Bitcoin Foundation Plays Down Silk Road Connection at Senate Hearing
UPDATE: The full video of today’s Senate Committee on Homeland Security and Governmental Affairs hearing can be viewed here.
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Even the title of Monday’s Senate Committee hearing on bitcoin reflects the overriding concern. “Beyond Silk Road – Potential Threats, Risks, and Promises of Virtual Currency” brings together several speakers from the government, industry, and non-profit sectors to give their opinions to the Senate’s Committee on Homeland Security and Governmental Affairs about the potential security risks of the cryptocurrency. Here is a roundup of what to expect from testimony given at the event.
Given the title, it’s perhaps unsurprising that Silk Road features heavily in some testimony. In particular, Mythili Raman, acting assistant attorney general for the US Department of Justice’s Criminal Division, uses it in his prepared statement as an example of why regulation of decentralized currencies should be “sufficiently robust”.
Anonymity vs privacy
Silk Road, the online black marketplace taken down by FBI investigators in October, highlights “challenges investigators face when they encounter these systems, some of which may ultimately require additional legal or regulatory tools,” Raman said, singling out the difficulty of accessing customer records as one of the most significant challenges facing law enforcers dealing with virtual currencies.
Ernie Allen, president and CEO of the International Centre for Missing and Exploited Children, is also worried about anonymity in virtual currencies. In his testimony, he will voice his concerns over the use of virtual currencies including bitcoin for child pornography and sex trafficking payments.
“In our consultations with law enforcement worldwide, we have heard the argument that there is a difference between privacy and anonymity. Law enforcement leaders embrace the broadest possible privacy protections for individuals, but emphasize that absolute internet anonymity is a prescription for catastrophe,” he says. “Our challenge is to find the right balance.”
Other testimony challenged those concerns about anonymity, though. “Anonymity is also a two-way street,” says Patrick Murck, general counsel for the Bitcoin Foundation, in his prepared statement.
“A top dealer on Silk Road was actively working with federal law enforcement, the anonymity of Silk Road making it easier for them to make undercover drug deals and subsequent arrests,” he explains.
Murck also has some feedback for those that hold up Silk Road as an example of bitcoin’s dangers, cautioning against tying bitcoin and Silk Road too closely together. He cites the Genesis Block’s analysis of the contribution that Silk Road made to bitcoin pricing.
In late December 2010 and early 2011, people buying bitcoins to make Silk Road purchases may have spiked the price from $.30 up to $.80. The price was then boosted by mainstream media attention, before settling at around $5, he says. Further price spikes were unrelated to Silk Road, and even its takedown in October had little long-lasting effect.
“The less this colors public and policymaker assessments of Bitcoin, the better,” he argues in his testimony. “Criminals do turn the beneficial instruments of society to their ends. But overreacting to this simple and obvious fact because Bitcoin is exotic and new could delay Americans enjoyment of Bitcoin’s benefits, which are vastly greater than its potential costs.”
Decentralized vs centralized currencies
Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University and director of its Technology Policy Program, testifies that a decentralized currency like bitcoin would in any case be less appealing to online crooks than a centralized digital currency, like Liberty Reserve, which was taken down after its founders were arrested.
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“Serious criminals looking to hide their tracks are more likely to choose a centralized virtual currency run by an intermediary willing to lie to regulators for a fee, rather than a decentralized currency like bitcoin that, as a technical matter, must make a record of every transaction, even if pseudonymously,” Brito points out.
Brito compares centralized digital currency Liberty Reserve’s estimated $6bn in crime-related revenues to under $200m in drug sales via Silk Road. He adjusts the Silk Road revenues down from the oft-quoted $1bn figure to reflect bitcoin value over the entire period.
At least one regulator seems sympathetic. FinCEN director Jennifer Shasky Calvery points out in her testimony that virtual currencies have yet to overtake more traditional methods to move funds internationally, whether for legitimate or criminal purposes.
“Any financial institution could be exploited for money laundering purposes,” she points out, adding, “While of growing concern, to date, virtual currencies have yet to overtake more traditional methods to move funds internationally, whether for legitimate or criminal purposes.”
Inter-departmental collaboration
FinCEN itself is hard at work, and several FinCEN virtual currency experts gave a comprehensive presentation on the topic to an audience of Federal and state bank examiners at an FFIEC Payment Systems Risk Conference, Calvery says, adding that the agency also works with the FBI, with the Treasury Cyber Working Group, and “a community of other financial intelligence units”.
This inter-departmental collaboration is an important strut of the government’s approach to law enforcement in virtual currency, says Raman, especially in the context of the Government’s Strategy to Combat Transnational Organized Crime. The Department of Justice works closely with FinCEN and the State Department, and it was this relationship that enabled the co-ordinated targeting of Liberty Reserve, he says, adding:
“Such coordinated actions are integral tools in combating illicit finance. Investigations into illicit virtual currency businesses therefore often require considerable cooperation from international partners.”
He highlighted the fact that the Liberty Reserve takedown involved co-operation between 17 countries.
The Foundation is eager to talk up its relationship with regulators, even if Murck finds “details on which we might quibble,” such as the Foundation’s desire for a notice-and-comment process before FinCEN issued its new virtual currency guidance in March. However, the Foundation has found federal regulators welcoming, on the whole, he says.
Harsh words for state regulators
He reserved harsh words for regulators at the state level, however, particularly calling out “one state regulator”, which he said issued 22 subpoenas to bitcoin-related businesses, and made TV statements about “narcoterrorism”. He’s referring to New York’s Department of Financial Services, who made that statement on the air.
“Irresponsible public statements like these make it more likely that legitimate bitcoin businesses will relocate to more welcoming countries,” Murck said.
However, he added that he saw positive signs among both state regulators and banking executives, indicating that greater understanding is coming.
Calvery echoed Murck’s conciliatory overtones, talking about an outreach effort to court the bitcoin community. FinCEN met with the Bitcoin Foundation in late August, and has invited it to present to a Congressionally-chartered forum, the Bank Secrecy Act Advisory Group (BSAAG) scheduled for mid-December.
Jeremy Allaire, founder of merchant payment services firm Circle Internet Financial, which recently received $9m in funding, also wants a collaborative approach to regulation. He identifies several dangers for an unregulated bitcoin community in his testimony, including tax dodging, fraud, and terrorism. Illiquidity and volatility are two other dangers, he warned, predicting wild price fluctuation if central banks and institutional investors are not able to act as market-makers in bitcoin.
“I believe we are at the forefront of another 20-year journey of Internet-led transformation, this time in our global financial systems, and the opportunity is to foster that economic change while simultaneously putting in place the safeguards that only government can enable,” he says.
The hearing happens at 3pm EST Monday 18th Nov and will be live streamed. Stay tuned to CoinDesk for more updates.
Featured image: Greg Kushmerek / Shutterstock