Bitcoin makes a pitch for 'safe and sane' regulation

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Bitcoin, the virtual currency that fuels transactions on Internet black markets such as Silk Road and Black Market Reloaded, will make its case to Congress on Monday that such currency has potential to open the digital economy to poor societies around the world.

Federal law enforcement agents will testify that criminals can use Bitcoin to launder money.

Last month, federal agents shut down Silk Road, a black market that sold illegal goods such as heroin and forged documents, and arrested its alleged operator, Ross Ulbricht. The site operated on an underground network known as Tor and transacted its sales in bitcoin.

Patrick Murck, general counsel for the Bitcoin Foundation, will appear before the Senate Homeland Security Committee for the first congressional hearing on virtual currency. Murck, in prepared testimony, said he hoped Congress would "chart a safe and sane regulatory course" without tamping down the economic and societal potential for the digital economy and Bitcoin.

Bitcoin can help people avoid official corruption and punitive taxes and spend money on unpopular causes without risking interference from government, Murck said. Fees are generally lower than traditional banking, he said.

"Bitcoin can facilitate private and anonymous transactions, which are resistant to oversight and control," Murck's testimony says. "This by no means implies that using Bitcoin can or should provide anyone immunity from the law."

The committee has asked Murck and representatives of the Justice Department, Homeland Security and the International Centre for Missing & Exploited Children to discuss the risks and potential of digital cash that can be transferred anonymously and without government regulation.

Bitcoin, invented in 2008 as a person-to-person digital currency that can be traded without banks or a central monetary authority, has grown exponentially as Internet businesses, legal and illegal, adopt it as a payment method. Bitcoin can be exchanged for standard currency, such as dollars, euros or yen, but the exchange rate varies wildly. One Bitcoin has sold for more than $400.

In March, the Treasury Department's Financial Crime Enforcement Network (FinCen) said Bitcoin exchanges that allow users to convert their virtual currency to dollars must register with the government and abide by anti-money-laundering regulations. European regulators issued similar requirements in July.

To pay with Bitcoin, users create a "wallet" using Bitcoin software that is identified with a 33-digit code. That code links to a private one known only to the owner. The wallet's owner uses the private key to "sign" transactions, which is then validated by the computer. Every transaction is listed in a public ledger, called the "block chain," which prevents spending Bitcoin twice.

Responsible virtual currency providers should implement the Treasury Department's anti-money laundering procedures and report suspicious transactions, Jennifer Shasky Calvery, director of FinCen, said in written testimony.

"Legitimate financial institutions, including virtual currency providers, do not go into business with the aim of laundering money on behalf of criminals," she said. "Any financial institution could be exploited for money laundering purposes. What is important is for institutions to put controls in place to deal with those money laundering threats."

The Department of Homeland Security is carefully watching the development of virtual currencies, Brian de Vallance, acting assistant secretary for legislative affairs wrote in a letter to the committee.

Anonymity in cyberspace creates "a unique opportunity for criminal organizations to launder huge sum of money undetected," he wrote.

Criminals have migrated to Tor to hide their identities and use virtual currency to hide their transactions, said Ernie Allen, CEO of the International Centre for Missing & Exploited Children, in prepared testimony submitted to the committee.

In August, police arrested the owner and operator of Freedom Hosting, which maintained "deep Web" servers that hosted child porn sites, including Lolita City and Pedo Empire, that accepted payment in Bitcoin. The FBI called Freedom Hosting "the largest facilitator of child pornography on the planet," Allen said.

He said he can see the virtues of a digital economy and digital currency as a way to get capital to people without access to banks, credit cards and mainstream financial institutions, but he also sees it as a way for criminals to hide the profits of their crimes. Police often follow the money to find the operators of child pornography and sex trafficking websites, Allen said. The center is encouraging countries to regulate virtual currency at the point where it is traded for standard currency.

"The attractiveness of Tor and Bitcoin for child pornography is based upon a perception of anonymity," Allen said. "If the perception of anonymity diminishes, we believe the criminal use will diminish with it."