Capping six months of exhaustive hearings, research and testimony, Benjamin M. Lawsky, superintendent of Financial Services for the State of New York said today a lot of questions need answers with regard to virtual currencies such as Bitcoin, but one thing is certain: Some regulation is inevitable.
"Our agency will likely have to proceed with issuing some form of specially tailored BitLicense that adapts [money transmitter] rules to the world of virtual currency," Lawsky said in prepared remarks.
That means any small business working with or transacting in virtual currencies in New York will have to adhere to new regulations, but the regulations being proposed here are likely to be "regulation lite." In other words, the effort is meant to leave the door open to innovation without gumming up the works.
New York's BitLicense foray could signal similar regulations in other cities and states, as what happens in the Empire State rarely stays in the Empire State.
Money transmitter licenses are often hard to procure, requiring massive amounts of paperwork and months of oversight, in addition to capital requirements for businesses of up to $1 million. Additionally, businesses must apply for transmitter licenses on a state-by-state basis, and they must be renewed annually.
"We do not have to throw out all of our existing rules for money transmitters or banks, which have generally served consumers well when vigorously enforced," Lawsky said. "Indeed, certain aspects of virtual currency could dovetail with existing regulations."
Beyond an operating license for virtual currency companies, strong consumer protections will also need to be in place, including notifications about the volatility of digital currency and privacy concerns. Bitcoin is not the only virtual currency out there--there are actually dozens--but it is probably the best-known and perhaps the most volatile, trading on specialized exchanges for prices that have wobbled between pennies and more than $1,000 in recent months. Virtual currency firms will have to have adequate financial buffers in place to protect consumers.
Even bigger questions linger around what point regulators come in to apply their oversight. One of the most unusual aspects of cryptocurrencies is their anonymity, which in many ways allows transactions to mimic the movement of cash. At issue for regulators is the attraction crypto-currency has to criminals, who can use it to launder money for illicit purposes. Most famously, the website Silk Road was shuttered late last year when it came to light Bitcoin transactions through the site were being used to finance a drug trade and other illegal activity.
To deal with these issues, Lawsky has proposed some form of consistent public ledger accounting, primarily with the exchanges that facilitate the transfer of fiat, or national, currency to cryptocurrency. That could allow regulators to spot criminal activity more quickly, he said.
"A regulator may not immediately know what person is associated with every single transaction," Lawsky said. "But they can see every transaction, which can be important for law enforcement in spotting red flags for further investigation."