As announced earlier, the United States Commodities and Futures Trading Commission dedicated a portion of their meeting today to the subject of Bitcoin derivatives. The full video won't be released for a few days, but the full transcript of the session on Bitcoin derivatives is below.

>>: Thank you Mr. Chairman. We have our next panel here to discuss the next topic of cryptocurrency derivatives and here to help us with that we have Jerry Brito from the Coin Center, newly created Coin Center, I believe.

Professor Houman Shadab, I hope I am saying that right, from New York Law School.

Tim by an from BitPay and Leonard Naura from TeraExchange and Tom Leahy from the staff here at CFCT. Thank you for coming to and I think we will start with Tom who can go through some of the new and novel issues that and challenges have been raised by the filing exchange as as well as the discussions with other platforms who appear to be poised also to try to submit a contract for listing.

Tom?

>> THOMAS LEAHY: Thank you, Commissioner Wetjen.

The agenda says I will discuss the process for self certifying.

>>: Can you speak up? It may just be me that is hard of hearing, but I would appreciate it if everyone could speak up.

>>: It is not.

>> THOMAS LEAHY: Okay. The agenda says I am going to speak about the process for self certifying Bitcoin derivatives and I am going to use our experience with TeraExchange as a case study if you wish.

So TeraExchange is a self certifying Bitcoin Non-Deliverable Forwards contract subsequently listed that contract for trading on the following business day and according to the salsa vacation precursors of commission 40 .2.

Any contract that is listed that itself certified and listed for trading pursuant to 40 .2 has not been approved by the commission.

The staff conducts and in — the staff conducts a review of the salsa location filing to verify compliance with the commodity exchange act.

However, given the limited review time for a or vacation provided by the commodity exchange act, commission staff generally encourages them to send draft file for innovative contracts prior to self certification this allows staff to raise issues or express concerns, asked questions before the contract is listed for trading.

TeraExchange provided draft filings to commission s taff.

With a new contract, the staff a test is the terms and contract to see the conditions and appliance — compliance with the core principles.

Pending C 2 part 30 A is referenced as a acceptable practice for trade.

For these contracts such as the Bitcoins swap, self certified and listed by TeraExchange, the cash, so let price should not be readily susceptible to many relation. It should be reflected of the underlying market for that commodity.

In addition to this, should be a reliable indicator to the cash market price and acceptable for hedging.

The staff raised questions about the Bitcoin index that TeraExchange initially used two cash and settle its contract.

In this respect, there are very few prices used to calculate that index and the calculation methodology might result in an index that is not robust.

So TeraExchange responded to staff questions by developing a proprietary index that addressed those questions.

TeraExchange, the terror index uses several inputs from Bitcoin exchanges and is captivated using a volume weighted methodology that trims out.

Back testing of the index shows that the index consistently shows prevailing it coin prices and was not affected by outlier prices.

The staff also raise questions with respect to court principles four and five which are monitoring of trading and the ability to obtain information respectively.

Court principle for requires staff to monitor for price after malice in the index and requires es methodologies to resolve the threat of many relation or distortion.

Core principle five requires the staff to have the principal to carry out international information sharing agreements that the commission may require.

So TeraExchange provided a demonstration to the commission staff concerning how they would monitor training activity in the Bitcoin market and then a contracted with a third party for regulatory services including market surveillance.

In addition, TeraExchange entered into an information sharing agreement with each Bitcoin exchange that provides prices for the calculation of the Tara Bitcoin index and Tera made signing an information agreement a preclusion for (Indiscernible) in the index.

Having largely addressed that questions during the draft review process, TeraExchange self certified their Bitcoin Non-Deliverable Forwards swaps contract and it is currently listed for trading.

Thank you.

>>: Thank you, Tom.

We will go outside of the order of the agenda. I think it might be more natural to have Leonard speak next because he represents TeraExchange who honestly has listed and designed the contract.

Leonard, you want to go with your presentation?

>> LEONARD NAURA: Sure. They you Commissioner.

I am Leonard Nuara from TeraExchange. I want to thank you for the opportunity to speak. It has been a number of months that we have been working with the staff here. And Tom just spoke about, we originally started this back in March, and it has been a great process that involves a lot of people and we would like to recognize the staff for the amount of time they gave us in working through this.

>>: A little closer to the mike's before. We were going to speak about the demand for the estimate, why we created it, the process to self certify. I will touch on this briefly because Tom Leahy did a great j ob. I will talk about how it operates and how it is traded on TeraExchange. We will go through this and then we will go to the other speakers.

So we have some slides that they might want to turn on.

Look at that.

Thank you, in the back room.

So first of all,, the demand for the US dollar, B itcoin, Non-Deliverable Forwards.

You will here little bit about this from my fellow speakers here is much larger and much brighter than most people realize.

There are merchants accepting Bitcoin as a method of payment. There are payment processors, one of which is here today that has 40,000 merchants worldwide accepting payments in Bitcoin.

There are minors. These are minors, not with hats and pics, but it is a phrase in the marketplace for those that are generating Bitcoin and there will be a technical conversation about how that happens.

There are wallets, places to store your digital commodity. You will hear that phrase in a little while as well from some of my colleagues.

And there are investors in the Bitcoin industry itself that are investing (indicating) structure, Bitcoin technology as well as those that are investing in the Bitcoin themselves, similar to investing in gold or silver.

The point to be made here is that the trading of Bitcoin, various exchanges that this exchange connects to his rather volatile.

There is a calculation of 3 .57, if you fancy that, or you can say that a Bitcoin on average trading can be 3% difference every day, 3% market change on a daily b asis, sometimes more and less.

It is being accepted wildly, because it is being used by a diversity of players that I just spoke about because it is a payment mechanism, again, that Jerry and whom I will speak to.

A mechanism that doesn't have the same friction that lets a using regular banking channels or otherwise, there is a greater acceptance for electronic, e-commerce platforms.

There's a great demand for some regulated type of risk transfer solution, namely, swaps or other future products and regulated because is it too since products.

It is not a platform or a product for the trading by retail customers. It is an institutional level swap, execution platform, institutions of the user of the product, and his additions are looking for a way to hedge the volatility that currently exists or take a view with regard to the direction of where Bitcoin price is going.

So the process that Tom so neatly just described for us started back in March.

We did provide drafts, it is a phrase that Tom mentioned and we have had numerous discussions with the staff over the ensuing months from March until this September 11.

The key features of those conversations were to make sure that TeraExchange, the product, underline or otherwise, met all the core principles that a swap execution facility must satisfy, in particular the reference rate, which is the rate that Tera Bitcoin index is not necessarily (Indiscernible) to our swap market.

Both meet ongoing oversight and surveillance.

Will utilize the NFA for some of the services, we utilize the sharing agreement like Tom mentioned, excuse me, Bitcoin execution venues to provide affirmation.

We self certified on September 11, not too long ago and our first trade was yesterday.

The market is going to lift off slowly as most new markets to.

We are on board a and clients daily as we speak that want to start to trade in the space.

The contract itself is a bilateral, non-cleared, different from this morning. It is not an issue with clearing.

It is a bilateral, non-cleared trade that has credit support Annex, collateral delivery by either side to support the trade.

It is nondeliverable. No Bitcoins exchange. This is a US cash settled forward.

It is settled the similar as to what was described this morning. It will follow the track as a type of forward contract.

Dollars are exchanged with contrite maturity. Ultimately the settlement rate, which is determined by the Tera Bitcoin index. And we will provide a little bit more detail in a minute.

It follows or tracks traditional Non-Deliverable Forwards. Again, this one is a non-cleared instrument.

The Bitcoin price index, the Tera Bitcoin price index is one we spent a lot of time working with the staff here to firm up. We originally had some ideas back in March, and they were not as firm and as robust as they could have been.

So we proceeded to build our own and we proceeded to connect to the variety of venues worldwide that are trading Bitcoin online and we started to build a tool that would pull that data in an normalize that data, essentially neutralized outliers and also to limit the influence of the numbers, diversion prices coming through from other Bitcoin exchanges.

, namely, to mute the possibility that there could be many relation in other exchanges and that many relation essentially affecting the index, which would in turn affect the contracts on our marketplace.

That took quite some time including accessing numerous times, both internally and also accessing the data to the CFCT.

And the staff has the full data to analyze that.

The index ultimately becomes what is the fair value of Bitcoin spot price without having specific reliance on one exchange or another.

It is essentially a composite that leads to the market price and at least to the ability of the escrow agents and the custodians as well as others to have that number for margining and collateral purposes on the traits.

Finally how is it traded?

Because this is a bilateral contract, it is traded as a request for quote with the option for liquidity providers to provide indications of interest.

That would light up the screen.

Obviously none of you can read this from the distance it currently is.

But on the screen there is prices posted by the liquidity providers and when someone hits one of those prices, it essentially turns up a request for coat — for quote to the counterparty. There is a risk transfer insurance there.

That is where collateral comes into praise.

There are pre-trade checks. We adopted that concept and there are credit checks based upon the amount of deposit that the participant has for their market account.

Tenors range from one day all the way up to two skiers, no different than normal NDF.

And then the CME is actually the SDR for the SDR reporting.

The trades were reported yesterday after they were completed and the files were dumped over to the NFA for their constant surveillance.

Here's a quick summary. There is more slides for the other presenters, but I do not know who was next.

Thank you very much for the time.

>>: Thank you. Jerry?

>> JERRY BRITO: Thank you, Commissioner we for having me here today. My name is Jerry Brito and I am the executive director of Coin Center, a recently launched nonprofit advocacy center that is focused on the public policy issues facing digital currency.

I would like to provide some background on the technology that we are discussing, explain some of the demand for the derivative products and answering the questions that you might have.

So Bitcoin is regally described as a digital currency and a lot of the descriptions are accurate, but can be misleading because it is at once to broad and too narrow. It is too broad because 21 — Bitcoin is a particular kind of currency. Is a cryptography base currency, indeed the first-of-its-kind.

The description is also too narrow because although currency is one aspect of the Bitcoin system, Bitcoin is more broadly and Internet protocol with many applications beyond payment or money transfer.

You can think of it like email or the World Wide Web. It is an open network to which anyone can connect without permission from a central authority.

Anyone can send a message to anyone else and on top of that, you can really build any number of different kinds of applications. In that way it is like the web or email.

Online virtual currencies are nothing new. They have existed for decades from World of Warcraft gold to basement credits.

They have been around for a long time and online payment system is — payment systems are not new.

We have had PayPal, visa, Western Union.

What is it about Bitcoin and similar cryptography based currencies that make them unique? Bitcoin is a world first completely decentralized digital currency.

And it is the decentralized part that makes it unique.

Prior to Bitcoin's invention in 2009, online currency or payment systems had to be managed by a central authority.

For example, you could have had Facebook issuing Facebook coins or PayPal insuring a transaction between customers in are reconciled. They provide the central authority.

However, by solving a long-standing conundrum in computer science known as double spending, Bitcoin for the first time makes possible transactions online that a person-to-person without the need for an intermediary between them, just like cash.

Comparing Bitcoin traditional payments of money transfer systems, this helps explain the distinction.

So before Bitcoin, all the transactions were required with third-party intermediaries.

For example, if Alice wanted to send $100 to Bob over the Internet, she would have to rely on a third surface like PayPal or Bank of America.

Intermediaries like PayPal keeping ledger of account holders balances.

When Alice sends Bob $100, PayPal deducts the amount from her account and as it to Bob's account.

Without such intermediaries, digital money could be spit twice.

Out is and $100 to Bob by attaching a money file to a message, but just like with email, sending an attachment does not remove it from one's computer.

Alice would retain a perfect copy of the money file after she had sent it.

She could easily spend it a second time, sending the same $100 to Charlie.

Tran ones invention is revolutionary because of the first time, the double spending problem is solved without the need for third-party.

Bitcoin does this by distributor necessary ledgers among all the users of the system via a peer to peer every transaction on the network is registered in the distributed public ledger, which is called the block chain.

Transactions are ledger to get the block chain thus eliminating the global spending problem.

The global peer-to-peer network composed of thousands of users takes place at the intermediary.

Allison and Bob can interact online with added third-party intermediary.

How is this possible? With bitcoin, transactions are verified and double spending is prevented by public key cryptography.

That requires each user to be assigned one private key like a password and one public key that can be shared with the world.

When Alice decides to transfer Bitcoins to Bob, she creates a message called a transaction, which creates and contains Bob's public key and how many coins as she ascended.

She signs it with her private key and broadcast this message over the entire network.

By looking at Alice's public key anyone can verify that the transaction was sign with her private key.

It is an authentic exchange and then Bob is the owner of the funds.

The transaction, and thus the transfer of ownership of the Bitcoin is recorded, time stamped, and displayed in one block of the block chain.

Public cryptography ensures all computers in the network have constantly been updated and verified records of all transactions within the Bitcoin network, which prevents double spending and fraud.

Out of technical necessity, transactions on the Bitcoin network are not denominated in dollars or euros or Yuan like PayPal. This makes Bitcoin a global currency. It is not derived from gold or silver, but from the value people assigned to it.

The dollar value of the Bitcoin is determined on the open market just as the exchange rate between two different world currencies.

The total number of Bitcoin that will ever be issued as well is the rate, which they are algorithmically released into the system is determined, predetermined at the time the protocol is established.

To date, Bitcoin has represented money out of floating exchange rates and the Bitcoin network has employed as a vast expensive meaning of money transfer or payment.

But there is no reason why particular Bitcoins could not represent something besides money.

If we see a Bitcoins as a token, other applications become apparent.

For example, we could agree that a particular Bitcoin or indeed and in potentially a small fraction of a Bitcoin such as eight (Indiscernible) token, we could agree a particular Bitcoin represents a house, car, share of stock, ounce of gold.

Conceived in this way, the Bitcoin block chain becomes more than a payment system. It can be completely decentralized and perfectly reconcile property registry.

Bitcoin is therefore an open platform for innervation, innovation just like the Internet.

In fact, Bitcoin looks very much like the Internet did in 1995.

Some dismissed at the Internet then as a curiosity, but many could see that such an open platform for innovation would allow for world changing applications to be built on top of it.

View in 1995 could foresee Facebook or Skype or N etflix, but they could see that the building blocks were therefore amazing innovation.

Bitcoin is like that today.

We cannot conceive yet what will be the future applications, but it is pretty obvious they will come.

Bitcoin faces some challenges; however, and chief among them is regulatory uncertainty.

If we think back again, to the early Internet, it was not until the government made it clear that it would pursue a light touch regulatory approach that Internet in a patient really took all.

Bitcoin today is in need of similar commitment from the government.

And the case of financial regulation specifically, Bitcoin would benefit from the development of hedging estimates.

As I explain earlier, Bitcoin's value is determined on the open market and that market is still developing and it is not very liquid and as a result it has been historically volatile.

Merchant and merchant processing services and exchanges and many other businesses and institutions who want to build on top of the Bitcoin platform are in search of good hedging estimates.

Additionally, as Bitcoin matures, it is up to about — a public cryptography mechanism could be entered.

While unprecedented, such a use of technology could lead to important efficiencies and interventions.

As regulators begin to consider these developers, they should do so with an open mind and avoid undue restrictions that could have unintended consequences including limiting animation.

So thank you for your time and I look forward to your questions.

>>: Thank you, Jerry,.

>> HOUMAN SHADAB: Thank you so much for having me here Commissioner Wetjen. It is a pleasure to do be here with all the panelists and the guest in this room and thank you to GMAC for organizing this hearing as well.

My name is Houman Shadab, a professor at New York Law School and my focuses primarily on derivatives and primarily cryptocurrencies such as Bitcoin.

It is serendipitous to be here today.

I was asked to speak about the regulatory challenges from the CFCT perspective facing Bitcoin and I see them as three.

One, what is Bitcoin from the commissioner's perspective.

What is the nature of it?

Second of all how do we apply the traditional estimate between futures and forwards to Bitcoin derivatives in cases where could be ambiguous? And finally how do we regulate, not derivatives that reference Bitcoin, but derivatives that are executed and cleared and traded and settled and so forth through the block chain, through the Bitcoin networker protocol?

So the first one I want to say is that Bitcoin is best understood not actually is a digital currency, but as a digital commodity.

Certainly the primary application or use right now, of Bitcoin, perhaps besides investment or specular purposes of owning itself are for payments and there are a growing number of merchants that accept Bitcoin and that certainly is an important aspect of what it is used for.

But Bitcoin fundamentally, as Jerry Brito just noted, is a method of transmitting messages over a block c hain, what is also called a distributed ledger network.

Because of that, many software developers right now, are currently developing applications that go beyond payments including things like smart contracts, which essentially allow two parties to trade in automated fashion, which is also decentralized, secure a sort of basically publicly verifiable through the block chain.

So because of all that, I think it is best to view it coins as a commodity more like gold and silver and less like excluded commodities under the commodity exchange act such as currency and other financial interest.

Think of Bitcoin as just a currency would be to think of the Internet just like a network for sending an email.

It is true, but it is too narrow.

>> COMMISSIONER WETJEN: I don't me to throw you off, but you made the extension between excluded versus exempt.

Help us understand more what that matters?

>> HOUMAN SHADAB: I think I would not bring into the equation sort of regulars including banking regulators and monetary authorities that might be more concerned about currency type issues.

Second of all for the more nitty-gritty type, details with respect to the commodity exchange act, being an exempt commodity pretty much means that Bitcoin would fall and look more like an intangible commodity that can be physically delivered as as opposed to, let's say, a currency.

When we think about regulating many Bitcoin swaps or Bitcoin future forwards, we may think about the deliverability aspects of it and not so much whether, for example, a Bitcoin swap falls under something that looks like the in VF classification or something that looks like a treasury exemptions for physically delivered FX, certain FX futures and forwards.

It is subtle. At the end of the day, it might not matter too much for how the regulatory structure wraps around Bitcoin, but I think that for a bigger picture idea, it is sort of important to classify and get the conception right about what exactly Bitcoin it looks like from your commission's perspective.

Given that is the case, the second challenge is how do we apply that traditional distinction between futures and forwards that is huge with digital commodity Bitcoin and often we look at the commission and how it distinguishes between futures and forwards between whether or not they are deliverable, physically deliverable or cash settled.

Whether or not the contracts are standardized, whether or not the platform serves as a central counterparty and whether or not the contracts are findable as well.

That is important, of course, with respect to futures and forwards because forwards basically do not fall within the same jurisdiction, starting not like the futures contract.

If you look at some of the platforms that are currently being developed with respect to trading Bitcoin derivatives, some of them fall in between and it is hard to determine whether or not certain contracts are futures for Bitcoin or maybe forwards.

For example, maybe they are studying jurisdictional questions aside, the ICBT, which calls itself a futures exchange, cells Bitcoin futures and the contracts are relatively fundable, one, two, three month standardized future contracts.

But on the other hand, the platform doesn't serve as a central counterparty and does not have physical delivery.

So maybe that kind of contract, that kind of platform, again, setting aside jurisdictional issues, Mayer and a not fall under the scope of the jurisdiction of the commission and something to think more deeply about, recognizing that even though Bitcoin's digital, and to that extent may be intangible, it can be physically delivered just for the same reason the commission recognizes physical delivery in a sense of other intangible commodities such as pollution rights for example.

So that is my second General regulatory challenge.

And finally, all the foregoing I talked I talked about really applies to derivatives written on Bitcoin whether it is Bitcoin futures or swaps or forwards or options.

But there is another sort of Bitcoin derivative and that is really, it is a smart contract. Age riveted and that enables basically that goes through the Bitcoin lock chain system.

And what is interesting about these contracts is that like many other aspects of the financial market, they are programmable ahead of time.

So maybe if you had a Bitcoin, excludes me a block chain future or a smart features Contra Costa you could program because the futures are already sort of by definition standardized, all of the terms of the agreement except for the price, the quantity, the maturity, and so forth.

And then maybe the internal processes of the software application that applies to the block chain could help determine the price.

And although many of these smart contracts, platforms and applications are currently works in progress, many companies, organizations are developing underlying codes, and plummeting these agreements.

Two or three aspects of this is that programmers or developers are starting to identify what is important, multi- signature authentication to sort of verify and authenticate different aspects of the agreement or different types of the performance as the contract proceeds.

Escrow services as well to sort of safeguard parties, capital, or other assets.

Is sort of an Oracle, what is basically a part of the application or a separate one the sort of interacts with the outside world to essentially incorporate or provide a data feed to the agreement.

So that is sort of operating properly and sort of in the financial estimates based, we can see how interact with the outside world including prices and so forth would be important to execute that.

Certainly the derivatives markets are very are ready using a lot of software and very tech and able to with, but nonetheless I do think that the Bitcoins block chain could provide a sort of unique functionality, unique advantages that currently are not being fully utilized or even available. Traditional or 10 logical means if that is not a bit of an oxymoron.

One is maybe the block chain doesn't use fewer intermediaries.

The transactions could be traded, cleared, and settled much quicker and may be at a cheaper cost as well.

Furthermore, you can probably build in, let's say, the 23 core principles at the futures exchanges are required to abide bye into the very code itself.

If you embed those types of rules into the agreement ahead of time, one question is Wellco maybe these types of transactions — transactions to qualify for an exemption under a traditional rule that would otherwise be applicable to a contract that essentially is provided for, say, a future delivery of a commodity, whether it is physically delivered or cash settled.

Finally another potential damage of a Bitcoin futures, block chain futures is that it could actually allow for integration with other markets better than current future market do in the sense that if there is sort of one universal block chain or block chains that interact with each other on a global basis, it can allow for future markets to be integrated with more like a securities market or even for futures markets being more integrated with commercial markets and at some point, a physical producer of agriculture would automatically purchase in the sense or be entered into in order for futures agreement if the projected price of a commodity goes below a certain point in the future.

So I last sort of conclusion here is that given that it may be possible and certainly many of these concepts or sort of potentials are about what technology may look like in the future, which is always sort of inherently difficult to do.

But given that it may be regulatory for the policy objectives to be achieved through the block chain, to be achieved through software, code, and into the contract rules themselves, the commission may want to think about or consider exempting these types of agreements from the full scope of the regulations to sort of balance consumer protection, market stability, and the systemic risk with animation and progress.

So thank you, so much for hearing my remarks.

I really look forward to the discussion.

>>: Thank you, Professor. Tim?

>> TIM BYUN: Good afternoon. I am the Chief Compliance Officer for Bitpay. Thank you, GMAC members for this opportunity. I have maybe five minutes of prepared comments and also to address your two initial questions, but I would love to address any further questions that you may have and I think based on your look with the distinguished panel. , there's going to be quite a few questions.

But let me please start off with the next slide please.

I just wanted to give you a short introduction of myself because I think I'm very fortunate to be sharing some remarks to you today.

As I mentioned I serve as the Chief Compliance Officer, but I also spent five years at Visa , Inc. as their anti-money officer and head of credit settlement risk.

Publicly disclosed on their website, visa has about 50 billion dollars worth of credit risk on any given day.

Prior to that I was a regulator for the Federal Reserve Bank and the FDIC. And I also worked for a commercial bank in their credit corporate underwriting department.

So I hope my background can shed a little more light, specifically on the next slide I want to get into your first question of how is the adoption of Bitcoin going in the market place?

And we have some visibility of that because we are a merchant processor out there.

In short as on the next slide, as a merchant processor, I want to let you know that we were founded in M ay 2011.

Bitcoins were the white paper was conceived in 2008.

Bitcoin, the first version or first block of Bitcoins came out in 2009.

So by that standard, we are a veteran out there, but we are a very small startup.

We have a thousand merchants worldwide.

On the next slide, we have about 32 million dollars investment capital from our venture capitalist and we have just a few of those names out there.

You can see Index ventures from the UK, founders fund led by Peter Thiel, horizon ventures supported by Lee Heashing, the prior CEO of American Express and others.

We have about 75 employees worldwide.

Bitpay is headquartered in Atlanta and we have colleagues all over the world as you can see.

On the next slide is the adoption side.

Here is a glimpse of as up-to-date from August 2014, how many transactions we do permanent.

And as you can see, we have been hovering about 40,000. But from a year ago, it has significantly or exponentially increased.

And so we see adoption from our point of view being very robust.

I want to also present you this public chart from block chain where they measure or provide charts on the entire Bitcoin system.

And you can see that the total transactions there are steadily increasing over time.

This is a two-year look back chart.

I think adoption is great.

Is it in the mainstream? No..

Is it in Wall Street? It will get there.

But currently no.

So it is very experimental currently. I think you are seeing significant startup capital being invested in the marketplace. I believe you're today, 2014, there is about 300 million dollars dedicated or invested in Bitcoins ecosystem startups such as ourselves.

And so it is progressing very nicely or very robustly.

Your second question asked to start.

What is the possible use of derivatives or Bitcoin instruments? And IC it as and kind of three categories.

For Wall Street, for your marketmakers, or for even ecosystem exchangers that need to build the infrastructure and idea of how to use Bitcoin.

And I think they will build up the ecosystem.

It could also be used in Wall Street for trading purposes.

As a principal or even an agent.

It could be used as an alternative class for your money managers.

This it would be on the buy side.

Corporations such as Bitpay could use it to hedge our treasury operation as we need to pay on the merchant side or settle they are, which we see every day.

For individual or sophisticated investors, they could diversify their holdings or even speculate on Bitcoin, the price itself.

So I am sure, especially in this conference room, you have a better perspective of what is possible on a derivative scale.

And with that, I will leave it open for Q.

>>: Thank you very much, Tim. We are now joined by the commissioner. Chris, do you want to make a few remarks?

>>: First opening up to the group. I do not know if any members have questions of the panelists. We could start there. I have a couple of my own.

>>: A question as far as you know, ski we had some pre-read that was from George Mason University.

And in the reference, it kept referring to this as a digital currency.

I am trying to get my head, I think is a digital currency, but this is opposed to a swap and changing the nuances around that.

I can see a digital currency and how the valuation and using it to purchase goods, the link there, but could you speak a little bit more? It was not clear to me as far as it being a digital commodity itself.

>> TIM BYUN: Let me answer first. I am not sure — honestly it is a digital currency in the sense that there are things —

>> JERRY BRITO: Things that are denominated in Bitcoins prices or dollars and then have a conversion.

And you can use it to pay.

And the first thing, the most widely application of Bitcoin's payment and it definitely is a digital currency.

I think you cannot stop thinking of it as a digital currency.

At the end of the day, it is a token. You can use the token as currency, but there is no reason why you cannot use that token as something else.

You could use it to represent any number of things.

And I think what Houman Shadab was getting at and you can confer this or not, but because it is digital, these tokens are digital, it is programmable.

So we could have, normally if I give you $100, I take a $100 bill and I give it to you. Now I have it and now you do and I do not.

That now without an intermediary between us, now you have it and I don't.

We could introduce this into the transaction. It is not a simple transfer. We can do something as simple as give this Bitcoin to Mike only if the price of Google is over X tomorrow and only if that happens, doesn't get transferred.

That is a possibility that is available to Bitcoin.

>>: Let me elaborate. It is a digital currency, but it is a lot more. There is no doubt that Bitcoins is unique. It is hard to classify whether under a particular body of regulations or may be conceptually, but certainly in commercial transactions, financial transactions, I think that any sort of software in transaction it can be used to automate a lot of the processes. But the block chain makes the messages themselves sort of be a type of contract performance. Let's say you take a loan through the block chain.

Then the borrowers' funds could sort of be automatically deducted from their account, weathered his monthly or annually or quarterly, whatever it is.

At the same time, if the borrower breaches a financial or loud covenant, the loan could be immediately accelerated which the lenders have the right to do.

In addition the interest rate could change as sort of a performance pricing contract, again, automatically without the parties having to engage in an active monitoring of contracts, legal enforcement, or sort of do any additional conduct such as borrowing people telling the lenders that (Indiscernible) and what are we going to do about it.

Contract automation in every case and all the way through is the best thing for the market. Certainly software providers already scale back and pull back on the automation, which is even further possible because human intervention, manual overrides are sometimes, or often in certain contacts, better than completely automated contracts, which pre-commit to arrange a scenario that they may or may not know about ahead of time.

But just to go back to that question, it seemed like the block chain was much more application or functionality rather than transferring payments.

>>: Thank you. So Mike, on a more basic level, in regards to a swap, the swap can be put to an asset and the asset is Bitcoin. The Bitcoin is we are getting the pricing data from a variety of exchanges worldwide and we are establishing and index value to that. So you can do a forward contract. You are doing the swap, which is the forward, the Non-Deliverable Forwards based off of that index value of the Bitcoin.

So you and I can agree today that Bitcoin is trading today at 375, and you want to lock in at 350. You have a large contract and you need to use a lot of it.

So you and I can lock in at 350 and then in one week, one month, or whatever, we look at the end and the price is at 320.

Well, you get the benefit of that and I will pay the difference. Or it is at 400. You are ahead, and you would just pay me back the difference.

It operates just like regular, but this thing that we call Bitcoin, it is the underlying asset.

And in our application, 40 .2, we labeled it a digital asset, one way to call it, but the point is it is an asset. We use the index to establish what the price is.

And that is will we put the structure around. It is very simple.

>>: One of the issues discussed in the paper, the degree of anonymity available in the Bitcoin exchanges themselves and the corresponding potential for money laundering resulting from that and I was wondering if you could explain further the response in the paper to that concern.

I wasn't sure that it was entirely satisfactory.

I was wondering what your thoughts were on that.

>>: Sure. So on the Bitcoins block chain, payments are neither identified or anonymous.

So if you think about a cash transaction.

A cash transaction is completely anonymous.

So you and I can meet at Union Station and I give you $100. You give me a bicycle. We parked our separate ways.

I do not know your name and you do not know my name and there is no record of that transaction happening, Time, Place, amount.

That is cash and an. Then you have a credit card transaction that is completely identified.

The credit card issuers know your name, my name, and there is a record kept of the amount and the date anytime and sometimes even the purpose of the transaction, perfectly identified.

Bitcoin transactions are in the middle, between the two.

So every Bitcoin transaction is recorded, the time, the amount, and two Bitcoin addresses from which payment went from one addressed to the other.

And that is recorded in the public ledger known as the block chain and it is public.

Anybody at any moment can go online and see all transactions that are happening right now or has ever happened.

There is a record available of all transactions, available to you and me and law enforcement, anybody.

These addresses are simply random, essentially random strings of letters and numbers, basically like an account number.

So it has account number XYZ 123, this amount, this time to this account number.

So you have a perfect record, but it is not tied necessarily to a particular identity.

You have exchanges.

I want to acquire a Bitcoins.

I have dollars and my bank account and I want to acquire this way use one of Bitpay's margins.

I go to an exchange. I happen to you something called coinbase.

A very popular service.

Coinbase works with regulations and so they do the AML and KY see. So they identify me and my identity as tied to an address.ess.

So there are some other folks I could refer you to in computer sciences who are looking at how easy or difficult it is to D anonymize transactions. It is a lot easier than some folks think it is.nk it is.

>>: Could I add a few comments to that? And hopefully, shed some light.

Yes, Bitcoin transactions are synonymous or in your words, anonymous, but it is really what you are seeing is real time, almost like a ticker that goes across the NYSE ticker.

You see IBM getting crossed 100 shares at $104. But you don't see on the ticker who is buying or selling that. When you eventually pull that record and find the broker/dealer, you can see who the broker/dealer was.

When you examine the broker/dealer was, you can find out the ultimate party.

Similarly when Jerry by something at a merchant, Bitpay as the merchant processor conducts the KYC on the merchant, our customer. We want to know what did they sell, who owns the shop, what is their tax ID number.

So we conduct the KYC on that.

Coinbase is a money transmitter determined by virtual currency guidelines that came out in March 2013.

As a money service business, coinbase as well as other money service businesses, the more traditional ones being Western Union and Money Gram must conduct KYC on their customer, which is the consumer or shopper in this case, Jerry.

So I think it is a bit of a misnomer that it is completely anonymous, but I want to make sure that the ticker going across that is on the block chain that is in realtime, you don't know who is on the underlying, who is making that transaction underline.

>>: And one last point on that.

Tom Leahy mentioned earlier that TeraExchange has an information agreement with every exchange to establish index.

Every one of those exchanges in that agreement has agreed to supply as the details and they all do AML, KYC on all of the people trading on each of the exchanges.

The exchanges that do not provide us this cannot be on this. We are not ascribing to anonymous trades that are happening out in the market place.

>>: Yes?

>>: I have a basic question on the mining of the component of Bitcoin. Like if you could just explain a little bit like what happens. Because it seems like from the pre-reading, there is a limited number of Bitcoin there and then on the next lie, 120 odd euros will get unlocked based on the computing power or, you know, for whatever transaction verification.

So I was interested to hear like is there, is that public information? And are you taking on variability of like your Bitcoin currency being devalued or d eluded? What if it was unexpectedly? Somewhat it said in the paper that it is incentive driven. How many people are going to be, you know, trying to unlock these Bitcoins?

>>: That is a great question. There is this idea that the processing power necessary to mine the Bitcoin's ever-increasing.

That is not actually the case. It is varied and I tell you what the variability is.

The Bitcoin network essentially looks to see how many Bitcoin is being issued in a given time period, usually two weeks.

Every two weeks, when I say it, is very difficult because there is no central server. All of the machines are collectively connected following a protocol.

They look to see how many Bitcoins have been issued.

If there is more than should have been issued, the math problem that must be solved becomes harder.

If less Bitcoins have been issued than should, then the math problem gets easier.

But what in up happening is that on average a new block is mind every 10 minutes and every 10 minutes, 25 new Bitcoins are introduced into the money supply and that is predictable.

So it is out rhythmically self-regulating.

If you have many more miners coming into the ecosystem, maybe for a few days you might get a bit more Bitcoins than average, but it would soon revert to 25 Bitcoins every 10 minutes. It is self-regulating in that way and if diners leave the space, the problem would get easier.

And again, it would always revert to that predetermined algorithmic rate.

>>: Who owns that protocol?

>>: It is open source. Nobody owns it. It is an open protocol. Anybody can use it.

I know.

>>: I mean, it just seems, like you mentioned that, you know, there is a dependency of everyone, all of these Bitcoins being connected via this protocol.

So just like I was trying to understand. When somebody joins, how is that regulated if it is open source and nobody owns it.

>>: Great question.

>>: So we kind of need some sort of verification for you can join in.

>>: Very good question. It is consensus-based.

If I try to join the network and I write open source, I can rewrite the code and I would write it to say I'm going to generate one Bitcoins a minute, a lot of Bitcoins and I join the network.

So it is a peer to peer network. You join first one. Next to you, 121 and then you join other peers.

The first. I joined is going to shake my hand, look at me look at the fact I am to do that and will reject it.

It is consensus-based.

If you are not following the rules, what is the first thing that a Bitcoins client does? It is to look at the peer it is connecting to and see are they following the same rules I am? If not, it is rejected. If they are following the same rules, you can join Bitcoin in that fashion.

>>: To questions. The first is how do you know there is no fraud or backdoors built in to the initial code? And then the second is if all the goodie is coming from the block chain, why not just put dollars on the block chain?

>>: Good question.

So how do you know that there isn't some secret back?

You know — so I presume that many of what we are using her today, the TVs and the projector run on open s ource, they run on Linux.

So how do we know there is not a backdoor? The answer is all open source by definition is open and public to scrutiny and review by anybody who wants to look at it.

So there are a couple of ways to do this.

And a trust list manner, you can download the source code yourself self, review it, and verify for yourself that there are no backdoors.

I am not a computer programmer, so I have to trust some of the worlds foremost cryptographers who have looked at it and have given if the thumbs up.

But essentially, it is open and verifiable to anybody.

So that is how — it is actually probably, I trust it more than I would trust a proprietary software system where you have to trust the company.

That is my position. Your second question is why not dollars?

I was sort of turn it around and say how would you do that with dollars? You could imagine — so you have to have a token that can be transferred between two different parties. That token, we call it a Bitcoin.

Because there is a limited amount of them, the value floats.

It is relative to the dollar.

You can imagine the US government tagging the dollar to the Bitcoin.

I doubt that will happen.

That is how you would accomplish it, but there is no technical way really that you could technically put it to the dollar without a third-party guaranteeing that.

>>: I think it is an excellent question and I think it is possible and we have a live example of Ecuador starting to do that now.

So they actually want to tie their national currency using the Bitcoin protocol and the validation system and as you may know, the Federal Reserve is looking to modernize their financial system, ACH, fed wire and I think it could be very feasible.

I see it as, just like Bitcoin itself, we are in the experiment of.

The Fed is due a small experience, tie a few US treasuries to the protocol, tie it as a U.S. Treasury and let that be exchanged and validated.

Because the core of the Bitcoins is really just a validation system.

The real power of the Bitcoins is to say that I no longer have that one Bitcoins. I sent it to you and now you have it and all the miners are putting their power — and it is actually not a peer to peer — I think it is a competitive peer mining ecosystem.

They are all trying to first calculate the winning formula or output so that they can get the 25 Bitcoins reward.

There are a lot of losing miners out there that spend a lot of expensive electricity, but they don't win that reward and they hurry up and tried to win the next reward.

So as some are unsuccessful, they are going to drop out.

Summer going to be more successful because they have more computing power.

May they set up shop in Seattle where the electricity is cheaper.

You know it is a very open market.

But I think your question is a possible future use of Bitcoin.

>>: I think I was just asking — it seems to me like it is just a distributed ledger that this intermediates.

If you can have a token that represents a Bitcoin, could you have a token that represents a dollar on yet a separate block chain.

>>: And that is what Ecuador is doing.

>>: But it sounded to me like they were tying it to the Bitcoin. That I missed that?

>>: No.

>>: It is a separate block chain?

>>: Yes. It is a separate copied or mimicked Bitcoin protocol because it is a free source. It is a free open source code out there.

>>: David?

>>: So the material we were reading, it talks about the market either being unregulated or subject to existing regulation.

Where do you see this between those two? And what are the differences between the American perspective and that of Europe or are there any differences? I think there is a misconception that Bitcoin is unregulated. I think since it's invention, since they won, it is subject to existing Money transmission regulations and other consumer protection or.

So it is definitely regulated in many different ways.

I could go into detail about my transmission if you would like me to. But I will not.

These other countries, it varies.

There are some countries that are friendlier and some countries that are more hostile.

So take for example, Russia. It seems to be, have a law proceeding through its processes that might make it illegal.

And I think it is largely the cause they are concerned about the capital controls.

You need to have other things such as — Amsterdam — it has been especially from the.

The UK recently, they announced that he wants the UK in London to be the capital of Bitcoin finance and he wants to initiate a proceeding on how to figure out how to open up that regulatory space there.

So there seems to be a bit of competition right now to attract that investment and to attract that innovation.

>>: I also think for a regulatory perspective, you have to think about different US, or whatever countries, regulators, from their own perspective or wheelhouse, things they are concerned about in particular.

Maybe the consumer finance protection Bureau, which deals with consumer issues and the securities and exchange Commission will think about other issues.

From the FCC perspective, whether you raise capital with dollars or dog biscuits or Bitcoin, you still have to abide by securities regulation.

And we have seen a couple of relatively prominent fraud and Ponzi scheme that happened with Bitcoin.

Coming back to this commission here, I think that Bitcoin is regulated by and could still achieve the policy objectives while fostering really important innovation in the marketplace through contract structure and market structure as well.

I think on some level that regulators need to let Bitcoin developers put their money where their mouth i s.

And say if there is a system that can sort of revolutionize or up in finance this by making it decentralized and cheaper and so forth and faster, you should try it and see what sort of policy objectives in terms of consumer and investor protection and market protection you can achieve as well.

>>: Just one more point on that.

The question to regulate or not, usually with regard to underlined activity.

To regulate Bitcoin is like regulating the Internet.

It is what you do on the Internet or how you use that, money transfer, by an asset, e-commerce or otherwise.

You don't just regulate the Internet, no one does and the Internet is a protocol. Most people don't know that. But it is TCP/IP, Internet protocol. Nobody in the room really cares about analyzing what the protocol is or who wrote it or otherwise, but it has long existed, originally developed with government research money, and it is used reliably for very long time.

Bitcoin is another protocol.

What would you regulate? The activity using the protocol called Bitcoin and if it is for money transfer, then okay. If it is for swaps, that is the regulation that the FCC uses as an index. If it has a Bitcoin asset beneath it.

You cannot say regulate Bitcoin so much as you can say regulate activity that touches, utilizes, or otherwise, involves the use of that protocol.

>>: From the perspective of this regulator, to what extent would markets and swaps for Bitcoin be susceptible to me relation?

>>: So with regard to what we have established in the filing that we presented to the CF CT, we built a a swap. And the swap relies on an index, a series of underlined markets.

The underlined markets could potentially be susceptible to manipulation and what we had to establish with the staff and ultimately our self certification is that the numbers we are pulling from these various exchanges will ultimately be curated, filtered, take out anonymous behavior to prevent somebody from essentially attempting to manipulate, either meeting the requirement that is not susceptible for many relation and two levels.

First is our market susceptible? Every participation is marketed and we have our own surveillance and we also have the surveillance of the NSA to back us up with regard to market participants.

He also surveilled the underlined market that feed into the index and as I mentioned before we had information sharing agreements with each market so the location we pull data from provides us access to individual traders if necessary, positions they may hold to determine whether there is going to be manipulation.

As a matter of fact,, the changes, the exchanges we use are proud of the fact they are following KYC and what robust market places to address the very question you are asking, which is is there many relation happening? They want a sound marketplace and they are achieving it in their marketplaces and we can take the data and build the swaps off of that.

>>: So you have these information sharing agreements between the TeraExchange, the cash markets, and the SEF's? Correct.

>>: Okay. But what other functions, surveillance functions do you use? You're getting a right of access of some sort, but otherwise, how are you surveilling these individual cash markets around the globe?

>>: We use surveillance by pulling the feed and watching surveillance on the feed, watch the price action and when we find the behavior, it is filtered in the index automatically props up on call for us to make an inquiry.

During the analysis for between March and when we ultimately filed, there was activity on what in the exchanges.

For example, it essentially look like someone could essentially be doing something. It triggered flags on our system to advise us to look out, look at this behavior which we did.

We made the phone call, spoke to the technology personnel and also spoke to the underlying controllers of the account. They said no. We know these players. There is nobody moving the market. There is no lost to trade.

We have that information at our disposal, so we can constantly monitor it.

>>: Anything else?

>>: I think that is going to bring the meeting to a close. We have gone over time.

Thank you again very, very much. Just one last point I would like to make on Bitcoin.

Obviously, there is relevancy here in taking up this topic today in light of TeraExchange filing.

As I mentioned before we expect that we are going to receive other filings from other platforms as well in the very, very near future.

I was interested to hear in some, some of the remarks by the professor about these applications that could be made at this technology in a way that is actually useful to our space, the derivatives space.

And it just seems like based on what I have learned, some of those applications could be so compelling that it would be a real mistake for us as a commission to not make sure we are staying on top of these development's.

Not, because we want to do anything other than understand the developments because it seems like this protocol, the Bitcoin protocol or something like it is very, very likely here to stay.

So the more information and education we can do on this now in trying to stay somewhere on the appropriate spot of the learning curve, it seems to be a very sensible thing to do.

So I think that it has been very, very helpful and thank you for representing the CFCT staff and I will turn it back over now.

>>: I think we are good. I want to thank everybody for coming. I want to give a special thanks to the staff and her team that does all the work going on behind the scenes.

I appreciate everyone coming today. And as the temporary chair, I now adjourn the meeting.

Thank you for your participation in today's conference.