Digital Currency, Bitcoin and Money-over-IP

Jeremy Allaire, Circle Internet Financial, Founder & CEO John Beccia, Circle Internet Financial, General Counsel and Chief Compliance Officer

Agenda
What is Digital Currency and why does it matter? What are the market opportunities for it? What is Bitcoin, what is its potential, how does it work, and answers to common questions What are the legal and regulatory issues surrounding Bitcoin and digital currency?

My Background
20-year Internet entrepreneur in software platforms and online services Built and led several leading public-company Internet software and online service companies (Allaire, Macromedia, Brightcove) Founded Circle earlier this year, building products and services on digital currency platforms

What are Digital Currencies and Why Now?

Many attempts since early Internet years 2008: A convergence of trends massive global adoption of the internet globalization of commerce, communications and culture Social networks and the birth of Global Identity the birth of the smartphone and global mobile platforms the global financial crisis of 2008 a crisis of trust

Crypto-Currency, Math-Based Currency, Digital Currency

All the same but Digital Currency is the right meme Crypto Roots - Built on the state-of-the-art in cryptography - Strong Libertarian idealism - But globalist in intention - Deep focus on security and privacy

What is a Math-based Currency? Math is at the center of every aspect of digital currency: - money supply is mathematically pre-determined; no way to debase currency - mining incentive system is based on escalating cost of solving complex, computer-intensive math puzzles - global general ledger is governed by a math-based system of record that is public and easily audited - math drives the encryption, security, verification and privacy mechanisms of the protocol

Explosion in Digital Currencies

Since 2009, there have been nearly 150 different digital currencies launched, collectively dubbed alt-coins, often based on forked versions of the Bitcoin open source technology.

Why is this happening now?

The International Dollar Reserve System, QE and the Triffin Dilemma Post-2008, a global crisis of confidence in large banks and central banks Global social network platforms and the emergence of global identity Explosive growth in mobile platforms and broadband platforms globally

What role could Digital Currency play?

Free market innovation and Internet technology disruption
Radically lowering the cost associated with retail payments and person to person (around the world) money transfers Improving the security and privacy used for payments, reducing fraud Lowering the cost and complexity of cross-border exchanges for both consumers and businesses Leveraging mobile infrastructure, delivering cost effective and easy to use financial products to the 2.5B mobile users who are unbanked Changing consumers experience of using money

Bitcoin: What is it and how does it work?

Bitcoin is a set of open standards and open source protocols, as well as a massive distributed network of computing power, for issuing currency, making payments and money transfers, and for the secure storage and accounting of digital currency. Bitcoin is a P2P technology that does not rely open a centralized server to function, and is built on some of the worlds most reliable cryptographic standards for security and verification functions. Bitcoin is to Money what VOIP is to Telephony and SMTP to Mail --- Money-over-IP

Printable, Offline, Paper Bitcoin

What backs the value of Bitcoin?

Free-floating exchange with fiat currencies, with value based on scarcity as well as trade utility Bitcoin is backed by the real-trade happening within ite.g. the more that Bitcoin is used the more valuable it becomes Over time, the value of Bitcoin will be backed by the trade value of the digital economy

What is Bitcoin Mining?

Incentive system for operating computers that process and confirm transactions as well as secure the network Miners earn a bounty in newly issued bitcoin if they successfully find and verify a block of transactions Dramatic evolution in the computing and processing power of the Bitcoin network over the past 12 months

How does Bitcoin technology evolve?

Open source and open standards technology project Thousands of developers actively working on enhancements, bug fixes, etc. Examples: active work happening around scalability, wallet security, payment requests and receipts, and recurring payments support This is similar to how virtually every Internet technology that we use daily has developed and matured

Market Opportunities for Bitcoin

Reduce the costs of payments and money transfers globally Increase the ease of use of digital payments Enhance security and privacy of financial transactions; reduce fraud Radically reduce the cost and friction of cross-border payments Create new options for the global un/underbanked Enable cost-effective micro-transactions and payments

LEGAL AND REGULATORY ISSUES

Recent Events
5/15/13 Operations of largest Bitcoin exchange Mt. Gox (Japan based) suspended by U.S. government for failing to register as a MSB 5/28/13 - NY U.S. Attorney charged Liberty Reserve (a large digital currency company) with running a $6 billion money laundering scheme (Dept. of the Treasury also named them as a financial institution of primary money laundering concern under Section 311 of PATRIOT Act) 8/7/13 SEC action against a Texas man for conducting alleged Bitcoin Ponzi Scheme through a hedge fund (Federal judge ruled that Bitcoin is a currency and declared that related investment funds fall under U.S. securities laws)

Recent Events
8/12/13 NY Dept. of Financial Services issued subpoenas against Bitcoin firms to further investigate the related risks 10/2/13 - FBI shut down the illicit website Silk Road and seized millions of dollars worth of Bitcoin (website founder was charged with narcotics trafficking conspiracy, computer hacking and money laundering) 10/29/13 UK based exchange Coinfloor launches service, but bans U.S. customers due to regulatory concerns

What are the US Regulatory Issues for Bitcoin?

Core issues focused on KYC/AML/OFAC requirements for Bitcoin to be trusted and secure Additional concerns regarding privacy/information security, consumer protection, taxation and securities Bitcoin likely to be legal money and be regulated under all relevant bank and non-bank laws, and taxable income

Interested Parties
Federal Banking Regulators and Department of Justice Money laundering concerns, impact of Bitcoin on payment system and central banker issues Consumer Financial Protection Bureau Jurisdiction over an consumer financial product or service as defined (may apply to Bitcoin wallets and exchanges) State Banking Regulators and State Attorneys General Money transmitter and consumer protection concerns Internal Revenue Service IRS has not issued rules regarding Bitcoin (IRS and FASB guidance needed) Securities and Exchange Commission and CFTC Question of whether Bitcoin is a security or commodity Congress Senate Committee on Homeland Security and Government Affairs and Senate Banking have expressed interest in hearings

FinCEN Guidance
On 3/18/13, FinCEN issued guidance regarding the application MSB regulations to virtual currencies FinCEN defines virtual currency as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency The guidance addresses only convertible virtual currency, which either has an equivalent value in real currency or acts as a substitute for real currency Users of virtual currency (i.e., individuals) are not MSBs, but exchangers and administrators of virtual currency are considered MSBs

Global Regulatory Considerations

EU and UK - Bitcoin is currently unregulated See European Central Bank publication on Virtual Currency Schemes (October 2012) no regulation due to lack of widespread use Germany adopting a progressive and welcoming posture to Bitcoin China taking a hands-off approach (for now) Posture unclear in currency-distressed markets (Cyprus, Argentina, etc.) Bitcoin has gained popularity in countries that have high inflation, taxes on deposits and strict exchange currency controls Critical to establish International Standards for AML and OFAC Future potential role for BIS and IMF

Impact of Current Environment On Circle

FinCEN MSB registration along with money transmitter applications in all 50 states (and various international locations, as needed) Development of a robust AML and Compliance Program, which includes strong KYC requirements, transaction monitoring and regulatory reporting Ongoing monitoring of rapidly changing legal and regulatory environment Dialogue with key stakeholders (regulators, lawmakers, etc.) Coordination with industry groups such as the Bitcoin Foundation and the Digital Asset Transfer Authority (DATA)

Digital Currency, Bitcoin and Money-over-IP

Jeremy Allaire, Circle, Founder & CEO