 Let me introduce this fantastic panel. Sitting next to me is my friend, Jeff Nyman, all the way from Fort Lauderdale where it's much warmer. Much, much, much warmer. And Jeff is with the firm of Marcus, Nyman, and Rashbaum. Jeff is an accomplished trial attorney. He focuses on white collar defense, tax controversies, securities regulatory matters, and general litigation. He graduated with honors from the University of Florida. He went to the United States Attorney's Office, the United States Justice, I'm sorry, the United States Department of Justice office, and he received the general's honors program there. For nine years he worked as an AUSA and a trial attorney for the Department of Justice in South Florida and in Washington, D.C. Jeff is recognized nationally for handling complex, high profile matters including, and most especially, the groundbreaking historic prosecution of Switzerland's largest bank, UBS AG, for aiding American citizens to commit tax fraud. Jeff is a frequent lecturer and panelist. He's a contributor at conferences on topics including offshore tax evasion, tax fraud, Ponzi schemes, and trial practice. And Jeff is going to contribute to this panel specifically, and not exclusively though, regarding the tax implications of Bitcoin, use of Bitcoin. He is a recipient of the Attorney General's John Marshall Award for Outstanding Legal Achievement, which is the highest award offered to an attorney for a contribution in a specialized area of legal performance by the United States Attorney General. Equally impressive, sitting next to Jeff is Frederick Reynolds, who is the Deputy Director of the Department of Treasury Financial Crimes Enforcement Network, and fondly referred to as FinCEN. Fred was appointed as the Deputy Director at FinCEN in January 13, 2013. Frederick oversees FinCEN's wide-ranging work to protect the United States financial system from money laundering and other forms of illicit financial activity and to advance the national security interests of the United States. Well, I don't need to tell you how Frederick fits into this panel, but I do want to know that. FinCEN leads the development of regulatory policy to combat money laundering and terrorist financing and is a respected leader among the world's financial intelligence units. Frederick joined the Treasury Department from the Department of Justice, where he most recently served as Deputy Chief in the Criminal Division. While at the Department of Justice, Mr. Reynolds founded and headed the forfeiture unit for the asset forfeiture and money laundering section. During his tenure as Deputy Chief, the unit was responsible for seizures and forfeitures, totaling more than $1 billion. Prior to serving as Deputy Chief in the Criminal Division, Frederick served as a Senior Trial Attorney in the Department of Justice. Prior to joining the Department of Justice, Frederick served as an Assistant Attorney General for the Republic of Palau, where he founded and headed the country's first financial intelligence unit. And following law school, Frederick joined the Winstead Law Firm in Dallas, Texas. He was an Associate and a Senior Associate there in private practice. He specialized in complex civil litigation, securities, and antitrust law. He holds a BA cum laude from Brandeis and a JD from Emory. And Frederick is a member of the State Bar of Texas, which had a recent decision regarding whether or not Bitcoin is money. So we'll get to that later in the State of Texas. Sitting next to Frederick is Margo HK Tank. Margo hails to us from Washington, D.C. where it is certainly warmer than it is here. Not a fight all that much, but warmer. Margo just flew in. She's a true panelist trooper. She landed not less than an hour and a half ago. Margo is a partner at Buckley-Sander, Sandler. Margo advises financial services institutions and technology companies on structuring online and mobile financial services product offerings in compliance with the Electronic Signatures in Global and National Commerce Act and the Uniform Electronic Transactions Act, as well as with respect to state and federal laws governing electronic financial services transactions, which of course includes prepaid access and virtual payment methods. Margo is truly an expert in virtual payment methods. Her other activities include acting as co-reporter for the drafting committee preparing the standards and procedures for electronic records. She is an advocate before Congress and federal regulators with respect to electronic financial services issues. She was named in 2009 the Mortgage Banking Technology All Star by Mortgage Banking Magazine. She's a member of the ABA's business law section, the Committee on the Law of Commerce and Cyberspace and the Electronic Transaction Association's Mobile Payments Committee. Prior to joining Buckley Sandler, Margo was with Goodwin Proctor and before entering private practice she was canceled to the U.S. House of Representatives, the Committee on Banking and Finance Services. She received her J.D. from Drake University with honors and she received her B.A. from the University of Vermont and she also studied in Oxford and England and Margo has written numerous publications. I would urge you to take a look at some of her pieces because they're incredibly informative on this subject. And last but certainly not least is Mr. Luke Sully, who is the Director for Intelligence and the Co-head of PWC's Digital Currency Task Force. Luke advises clients on the impact of global threats to business and assets in implementing legal practices to detect, investigate and remediate such issues. He has led a number of strategic intelligence assignments collecting and analyzing risk-relevant information for his clients, usually in emerging markets. His clients include Fortune 50 companies, multilateral institutions and governmental bodies. At PWC, he leads the development of the firm's strategic intelligence methodologies and also has led multiple engagements to chart asset flows into high-risk jurisdictions such as Iran and Afghanistan. Previously, Luke worked in public diplomacy for the British government in Latin America and for boutique risk consulting houses in Asia and Europe. He holds a first-class honors degree in languages and was a member of the Sloan School of Management's Entrepreneur Program at the Massachusetts Institute of Technology. My name is Nina Marino. I'm a partner with the firm of Capital Marino in Beverly Hills. I specialize in white-collar criminal defense practice. I will be your moderator. So to kick off this panel discussion, let me read to you what Ms. Rahman said speaking in front of the United States Senate Committee in November. She is the Acting Assistant Attorney General for the U.S. Department of Justice's Criminal Division. And she said, and I quote, The Department of Justice recognizes that many virtual currency systems offer legitimate financial services and have the potential to promote more efficient global commerce. We have also seen, however, that certain aspects of virtual currencies appeal to criminals and present a host of new challenges to law enforcement. And so with that, Margo, if I could ask you, set the table for us. Tell us what are we talking about when we're talking about Bitcoin? Sure. Virtual currency, digital currency, cryptocurrency. What is it? Is it legal? Who regulates it? We'll talk about all of that. Some of the risks for payment processors, banks, merchants, consumers, investors, those in the chain, the legal actors. These new and emerging payment forms vary. We're going to talk about all the different from e-gold to Bitcoin and some of the differences. But they share a common feature. They're not legal tender, nor are they backed by any government, nor is the supply determined by a central bank. Those three factors are important because the government is having difficulty in defining what virtual currency is and how to regulate it because it doesn't meet traditional definitions. It's not currency by definition. And we'll talk more about that and Frederick can talk about what Vincent has done to address that definitional issue. The appeal and drawbacks of virtual currencies are basically two sides of the virtual coin. Virtual currencies offer a level of anonymity and finality, similar to cash, and speed similar to credit cards. They can be transferred internationally with a click of a button. Except for cash, most payment systems require a middleman to move funds from a buyer's account to a seller's account. But by contrast, and in particular with bitcoins, buyers and sellers may deal directly with each other to move the virtual currency. Many of these currencies have not yet seen widespread usage. They're not easy to exchange or exchange from fiat to virtual and back legally anyway. However, there are, according to coinmap.org, 2,600 stores and businesses worldwide now accepting bitcoins with concentrations in Western Europe, California, and New York. So that adds another whole element when you can begin to purchase goods and services and then perhaps resell the goods and services. And we'll talk more about that. Banks generally are not accepting or offering services for them. There are concerns that cryptocurrencies are extremely risky due to volatility, but investors seem to like that concern and are rushing to the table to participate in any way they can. Regulators in several countries have warned against their use, some have taken concrete regulatory action. In our country, it's been a little bit more measured saying that there could be some good purpose for this alternative payment system. The more anonymous the currency is, the more attractive it is to criminals, regardless of the intention of its creators. So I'm sure that you've read over the past year or so, snippets here and there, e-gold, web money, Second Life, maybe some of your children play video games, World of Warcraft, Liberty Reserve, bitcoins and so on. They're all different types of virtual currency that has value that's either bought, mined, or earned. Both state and federal regulators have taken a keen interest, and I think we'll talk about the interest in particular. Justice and FinCEN has taken most regulators agree that, again, that they're not illegal. The critical issue is going to be how do we regulate? How does the government move in, either at the state level, by requiring money transmitter licenses for these entities, and certainly the federal government has its FinCEN registration for MSBs and its money laundering tools. I'll turn it to you, Frederick. Let me just point the question. Margo, you say how do we regulate? Maybe the broader question is, should we regulate? Is that really the power of the government to regulate? Because foundationally, the principle of Bitcoin was that it should not be regulated, because it's a mathematical series of calculations that create this cryptocurrency, and so what business is it of the government? Frederick? So I think it's important to start from the concept that we actually regulate Bitcoin, and I think that's a common misperception that FinCEN has regulated Bitcoin or has regulated any other cryptocurrency. What we actually regulate are the individuals or businesses who fall within our regulations as money transmitters, and I think that's an important distinction, because if you have Bitcoin and you're going to go purchase a pair of shoes, we don't regulate that transaction, we don't have any visibility into that transaction, you are a user under our regulations, and so you fall completely outside of our regulation whatsoever. Where we regulate is where we already have regulated for years, which is if you are somebody who moves something of value, so if you're in MSB, whether you are Western Union who's moving money from New York to Florida for somebody, New York to Moscow, or whether you are a Bitcoin exchanger who is transferring Bitcoin from Bitcoin to fiat currency or taking fiat currency and giving Bitcoin, or you're moving Bitcoin on behalf of someone else or any other virtual currency, that's really where we regulate. So it's this node point with the sort of mainstream financial system and those are the points that we have typically regulated and our guidance actually was not new regulation, what our guidance was in essence is letting virtual currency exchangers understand that they are covered by our existing guidance because they are MSBs. I just hear you say the word regulate and as the criminal defense lawyer, I get nervous that there's a distinction between regulating and prosecuting and I know now as the U.S. government prosecuting individuals for intentionally is what the government would say not complying with defense and reporting requirements or the money transmitter registration which along with the money transmitter registration comes a whole host of compliance issues and knowing your customer and due diligence and it kind of is defeating what is the purpose of these currencies which were created by folks who didn't want to deal with government regulation I guess they had apples I think who were out there using this currency in a way to maybe deal with drugs or prosecutions or even see a murder for hire with these virtual currencies that are done. I guess that's kind of got to be the question that we have to ask Vincent is where are you guys going? How far is this regulation versus prosecution? So first of all I think it's a distinction that obviously having worked with the department is that the Department of Justice ultimately is the prosecution authority and they make prosecution decisions. Now the Congress has passed laws that impose criminal penalties at times for criminal violations of a regulatory scheme and that exists whether you're in banking securities or in the MSB field and I think the fundamental concept that Congress has put forth is that it is a privilege to participate as an entity in the financial system and with that comes certain responsibilities and those responsibilities again whether you're a bank whether you're a securities broker dealer there are certain responsibilities that come with that and one of them is registration with Vincent if you're an MSB and there are certain program requirements that attach to that as well. Again if you're a user none of this is directly applicable to you it's only if you are an exchanger or falling under the category of an MSB that our regulations impact you at all. I think that the challenge that a lot of the industry is facing is that you're absolutely right the MSB regulation is very clear and the US government have been consistent throughout but the issue is that the burden the responsibility for monitoring suspicious activity is placed on the money services businesses and this is a new realm because you're looking at basically anonymous transactions across the internet that aren't necessarily linked to an individual they're linked to an IP address and so I think it's proving very very challenging for companies who want to be compliant yet at the same time there's an incredible amount of uncertainty about how you go about not registering but you're reporting requirements and your record keeping is an extremely tough ask and that is a gap that we're seeing right now. I think it's a virtually impossible task for a lot of these virtually or digitally impossible because we were talking earlier you go into a bank and you deal with the cash transaction or maybe there's something that just raises some suspicious face to face in the bank the bank files suspicious activity report how does one of these transmitters deal with that? Well you can have how can they? When you set up an account you give all of your identifier information which is fine that's all stored but really it's an IP address and a public key that are the two identifier pieces information and linking an IP address as anyone who works in cyber crime knows is extremely difficult to understand the underlying individual responsible for an IP address and so that's the gap and that's holding up the development of the industry. If you bring these actors into the registration system whether it be federal or state then there's requirements to take identifying information and requirements to build flags for tracking suspicious and unusual activity the problem is that everyone's playing outside of that. So of course they're not going to collect, they don't want to collect but there are mechanisms that could be utilized to collect identifying information. I agree, I think the way the industry's developed in the last six months is that there is the underlying exchanges that will convert fiat for bitcoin and vice versa. But there's another raft on top of that of companies that sit on top of exchanges that don't want the headache and the criminal liability if something goes wrong and so that broad band of technology and industry and brokers is building and it's turning into sort of a bulge right now and that's creating more business and more business opportunities and the underlying regulatory issue with respect to exchanges still hasn't changed I guess. So I mean one of the issues that that I think everyone's dealing with right now is whether or not bitcoin is in fact legal tender, is it not? I mean you've raised that right at the outset. And Court in Texas has certainly ruled on that. Can you explain a little bit about that decision and maybe the man from Texas should explain. The Texas Court basically found that the SEC could pursue an individual for misrepresentations related to bitcoin investments because the investment was an investment contract which is a contract involving so again when we start out talking about currency if you look it up it's government backed. Money can be not government backed can be other things. So the SEC in this case said it's money. You want to add to that? So I think the government position has been fairly clear that it is a medium of exchange or value. It can store value, it is a medium of exchange but it is not a fiat currency and that's defined by federal law as to what is a fiat currency. And to my knowledge unless it's changed recently it is not considered a fiat currency in any country throughout the world. So at this stage bitcoin and I'm unaware of any other virtual currency which has been considered a fiat currency again I think that's an important distinction that just because it's not a fiat currency doesn't mean it is not a thing of value, it doesn't mean it can't store it is not a means of transmitting value which is exactly why it gets pulled under our MSP regulations. And I think the government has been to its credit has been clever and you even hear from the acting assistant attorney general's comments where she kind of talks on both sides a little bit how the legitimate purpose is here but there's also the illicit purpose that gives them the concern where they've taken the existing laws on the books, the existing money laundering laws, the existing money transmitter laws, mail wire fraud there's a scheme to defraud there and I've used them and applied them in these virtual currency worlds where the courts have taken the view that although it doesn't explicitly say that these currencies or these types of schemes fall within the thoughts of the code they still apply and and to me that's kind of fundamental good government right is at the end of the day you actually want to draft and we have a regulatory attorney who can talk about this I'm sure much more eloquently than I can but I mean at the end of the day I think you want to draft regulations laws certainly but I think regulations importantly that will stand the test of time because if every time there's a new technology or every time there's an innovation Finzen has to go in and tweak a regulation to make it applicable or to deal with it that's not in my opinion a very good regulation and that's one of the things I think is important about the way we have drafted our regulations in our space is we have drafted them in a way that they are flexible enough to account for innovation and frankly I think they're flexible enough to allow innovation and I think that's one of the important things to realize is that there's been no attempt by the US government to stop innovation or stop bitcoin what we've done is just used existing regulations that have applied to a wide variety of things not just virtual currency and use them so that we can keep pace with technology to ensure that the technology is not used for illicit purposes but by the same token allowing innovation in the space but that's always the concern is the government regulation and the government enforcement going to suffocate that innovation is it going to prevent those who want to participate in this mechanism from doing so it goes both ways we get calls where companies who want to be bitcoin exchangers they don't like the state regime it's expensive time consuming lot to manage and they say well geez can't we be regulated by CFTC or SEC or somebody can somebody tell us what to do so you know there's the good guys do want to get in the game and have some safe I'm not going to call it safe harbor but some place where they know if they play by the rules that they're going to be buying assets not seized one thing I would say is I think the clock is ticking in as much as the gap between technological innovation and regulatory standards is still there and unless that gap is filled although the regulators don't want to stifle innovation there is a finite amount of time before another jurisdiction decides to move ahead on this with lower regulatory standards and the industry will move there so we've seen it now for we've seen it brewing for probably 6 to 8 months and I think we don't have very much time left frankly for the industry to pony up frankly or this could which comes back to the point I think of our talk this could either dive and become the method of exchange of choice for bad actors or could just move off shore completely and that is one of the I don't want to sound overly melodramatic but it could prove a doomsday scenario for the US government if the entire industry and exchange of community moves off shore FinCEN regulation is there to protect the United States from bad actors placing money through the financial system but it's even more difficult when that entire industry is off shore and having foreign jurisdictions integrated there are some foreign jurisdictions that could be mistaken but that have integrated Bitcoin into their banking system already there's been very uneven regulatory standards around the world if you look at China liked it and then December they decided they didn't like it and there could be many reasons why they decided to do that Germany classified it as private money though I haven't really understood what that means I don't know what that means you don't know what that means so there is uneven regulatory standards I think that FATF regulation seems to be the ultimate global driver right now but what you're seeing is a safe haven in Canada and just just north of here very close to here so I think that's an interesting the pattern of regulatory development globally will be interesting to watch I'm not taking as legal fees yet bitcoins and I'm not sure I ever will get to that point but I think it doesn't matter what the currency, virtual currency we're talking about is I think the government is kind of approaching this with cash in that there are certain regulations in which everyone has laws that people have to comply with if they deal with cash and they're taking the concept of kind of willful blindness or those who are dealing in bitcoins or virtual currencies just like to do with cash in money laundering cases saying look you should know that this is bad money and the fact that you're moving this means that you're guilty of a crime and just last week I guess we saw one of the founders of bitcoins get indicted in the southern district of New York and charged with basically allowing this black market on his watch go on with illegal activity which I think is raising a whole other host of issues as to how is the government going to prove the intent here of these individuals who knew that the system which is designed to be secret and underground and fuzzy to deal with knew that there was illegal activity going on under his watch so to speak and you're referring to the Charlie Shrem arrest and which raises a very interesting issue in light of that arrest do we conclude that federal prosecutors are ramping up efforts to crack down on online exchanges where bitcoin is the currency of choice well there's federal prosecutors and there's the southern district of New York so I don't know if we want to necessarily well and look I think it's tough any time you know being a former federal prosecutor I think it's tough any time to draw sweeping generalizations from any particular case because a case is just that right a case relates to a specific criminal activity and I don't have any specialized knowledge of the Shrem case and so I would let my colleagues from STNY talk about their case but more generically it's important to realize that this is not sort of a theoretical risk right we've seen Liberty Reserve which was a virtual currency and was to date the largest money laundering case in US history you've seen Silk Road which exclusively used bitcoin as its means of exchange specifically because bitcoin was perceived to be anonymous and was perceived to be the currency of choice so it's not a theoretical risk that I think these currencies pose we've actually seen a number of cases that have been charged Finsen obviously participated in the Liberty Reserve using our section 311 power to designate Liberty Reserve as a primary money laundering concern and I think that goes to Luke's point of you know if it does go offshore what ability do we have I don't disagree it becomes more difficult so there's no question about that but you know the US government does still have tools at its disposal if it if there is a threat offshore such as Liberty Reserve there are tools that we have to try to address that threat to the US financial system and let's look at those tools for a second because when you say 311 311 you're talking about the Patriot Act so so section 311 of the Patriot Act allows Finsen the Department of Treasury more broadly but delegated down to Finsen to designate a foreign typically business that usually a financial institution as what we call a primary money laundering concern and there's a variety of things that can be done as part of that it could be simply increased reporting on the entity it could be all the way up to barring that entity or jurisdiction from interacting with the US financial system so it's essentially a way to regulate who has access to the US financial system if there has been a determination that it is a primary money laundering concern and that in and of itself is actually a regulatory action so we actually put in front of OMB proposed regulations that designate an entity or jurisdiction that has a primary money laundering concern so that's certainly something we have sort of facing out from the United States then of course internally we have again I think as Jeff mentioned really the typical powers that we exercise both in the virtual space as well as none of the virtual space is we have civil regulatory authority and then of course the Department of Justice again I think uses the tools that it has always used to deal with these and a question to me before we started about couldn't people use Bitcoin to purchase goods and then sell those goods and get real cash for them and I said yeah absolutely that's trade based money laundering which goes on every day and goes on in a variety of currencies and so I think at times Bitcoin and virtual currencies we hear cryptocurrencies and it seems very innovative and very interesting and it's sort of the latest thing but at the end of the day not to de-emphasize the interest of the panel but I think it's important to remember that just because you use a virtual currency that's supposed to cash it doesn't suddenly make something which is trade based money laundering that we've seen for 30 years it doesn't make it go away or it doesn't make it candidly anywhere interesting it's sort of the same thing and we have the same tools to deal with it yeah I think we've seen government war on the use of cash and they want to make it as uncomfortable and as difficult for for American citizens to deal with cash because the government wants to come back and be able to track every purchase and every move and where you were and where you drove and Google in the US government we don't know the lines have been blurred between the two that way it seems you just have to wonder it's just the next phase now they want to put the war on the virtual currencies as well to make that as uncomfortable and impossible to deal with where basically we're stuck in a world where we're going to be watched and have every move looked at I'm not surprised that something like this has occurred and if you track it back to e-gold and it closed peer to peer ways of paying each other this does break out of that mold I think but 85% of the world's transactions are still in cash and if you speak to the CEO of credit card companies there's a big market out there that they want to capture and I do think for regulatory purposes the US government need to be able to track the movements of money and so there is a push towards a cashless economy and it's been slowly moving there but this is another step in that direction so in some respects we're going to rifle that innovation for a lot of reasons so we're seeing a trend away from cash without a doubt but what you have to do is not find that very fine balance between ensuring that the regulatory agencies can still be able to understand what that movement looks like at the same time as developing the innovation that's the balance that I'm glad I'd not pay to try and figure out on a day to day basis I just think people are always going to buy drugs people are always going to engage in want to hire hit men and pay cash there's always going to be bad acts and I guess you just want to hope that when the government comes in and looks at these cases from the criminal perspective that they're not going to put such pressure on those who are in these transmitters to make it go away completely that we're out of luck drug dealers and hit men are out of luck but those who want to do legitimate commerce through this currency are out of luck I think it circles back to the point we started with which is at the end of the day whether you're going and paying $200 in cash or you're paying $200 in bitcoin for a product the reality is we have no more visibility into the cash than we do to the bitcoin I'd like you to comment on that two more because we talked about that earlier but does the existence of bitcoin really make it easier to commit a crime? I think the differentiator if we had to find one would be the ability to sit at home in your slippers and push a button and send bitcoins to China versus taking the cash and moving it putting it in a car and going across the border to do so those who are trying to do it more easily, faster, cheaper and not get caught may go to the electronic version of it I think you can't ignore the anonymous nature of bitcoin and the ease that it can be moved if you look at the Secretary of Treasury's comments in Davos it's important for the Treasury Department to look at how virtual currencies can be abused and to ensure that they do not become the favorite medium of exchange for criminal activity, terrorism and that it's anonymous nature is obviously something that lends itself to that as well as the ability to move quickly but I also think that the Secretary was measured in his comments he certainly didn't say that there was anything inherently wrong with virtual currency he didn't say that there was at the end of the day there was no war on cash there was no war on bitcoin it merely is a concern like we have a concern with any payment system and with any part of the financial industry to harden it to protect it against abuse by criminals and terrorists and that's our mission and protect consumers and protect investors and protect stability of the whole system in valuation that may lead well into a really nice example of the use of bitcoin in a criminal enterprise and so there's a very nice USA Today slideshow and we'll talk through this a little bit but what I want us to consider what the panel to consider is what are we really talking about here are we talking about bitcoin as being the root of the evil about really the dark net being the root of the evil where is the criminal connection Jeff this is the first slide the USA Today always does a great job of simplifying things for us in color with really fancy graphics which really speak for themselves to a large part but basically what you have here is this Silk Road 101 which kind of takes on the first slide how a normal network works where you have a user makes a purchase from a merchant and it goes through a server and it's kind of transparent for the world to see but what you see though is in the next slide is that Silk Road which was one of these what the government calls a black market that allowed the bitcoins to be traded on or used as a server here some technology to kind of code everything a little bit in disguise and make it even more difficult for and by the way I'll feel free to chime in with this especially you look because you know this stuff cold not personally I'll just you have a purchase with bitcoin does anyone ever actually purchase with bitcoin because you see kind of retailers that try and have been out there saying that they're going to do it and they back away from doing it I don't know SacramentoKingsOverstall.com is that what it is? yeah so I think retailers are showing interest in it because of the market that it captures maybe more than the technology behind it that's up for debate I don't know I think with Silk Road what was interesting was that there were many layers through which the underlying cash that the Silk Road users wanted to convert into bitcoin to purchase illegal goods and services went through a few layers and if you read the SHREM complaint at each layer this was passed through there was an alleged conspiracy to commit money laundering which is the underlying issue that SHREM has now but the masking capability of using tumblers which I'm not a tech guy tumblers were used to disguise some of the originating IP addresses as well and frankly I think the conclusion that I saw from Silk Road was the phenomenal job that the US government did from the technological side to unpick some of this and this is absolutely groundbreaking but basically what Silk Road did is they used this what's called TOR onion routing system that was developed by the Navy of course to basically jitter everything up and make it impossible to trace the IP addresses and I am as far from an IT person as one could possibly be so basically making it more difficult to conceal who the actual users were the merchants were, what was being bought how was being bought and they ended up with 100 users on slide 3 with $1.2 billion in revenue because they charged transaction fees in a short two year period so we're talking about crazy amounts of users and crazy amounts of money but then they would even layer it even more on slide 4 with these tumblers that Lou just mentioned to kind of even code it even more and when I was a federal prosecutor specializing in tax cases we used to always say concealment shows knowledge that what you're doing is wrong so you would say the fact that you layer things the fact that you're trying to disguise the true nature of a transaction must mean that you know what you're doing is illegal or improper otherwise you would just be out in the open and make your position well known I think the mentality especially in the wake of the NSA scandal has to be changing a little bit where now I think Americans don't necessarily trust government to to do right with the information they get where maybe it's not the default that we should be out in the open conducting our affairs or conducting our business maybe there actually is now some exception it's accepted to actually conceal a little bit and act in that way yeah it's a really good point I mean if you overlay the two major issues that have happened in the last five or six years which is the global financial crisis and then the issues around in security and privacy with respect to the data that you have started and with very strong libertarian principles that are underlying it there's a lot of libertarian investors out there that believe in it which was if you put a mirror up to the perception of some of the global financial crisis issues with respect to traditional financial institutions this was a great alternative and then when the NSA scandal and the issues the subsequent dialogue around what is private, what is secure this then falls into that new concept as well so it actually came across it's actually appeared at a really interesting time as a mirror to put up against some of the broader social dialogue that the United States is going through right now yeah I think conveniently when I was a prosecutor I was already a consumer and I think the jury would generally kind of see where I was coming from the wide structure I think today when I have to make it organ as a defense lawyer before you're lucky with the timing I guess I think it's going to be a lot better to resonate with the jury as to maybe this isn't automatically elicit just because it's in the underground just because it's the steps for being done to conceal but the FBI I don't know if anyone knows enough about the Silk Road story how the FBI kind of jumped in and kind of blew it all open I did some reading on it but someone knows it probably better than me I think they, I think that I think it was the DIRS yeah well it's always the IRS I think they use some traditional methods to understand the movement of money and the elicit nature of the goods and services that we're being provided and that formed the basis for some of their case but when it came to actually tracing the money and tracing the identifier information behind the Silk Road users that is still the secret source that I think that certain prosecuting bodies are still feeling pretty happy about and they're not giving that one away but they're going to have to in discovery I think through this criminal case at some point it's going to some forms of hacking yeah they hacked in I don't know they basically hacked in and were able to figure out the code and then they figure out who the users were and who the merchants were next thing you know which strikes the very core concept of digital currency which is the cryptographic element the whole reason there's value in Bitcoin is because people believe in the cryptography people believe in the secure nature of transferring that value across the internet and that's based on cryptography the ability to encrypt, decrypt and if that's not there then you take away one of the foundational principles as to why people like it and why people want to use it and where the value is derived from so it's quite an interesting concept there as well on the last slide we see that the FBI then hacked the code, they seized about 26,000 bitcoins that were worth 4 million bucks at the time of the slide which watching the Bitcoin market who knows what that is today the FBI is the largest holder of Bitcoin I have the number, I just don't have it with me that goes well for the future of Bitcoin if the FBI is the one who controls the market and so this begs the question is we've looked at whether Bitcoin should be regulated we've looked at ways in which the government is attempting to regulate and we've now just seen how Bitcoin can be used as the as the medium for the commission of criminal activity so I've posed a question to the panel in the Silk Road case Bitcoin wasn't really the nefarious element in the criminal activity it was in fact Silk Road, correct? All panels are not in their head, everyone agrees with me so that kind of circles us back once again then how much regulation is appropriate by the government I think he gets to Nina's point I'm sorry, Margo's point that she made previously which was clearly Silk Road was the marketplace that was doing everything from drugs to child pornography to a variety of other criminal activities but at the end of the day there was an interview with the dread Pirate Roberts Does everyone know why he's called the dread pirate Roberts? Because it's a good story Who do you like the story? I guess it's named after the Princess Bride one of those cult movies that everyone loves which apparently I think they're redoing which is going to be awful how do you re-create Andre the Giant in any role but that's beside the point so look he said take him in his word this is what he said I paraphrased him my choice is Bitcoin because it is the most anonymous currency out there and Bitcoin has allowed Silk Road to exist so I think it's a bit of there is a crossover and again I think one can this goes back to Margo's point that there are some elements of Bitcoin it's an honest nature you can sit in your living room and say I'm going to use my mind to make it something that is attractive to the Silk Road to the world at the end of the day the government is going to have to prove the intent these individuals knew that the money was being used or the Bitcoin spring used to further criminal activity and the concept I guess is going to wrap back to this willful blindness around you and say I didn't know what was going on and the government is going to have to try and piece together as best they can to show that the Silk Road operators very well knew that the money was being used or the Bitcoins were being used for their criminal purpose and I think look again I think it goes back to the fundamental point that we made which is that's no different a standard than if they use cash or euros or credit cards in union it's exactly the same standard that they have to prove in the criminal case for any of this and so again it doesn't fundamentally change the landscape prosecutors have the same burden that they've always had to establish criminal activity right because if it was cash you'd have the same anonymity that Bitcoin has what about let's flip over to talking about anonymity what about tax implications and what about you know how does the government look at payment of income tax or sales tax or right this is such a fascinating area also where's this going to go Todd filing of 1099s W2 suppose you start if I want to pay my employees in Bitcoin then what what do you think then you work for the FBI I guess no I think that we see tax reporting generally is there to make the IRS's job if they choose to audit you easier so they can then say you were supposed to file this 8300 when you dealt with the cash payment or here you got the 1099 from the third party who paid you X dollars I think you're going to probably have to naturally see the regulations expand to include and they probably actually as they're written today already include compensation and it's so broadly worded in the income tax world that that I think if you're getting compensated whether it's a a boat a house or a Bitcoin and it's a value and exchange work the 1099 requirements you're going to get the 1099 so I'm not sure if we need more laws or more rules I just think it's going to be harder for the IRS to necessarily kind of keep track of this and hold people accountable when they choose to harass their taxpayer with the audit I guess I think that again this is just the lawyering that goes on right in what bucket does it fall in is it property is it not property is it compensation what does it mean and so while the laws may cover it there has to be some interpretation and the regulators need to step out or step back one way or the other but at the end of the day from a tax perspective compensation is compensation and I'm not sure bottom line is going to matter but I agree other than to say from the IRS's perspective they're confused well that's normal to where the place had to treat it but I think the issue of anonymity is particularly highlighted here because frankly how's the IRS going to know when someone is paid in Bitcoin and they haven't filed their 1099 or how is that going to be traced I think the way they trace unreported income today in any other type of case they're going to do a net worth analysis they're going to look at the expenditures and the money that's spent they're going to look at the way someone's living their life and doesn't match up with their tax return my last case I prosecuted when I was with the government was this father and son hotel developers they had the like $20 million house on south beach they had the helicopter that they took to work each day because the traffic over 195 was so bad they had the limo driver you name it they had it and they reported $30,000 a year on the tax returns and that was pretty easy so that's obviously a very black and white example but I think they're going to still look at I guess my position would be we don't need more laws we don't need really more regulations what we have is on the books let's just enforce what's on the books one other point on that is the valuation of it let's say you want to tax it is how do you value it the federal election committee took bitcoins as an in kind contribution instead of money again by definition they weren't sure how to define it so they said it was an in kind contribution and then the question was how do you value it if it's so volatile and changing and they decided to value it on the day that it came in that was the value of the in kind contribution so for tax purposes it would be similarly easy and hard I still believe there's a fundamental discussion going on around asset classification in general and that although the industry is developing at quite some pace you're seeing and as you see potentially more mainstream activity with respect to retailers using it they I don't believe there's been any definitive issue with guidance with respect to asset classification whether it is actually a currency whether it is a commodity whether it's a security a marketable security or capital asset and you find examples out there where where it could be either of those things many of those things and if you look at the Winklevoss who the famous Facebook twins they're S1 filings they classify as a capital asset in an exchange trade fund and they do that for a variety of reasons they don't want to be an exchanger so the underlying security is the big one but they're classifying it as something completely different so it's being talked about like a currency and it's being traded like a commodity and it has to be one or the other because frankly you can't be a store of value in a medium exchange at the same time and until classification issue is is clearer the underlying taxation of it and the difficulties that you've mentioned about time evaluation and traditional taxation issues that's a fundamental again it's coming back to some serious fundamentals that no one is that there is still a debate about and it's causing splits in the community splits in the industry and and people's definitions will guide it down particular paths so it's a fascinating conceptual level it's very interesting but also it's proving complicated in real life as well just a spin off from what you were just saying Luke being that the government is looking at ways to regulate and there seems to be a consensus among government that there needs to be regulation to protect the consumer essentially do you think Luke that much as we've seen in the area of FCPA enforcement there's been a greater need for monitors and more corporate compliance and do you think now going forward with bitcoin brokers much like there will be which was the Shrem company and by the way he was supposed to be the monitor Shrem that's sort of humorous do you think there'll be a greater need or a market for monitors for the bitcoin brokers I firmly believe that I just don't think anybody's got that yet in a meaningful way you have many potentially many layers of brokers who will take a fee for passing it and moving it on but there are still maybe half a dozen exchanges in the world some of them aren't in the US and so if you look at the the way that everything works it's still very fragile it comes down to a very small number of exchanges that actually will exchange that bitcoin for fiat currency and vice versa when it comes to regulatory compliance like most regulation there will be increased compliance at many levels and the way the technology will develop and the way people insert themselves in the industry will guide where a lot of the regulatory compliance comes from so we're talking about exchanges but what about brokers in the future and I think the issue of regulatory compliance around exchanges is still not there I think it's posing an interesting question to commerce as to how you monitor anonymous digital movements such that they meet the high standards of traditional money services businesses I don't think anybody's got that yet but I think the burden is on business and the private sector to figure out that because the regulators they've marked where the standard is and as I came back to before it's up to business and the private sector to meet that standard did you want to say something private? I just think we sort of talk about all these issues they're fascinating issues just from a discussion standpoint I think there's just a ton of very interesting issues here and I think again we exist in the anti-money laundering space counter-terrorist financing so that's our initiative world and our regulations I think again we deal across a lot of sectors securities commodities banking, MSBs so by its nature our regulations are flexible enough I think to accommodate a wide variety of different industries and so I think your point is to what is this I do think that's still a bit of an open question and I think one of the nice things again about our regulations is is they are flexible to accommodate for that at some point this is determined to be a commodity which won't be our decision commodity there are animal regulations that govern to the extent it's securitized there's animal regulations for that so the nice thing is it's flexible but I also think again from a good governance perspective I don't know that you want any government, let alone the US government rushing in and making very quick determinations about every facet of what is an evolving marketplace I do think there's some merit to working with the marketplace we've hosted virtual currency folks and we've come and talked to us and we've talked to law enforcement and we talked to a lot of different people that's one of the unique things about FinCEN is that we sort of are at the crossroads of regulators industry our foreign counterparts and law enforcement so we do sit at that crossroads and we make an effort to really talk to everyone and to try to get viewpoints from industry to try to get viewpoints from regulators and I think that's valuable and I think you'll see we just had two rulings that came out and were published fairly recently again clarifying do these do these rules apply or not in both cases they did not and I think that's an important distinction at least from the press that I saw from that that they were well received there was a sense of this is how the system should work where there's questions you know the public ask the government and the government responds and clarifies what the rules of the road are so in many ways I think it's working how it should and I think there's still a lot of unknowns but I think that's expected in an area that's evolving as quickly as it is I'm from Washington I'm here to help it's always taken with a bit of skepticism but I do think we do need that clarity because with that flexibility comes ambiguity with ambiguity comes confusion and when there's confusion you see the government maybe moving in one direction with an enforcement action that they don't move in another direction and then you end up with people who are kind of caught in no man's land wondering what do I do and then you're paralyzed and nothing gets done and the industry is shut down and sometimes I'm cynical enough to think that that's the government's intent is to be so slow sometimes to react that it creates such confusion that it kind of just hopefully goes away and doesn't become a problem it's hard having more than half or nine years and now I've switched the other side so I and look I think there's always there's always a desire for clarity which I think is important but as the government you also as you know you have to be cautious of unintended consequences and you have to be cautious that what you're doing is well thought that you've put the right amount of thought and discussion into it to ensure that you don't take an action which will have an unintended consequence on an industry and so we're very cautious to think through these issues very carefully to try to make sure that each decision that we make and each guidance that we put out and each statement frankly that we make about it because if I or the director fence and go up and talk about something I guarantee it ends up in some article the next day and so I do think you have to be very measured as the government about your approach to these things so that you don't inadvertently cause a harm or a fact that you certainly didn't intend no and there are examples in other aspects of government specifically the IRS where you can ask for a private letter ruling where you lay out your facts here is what we did what is the tax consequences and the fact that you have that ability to go back and forth I just think that the government then is going to kind of come back and say to those who didn't take advantage of that process and say you should have and now that you didn't we're going to hold you accountable and here's your fine go directly to jail and I don't know how much I don't know how much let's call it the industry and that whether that's Bitcoin or digital currency advocates whether that's traditional finance institutions considering it venture capital money or large retails I don't know how much what level of interaction they are having with government in order to help guide and define what is acceptable I don't have any insight into that but if there is an increased level of dialogue then that can only be a good thing for that relationship and the professionalization of the industry in general you wouldn't work out I was just going to mention the New York Department of Financial Services hearing last week or the week before they had two days of hearings and heard from industry investors lawyers and so on and I think the message was want for regulation want for MSB Bitcoin license some type of state money transmitter license knowing that the AML aspects are already there but so I think people galvanized around where is there a place that I can go to legitimize what I'm doing for the good actors there was a lot of discussion about a lighter touch on the regulatory regime well first unanswered questions if you're going to get a money transmitter license how do you meet bonding requirements again all about valuation lots of very particulars about money licensing which we don't need to talk about but basically porting over this new concept to old laws I think the bottom line was they thought yeah they wanted to be licensed in some way they thought it would be good for the industry but wanted a lighter touch and the regulators approach where it was well I'm not sure how much lighter we can go a lot of discussion about let us operate for a year and see if we can stay in business and then we'll get a license that really wasn't the right balance I think New York was seeking but the dialogue's happening I guess is the bottom line I found it interesting and I say this just as a consumer and not as a government employee but I found that to be interesting because there did seem to be a sense that consumers regulation is good because consumers want to deal with well-run organizations they want to know if I go to an exchanger they're much more comfortable going to an exchanger who is licensed with FinCEN and is compliant with regulations and has a good reputation because they know that if I send my bitcoin there and I ask for money back I'm actually going to get money back so I think to a certain degree we talk about the burden of regulation but I also think for consumers as a consumer and not as a government employee but I think as a consumer to a certain degree where you have a business that has that has worked to be legitimate it has worked to meet regulations and has worked to put in place those systems necessary to meet the regulation I mean I think there's a certain confidence that as a consumer you have in that entity that you would not necessarily have as to another entity so in some ways as contrary as it may be you know I guess initially think about it I think that complying with some of this regulation actually I think could be thought of as being good business because I think you may have a competitive advantage as being sort of a trusted person absolutely yeah and I think and that is only underscored by the fact that there were at least two if not more major thefts of bitcoin major thefts you know the numbers on that they're big numbers yeah no they were in the millions so I think again I think that goes to the question that as a consumer do you want to use the business that is reputable and is meeting statutory and regulatory requirements or do you want to go with the business that isn't but don't you think the market is going to dictate that as well that if somebody kind of steps up and says I'm the bank of America of bitcoin or whatever you want to be acting there in a prudent manner and does they're they're going to kind of seize the market if that's what those who use this currency want to do so that's the classic big government versus small government I guess debate I think that a consumer will have a choice whether they want to use a dollar or bitcoin and then part of that decision making process is how much trust they have in the ability for bitcoin to deliver on what it says it's supposed to and what protection those consumers have should something go wrong in the transaction process and if you look at it in those terms the fact that the bitcoin transaction is irreversible that there is no consumer protection right now it still perhaps remains the consumers would perhaps have more faith and more trust in a dollar than a bitcoin on a general level right now I'm guessing I haven't done a consumer survey on that but it comes back down to the value proposition of what bitcoin is supposed to do and mainstream acceptance will occur if consumers believe that they have as much faith and trust in the use of a bitcoin as they do in a dollar and that's the discrepancy you have because the trust in a dollar because the US government back it it's because the transaction systems that have been governing in the last 30-40 years mean that you can get your money back if there's a wrong transaction that doesn't occur in bitcoin well the same with cash though just to right you lose your wallet right whether it's your bitcoin wallet or your leather wallet you leave it somewhere or someone to pick pockets you and hacks it there's no FDIC insurance for cash there's no you're so cynical I just know they're going to find my wallet and call me and give me back but to change the subject but I think another issue that we're talking about is when you have this business kind of pushed outside the United States how do you enforce in this global flat world these currencies that are crossing the borders and I know from my offshore tax experience where we were looking at some sort of US nexus unfortunately or fortunately however you want to look at the long arm of US jurisdiction is pretty darn long it doesn't take much to trigger US regulatory I guess requirements to comply so I think it's kind of going to be an interesting issue to see if the government overreacts and gets pushed more and more into the shadows outside the United States how is the US government going to react to try and bring it either into compliance at all or we're basically just going to be stuck with a world where it's completely in the underground and that's I guess the big question Fredrick do you feel that you have the tools that you need so I think look we have existing tools and I think we have used them and are prepared to do so and you know I think the question of what what comes in the future I think is always an open question but I think right now we're looking at what tools and authorities we have and we're using them like we do in any other industry and I think so I think at the end of the day again I think you've got much the same concerns with what if Bitcoin moves offshore we have money exchangers who move offshore we have banks that are offshore so again I think if you look at the threats it's to some degree they are analogous and there's going to be differences because of technology but to some degree we're already answering and dealing with those questions so I think this just falls into the same lane that we have to deal with those threat actors already who use offshore systems for example where that could potentially happen alright so in regulating Bitcoin Vincent believes that they've got the tools available to do what needs to be done because they interpret the law if you sneeze and it somehow the US government basically says you sneeze and impact commerce here in the United States you're now subject to our regulations we see it in the Foreign Corp practice act legislation we see it in the tax now where they're going after folks who've never stepped in US soil calls to the US and accusing them of helping Americans conceal assets and charging with crimes where they never violated their own countries so I guess that's got to be another kind of balance here you just got there's concern about how far was the US government going to try to reach and continue to reach and I think we're still I still think we're lacking clarity as to how to specifically define Bitcoin right Margo whether it's property, whether it's barter whether it's a foreign currency whether it's a financial instrument those are well Vincent has taken a position as to what it is I don't know that that's a global position so those issues are still issues that we'll be working through and regrettably although I thought we were going to accomplish it today every day it doesn't seem to have happened the enforcement mechanisms we've taken a look at looked at the use of the Patriot Act let me just divert to that first thing because I do want to kind of wrap things up in sort of some sort of cohesive package but the use of the Patriot Act you know the Patriot Act it's one of those things that you kind of pull out of your back pocket in an emergency in my opinion maybe not so much is the Patriot Act a tool used frequently by you know Vincent or the SEC so I think it depends how you define the Patriot Act because there's a huge amount of things in the Patriot Act yeah there is so actually it crosses a lot of different branches of government so you know I think the Patriot Act gets a lot of use just because it's a law like any other in the United States that amended statutory provisions across the US code so when you talk about the Patriot Act it's tough I think to generalize well I was talking about with respect to Liberty Reserve specifically as to our 311 power right look I think we use it appropriately and where needed and I think we obviously can't talk hypothetically about where we will use in the future we may not use it we may use it really again it's much like a criminal case it's tough to generalize because you know each is a really a case by case determination that we use it where we think that we have identified a primary minority concern and where use of 311 is appropriate and there's a number of statutory enumerated factors that we consider and it's a very deliberative process and so certainly like any authority where it's appropriate to use it really use it and where it isn't we won't but but I think you know if you look at Liberty Reserve I think that's a great example of where our section 311 power was appropriately used to stop what was in essence a payment system that was designed specifically to facilitate criminal activity comments from the panel on that on any other force with mechanisms I would like the audience to have the general understanding of the enforcement mechanisms used with respect to well I think you're seeing traditional asset forfeiture tools used also by the government where they're coming in saying we can tie this to criminal activity we're taking it we're going to take your bank out we're going to take your car we're going to take your transmitters we're going to take your computers we're going to take whatever we can trace to the criminal activity which comes back to the bigger picture these are laws that are on the books and as long as they're able to show the criminal nexus they can sue it to sue to take it properly they can criminally indict and seize which is not unique to bitcoin at all and if you're not licensed to the money transmitter right yeah which is which is a regulatory issue which is an issue right and again I think it's an issue that much as if you're taking you're taking cash and sending it to your favorite country you're sending it to France and you're not licensed to do so or you're accepting bitcoin and sending it to France again it's exactly the same whether it's a regulatory response or whether it's a criminal response really depends on the specific facts of the case and I don't speak for the department of justice anymore so I'll let them speak as to where they think 1960 is appropriately used in a criminal sense but obviously there's a difference between a regulatory response and and a criminal case under 1960 and I think you know you just you can look at press releases in and of themselves to see that not every regulatory case results in a criminal case and not every criminal case has a regulatory response yeah you hope they use the criminal process for the egregious really blatantly bad cases the criminal ones not the footfalls any questions we've got a couple of minutes yep hi my name is Patrick soon I'm a young attorney in Newport Beach in California I'm a bitcoin enthusiast I majored in bitcoin early on I'd like to talk to you about my friends are you an FBI agent? he's my one one of my friends started a job he calls it coinally.com and his company is not evaluated to be about $1.8 million US dollars he started early with this one thing that I really want to say I appreciate all of you coming today and talking about this this is a really interesting topic for me one question that I have is what are the origins of bitcoin? it seems like we talked about enforcement today going after criminals silk road encryption but one thing that we know for sure is that bitcoin was founded on encryption called 256 bit which was developed by the NSA I'm really curious if one day it does come out who the inventor of bitcoin is if that has any effect on your jobs in the various agencies you work with that has any sort of informative effect on the way the public sees it I think the anonymity of the founder has created a certain quality I frankly don't think it's gigantically relevant but by the same token if you don't know who the founder of a particular issue or a company is that in itself could be deemed to be a red flag I think that I'm guessing that the strong libertarian principles which underline the bitcoin and the blockchain I think the founder let it speak for itself that's my opinion I have no basis for that other than just having read a bit I think it attracts some people I think frankly it puts a lot of other people off but I think it was deliberately it was an intentional effort on the part of the founder to remain probably in the background that said there is a core team of five developers which monitor and update the protocol and those names are you can just google those names so those are the people that look after it and they're paid by the bitcoin foundation so there is a structure behind it I guess I agree with you to your point I think it attracts some people and pushes some people away from a reputational perspective it's a technological protocol that someone decided had value because of its limited nature but that almost same technology is utilized now to tamper seal certain financial assets negotiable instruments that are created electronically so you can detect alteration I mean it's so I'm not sure if it's much different than that other than the who created this and that it's finite and it's used by the criminal market that's really made it move I think last count maybe I'm wrong I'm behind 36 other versions 36 other coins light coin Kanye so there are iterations right and the pace of the technological development it will continue to iterate an extraordinarily fast rate and already has with the introduction of colored coins and so so yes it's a point that's relevant from a technological standpoint as the technology iterates and but in terms of the broader point about transparency I think transparency is an extremely important point which validates the entire concept so I think I think there is a need for transparency for it to maintain its relevance comments on that we can take one more question and then we're going to have to roll so please I noticed Jeffrey said about that he had accepted bitcoin from clients yet what if someone walked into your office and said I want to pay you a big coin or how do you advise some other how do you take some other criminal defense you take how much are you talking about no look why don't you just say yes but I guess the question is do I have to file an 8300 what regulations are I going to subject myself to if I take it like yeah that's where my hesitation would be just the unknown as to if someone walks in with a suitcase of cash I generally tell them go to the banker and deposit I'm going to check because that way I can rely upon that the bank's internal anti-money laundering to raise whatever suspicion I'm going to ask my questions as to where the money is coming from for sure but I think that's part of the concern with the bitcoin as a criminal defense lawyer I want to make sure that I can get paid and I can keep the money that I'm paid to do my job so I need to ask where is it coming from is this legal money how the darn forms just like anybody else right that's where the confusion I guess comes in the play right but that also circles back to perhaps a most likely a greater role for for compliance and monitors we are out of time please join me in thanking the panel applause