Yesterday, the Senate Committee on Homeland Security and Governmental Affairs held a hearing on the potential risks, threats and promises of virtual currencies. Later today, a Senate Banking Committee will hold a similar hearing. The focus is on Bitcoin, a virtual currency that operates completely outside of U.S. financial regulations and protections. Critics argue the current lack of oversight offers anonymity to those hoping to skirt U.S. laws, but others say it’s a frontier in electronic commerce with important consumer benefits. Diane and her guests talk about Bitcoin and the future of virtual currencies.


  • Jennifer Shasky Calvery Director, Financial Crimes Enforcement Network, U.S. Treasury Department
  • James Freis Attorney, Cleary, Gottleib, Steen and Hamilton specializing in financial regulatory and enforcement issues.
  • Jamila Trindle Senior reporter, Foreign Policy Magazine
  • Jon Matonis Executive director, Bitcoin Foundation
  • Francois Velde Senior economist, Federal Reserve Bank of Chicago

What Is Bitcoin?


  • 10:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Bitcoin is a virtual currency launched in 2009. It's attracting some high-profile attention this week. Two Senate committees are holding hearings on its potential use and misuse. Joining me to talk about how Bitcoin works and why some believe exchanges for the currency should follow the same rules as other financial institutions: Jennifer Shasky Calvery of the U.S. Department of Treasury, James Freis, an attorney in private practice, Jamila Trindle of Foreign Policy Magazine.

  • 10:07:36

    MS. DIANE REHMJoining us by phone from Zurich, Jon Matonis of the Bitcoin Foundation, and, from a studio at WBEZ in Chicago, Francois Velde of the Federal Reserve Bank of Chicago. I know you'll want to know more, as I do, about Bitcoin. So do join us, 800-433-8850. Send us your email to Follow us on Facebook or send us a tweet. Hello and welcome to all of you.

  • 10:08:16


  • 10:08:16

    MS. JAMILA TRINDLEThank you.

  • 10:08:17

    MR. JAMES FREISGreat to be here.

  • 10:08:17

    MR. FRANCOIS VELDEThank you.

  • 10:08:19

    REHMAnd, Francois Velde, since you are the person who has written a Chicago Fed letter titled, "Bitcoin: A Primer," I'm going to start with you. I know absolutely nothing about Bitcoin. Please explain what it is and how it's used.

  • 10:08:46

    VELDEOK. I'll try to do it as simply as I can.

  • 10:08:49


  • 10:08:50

    VELDEIt's rather complicated and involved, but -- so let's think about designing a digital currency. And by currency, I mean something that's going to replace dollar bills. So dollar bills are physical objects that we exchange to make purchases. We're going to try to replace it with a digital currency that is essentially a computer file.

  • 10:09:11

    VELDESo we're going to try to use a computer file to buy and sell goods and services. Now, there's lots of problems with using a computer file, but first we're going to want to keep track of them. So let's say they had a serial number. Let's even say that the content of the computer file is its serial number. So that's a start.

  • 10:09:30

    VELDENow we can differentiate different units. But, of course, the problem with -- one problem with a computer file is I do not know whether you're the legitimate owner of it. If you hand me a dollar bill, you know, by definition, you own the dollar bill. Another big problem obviously is that a computer file can be copied as many times as one wants.

  • 10:09:49

    VELDEIt's as if everybody had their own Xerox machine that could reproduce dollar bills perfectly. That would be a serious problem. So we have to design the system to take care of these issues. So one idea is to -- let's suppose that I know for sure that you are the legitimate owner of that Bitcoin. You want to transfer it to me.

  • 10:10:11

    VELDEWe're going to modify the serial number to indicate that the transaction has taken place. So in effect what the serial number is is the list of all the transactions through which that Bitcoin has gone or the list of all its users from the very first moment it was created and every time it changed hand and at what time it changed hands and to whom it passed.

  • 10:10:34

    VELDESo that's what the serial number of the Bitcoin is. So what is a transaction? A transaction is modifying that serial number through a process between your computer and my computer. Now, there's still a problem of verifying whether that long list of transactions, that serial number is correct, has not been falsified somehow.

  • 10:10:57

    VELDESo we're going to do that by comparing it with a general list of all the transactions where all the transactions of all Bitcoins have been recorded. Now, one way we could do this is to entrust that general ledger to a single authority, a government authority or a bank or somebody, and would just go to that authority and ask them, please verify that the -- that this chain of transactions is accurate, is a true one. The Bitcoin idea is to move away from a central authority. There is various possible reasons for that.

  • 10:11:29


  • 10:11:31

    VELDEBut to completely avoid having a single authority in charge, rather we're going to have lots and lots and lots of people. In fact, anybody can join in the process of authentication, of verifying. Now, that of course creates its own problem.

  • 10:11:44

    REHMYes, indeed.

  • 10:11:45

    VELDEIf anybody can add a transaction to the general ledger -- think of there's many, many copies of that general ledger that are floating around the Internet. If anybody can add to it, then it's going to be falsified immediately. And we need a way to coordinate. So we're going to have to make it difficult to modify that ledger.

  • 10:12:04

    VELDEWe're going to make it costly. And the way to do this is, in order to add a set of new transactions to that general ledger, a computer is going to have it to solve a complicated mathematical problem that involves the existing list of transactions and the new block of transactions. Essentially, you take those as inputs.

  • 10:12:26

    VELDEAnd there's a complicated function that's predetermined, that's part of the code. It has an output and number, and you're trying to find the lowest possible value of that number. Or you have -- you need to find a value of that number below a set level of difficulty. And I'll come back to that difficulty.

  • 10:12:42

    REHMAnd tell me what a Bitcoin is worth today.

  • 10:12:51

    VELDEI would have to check because it changes so quickly. That's part of the problem with Bitcoin. But I think, as of the last few days, it was on the order of 600, $700.

  • 10:13:00

    REHMAll right.

  • 10:13:01

    VELDENow, Bitcoins are divisible to the, I think, ten-millionth or hundred-millionth part, so the fact that one Bitcoin is worth so much would not necessarily make a difficulty using small transactions. It's easily divisible.

  • 10:13:14

    REHMAll right. I'm going to stop you right there, Francois Velde. He is senior economist at the Federal Reserve Bank in Chicago. Jennifer Shasky Calvery, I know you testified yesterday concerned about virtual currencies and criminal activity. Francois has just given us an inkling of what that's all about. Explain what it is from your perspective and why there is concern about criminal activity.

  • 10:13:54

    CALVERYSure. So I look at it from the perspective of money laundering and terrorist finance. I'm the director of the Financial Crimes Enforcement Network. And our job is to prevent -- or rather to protect the U.S. financial system from illicit actors who would launder money through the U.S. financial system or move money for the purposes of terrorism.

  • 10:14:15

    CALVERYAnd so any time we look at a payment system through which value can transfer and it's not transparent or not regulated, we worry that perhaps illicit actors might take advantage of that. So any type of payment system, any financial institution is susceptible to being exploited by illicit actors. However, we take steps through our regulation to protect them.

  • 10:14:41

    CALVERYAnd so with the advent of a new payment system, Bitcoin and these types of virtual currency, we worry that perhaps they're not adequately being protected from some of those illicit actors. And so we have thought about what are -- you know, what are some of the aspects of virtual currency that give us concern?

  • 10:15:03

    CALVERYAnd some of them are -- some of the attributes that might make a bad actor want to use virtual currency might also want to make it a completely legitimate person using virtual currency. So it could be things like it provides anonymity. It's easy to navigate. I might have low fees associated with it. It's accessible globally with a simple Internet connection.

  • 10:15:26

    CALVERYIt doesn't typically have a transaction limit. It's generally secure in terms of moving value. And then from an illicit actor's standpoint, it provides a loophole from anti-money laundering regulatory safeguards in most countries around the world.

  • 10:15:43

    REHMJennifer Shasky Calvery, she's director of the Financial Crimes Enforcement Network at the U.S. Department of Treasury. Jim Freis, we once had gold. We once had coins. We once had dollars. What's the push toward Bitcoin now?

  • 10:16:11

    FREISWell, we still have those things. But basically the question is, why are those things not sufficient? And all of those things that you mentioned, those physical currencies require persons to exchange that value in person. That's not the way people shop anymore. The advent of purchasing over the Internet -- and even more of them when we think of marketplaces, like in eBay, that allow people to buy and sell things around the world.

  • 10:16:38

    FREISThere's a need to introduce and move value across borders. One unique aspect of Bitcoin is, because it's not denominated in a single currency -- you talk about Bitcoins in any jurisdiction around the world, but it also allows for near instantaneous transmission of the value. You don't have to wait for literally the check to clear. You don't have to make sure that you're funding a transaction or settling a transaction, so...

  • 10:17:10

    REHMAnd that is James Freis. He's an attorney specializing in financial regulatory and enforcement issues. And, Jamila, to you, Jamila Trindle, this is precisely why people are concerned about Bitcoin right now. Is it not?

  • 10:17:35

    TRINDLEIt is. There is concern from the federal level, from federal regulators, from Treasury, from the Securities and Exchange Commission, but there's also state regulators that are concerned. Benjamin Lawsky, who's the top New York financial regulator, has issued subpoenas. He's investigating whether Bitcoin companies are complying with current regulations and whether there needs to be further regulation.

  • 10:18:02

    TRINDLEAnd last week, he introduced the idea of a BitLicense, which would license particular Bitcoin companies as having met certain -- not just money laundering regulations, but also consumer protections because that is a big concern right now. There is -- there are cases of theft and fraud. And so protecting the consumer is another part of it.

  • 10:18:26

    REHMAnd Jamila Trindle is a reporter for Foreign Policy Magazine. When we come back, you'll meet Jon Matonis. He is executive director of the Bitcoin Foundation. Short break here. I'll be right back.

  • 10:19:59

    REHMAnd welcome back. We're talking in this hour about the emergence and the growth of Bitcoin, something that many of us have yet to experience. But we've got lots of people here who know a great deal about it, one of whom is Jon Matonis. He joins us from Zurich. Jon Matonis, tell us what we know about the entities who accept Bitcoins as payment and why.

  • 10:20:40

    MR. JON MATONISWell, we're seeing, first of all, that Bitcoin is not just a U.S. phenomenon. We're seeing it as a global payment phenomenon now. And in terms of the merchants that accept Bitcoin, it's in the tens of thousands, and it includes some of the merchants such as the ones that are at processors at BitPay. BitPay currently has over 13,000 "legitimate" merchants that are accepting and processing in Bitcoin.

  • 10:21:13

    MR. JON MATONISIt's attractive to merchants, number one, because it immediately opens up their customer base -- their potential customer base to a worldwide audience. The major processing networks, such as Visa, MasterCard and PayPal, they exclude almost 60-plus countries around the world, which would make them not available as potential customers to a merchant. When a merchant can turn on Bitcoin and begin accepting in Bitcoin, they broaden out their potential customer base. That's an obvious easy step for them.

  • 10:21:50

    REHMBut now...

  • 10:21:50

    MATONISThe other thing is that...

  • 10:21:51

    REHM...let me ask you a question, Jon. Isn't there some concern about online gamblers using Bitcoin as payment?

  • 10:22:04

    MATONISWell, that would be regulated by the jurisdiction that the potential online gamblers are located in and also where the gaming operators are located. So that would, you know, currently fall under the same regulations for the national fiat currencies being used in a gambling casino. There are some movements now for the major gaming operators to start accepting Bitcoin, but they're already in a highly regulated environment.

  • 10:22:32

    REHMDo you believe that to be true, Jennifer, that they're in a highly regulated environment, or are they moving outside those regulations?

  • 10:22:46

    CALVERYI don't believe that regulation has yet caught up globally with the advent of virtual currency. At this point in the United States at the federal level, we do have anti-money laundering regulations in place. Those were issued by FinCEN, and we feel fairly comfortable with the coverage that we have of virtual currency here in the United States. However, as I talk to my colleagues around the globe, they're still trying to understand what virtual currency is as our...

  • 10:23:13

    REHMJust as I am.

  • 10:23:14

    CALVERYYes. I think our earlier caller just emphasized how complicated it is. So they're trying to understand what it is. And should it be regulated? What dangers does it pose? But at the end of the day, I think we will find out that all countries have an interest in protecting their financial systems from illicit actors, from collecting taxes. They have an interest in protecting consumers from fraud and protecting investors. And so, as this payment system develops, if it does indeed develop globally, I think we'll start to see the regulatory field get filled.

  • 10:23:48

    REHMGo ahead, Jamila.

  • 10:23:49

    TRINDLEI think that's a big question still is if -- I think there's a lot of Bitcoin enthusiasts who are really interested in the idea that this could be -- could bring a lot more people into the financial system. But there is still a big question as to whether once you put the regulatory protections in place to protect consumers, whether it still remains the incredibly inexpensive quick transactions that -- whether it continues to have all of the virtues that it supposedly has now.

  • 10:24:25

    REHMSo you're saying that right now it's in its very early stages, so people are interested and using it. But once the regulations tighten, it may not be quite as useable.

  • 10:24:44

    TRINDLEWell, it will still be -- it could be more useable in some ways, but it will be not necessarily as inexpensive. It will be just as intermediated sort of as running through a bank because a bank needs to have all of these protections. They need to make sure you're not laundering money. They need to make sure that, you know, if you're buying something, that person is going to send you whatever you bought online, for instance.

  • 10:25:06

    TRINDLEOne of the issues with Bitcoin is that it's not reversible. So if you buy -- like, if you have a credit card and you buy something online and the person never sends you anything, you can call your credit card company and get that transaction reversed.

  • 10:25:19

    REHMAll right. And suppose you purchase something with Bitcoin and don't like what you get. Isn't there a problem sending it back?

  • 10:25:31

    TRINDLEThere is. And right now -- I mean, there are companies -- there are startups who are creating this sort of infrastructure over top of the Bitcoin that will allow you to maybe reverse a transaction or to hold the Bitcoin in a separate account until you get what it is that you bought so that you can make sure that you can actually have safe transactions.

  • 10:25:52

    TRINDLEBut whether -- those things are still being developed, and they're still -- they're not quite there yet. So having a safe place to keep your Bitcoin, making sure the transaction is safe -- all of these things that we take for granted when we use a conventional bank haven't yet been fully developed in the Bitcoin world.

  • 10:26:09

    REHMJon Matonis, explain the community that has really grown up around Bitcoins beyond those who are using them to buy and sell.

  • 10:26:25

    MATONISWell, definitely, I'd be happy to do that. In addition to just transactions with merchants to purchase stuff, I would say more importantly it's the P-to-P transactions that individuals and Bitcoin users appreciate the most. That includes sending money to your children who might be attending school overseas or to relatives for a gift or a reimbursement, migrant workers in Minneapolis, for instance, who need to send money back home to Africa or to Asia. Those are the P-to-P, person-to-person transactions, that tend to get neglected.

  • 10:27:01

    MATONISThe excitement that you're seeing around Bitcoin, however, it comes from many different areas. And it's contextual in nature. So the people in the United States might not see the same benefits that someone, for instance, in Argentina might see. Argentina's going through a very difficult monetary crisis, exploding inflation, and Bitcoin to them offers a predictable and fixed supply money system -- monetary system. So they don't have to worry about the debasement of the currency.

  • 10:27:32

    MATONISThe Bitcoin is also counterfeit-proof. It gives people peace of mind from bank mismanagement, political instability. People in the U.S., again, might not be so concerned about that yet. But if you look at the recent episode in Cyprus with the deposit levy, the individuals in Cyprus should be very concerned about that. And the fact that Bitcoin is able to operate without a third party intermediary gives them that peace of mind.

  • 10:28:03

    REHMFrancois, I wonder how concerned you are about the rapid growth of Bitcoin.

  • 10:28:16

    VELDEWell, I should preface my remarks by saying that, although I work for the Federal Reserve Bank of Chicago, I don't represent the views of the Fed on this subject at all. So I'm just an interested observer.

  • 10:28:26

    REHMI understand.

  • 10:28:26

    VELDEI think this currency -- this is an extraordinary experiment in creating a fiduciary currency that is digital from scratch. So in that sense I'm not concerned or unconcerned or enthusiastic. As I say, I'm really an observer. What's really interesting to me is the fact that it's not merely a payment system. It's not a way to transfer dollars or euros or yens or whatever from me to my children or from me to a merchant, but it is in and of itself a currency. It's denominated in Bitcoins. The object -- or the conceptual object, if you want, the file that I'm transferring is a Bitcoin, not a dollar.

  • 10:29:09

    VELDEAnd then there are markets where I can exchange Bitcoins for dollars or euros or yens or whatever. But one feature that's very interesting about this system is the fact that, as Jon mentioned, there is a fixed supply at any point in time of those units. And the Bitcoin protocol itself governs very strictly how many of these units are created over time to reward the computers that provide the authentication or verification that I've described. And that's really fascinating.

  • 10:29:37

    REHMJim Freis, why is this picking up in popularity so quickly?

  • 10:29:46

    FREISI think one part is the coolness factor of it.

  • 10:29:49

    REHMThe coolness factor.

  • 10:29:51

    FREISFrankly, it is driven by aspects of the IT industry. And one of the reasons why Bitcoin has been so successful is because it's an open source model. It's not something that someone has a patented technology and you need to go back to that licensing authority. It allows all the participants to see the coding, as Francois mentioned, in terms of the change.

  • 10:30:16

    REHMSo explain that. So if I purchase something or if I have a Bitcoin, how does it move from me to you with identification?

  • 10:30:37

    VELDEEssentially think of it in the context of an email transaction.

  • 10:30:41


  • 10:30:42

    FREISRight. Where you're sending from your digital wallet, right, so basically your account. And then this chain, which as Francois mentioned, includes the chain before you, right. The other person receives it, and they can see online to track that you got it from me, you got it from other persons, and made sure that it's not -- I didn't send you the same copy of what I sent to someone else.

  • 10:31:07

    REHMSo it's not phony.

  • 10:31:10

    FREISSo that it's not phony, yes. And that's what we were talking about before, about the lack of counterfeiting ability for it. You can't copy it, right. You can verify back that I had it from someone before me who had it from someone before them.

  • 10:31:23


  • 10:31:24

    TRINDLEAnother big driver of interest in it, which is important to mention, is just investment -- speculative investment. They're analysts and researchers. And Francois has looked at this in his research as well, is that a lot of people are just buying and holding it because they think it will gain value in the future.

  • 10:31:41

    REHMSo -- but we don't know if it's even going to stay around.

  • 10:31:45

    TRINDLEWell, we know that, at the beginning of the year, it was trading at something like 12 or $13. And now it's trading at $700. But, as Francois has said in his research and others have pointed out, this volatility actually may make it harder for people to use as an actual currency. For instance, if I wanted to -- if I owed you some money -- I was going to send you some money.

  • 10:32:08

    TRINDLEAnd either I could send you dollars, or I could send you Bitcoins. If I sent you dollars, you would know that -- we would know that in a week it would be worth more or less the same amount. If I had sent you Bitcoin a week ago, it would be worth twice as much today as it was then. And in two weeks, we don't know what it'll be worth then.

  • 10:32:25

    REHMBut, on the other hand, isn't this the way people speculate, for example, about gold? Isn't that the same thing driving up the price of gold? Explain that.

  • 10:32:45

    CALVERYSo I don't know if I agree that I would quite call it a currency yet. I think maybe a better way of thinking of Bitcoin is as a payment system, as one aspect of it.

  • 10:32:53

    REHMA payment system.

  • 10:32:55

    CALVERYA means to transfer value from one place to another. It's also a place to store value. So that's where it's like gold. You can hold it, and you're storing value. There's volatility behind it just like you might have with gold, but you can hold onto it as an investment. And then whether it's actually a currency, we certainly haven't opined on that at FinCEN or Treasury.

  • 10:33:16


  • 10:33:19

    CALVERYBut what we have done is have regulations that are broad enough to encompass it. So we talk about other value that substitutes for currency.

  • 10:33:27

    REHMAnd you're listening to "The Diane Rehm Show." Jim, you wanted to add something.

  • 10:33:33

    FREISJust one thing that makes Bitcoin very different from other things, like gold. Gold has intrinsic value. It can be used in electronics industry. It can be used for jewelry. A dollar bill, just as it says on the very front, is legal tender.

  • 10:33:45

    REHMIs a dollar bill.

  • 10:33:47

    FREISSo basically if I owe you money and I throw dollar bills at you, then I paid that debt. With respect to a Bitcoin, it's a type of an IOU. It's only because you want to accept it. And that's what's so critical about Bitcoin or other aspects. For instance, even a PayPal, you can fund your account at PayPal. You pay in from your checking account. You pay in from a credit card. Similar with respect to Bitcoins. You can mine them, but for most people you buy them through an exchanger. And then you also have the ability to sell them out.

  • 10:34:20

    FREISSo if my business accepts Bitcoins, what do I do with my suppliers? What do I do with my employees? Will they accept Bitcoins as payment? Some will. But if they don't, I have to find a buyer to cash in those Bitcoins to get dollars. So that's why Bitcoin is not yet to the stage where it's gone outside of this small community. And the more that you have speculators that pull big coins out of circulation, hold them under the mattress, that actually is part of what's driving up the value.

  • 10:34:49

    REHMAll right. I'm going to open the phones because our listeners are perfect examples of people who want to know more. First to Brian in Alexandria, Va. You're on the air.

  • 10:35:08

    BRIANGood morning, Diane. Thanks for taking my call.

  • 10:35:09


  • 10:35:10

    BRIANI consider myself a pretty just typical guy. I mean, I use the Internet for a lot of things. I've bought many, many goods and services over the years just through standard transactions using a credit card system. I have never had a problem with that. Everything that you've described this morning when I heard about this sounds so much more complicated and involved. Why in the world would someone use this system?

  • 10:35:33

    BRIANIf I want to buy something right now, I just use a credit card. I put in the number and buy it. Why in the world -- what are the advantages of this? Why would someone use this system versus just for normal goods and services? It sounds like there's sort of banking and investment and other stuff going on that doesn't involve me. But if I want to buy something from, a shirt, why would I -- or any other merchant, what advantages are there to Bitcoin versus just putting it on my Visa?

  • 10:36:00

    REHMOK. Let's ask Jon Matonis.

  • 10:36:03

    MATONISRight, right. Well, for certain things like a washing machine or a television, you may want some of the chargeback protections that come with that and come with using a Visa or MasterCard. So it would be appropriate in those environments. Bitcoin is not intended to replace every single other type of payment method.

  • 10:36:25

    MATONISWhere it has advantages, however, is in the online sphere, certain places where either credit cards are not accepted, where credit card payments may have been blocked, for instance, like a politically incorrect donation site. For instance, WikiLeaks experienced that. There are also applications that are international where a credit card or a wire transfer would take an inordinate amount of time to clear and process, whereas with Bitcoin you can press authorization clearing and settlement all into the same point in time.

  • 10:37:05

    REHMAll right. I'm going to follow up on that when we come back. That was Jon Matonis. He's executive director of the Bitcoin Foundation. We'll take a short break here, answer more of your questions when we come back.

  • 10:39:57

    REHMAnd welcome back. We're delving into what is Bitcoin, how it's used, how transactions are carried out. During the break, I used a hypothetical situation. Suppose a foreign person sent me a check for, say, $10,000. And for some reason that check was held up by the Fed, and I didn't even know it. Now, suppose that same person had sent me a Bitcoin worth $10,000, what would happen?

  • 10:40:49

    CALVERYWell, you would have the Bitcoin in your account, on average, about 10 minutes later after it was sent.

  • 10:40:54

    REHMThe Bitcoin would be in my account worth $10,000.

  • 10:41:00


  • 10:41:00

    REHMBut then how do I get $10,000 from that Bitcoin.

  • 10:41:06

    CALVERYWell, that's the rub. Now you need to find someone who's willing to buy those Bitcoins from you and give you $10,000 in cash. So those are sometimes exchangers. And sometimes you can do it online. Sometimes you can't. And it's all going to depend on demand.

  • 10:41:23

    REHMAnd what about my bank? Is my bank going to participate, Jamila?

  • 10:41:30

    TRINDLEYour bank is probably not yet accepting Bitcoin. And most of the largest exchanges are actually not in the U.S. So you would have to go to an exchange probably in Japan or in China or in Russia to find someone to exchange that Bitcoin into dollars.

  • 10:41:47

    REHMThat sounds very complicated. Jon Matonis, go ahead.

  • 10:41:51

    MATONISYes. I'm glad that you brought this up, Diane, because I had recently been studying this issue. The Foundation's been studying this issue. And we're looking at approximately less than 2 percent of all Bitcoin trading volume done in the United States right now. So, unfortunately, you would probably have a very difficult time locating a bank that was willing to exchange that much in Bitcoin into your bank, at least in a lump-sum amount. And this is a result of two to three years of what I refer to as a chilling effect on the banks.

  • 10:42:28

    MATONISAnd I don't necessarily blame the government regulators directly because the banks are actually the ones who are making the decision to not always do business with Bitcoin companies. And the reason is because of this chilling effect of where they're unsure of how they will be treated by the regulators, even if they comply with all of the AML regulations and the KYC, Know Your Customer, guidelines.

  • 10:42:55

    REHMNow, here's an email from Rita in Cincinnati -- first, one from Bernadette: "How do you acquire Bitcoins? Are they for sale and where?" And then following up, from Rita: "In the process of initially obtaining a Bitcoin, I must use ordinary money, essentially a credit card, to buy it. Where does that money go in this system?" Francois?

  • 10:43:38

    VELDEWell, as Jennifer said earlier, it is probably indeed too early to call it currency if you define currency as a generally accepted medium of exchange. So right now you can maybe think of Bitcoin as coexisting alongside the main currency that we all use. So it is definitely the case that, if you want to acquire a Bitcoin, at present you're going to have to expend dollars or Euros or Yens or wherever you might be based in order to get one. Then the question of where the money goes, well, it goes to the person who sold you the Bitcoin.

  • 10:44:13

    REHMBut who is selling these Bitcoins?

  • 10:44:17

    VELDEGood question. The system does not provide anonymity, but it provides pseudonymity. Transactions are identified, but they're identified by digital wallets. It's the wallet that transacts with another wallet. Who actually owns the wallet is rather difficult to find out. It's possible, but it's not very easy to do so. So it's going to be…

  • 10:44:40

    REHMJennifer -- I'm sorry. Go ahead, Francois.

  • 10:44:45

    VELDENo, that's fine. That's fine.

  • 10:44:46

    REHMOK. Jennifer?

  • 10:44:47

    CALVERYWe have already heard at the Department of Treasury, from some of our colleagues abroad, of cases where these exchangers have run off with the money. Someone provides them the Bitcoin. They don't, in fact -- or I'm sorry, they provide them U.S. dollars, for example, they don't provide any Bitcoin, and they disappear. So that is one of the difficulties, I think, that the Bitcoin community is still working through.

  • 10:45:13

    REHMOK. And then David writes, "Whoa, how about backing up and explaining how Bitcoins get their value? Why couldn't someone figure out to do this at the start of the show? I'll bet 99 percent of your audience doesn't know the answer to the question, and the entire conversation is sort of worthless without having this understanding." Jennifer?

  • 10:45:44

    CALVERYWell, the value comes from what people are willing to pay for it. There is nothing backing it up. I think Jim mentioned earlier that it's unlike gold, which actually has some intrinsic value in and of itself. So it is only as good as the demand.

  • 10:46:00

    REHMAll right. I'm going to go now to Shawn in Tampa, Fla. You're on the air.

  • 10:46:08

    SHAWNHey, a huge fan. Thanks for taking my call.

  • 10:46:10


  • 10:46:12

    SHAWNThat was a perfect lead in. I feel so far that the panel has missed a larger point, that this is basically the triumphant story of capitalism. We've completely removed a system from gold or even currency that's based on a government to just an idea of capitalism. I mean, capitalism has become so recognized and accepted over the world that people believe in it, and they believe in Bitcoins that are based on nothing.

  • 10:46:39

    REHMFrancois, would you agree?

  • 10:46:45

    VELDECapitalism has existed for a long time, but it's always had some kind of currency that was part of it. And history shows us that, although there are examples of private currencies at various points in time, generally speaking the unit of account and the medium exchange have been provided -- or defined at the minimum -- by government. So I'm not quite sure that I would be willing to equate the concept of a privately-issued fiduciary currency with idea of capitalism itself.

  • 10:47:17

    REHMJon, do you want to comment?

  • 10:47:20

    MATONISYeah, I do. I just want to comment on the intrinsic value point that a few people were making because if you strip away the monetary exchange value from gold, you're probably left with only 5 percent being intrinsic value for gold and jewelry and electronics. So Bitcoin makes its market in a 24-hour, seven day a week, free-floating exchange, and it's based on mathematics and cryptography.

  • 10:47:48

    MATONISSo, just as gold is based on chemical properties, Bitcoin is based on mathematical properties. And if it weren't for the legal tender nature of fiat paper currency, then, you know, that intrinsic value would be the paper it's printed on.

  • 10:48:05

    REHMAll right. To Russ in San Antonio, Texas. Hi there.

  • 10:48:11

    RUSSHi. Good morning, Diane.

  • 10:48:13


  • 10:48:14

    RUSSThanks for the subject, Bitcoin. I'm very fascinated by it, and I think a lot of the beauty of it doesn't lie in the ability to exchange it for dollars but in the development of it. And if your guests could comment on the ability of Bitcoin to operate as a monetary system outside of -- influence and corporate influence that can happen in our money supply.

  • 10:48:38


  • 10:48:39

    CALVERYSure. Assuming that over time the infrastructure is built up such that someone could live their life just using Bitcoin to be able to buy the goods and services that one needs to live a life, at that point, it would be a fairly well-developed payment system. But at that point you're also going to have the interests of the different countries, I think, trump.

  • 10:49:07

    CALVERYSo the interest in collecting taxes, the interest in having a stable economy, the interest in protecting consumers and investors and having illicit actors outside of the payment system, all those interests are going to come to the fore. And so the idea that it will be able to exist outside of the regulatory scope of governments here in the United States and abroad, I think, is an idea that will not be reached if it truly takes off.

  • 10:49:34


  • 10:49:35

    TRINDLEAnd one would have to imagine there would also be new corporate influences that would come to dominate or come to be powerful in this new Bitcoin sphere. But I think, going back to the beginning for a second, this idea was, it seems, borne at the time out of the financial crisis.

  • 10:49:52

    TRINDLESo as Jon mentioned earlier, I think in some ways the instability of a currency and some people see, for instance, somebody mentioned Cyprus. You know, if there's great instability, maybe people could use this as sort of an alternate currency in a way that could sort of be a backup to the original system. I think some people see it as having that function.

  • 10:50:18


  • 10:50:19

    FREISThat's definitely the case. In time of crisis, that's when people put cash under the mattress because they worry about the bank failing. That's when the price of gold goes up because you worry about inflation. So it has certainly been the case in countries -- and it was mentioned before, Argentina, which has gone through currency crisis, used to have backing of the dollar -- that there is an interest in getting access to value that they can then realize offshore.

  • 10:50:48

    FREISSo that is something that the Cyprus, the Argentina, other examples have come up, even China, with its currency control systems. But that still is a niche market. And there still is an interest in the ability to use that, to cash it in, to use your example, to get your $10,000 out. If that went away, if people stopped being interested in accepting it, then I think we'd see the reverse of the value of the Bitcoins, that it would start falling.

  • 10:51:14


  • 10:51:16

    MATONISOK. Well, the monetary policy implications and the physical policy implications are some of the most interesting facets of Bitcoin as the Bitcoin economy matures. There are so many things that we can't predict. One of them, for instance, would be a governmental shift from taxation of income more to a reliance on a consumption-based tax.

  • 10:51:37

    MATONISThat could be something that evolves. It's not Bitcoin that has to change. It's the nature of the political institutions that will probably have to change. And I'll give you another example. When it comes to raising money at a larger national level, countries and governments won't be able to simply print their way into prosperity and to print their way into spending on wars. They'll actually have to do it the old-fashioned way through taxes. Now, taxes won't go away, but the types of taxes will certainly change.

  • 10:52:11

    FREISI don't really see the analogy there. We certainly already do have consumption taxes, sales taxes. One of the biggest questions that even the Congress is struggling with now is questions of taxing over the Internet and distributing then to a state level. Other countries have found ways to do that, but…

  • 10:52:31

    MATONISWell, there's not a national sales tax. In the U.S., there's a state-by-state sales tax. And the reliance of federal revenue is on the income tax, at a corporate and individual level.

  • 10:52:42

    FREISCertainly, but partly the aspect there is the arbitrage across jurisdictional borders. And this is something, again, that is a positive aspect that people are using Bitcoins for. As long as you are, for instance, an app developer that is selling your products around the world at small amounts, you may very much prefer to hold your payments, your incoming payment in your Bitcoin wallet and then spend them as you need in other jurisdictions. But that's a niche market.

  • 10:53:13

    CALVERYAnd so I was…

  • 10:53:13

    MATONISI agree with the arbitrage angle.

  • 10:53:15

    CALVERYI was speaking to some venture capitalists a couple weeks ago who are interested in Bitcoin. And I thought they made a good point and said, perhaps Bitcoin will be the thing that does change the world. Maybe it'll be the next Internet. Maybe it will take over and be just as successful and become the new payment system. On the other hand, it might equally just be an interesting experiment that fails entirely. And they see it very much as a binary investment.

  • 10:53:42

    REHMAnd you're listening to "The Diane Rehm Show." And let's go to Claremont, Fla. Inca, you're on the air.

  • 10:53:52

    INCAThank you, Diane, for taking my call. Well, I'm just a regular consumer, and I decided about two weeks ago I want to buy just one Bitcoin to find out how really the process works. So it took a lot of effort. I had to establish my wallet. I had to go and actually ask for it, if I may have one Bitcoin, and then I had to go through different sellers who maybe are willing to sell one Bitcoin.

  • 10:54:18

    INCAThen I had to go to the bank and put cash in the bank towards that Bitcoin owner, and then I finally had one Bitcoin. And I bought it at that time for $127, now being $600 -- that is great. However, is that process really that difficult? Did I do something wrong?

  • 10:54:37

    CALVERYThe process really is quite difficult at the moment because the infrastructure really isn't there. And it doesn't interact very seamlessly with the infrastructure we do have, which is banks and money transmitters. But I think that's the interesting question about Bitcoin right now, is that sort of coming of age. Is the infrastructure going to mature? Is it going to grow up and sort of have this, you know, become -- is it going to get easier, or is it going to stay this way?

  • 10:55:05


  • 10:55:05

    FREISBut one thing clearly that Bitcoin has done is challenged the issues of the current infrastructure. Does it need to be so difficult to send money across borders? Do we need to wait so long for a payment to settle? Clearly not, from a technology and telecommunications perspective. And that's part of the reason why we have seen so many people getting interested and really pushing the boundaries of what financial services can provide.

  • 10:55:31


  • 10:55:33

    MATONISYes. I would like to just remind the caller also that it is still experimental. We're not even at the one dot of release. Bitcoin is in beta. So it should be considered experimental. And it still is difficult to go through those hoops, which only proves we're at the early, early stages of what will be a long-term transition.

  • 10:55:57

    REHMAnd we have a final email question from George: "Does Jon Matonis, the executive director of the Bitcoin Foundation, take his compensation in Bitcoins or in dollars?"

  • 10:56:20

    MATONISEverybody at the Foundation is compensated in Bitcoin.

  • 10:56:26

    REHMSo you have -- you take no dollars?

  • 10:56:30

    MATONISWell, our assets are kept and maintained in Bitcoin, which is quite challenging on its own, especially when it comes to explaining it to the Quick Books bookkeepers, but that's been our policy from day one.

  • 10:56:45

    REHMJon Matonis, he's executive director of the Bitcoin Foundation. Francois Velde, he's senior economist at the Federal Reserve Bank of Chicago, Jamila Trindle of Foreign Policy Magazine. James Freis, he's an attorney on financial regulatory and enforcement issues, and Jennifer Shasky Calvery, director of Financial Crimes Enforcement Network at the U.S. Department of Treasury, thank you all so much.

  • 10:57:27

    CALVERYThank you, Diane.

  • 10:57:28

    TRINDLEThanks for having us.

  • 10:57:28

    FREISThank you.

  • 10:57:28

    MATONISThank you.

  • 10:57:28

    VELDEThank you.

  • 10:57:29

    REHMAnd thanks for listening, all. I'm Diane Rehm.

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