New York may become the first state in the union to place specific regulations on virtual currencies like Bitcoin, the state's Superintendent of Financial Services Ben Lawsky wrote in a Reddit AMA late last week.
Over the past year or so, Lawsky has taken the lead among state-level regulators to publicly grapple with the regulatory issues presented by pseudonymous digital currency. Lawsky’s efforts began last fall, when he issued a wave of subpoenas to "every important person in Bitcoin" in an attempt gain a better understanding of the issues involved.
In January, Lawsky’s agency held public hearings about the potential regulation of virtual currencies. "Right now, the regulation of the virtual currency industry is still akin to the Wild West," Lawsky said while delivering the hearing’s opening remarks. "That lack of regulation is simply not tenable for the long-term."
On Reddit, Lawsky noted that his agency is still in developmental stage of the project. But he laid out a very tentative timetable for unveiling a regulatory regime governing how cryptocurrencies are to be used in the state.
"Our expectation is that–during the course of 2014–the information we’ve gathered in our fact-finding effort will allow us to put forward a proposed regulatory framework for virtual currency firms operating in New York,” Lawsky wrote. ‟We want to move expeditiously because the sooner we provide some regulatory certainty, the better for the firms that want to know what the rules of the road are.”
He added that smart regulation is a crucial step toward incorporating Bitcoin, and other cryptocurrencies, into the larger financial system. When one user asked about a recent trend of some banks around the country closing customer accounts with large amounts of Bitcoin activity, Lawsky replied: ‟I think new, careful regulations, especially related to preventing money laundering, will make banks more comfortable with Bitcoin-related activity over time.”
According to Lawsky, one of the main issues in developing regulations is striking the right balance between requiring financial institutions transacting in Bitcoin to adhere to anti-money laundering and ‟Know Your Customer” regulations—and at the same time ensuring the costs for complying with regulations aren't prohibitively expensive. The issue of money laundering, particularly in how it relates to the funding of terrorism, seemed to be Lawsky’s primary concern.
Some Bitcoin businesses have started taking proactive steps to comply with these regulations, even though exactly where they fit into the regulatory system isn’t yet clear. Robocoin, the makers of the first bi-directional (meaning it can handle both deposits and withdrawals) Bitcoin ATM in the United States, requires first-time users of its system to jump through a litany of hoops—from swiping a government-issued identification card to scanning their handprint—before being able to use their system. Robocoin CEO Jordan Kelly explained that the company was taking these precautions as a way to provide regulators with a record that everything they’re doing is on the up-and-up.
Lawsky himself addressed the ATM issue directly, but only to say, ‟[We] don't have answers yet...[regarding] ATMs. It's a question we will have to face down the road.”
This cryptocurrency regulation may come in the form of "BitLicenses," which the state would grants to companies that intend to use virtual currencies.
At the hearing in January, government officials seemed amenable to creating a regulatory environment where a New York-based Bitcoin exchange could operate. Currently there are no exchanges based out of the United States—the present market leader is located in Slovenia.
It looks like Lawsky’s AMA may result in his own personal incorporation into the Bitcoin system. After admitting that he doesn’t personally own any Bitcoins, one Reddit user used an automatic tipping bot to give Lawsky $5 USD worth of Bitcoin.
Photo by David Iliff/Wikimedia Commons