The Bitcoin Hearings: A Regulator's Perspective

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New York to regulate Bitcoin

New York is set to be the first state to issue clear regulations for virtual currencies. Image: Rick Bowmer/AP

In a municipal building not far from Wall Street, financial regulators, law enforcement, and industry entrepreneurs met this week to discuss the future of virtual currencies, with specific focus on the increased acceptance of Bitcoin.

The hearing, which took place on Tuesday and Wednesday, was part of a fact-finding investigation that began last August, and seeks to establish a framework of regulations for virtual currency operators.

During the public hearing, government officials insisted on definite rules for virtual currencies, arguing that the price volatility and decentralized nature of virtual currencies pose risks for users.  Additionally, law enforcement officials voiced concerns that the anonymity allowed by crypto-currencies such as Bitcoin lends itself to issues such as the buying and selling of illegal goods, money laundering and tax evasion.

Cyrus R. Vance, Jr., the district attorney of New York County was one such voice.  “The anonymity offered by these payment systems attracts, from time to time, criminals,” Vance said.  “Without stronger government oversight in this area I believe we are going to be permitting cybercriminals, identity thieves and even traffickers of child pornography and other criminal actors to operate in what would be a digital Wild West,” he added.

These comments come on the heels of the arrests of two men earlier this week for allegedly operating a $1 million Bitcoin money-laundering scheme in connection with the now defunct underground Silk Road website.

Even though there are practices in place to detect and act against criminal activity linked to virtual currency, authorities say they are now facing an increased potential for such crimes, and are pushing for rules that will help alleviate these concerns.

In addition to calling for virtual currency exchanges to establish the identities of users to help prevent criminal activity, Vance thinks regulations should also require them to obtain licenses.

Vance stated that virtual currency systems are a form of money transmission and, as such, “should be licensed… to do business in the State of New York and therefore come under that regulatory framework.”

Though virtual currency exchanges and companies have had to register as money service businesses under federal guidelines, states have yet to officially classify these exchanges as transmitters of money, allowing them to operate without state licenses.

The New York Department of Financial Services (NYDFS) has already announced that the new rules might include issuance of a “BitLicense,” specific to virtual currencies.

Benjamin Lawsky, the New York Superintendent of Financial Services who called for the hearing, believes that his will be the first state to issue clear and comprehensive regulatory guidelines for Bitcoin and other virtual currencies.  “If we want innovation to happen, and we also want to root out money laundering, and we try to get that balance right, we also want to give businesses certainty,” he said.

Being one of the financial centers of the world, getting that balance right could make New York a center for legitimate Bitcoin commerce.  Lawsky said his state is hoping to do something concrete in 2014.

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