin,” Mr. Shavers founded and operated Bitcoin Savings and Trust (BTCST), and over 700,000 BTC through this investment vehicle, an amount equivalent to nearly $5 million USD at the time of raising, and roughly $70 million today.

One component of Shavers’ attempted defense was to call into question whether Bitcoin is truly a form of money and therefore can be regulated by the SEC. The federal judge ruled with no uncertainty that Bitcoin is money.

It is clear that Bitcoin can be used as money. It can be used to purchase goods or services, and as Shavers stated, used to pay for individual living expenses. The only limitation of Bitcoin is that it is limited to those places that accept it as currency. However, it can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan. Therefore, Bitcoin is a currency or form of money, and investors wishing to invest in BTCST provided an investment of money.

So much for that, Mr. Shavers.

Patrick Murck, general counsel for the Bitcoin Foundation, commented to Wired on the case. “This isn’t that shocking. If anyone wants to run a Ponzi scheme in Bitcoin, they can expect to get busted. If you run a Ponzi scheme anywhere, you’re gonna get busted — and you should. Bitcoin isn’t some sort of silver bullet that somehow ameliorates all the legal concern around your otherwise illegal activity.”

The full ruling by the court is embedded below.


CC image by Joe Gratz

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Inside Bitcoins NYC Keynote: Is Bitcoin the New Financial Order?

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Inside Bitcoins NYC Keynote Charlie Shrem

Charlie Shrem Calls Bitcoin the Currency of the Future, Wants to Grow the Bitcoin Ecosystem

In his morning keynote at the Inside Bitcoins conference in New York City, 23 year-old Charlie Shrem described Bitcoin as spurring a paradigm shift in the financial sector. Shrem is Vice Chairman of the Bitcoin Foundation and CEO of BitInstant.

The growth of Bitcoin—the digital currency that allows for feeless and instantly settled transactions–is directly related to wider acceptance by traditional retailers, assuring the security of transactions and combatting some of the less than favorable press that Bitcoin has garnered.

However, the growth of Bitcoin is also dependent on entrepreneurs like Charlie. Once laughed out of every venture capitalist’s office in New York City, Charlie Shrem convinced his mother to take out her life savings in order to start BitInstant, which solved the problem of “how do you buy bitcoins?” Today, as a result of Shrem’s efforts, you can walk into any 7/11 and buy Bitcoin in addition to your daily coffee or Slurpee. Later the famous, or infamous, Winklevoss twins invested in the startup.

Shrem’s latest endeavor is named Bitcoin Wireless, whose aim is to allow for the exchange of mobile airtime minutes as a currency (reminiscent of the virtues of mobile transaction pioneer M-Pesa).

Another innovation cited by Shrem in his talk was that of the Harvey brothers out of New Hampshire, who are launching the first Bitcoin ATM network; the ATM’s will allow for virtually instant cash-for-bitcoin exchanges.

With so much optimism and innovation surrounding Bitcoin, Charlie Shrem was quick to also point out some less rosy realities. Bitcoin has reputational issues to address; while these are due to Bitcoin’s “early days” when the currency’s environment was akin to the “Wild Wild West” and have been amplified by some members of the media, these issues are very real.

Next, is the issue of how Bitcoin might play with respect to traditional banks and financial institutions. In his talk, Shrem was hopeful that Bitcoin would one day be harmoniously incorporated into the traditional banking system, co-existing alongside credit cards, cheques and other more traditional instruments of financial transactions.

On the net, does Bitcoin’s future look bright? According to Shrem, “Bitcoin is doing to the world what Email did to snail mail.”


Authored by Michael Smouha and Ronan Murphy, Contributors to On Bitcoin

Conference photo tweeted by @saumvaish

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