Cryptocurrencies and Blockchains Senate Banking Panel Hearing, Oct 11 2018



this hearing will come to order today the committee will continue its exploration of the opportunities and challenges surrounded by the cryptocurrency and blockchain ecosystem prior to the introduction of Bitcoin and underlying blockchain ledger in 2009 there was no similar solution to the double spend problem where sent the same digital currency could be spent more than once which did not require a third party in a meaty area while Bitcoin the first decentralized cryptocurrency has been around for nearly a decade now crypto currencies have gained particular attention in the past two years due in part to their meteoric rise and subsequent fall in value last year advancements since bitcoins creation have expanded blockchains uses and given way to things like initial coin offerings a method of crowdfunding that has become popular in the cryptocurrency community while the technologies underpinning cryptocurrencies have the ability to transform the composition of and ability to access capital in the financial system much of the recent news about cryptocurrencies has been negative focusing on enforcement actions hacks on international exchanges and concerns raised by various regulators and market participants to that end in February of this year the committee held a hearing with the SEC and CFTC to examine their oversight roles of cryptocurrency related products and activities under their respective jurisdictions since that hearing the agencies have made strides to provide further clarification on their thinking surrounding cryptocurrency related issues but some regulatory and oversight questions still remain the regulatory questions price volatility and reports of things like pump and dump schemes have raised a lot of questions surrounding the cryptocurrency and blockchain ecosystem that need to be better understood blockchain networks have the seneschal to improve processes for things like smart contracts payments and settlement Identity Management and even things yet undiscovered in order to move forward in a productive way and give these innovations the room to flourish and develop in a safe and sound way we need to sort through the static and better understand what exactly are the opportunities and the challenges facing this ecosystem for example the committee would benefit to hear about the use of crypto currencies and derivative products as a store of value or medium of exchange or payment the current and potential applications of blockchain technology and the regulatory issues surrounding the various facets of the ecosystem and how they can be improved I look forward to hearing about this and other issues from our witnesses today senator Brown Thank You Jeremy Crapo for holding this hearing thanks to the two witnesses mr. Falkenberg welcome and doctor beneath welcome to the committee today's hearing happens to fall just shy of the 10th anniversary of Bitcoin blockchain being introduced to the world October 31st 2008 we were in the midst of a global financial crisis you can't blame some Americans for hoping that an alternative banking system would be created that would be superior to the one in shambles at that time that coin and other crypto currencies like it promised to make payments faster and easier and cheaper and to eliminate our reliance on risky financial institutions whose failures harmed workers and families and all of our communities the last 10 years unfortunately has shown that misconduct fraudulent investment schemes and cybersecurity threats are not unique to the traditional financial system when a cryptocurrency goes bust or a poorly supervised exchange fails it's often hard working Americans left holding the bag we want to see innovations in the financial system innovations that help Americans keep more of their money by avoiding fees or that make it easier to borrow for a small business startup but so far despite all energy all the energy and investment dedicated to finding a use for the blockchain there are a few real-world applications an alarming number of scams cryptocurrency prices are swung wildly over the last year in expiry investors who are hoping to get in on the next big financial investment has seen the value of those investments fall by more than 75 percent from their peak though they've raised billions of dollars from investors few if any initial coin offerings have registered the SEC chair Clayton told this committee in a february hearing every every initial coin offering i've seen as a security last month in New York Attorney General released a report on several crypto currency trading paths platforms that pointed to evidence of widespread manipulation and identified several exchanges that don't follow anti money laundering or know your customer requirements with a decade of experience much of the irrational exuberance around cryptocurrency and blockchain technology has subsided and we have an opportunity to set more realistic expectations for those of how these innovations might be used to promote a fairer and more competitive economy I hope this technology will prove useful particularly particularly in helping people who are unbanked or underserved by the traditional financial system as I understand why individuals might be interested in it at this point it's easier to see the malign impacts in society as a whole than the constructive ones that's why we look forward to hearing testimony thank you thank you senator Brown and today we're fortunate to have two witnesses from different perspectives whose in-depth knowledge of cryptocurrencies will be an asset to the community first we will hear testimony from dr. Nouriel Roubini professor of economics and international business at NYU's Stern School of Business and then we will hear from mr. Peter Van Valkenburg director of research at research and advocacy group coin Center dr. Rubin II you may proceed well before you do as I always do I remind you to please try to pay attention to the clock and keep your your initial remarks to five minutes you'll have opportunities to respond and and AD during questions and I remind my colleagues of the same limitations that they have on their questioning time and with that dr. Bini please proceed Thank You chairman capo ranking member Brown and members of the committee thank you for the opportunity to testify today on the top the cryptocurrency and blockchain ecosystem my name is Nadia Ruben I'm a professor of economics at New York University I'm an expert of the global economy of acid and credit bubbles and of financial crises in summary my view on these ecosystem are as follows first crypto is the mother or father of all scams and bubbles a bubble days finally gone bust this year second blockchain is the most overhyped technology ever and is no better than a glorified that database let me elaborate on this point first a recent study shows that eighty-one percent of all I cos were scams to begin with 11 percent of them have been failing or are dead and only eight percent are still traded on exchanges second after a massive bubble in 2017 Bitcoin has fallen by 70% this year other major cryptocurrency fallen by 80% and thousands of other ones have fallen by 95% this entire asset class is literally imploding now just yesterday major cryptocurrencies plunge another 10% in a day third these assets are not currencies calling them hit of currencies nonsense they are not a unit of account they are not a means of payment they're not a stable store of value bitcoin can do only five transactions per second visa can do 25,000 per second nobody's uses be a Bitcoin for transactions apart from criminals and terrorists crypto mining is also an environmental disaster as the system wastes massive amounts of energy fourth there is a revolution in financial services but it has nothing nothing to do with blockchain or crypto it is called FinTech and is based on a combination of AI big data and Internet of Things and it's already being used daily by billions of people for billions of financial transaction there is no block chain in FinTech v the crypto ideological utopia is a libertarian dream of full decentralisation of all human transactions no governments no central banks no corporation no banks no trusted institutions it's totally utter nonsense six crypto land is now subject to the opposite and dangerous trend massive centralization mining is centralized and controlled by oligopolies in authoritarian countries like China in Russia trading is centralized as ninety-nine percent of all transactions occur on non secure centralized exchanges that they're being act on a daily basis development is centralized as a technological elite is police prosecutor and judge they arbitrarily changed the code and fork coins into new ones when things go wrong and wealth is massively concentrated in crypto land the Gini coefficient of inequality for Bitcoin is worse than North Korea it's quite an achievement seventh there is massive price manipulation in crypto land widespread pump and dump schemes spoofing Wars trading insider trading cons like feather that are created by Fiat and used to manipulate upward prices massive criminality 8i SEOs associated with security tokens are non-compliant securities that break all security laws they're mostly scams and even decisi created a fake website to warn investors of such initial coin scams ninth utility tokens and whites reddit organization would mean a return to the Stone Age of barter even the Flintstones knew better than crypto as they used clam shells as their own one currency tenth and final point corporate black chains a so-called Enterprise DLT are glorified databases and have nothing to do with blockchain they're private rather than public their permission rather than permissionless there are based on trusted authorities verifying transactions rather being trustless they are not distributed on millions of computers but rather on a few selected control Ledger's of databases they don't use cryptographic games authenticate transactions but rather trusted permission authorities in summary they claim to be blockchain but they've not in to do a blockchain and 90% of all corporation experimenting with them have decided that they are no better than traditional databases in the they are more costly and less efficient than databases they will not use them only 1% of all CEOs say that there will be any adoption of DLT in their organization and 80% of all CEOs have no interest in this technology it's no wonder as no organization government corporation or bank would ever want to put on a public permissionless distributed trustless ledger all these transaction with customers and supplier it doesn't make sense and it's not gonna happen so blockchain is a lot of hype and almost no reality is an expert senior analyst recently concluded thank you for your interest and I'm happy to answer any question might have thank you dr. Roubini mr. Van Valkenburg chairman Crapo ranking member Brown members of the committee thank you for the opportunity to speak with you today my name is Peter Van Valkenburg and I'm the director of research at coin Center an independent nonprofit focused on the public policy issues effecting cryptocurrency and public blockchain networks what is Bitcoin bitcoin is the world's first cryptocurrency and it works because of the world's first public blockchain network what does Bitcoin do it's simple it lets you send and receive value to and from anyone in the world using nothing more than a computer and an internet connection now why is it revolutionary because unlike every other tool for sending money over the internet it works without the need to trust a middleman the lack of any corporation in between means that bitcoin is the world's first public digital payments infrastructure and by public I simply mean available to all and not owned by any single entity now we have public infrastructure for information for websites for email it's called the internet but the only public payments infrastructure that we have is cash as in paper money and it only works in face-to-face transactions before Bitcoin if you wanted to someone remotely over the phone or the internet then you could not use public infrastructure you would rely on a private bank to open their books and add a ledger entry that debits you and credits the person you're paying and if you both don't use the same bank well then there'll be multiple banks and multiple ledger entries in between with Bitcoin the ledger is the public blockchain and anyone can add an entry to that ledger transferring their bitcoins to someone else and anyone regardless of their nationality race religion gender sex or creditworthiness can for absolutely no cost create a Bitcoin address in order to receive payments digitally Bitcoin is the world's first globally accessible public money is it perfect no neither was email when it was invented in 1972 bitcoins not the best money on every margin it's not yet accepted everywhere it's not used often to quote prices and it's not always a stable store of value but it is working and the mere fact that it works without trusted intermediaries is amazing it's a computer science breakthrough and it will be as significant for freedom prosperity and human flourishing as the birth of the internet and Bitcoin is just the beginning if we can replace private payments infrastructure then we can replace other private chokepoints to human interaction as well now why should we want to build more public infrastructure why should we embrace block chains over corporate intermediaries why should we tolerate their in efficiencies and work to make them better why should we want the pioneers of this technology here in the United States and not fleeing overseas a simple reason because the corporate intermediaries providing today's critical but privately owned infrastructure are becoming fewer larger and more powerful and their failures are in critics increasingly grave so roughly half of all Americans 143 million people had their social security numbers exposed to hackers because of a breach at Equifax the Swift Network has relayed hundreds of millions of dollars in fraudulent transactions because of hacked member banks in Bangladesh Vietnam Ecuador and Russia the FBI suspects now that the largest of these hacks was perpetrated by North Korea corrupt low-level employees at an Indian Bank Punjab National were able to fraudulently certify Swift messages stealing 1.8 billion dollars it's the largest electronic bank robbery in history in fact it's the largest bank robbery in history in October 2016 an estimated 1.2 million Internet connected devices were hacked and turned into a botnet that for several hours made prominent websites unavailable across Europe and North America including CNN and Fox News The New York Times and The Wall Street Journal increasingly physical machines are being connected to the Internet to augment their capabilities they're wired through servers that are owned and maintained by private and trusted intermediaries the so-called Internet of Things pacemakers from st. Jude's Hospital have been hacked baby monitors from TRENDnet have been hacked and jeeps from Jeep have been hacked to the point where they can be remotely commandeered and driven off the road now those vulnerabilities are inescapable in systems that have single points of failure it doesn't matter if the point of failure is a corporation or if it's a government there shouldn't be a single point of failure similar choke points existed before the internet if you wanted to deliver a message you'd have to go through one of three television broadcasters or a handful of newspapers private corporations are essential but no critical infrastructure should rely on one or two the internet removed single points of failure in communications infrastructure and ushered in a wave of competition among new media corporations building on top of its public rails block chains can similarly disintermediate critical payments and IOT infrastructure the technology is not yet ready to answer all of those questions today but it is our best hope and as with the internet in the 1990s we need a light touch pro innovation policy to ensure that these innovations flourish in America for the benefit and security of all Americans thank you and I look forward to your questions Thank You mr. Van Valkenburg and I'd like to start with you your testimony details three particular areas where decentralized computing can be useful and helpful electronic cash identity and the Internet of Things some use cases some use cases like Bitcoin already exist while others are conceptual crypto currencies like Bitcoin have experienced volatile price fluctuation over the past year I'm gonna ask you first and then dr. Rubin I'll ask you to comment on this as well where do you see things going in the next year or so under what conditions do you see market value stabilizing Thank You chairman Crapo much of the ongoing volatility that we're seeing I think stems from a struggle to find a level for something brand new so when tulips were first introduced to the Netherlands from Arabia and they became very popular amongst the rich set it was hard to find a price and a lot of irrational exuberance pervaded those markets we saw vallah t in equity markets when trading joint stock companies became a new phenomenon the South Sea and Mississippi bubble and we saw volatility in the dot-com companies when the internet was brand new finding a level is very difficult fortunately we are now beginning to see institutional investment coming line with respect to Bitcoin and eventually other crypto currencies as well we've got CFTC regulated Bitcoin derivatives markets and that means that we'll have I think better sell-side research from the institutional investment class and there'll be the possibility for people to take short positions and rationalize the market now key to this effort is more institutional grade products that are regulated by the proper authorities so we have CFTC regulated derivatives we could use ETFs reg by the SEC where there's institutional grade custody and where there are known accounting standards and where purchasers know where they stand we could also use better custodians in general comptroller adding at the Office of the Comptroller of the currency has revitalized the process of offering FinTech charters to new companies offering new services that don't look like traditional banks a nationally chartered bank that custody x' cryptocurrency is something that I think would bring more rationality to these markets thank you and dr. Reuben would you come in on the same issue yes cryptocurrencies are not scalable our centralized and other centralized and they're not secure Bitcoin has five transaction per second and there's a massive concentration of the mining among about half a dozen Chinese Russian and others miners so you say you don't rely on translate institution you're relying on an oligopoly of individuals that are shady in countries that you have no control there are solutions that claim that in the future gonna be scalable but the only way they achieve scalability like proof of stake is gonna lead to even more characterization of mining and once you have characterization of mining there is no security if I lose my credit card or somebody steals my bank account I call and is blocked I've deposited insurance every lender last resort support of the financial system yes I pay a fee if somebody's hacking your crypto wealth is gone forever no deposit insurance no lender of last resort no solution on the immutable hacking of your wealth there is no security in this space there is no scalability in this space and there's massive centralization that is very risky and it's not going to change well thank you and I only have about a minute left so as a follow up many of the projects or use cases for decentralized computing as mr. Van Valkenburg testimony refers to it are still in the conceptual phase who are not being widely adopted as of yet are there particular factors hindering implementation or adoption of blockchain or decentralized computer Solutions and what are the most meaningful steps that market participants or regulators can take to create certainty or pre-meal promote a safe path forward I'd like to each to take about 30 seconds to answer me please so decentralize computing use cases are hard challenges as I said email was invented in 1972 and it took 20 years for those systems to be friendly enough for consumers to want to use them to send messages we've got choke points that are vulnerable on the internet today that could be made better with block chains for one the DNS system which was the hack that brought the websites and made them unavailable in New York time since I'll have to stop you there and go to dr. Roubini well there is no government or corporation or banks gonna use a public at the centralized permissionless system will be very risky to let millions of computer somewhere in China verify your transaction therefore all enterprise DLT is private his permission is based on trust so the idea of the centralization is never gonna fly ask any corporation or any bank know one of them is gonna go to the centralized system it's nonsense thank you senator Brown let's assume blockchain technology and some cryptocurrencies overcome the issues that you raised in your testimonies or their applications that could be beneficial in a broad scale to address problems in the financial sector well I do believe that there is some innovation as I pointed out if you're talking about enterprise DLT or corporate blockchains the systems that are private their permissions they are not distributed they have trusted Authority authorized transactions and in my view these are just glorified databases they are being called blockchain but they are not and we can improve the efficiency of sorts of a transaction financial incorporate by having an integration of databases reduced a bunch of transaction cost but I don't think that we're going to go to solution is based on a public permissionless entrust list system nobody is going to accept it no government no corporation no bank so there is lots of work we can do of improving and as I pointed out the revolution in FinTech is going to bleed them banking services to the poor and unbanked is a revolution is a revolutionising payment system credit allocation insurance asset management capital transactions is not in DubLi blockchain you have a leap a and WeChat pay in China we have an most square PayPal in the United States who have UPI systems in India within paisa used by poor farmers in Kenya and over Africa billions of transactions done by billions of people every day that's the FinTech revolution what's the penetration of blockchain after a decade 22 million users and half of them are not using it after a decade of the internet with 1 billion users the penetration of blockchain and crypto is collapsing you have fallen users collapse of 8% of transactions in transaction cost as a share of transaction have gone through the roof is the opposite of any successful technology in the financial sector or the Internet is just the opposite I think mr. Falkenberg it's one thing for tech for tech billionaires or the Winklevoss twins to be investing in a complex and poorly regulated market but I'm concerned about families who their savings what is the profile the average person who's investing in this market whether it's Bitcoin or buying into IC o–'s and other unestablished technologies so the profile of your average investor is technologically sophisticated because you have to deal with things like private and public keys or at least understand how the company that you're working with is securing them if it's coinbase or some other exchange and it's usually younger people who are interested in these new alternatives perhaps because they feel like the legacy financial system has in some ways disappointed them and they're looking for alternatives I think in good faith now that said are they safe are they being protected are there good regulations in place exchanges in the u.s. are regulated by the federal government for anti-money laundering purposes so FinCEN was one of the first out of the gate America led here and the rest of the world needs to catch up FinCEN said exchanges are money services businesses we need kyc we need suspicious activity reporting from a consumer protection standpoint though they're regulated by the states you have to get a money transmission license in every state where you have customers assuming the state regulator for money transmission licensing has opined on the question of whether crypto currency exchanges fit their definition of money transmission or don't that regime is not entirely rational these are natively global payments networks and you're going state-by-state to get licenses from the proper authorities and you're going to have 53 or so criminal background checks the next one is not going to make you more or less secure for your customers also money transmission licensing regimes they look for custody risk which is important to safeguard against but they don't deal in others in other investor protection concerns like manipulation and transparency and markets I think it's about time that we had a serious policy conversation in this country about whether that state-by-state approach is reasonable and whether it's the best way to protect consumers federal preemption and an alternative federal license for these companies perhaps one that also police's for market maybe mark market manipulation and supervises for that would be I think a wise choice that would make America a leader and protect our consumers Thank You senator Kennedy Thank You mr. chairman thank you gentlemen professor let me reverse this mr. Van Valkenburg how long is has crypto-currency in bar chain technology been in existence it's an excellent question so crypto currency and public blockchain networks have been around since 2008 2009 when Satoshi Nakamoto invented them but the blockchain that mr. Roubini has described the permissioned one that's been around since the 80s it's actually older than I am it's not a particularly innovative technology it's just an Excel spreadsheet I think we actually chose me I disagree on that interruption unless let's say ten years how is our world better off as a result of bought chained technology and cryptocurrency briefly so right now it's mostly anecdotal quite frankly because these things aren't used widely just as email was not used wide widely in the 70s and 80s until the 90s we've got a long runway but briefly I have one example so the World Bank has found that in developing economies 20% women are 20% likely to have a financial account at a bank and accounts under their names are often controlled by their male relatives there's a woman in Afghanistan Roya maja boob who was a leading tech entrepreneur and wanted to pay her employees most of whom were female coders in order to get around this issue where she was unable to pay her female employees or their husbands were actually confiscating their money she paid them using Bitcoin ok I see your point professor how do you think if at all the world's better off as a result of separating into cryptocurrency and in bought chain technology I don't think the world is better off there is a significant need for improving fan services and as I pointed out there is a revolution in financial services called FinTech based on AI and big data and so on and is used literally by billions of people especially digital payment systems are already available right now the low cost are efficient they used literally by billions of people all over the world including billions of people even in Africa that is a really revolutionizing if you're a poor farmer in Kenya use m-pesa you can make payment system you can buy and sell your goods you can get microcredit you can do everything at very very low cost and these technologies are spreading everywhere you go to crypto five transaction per second you cannot do anything you cannot be scaled that's what I want to ask you about let's set aside the the initial corn offerings and the Bitcoin and all that let's talk about bar chain technology you don't you don't see any potential there as I say that the only applications are going to be acceptable by any private or public institutions cannot be based on a decentralized permissionless trustless system today there is no decentralisation the mining is controlled by a bunch of people in China Belarus Georgia and Russia and this is not a system that you want with the whole paper by a scholar at Princeton University showing there is a tract coming from China to Bitcoin because 75% of all mining of Bitcoin is in China and they're gonna start to use it to manipulate at their own wheel therefore do we want to rely on a private system yes we want to rely on trusted permissions yes we want to rely on a system that is kept private and safe yes but there's nothing to do with lock chain blockchain means that you're relying on a cryptographic game where hundreds of thousands of computers verify transactions there is no institutions going to ever do that so the solutions are I mean that the basis and valkenburg answer that so mr. Roubini is brought up FinTech he's brought up we weep and a leap a which are innovations in China that are bringing lots of people under the financial system it's important to point out that those are extremely large databases and every Chinese citizen ends up with their full transaction history unencrypted in those databases and the Chinese government quite openly has said that they can look at every financial record of every citizen in their country because of that FinTech innovation that is a single point of failure in multiple regards those databases get hacked then those transactions are public to the world but it's also a single point of failure in the fact that it's effectively government control and total surveillance over the population and every financial interaction they make in the world it's a tool for totalitarians thank you gentlemen very interesting senator Jones thank you senator Brown thank you both for being here today this is just an area that I'm still learning a lot and I want up I want to move a little bit away from the financial markets per se as I think most people I'm a I'm an old prosecutor and I am concerned as much as anything with regard to the law enforcement aspect to this one thing that I learned as a prosecutor and it as a lawyer is it seems like the bad guys are always two three or a dozen steps ahead of emerging technologies I've learned as a senator in looking at nations like Russia and China and North Korea that they also seem to be way ahead of the game when it comes to cyber security and those issues so my questions or my question is just really generic for both these I'll start with you mr. Van Valkenburg talk to me a little bit about the dangers of cryptocurrency as it pertains to law enforcement money laundering human trafficking drugs the whole 9 yards in which emerging technologies can be exploited by the bad guys to really wreak havoc in our in our systems let's talk about that a little bit and if you could address briefly you know what we can do in this to early stage to try to prevent that and then I'll go to you mr. Roubini I'd like to just focus on those two is Thank You senator Jones you're absolutely right criminals are usually the earliest adopters of new technologies in fact I think if criminals aren't using your technology your technology's not worth anything good point so you know stock car racing and souped-up cars ultimately NASCAR was a phenomenon that was born out of bootleggers outrunning the cops during Prohibition technological innovation and ultimately something not so bad but moments of disruption and things we need to worry about now with Bitcoin I think it's actually a positive story especially here in the US as I said FinCEN our financial surveillance regulator was fast out of the gate globally first out of the gate to say that crypto currency exchanges need to know their customers and need to do suspicious activity reporting so when you're getting on to the Bitcoin network by buying bitcoins in exchange your name is going to be taken down if you're doing it at a u.s. exchange now what about transactions within the Bitcoin network that aren't in an exchange well they are public on the public ledger that I've been talking about and we have phenomenal law enforcement in this country that I've had the pleasure of meeting who have become extremely adept at analyzing that big data and finding and D anonymizing or identifying a Bitcoin address as being belonging to somebody involved in moving the proceeds of crime I've even talked to folks have said that they now prefer working cases where the illicit funds are moving through the Bitcoin network rather than calling up five or six international correspondent banks that don't keep good records or have shell accounts there's one record to query and it's perfect if it wasn't it wouldn't work Roubini senator you're absolutely right cryptocurrencies and blockchain have been used by criminals by terrorists by human traffickers by taxi ways or just to engage in a variety of criminal activities it's correct that in principle law-enforcement authorities can go after this stuff you know the Silk Road was using Bitcoin for lots of transaction they cracked it and then they got arrested and prosecuted but of course a system that in principle is supposed to be anonymous and not just ominous at the domestic level but globally implies significant risk to enforcement Steve minuchin secretary of the Treasury said we cannot allow a Bitcoin and cryptocurrencies to become the next Swiss bank account we've spent the last 20 years at the g20 level to try to crack down on offshore financial center and now you have a tool that would allow anybody not to declare their income not to declare their world not to declare the capital gains it's not gonna be acceptable are we gonna really go and find a system so that everybody is registered and everybody has to declare their income their wealth the capital gains and the taxes were very far away from it let alone other types of criminal activity do you want to respond real quick I did want to touch on one point quick yes Steve Newton's point was that the US has pioneered the policy here that we have classified exchanges as money services businesses and require information from them he was saying we don't want the rest of the world to not follow suit his reference to Swiss banks was basically say hey Switzerland you should follow our lead all right well thank you thank you both and just you know just for reference mr. Ben Falkenberg I'm headed I'm headed to the NASCAR race in Talladega this weekend I'll make sure they're not running moonshine around the track okay about too much moonshine senator thank you thank you senator Toomey thank senator Brown thanks to both of you for for being here this is a very helpful discussion seems to me the icos have featured some incredible scams there there's some it's very obvious the volatility of Bitcoin has been breathtaking on the other hand central banks over time haven't had the greatest record of preserving the value of the median exchange that they're responsible for we've discussed the friction in the payment systems that we have now and I think FinTech is is offering fabulous new ways to minimize that friction but there will always be some friction and even if they become extremely efficient which they are the payment system will still be in a fiat currency everywhere doctor Roubini you point out that bitcoin for instance is not really a unit of account it's not a medium of exchange and it's not a store of value and I think that's true but it strike me though that those are all issues of scale anything can be a currency if it is acceptable to enough people it then it then takes on those characteristics what I think I hear you saying is that it's simply intrinsic to the nature of the underlying technology that it is fundamentally not scalable that it cannot become widely enough used to achieve those characteristics that we normally use to define a currency and that's what I'm trying to understand why is it intrinsically it unless you you disagree in that there's a different reason but I thought I understood you to be suggesting that it just intrinsically cannot be scaled is that right yes some of it is quite technical but Vitalik booter in that invented etherium as what's called an impossibility Trinity that says in blockchain you cannot have at the same time scalability the centralization and security so proof of work that is the one that bit con is based is a not scalable only five transaction per second you could say is decentralized in principle but it's not the centralized because 80% of the mining is done by six oligopolies and once is a situation of this sort centralized is not secure now there are dozens of other consensus mechanism people are working in order to make it scalable okay let me let me just I just want to explore these a couple of these things a little bit more and let me give mr. Vonn ken burgin a chance to respond first of all is Bitcoin forever limited to five transactions per second or is there any way to expand that scale and secondly does an oligopoly on mining really matter my understanding is there is ultimately a finite number of bitcoins that can be mined and does it matter who mines them thank you senator Toomey first of all five transactions per second we can do a lot more there are multiple layers being built on top of Bitcoin today that do effectively things like batch settlement so in just one or two transactions to the blockchain you could have thousands of transactions now if that sounds like we're reinventing the correspondent banking system and adding more centralized trust into it it's not quite that that's because the batch settlement can be done by a robot bitcoin is digitally native so you can have smart contracts that manipulate and batch transactions together we have a an mm machine in our office you would normally press a button and Eminem would come out we've rigged it to work with lightning Network payments which are these second level solutions such that you can paper the MM with a fee that's about point zero zero two cents an incredibly negligible fee if we can run transactions like that in a test net or in early days of a new layer we can do all kinds of transactions per second on the question of Vitalik butor ins trilemma it's not an impossibility theorem it's a trial trial Emma it is true it's hard to have scale and decentralization and integrity of the data Vitalik himself said it's not impossible it's just a problem worth striving for it's the kind of thing that American innovators and entrepreneurs should be working on very quickly Minh that there's an oligopoly on the mining it's an excellent question so it's worth asking once you have a lot of mining power what harm can you do the Bitcoin protocol is decentralized not because it distributes power but because it checks power what can a powerful person do to a weak person in the system Bitcoin pits ambition against ambition like our federalist system here in the US and what I would say is you can't do much you can't change the number of bitcoins in circulation you wouldn't be able to make that block and have it accepted by the network you can't reallocate or move other people's funds on the blockchain the worst you can do is during the time when you've leveraged massive and costly resources you can slow down the network and block transactions it's a denial-of-service attack something that all internet systems are vulnerable to even the FinTech the doctoral beanie talks about thank you very much senator Warren Thank You mr. chairman so virtual currencies are an interesting innovation that at least theoretically could provide benefits to consumers but they also at the same time could empower scammers and criminals and the challenge here I think is for us to try to figure out how to nurture the productive uses of virtual currencies while protecting consumers from scammers and other sorts of threats now one argument I often hear is that cryptocurrencies are decentralized that anyone can mine new currency unlike our current system which relies on a central bank to perform that function dr Roubini I know you're a skeptic of that claim could you just say a word about why first of all I'm in favor of digital payment systems but we can have digital payment systems without having cryptocurrencies and as I pointed out in the US in China in India in Africa in Europe there are tons of digital payment system they do billions of transactions every day they're used by billions of people at low cost so it's not a question of being in favor of only cash or digital payment system the FinTech allows you to do that no the question I'm asking that is about decentralization the claim that crypto currencies have the benefit because they are decentralized and I said you're a skeptic of their it's it's false the miners are all centralized and it's a problem because you want you can have 51% attacks and those kinds of attacks have occurred every day on smaller cryptocurrencies so you can steal the money and gone forever that dozens of such attacks and people say well if you do it on Bitcoin you're destroying Bitcoin but if you have an oligopoly what does an oligopoly do they increase the prices in their margins of profits if you look at the transaction cost in their space they've gone through the roof as a miners arriving is a short transaction the last scene they've gone up by 200% because they're using that oligopoly power to impose higher fees it's an oligopoly that's why is inefficient so let me ask you the question then about the the consequence of this this concentration that you're you see is that inherent in the cryptocurrency or is it something that government could do something about its inheritance because there are economies of scale in mining and these economies of scale that are in proof of work become worse once we get to scalable systems like proof of stake where whoever has a greater stake to begin with can do more of the mining so there is massive concentration already in proof of work people say that's not scalable we're gonna move to proof of stake the proof of stake is going to become an even more concentrated heart I'll high definition of the system you need massive mining factories all over China or Iceland to do this scale of transaction you cannot do it on a laptop that's why you need to concentration air legalism okay so you're saying it is inherent here you know these new technologies create these new opportunities but if we're not careful they can follow the same old patterns of they make the rich richer and they leave everybody else behind I want to ask about another one and we'll see if we can get these together because I want to ask dr. Van Valkenburg according to reports more than 1.1 billion dollars of cryptocurrency was stolen in the first half of 2018 why is cryptocurrency so easy to steal and what should we be thinking about to secure it so those thefts were primarily with regard to newer crypto currencies who had experienced massive price increases and were being secured by exchanges or businesses usually overseas who didn't scale their security in line with the value that was rising that was a speculative bubble I will not disagree with dr. Bini at all in that account that was irrational and it was triggered by this ICO market which is largely fraud or unregistered securities issuance which is of course not permitted so Bitcoin was not involved in in the majority of the amounts that you're talking about there it was these smaller currents killer Bitcoin it was other you know I worry though because a lot of small investors get into the virtual currency market through initial coin offerings or icos which allow companies to raise money by creating and selling these new virtual currencies and you've just described a huge bubble around one of these in 2017 companies raise more than six billion dollars using I cos a record that's been broken by April of this year so let me ask you mr. Van Valkenburg a study came out earlier this year that said that 80% of icos in 2017 or scams SEC chairman J Clayton has suggested the right approach to uncovering the scams and protecting investors is to regulate IC owes his security offerings and I just want to ask if you agree with that approach I know we're over time but if I could just permit the witness dude to answer I do agree with that approach as I said the majority of AI SEOs have either been on registered securities issuance or scams as chairman Clayton has said the SEC has made very careful and deliberate policy here I think they've done an excellent job they released a report helping people understand these things they created a website going them understand them in a visual physical way and they've brought targeted enforcement actions that I think have started to chill these markets and make them more rational that said I think you can do a token sale and comply with securities laws as you should and we're seeing the emergence of companies doing that selling only to accredited investors or and I think this will happen in the near future even doing public registration and offering tokens to shareholders but what I hear you saying at its core is that an unregulated market puts consumers at risk and what's critical is to get the right regulations in place often often our current regulation securities laws work well for the last hundred years or almost and I think they'll continue to right so in event Holland thank you thank you both for being here dr. Roubini you mentioned your support for digital payment systems and innovation and FinTech clearly has reduced inefficiencies in the payment system it is not yet succeeded in getting the fed though to move to a real-time payment system something I've been pushing hard for because the current system where it takes time still the clear cheques has really been hurting a lot of lower-income people who were living paycheck to paycheck I was pleased to see the Fed recently announced that it's going to try and accelerate this effort do you have an opinion on using innovation to get to a real-time payment system as the feds moving toward it I hope yes I'm all in favor of it and there are technology can be used to achieve that particular result in principle you know the banks have access to the balance sheet of the Fed but you have a system where every corporation or every individual has access to that balance sheet you don't need to have a blockchain for that you have it on one ledger is secured by the Fed and if you do that however you have consequences because right now the deposit net banking system are essentially form of money that's central to the payment system if you go to a central bank digital currency and you have everybody accessing that one then there'll be massive disintermediation or private deposits and then the banks have to find themselves in a different way so they'll talk about going in that direction of opening up the balance sheet of the central bank to everybody there's important consequences for the financial system the point however is that you can do all these things but you don't need blockchain or if you want nice it's not gonna be a public one where a bunch of miners in China are gonna verify the transactions our financial system that doesn't mechanism I'm not disagree with you dr. Bini I just I've just been pushing I've been disappointed the Fed is now move more quickly to implement a real-time payment system and I think that that fact is a drag on a lot of consumers while I've got you here though I do want to ask you a question of where you see the economy going because you are one of the people who predicted the 2008 financial crash you don't not only predicted it but you predicted mechanics and economic and financial forces behind it and you have written about your concern about the economy and around 2020 a concern I share and I just want to note your article of September 11th is the next financial crisis already brewing question mark where you talk about the fact that the stimulus which was the sort of tax cuts which added 1.8 trillion dollars to our debt was ill-timed that it will create a drag on the economy in a number of years and that you foresee difficult economic times ahead given that you predicted the 2008 financial crash I thought I'd take the time to get your opinion on where we're headed right now well well in brief I would say this year growth is gonna be because of the stimulus close to 3% there's gonna be less than 3% next year my concerns are about 2021 because we'll have a fiscal cliff secondly because the Fed rightly with an overheating economy has to gradually increase interest rates short rates are going to go higher longer its are going to go higher the dollars gonna strengthen a credit spreads are gonna widen that tightening of financial condition is gonna slow economic growth I worried about protection is when trade wars slowing down genomic growth and I also worried about other stagflation Airi policies like restricting migration restricting capital inflows and outflows and FDI restricting investment in the environment and not having an infrastructure plan reducing growth and increasing inflation we also know that asset prices are frothy and if there's a shock to growth there could be significant correction so those combination of factors may may lead to a stall of economic growth by 2020 well you you summarized it very well and my question to you if you could just take a moment and talk about something many of us have said is likely to happen which is when you have an economy that was already on a rapidly rising trajectory and you add to that a huge amount of debt how that creates a fiscal and crowds out private investment down the road and actually slows down the economy after the overheating period is over can you just talk about that for a second yeah briefly its first time we have a two trillion dollar fiscal stimulus in peacetime without a recession that leads to a higher and longer short-term and long-term interest rate it deletes to overheating and forces the Fed to hike more soon and faster leads to a stronger dollar and it also leads to a larger current account and trade deficit if the savings of the government reduce our trade deficits 2% of GDP is going to go towards 3 percent and therefore the protectionist pressure may increase over time so it's an ill-advised fiscal stimulus thank you I appreciate senator Cortes Master thank you thank you gentlemen for being here I would like to go back to senator Jones conversation with you when it comes to identifying sex trafficking drug trafficking money laundering and I just want some clarification mr. Van Valkenburg does Bitcoin or any similar platform have a protocol in place to detect when it's cryptocurrency is being used by individuals to facilitate sex trafficking drug trafficking or money laundering is there a protocol in place so Bitcoin is a peer-to-peer network of persons running software around the world and that software is developed itself by people around the world it's a voluntary system if you will so there's no corporate forum to set and guarantee policies across all users that said there are several intermediaries are building their businesses on top of Bitcoin just as you saw several companies build their businesses on top of the shared and open Internet back in the 90s and those businesses especially those that are based and regulated here in the US do have those policies for identifying and policing illicit use of the network and they do file suspicious activity reports and they do register with vinson which is our financial surveillance Authority so it's gonna be incumbent upon those businesses basically what you're you're saying working with law enforcement to make the to identify when they're this technology they're utilizing is engaging in illicit activity I think that's that's right senator do you agree with that dr. Rohini that's well I do agree that in the u.s. there are rules about kyc ml that are being implemented but suppose that you're involved into human trafficking and you're setting up a Bitcoin account somewhere in a jurisdiction or offshore financial centre where this K was CML rule are not being followed and then you're doing those activities using these foreign accounts and it's anonymous it's very hard to crack down on them and therefore you're not under the scope of US legislation and you have created an asset class that allows this massive level or anonymity so unless you have a global agreement first at the g20 that then covers the rest of the world that make sure that those rules are applied by everybody else you have created a massive loophole that allows terrorist traffickers tax evade or criminals to do it more easily than the past that's a major risk thank you dr. Bini yes first of all I'd just be interested in how you can use something that isn't money to evade taxes but that's a separate issue I will say that with respect to international exchanges I absolutely agree that we should have a unified global approach to ensure that there's kyc but I will disagree that if you're just transacting on the blockchain even using an account that you originally created in an overseas authority that didn't collect information that it is as dr. Rivini says anonymous it's not anonymous at all and I've spoken with several law enforcement officials and investigators who as I said enjoy doing their blockchain investigations because they can track every transaction with perfect fidelity on the blockchain very different than the international correspondent banking system where you have shell accounts and bad records and records all over at different institutions a good example of this is btc-e which was an exchange based somewhere in Eastern Europe that was being used to launder money FinCEN in combination with the DOJ brought an investigation they looked at the blockchain they found transactions all from that exchange heading to a wallet all the fee transactions they said okay this was the person running this illicit enterprise and they ultimately were able to identify based on that information and they arrested him when he was I think on holiday in Greece thank name is Alexander Vinick no I appreciate that and and the reason why I asked the question because I think it's important as we go down this path and we're looking at the use of this new technology that we continue to study it that's why senator Toomey and I introduced the fight illicit networks and detect trafficking act the bill would require the GAO to study how virtual currencies like Bitcoin and other online marketplace used by cell facilitate the financing of goods and how it is affiliated if any with illicit activity so let me move on because I'm running out of time I'm curious dr Roubini I also sit on Energy and Natural Resources we've had this conversation about the use of black blockchain technology in the energy sector and how it's gonna be a game changer for the energy sector have you studied the use of this block change blockchain technology and any other sector other than the financial sector have you looked at it in its use in the energy sector at all well I've not looked at it in the energy sector but of course people talk about using it in the case of commodities my point is that even if you use what is called blockchain technologies to do transactions say in all energy on commodities you're never gonna use a public trust less permission less peer-to-peer distributed system it doesn't make any sense so they're using a private permission we've trusted authorities that's not a blockchain is a system where you have trusted authority will verify transaction and say these sets of transactions are okay so there are sophisticated versions of databases but they're not blocked chains are not based on cryptographic concerns Megan is that light a bunch of people in China Russia authenticate your transactions no commodity exchange no commodity business is gonna light for that happening it's going to be private and permission so it's not a blockchain I think is a misnomer calling these things block chains thank you thank you thank you and that does conclude our questioning I apologize to the witnesses I had to step out I'm also a member of a couple other committees and one of them was how a markup that I had to vote out so I apologized that I was absent for part of your your answers for senators wishing to submit questions for the record those questions are due in one week on Thursday October 18 and to our witnesses we ask that you respond to those questions as quickly as you can and again thank you for being here today obviously there's there is a significant difference of opinions on these issues but these I don't think there's any disagreement that these are critical issues that we need to face and deal with with that thank you for being here today and the hearing is adjourned

24 thoughts on “Cryptocurrencies and Blockchains Senate Banking Panel Hearing, Oct 11 2018”

  1. i like nouriel he brings freshness to the field, have listened to PVV many times and he's one of the best legal insight providers in the space, but its repetitive, i welcome bringing in haters like Nouriel, so much fun to watch <3 go nouriel go

  2. The bankers Jamie Dimon. Who is married to a Jewish woman and Mr. Nouriel Roubini who is a Turkish Jewish banker and the two surely Zionists belong to the Federal Reserve Bank of New York they see the cryptocurrencies with a bad eye especially their worst nightmare THE BITCOIN they talk about it and they do not want us to use our money to buy it instead they want us to deposit our income in their banks to continue with the financial fraud of the printing of NADA bills. by “fractional reserve”.banks SCAM

  3. he said mining is controlled by oligarch lol. china and russia well i dont blame those country they adopt BTC, US have a chance BTC first miners are the Gamers in the US ( note im not a Gamer) but American are so patriot about Dollars, behind them their own government screw them look at now US is behind on technology. usdebtclock.org thats bail out money from Bama 9 trillionbank bail out, baby bush 5 trillion terrorist funding, and Clinton well the inflation wasnot bad when clinton was president but the biggest Naval reserve oil was privatized elk hill California now its run by oxy petroleum. so my question who will pay that trillion dollars your grand kids? note dont blame trump he got in it 19.9 trillion he stop more bank bail out and recently smack talk Federal reserve.Add note about ICO, ICO is created from Ethereum (ETH), ehtereum classic (ETC) yet day trader believe on this platform.ETH ETC is not a COIN its a platform to create ICO Scams like CRIPPLE XRP> you tube is wide open search how blockchain works youdonthave tobe a scientist to understand it will take you 15 minutes

  4. What a moron this money called Dr Nouriel is! His not getting it. Putting BTC in the same bucket as ICO shows how stupid and uneducated he is. He made a fool out of himself. Zero credibility if you know just a little about the scene. The biggest scam is the dollar and guess what is used by the criminals and terrorists today? you guessed it the DOLLAR. Now STFU and go back to your cave DR monkey.

  5. This clown can't even speak English…how did he get to be a professor at NYU? He's got a point about Tether, though. How much has fake Tether pumped BTC?

  6. Bitcoin can scale .
    Its called bitcoin cash,paypal level tx already soon to be more than visa.
    Get with the times..

  7. Dr. Roubini's aim is basically to have a select few people that have complete control over money. Screw him.

  8. Bitcoin requires to trust the network, more specifically the hidden miners with no ability to sue as they are accountable to no one. I fail to see how that is better than trusting a named, well-known local entity that is accountable to local laws & regulation.

    News flash to Mr Van: All transactions on Bitcoin are public. No data protection whatsoever. At the point where every participants needs to be registered his success story of Afghan coders of course breaks down. I call BS

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