From Right: Anthony Gallippi, co-founder of BitPay; Mercedes Kelley Tunstall of Ballard Spahr LLP; Sarah Jane Hughes of the Maurer School of Law; Paul Smocer of the Financial Services Roundtable
The U.S. Senate held two days of hearings this week on the decentralized currency known as Bitcoin. And the posture of lawmakers may be best exemplified by the comments Sen. Chuck Schumer made at the tail end of Tuesday's session.
"I do not want to shut down or stamp out Bitcoin," Schumer said. "The potential for a new payment platform and the rise of alternative currencies could have profound and exciting implications for the way we conduct financial transactions."
It was a remarkable reversal (or a clarification, if we want to be generous) from a letter sent by Schumer in 2011 to the Attorney General which all but equated Bitcoin with money laundering and black markets. The fact that most of the other senators—and even the witnesses, including some from law enforcement—embraced the same cautious regulatory approach brought a sigh of relief from the Bitcoin camps as well as a major rally on the stock market. The price of Bitcoin has since continued a jagged but steep incline to its current price of US $670.
Schumer, whose initial concerns about Bitcoin stemmed from its characterization as a pseudo-anonymous currency and its status as the payment of choice for people shopping on the extralegal online drug market known as Silk Road, went on to argue that one of the best ways to foster this new technology was to rid it of its nefarious elements. Going into the hearings, representatives from the Bitcoin community were in a good position to demonstrate all the ways in which this was already being done. Last month, for example, the FBI and the U.S. Drug Enforcement Agency took Ross Ulbricht, the hacker allegedly behind the Silk Road website into custody. It was considered a major triumph for law enforcement and an indication that even the darkest corners of the dark Web are subject to regulatory scrutiny. Earlier this year, the feds arrested the operators of a different, centralized digital currency called Liberty Reserve and charged them with using the service to launder over six billion dollars since 2006.
With the Liberty Reserve and the Silk Road busts under its belt, the U.S. government seems confident that it possesses the tools necessary to prosecute criminals, even as they operate in this new ethereal financial space. Their confidence may finally take the heat off of legitimate Bitcoin businesses. Monday's panel before the Senate Homeland Security Committee included witnesses from the Financial Crimes Enforcement Network, the Department of Justice, and the Secret Service, none of whom offered any recommendations for new laws or regulations targeting digital currencies.
Mythili Raman, the assistant attorney general for the criminal division of the Department of Justice, assured the committee that even though these criminals were using a new technology, the laws they broke were old, and therefore agents have enough power under the existing system to nab them. "I do think that we have the statutory tools for the most part that we as prosecutors need to get at this kind of criminal activity," she said.
The Tuesday hearing, convened by the Senate Banking committee, was equally restrained in its consideration of new regulation. There, however, the committee put a heavier emphasis on whether such interference would have a stifling effect on economic growth, potentially threatening U.S. dominance over an emerging, lucrative innovation. The Internet was a prime example in this conversation.
"Mt point is, frequently in these situations we think about how we're going to fix it or facilitate it, when maybe we should just leave it alone," said Heidi Heitkamp a Democratic senator from North Dakota.
Speaking before that panel, Tony Gallippi, the CEO of BitPay, a Bitcoin payment processor, took the opportunity to highlight the economic benefits that Bitcoin can have for merchants and consumers alike.
In comparing his service to online credit card payments, he had this to say:
"Credit cards were never designed for the internet. Credit cards were designed in the 1950s. And last year over 12 million people became victims of identity theft, mostly from shopping online. Businesses lose over $20 billion due to payment fraud. The banks don't take responsibility for the fraud. If you're a business, it is your fault if you took a stolen credit card."
The irreversibility of Bitcoin transactions and the fact that they can be processed without divulging personal information does much to fix these problems.
Gallippi went on to assure the senators of the efforts his company has made to comply with anti-money laundering and so called know-your-customer regulations. "We only want the good actors using our service," he said.
With many of their fears assuaged, the senators seemed ready to ask what they could do to foster Bitcoin and other digital currencies during these early stages of innovation. And the message was clear: give banks the assurances they need to accept Bitcoin companies as clients. In the last year, this has been a huge problem for U.S.-based companies.
After Monday's hearing, I spoke with Ryan Singer, president of Tradehill, a Bitcoin exchange in San Francisco. He explained that Tradehill has been forced to suspend its services as it looks for a willing banking partner. And it is not the only one faced with that problem. Many other Bitcoin businesses have become orphans in the U.S. financial system. People like Singer blame this trend on pressure from federal auditors who he says discourage any association with the digital currency industry.
As Gallippi noted, the United States will have to play catch up if it wants to stay in the game. "China is getting very aggressive in the open market and if we want America to remain a leader in technology and in Bitcoin you have to look at the exchanges because that's where all the liquidity is," he said. "And right now the number one exchange in the world for Bitcoin is in China. The number two exchange is in Japan. Numbers three, four and five are in Europe. Number six is in Canada. America is not a leader right now in liquidity in the exchange of Bitcoins."
The senators expressed an admirable concern about falling behind in this arena. And if they really want the country to catch up, they will find a way to help Bitcoin integrate with the U.S. banking system. Now that Bitcoin is growing beyond its criminal reputation, perhaps that will finally happen.
A video of Monday's C-Span webcast is available here.
The Tuesday hearing is available here.
Photo Credit: Andrew Harrer/Bloomberg/Getty