On the second day of hearings, it became apparent financial regulators will focus on virtual currency exchanges.
It may surprise you that the U.S. government is one of the largest holders of the cryptocurrency Bitcoin, to the tune of about $30 million.
The reason why it holds so much of it, however, is probably not what you'd expect. The U.S. isn't hoarding it like gold, hoping its value will go up.
Instead, U.S. regulators wound up with the money after shutting down Silk Road, the online bazaar indicted for criminal activity, including drug dealing, late last year.
In the second day of testimony at hearings before the New York State Department of Financial Services about the fate of digital money in New York, the anecdote serves to illustrate the complexities of the situation: Financial regulators scarcely know how to seize digital currency gained from illegal activity, let alone value it, or construct rules for dealing with it legally.
But if you're planning to include digital currency in your business plans, take heart. New York's financial officials appear focused on regulating a narrow subset of companies. And what happens in New York is likely to serve as a model for the rest of the U.S.
"Without strong government oversight, we will be permitting criminal actors to operate in a digital Wild West," New York County District Attorney Cyrus B. Vance, Jr., said, adding that criminal enterprises using digital currency already span the globe.
Going forward, the exchanges, many of which are small businesses, may need to have a money transmitter's license. These licenses typically validate non-bank companies that transmit or convert currency.
They may also have to identify their customers, and file transaction reports, among other things. Money transmitter licenses, however, are costly and time consuming to get, and they must be procured on a state-by-state basis.
Regulators are trying to find a balance between giving startups the freedom to innovate around digital currencies--which are, generally speaking, stand-ins for cash in the online world--and making sure criminals don't abuse the system. So it makes sense to focus on exchanges, experts say, as these exchanges are the primary gateways to obtaining virtual currency.
Richard B. Zabel, Deputy U.S. Attorney for the Southern District of New York, described one of three cases his office is investigating this year, involving a quasi-bank called Liberty Reserve. Liberty Reserve processed some $6 billion in criminal transactions through virtual currency exchanges by allowing customers to operate anonymously, Zabel said.
One customer was free to conduct criminal transactions using digital currency, after identifying himself this way, Zabel said:
123 Fake Name Street
Made Up City, NY.
Obviously there needs to be more clarity and more certainty in networks that use or convert digital currency. And that can only help small business owners who want to transact in this world as well.
"Virtual currency systems can be legitimate global commerce mechanisms," Richard B. Zabel, Deputy U.S. Attorney for the Southern District of New York said.