New York’s financial regulator said the state this year will be the first to propose regulations for oversight of virtual currencies such as Bitcoin.
“Serious people -– in the technological and investment community -– are taking virtual currencies seriously,” Benjamin Lawsky, the state’s superintendent of financial services, said at a hearing in New York today. “They are putting significant amounts of time, attention, and capital behind them. We, as a regulator, cannot turn a blind eye.”
Federal regulators in March said Bitcoin-related businesses can be handled as state-licensed money transmitters, triggering a race by some states to assess their own rules.
Bitcoin, a software protocol for issuing and moving money across the Internet, has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com. Venture capitalists see it as an alternative to the global payment system currently dominated by companies including Visa, Western Union and large banks such as JPMorgan Chase & Co.
Other states, notably California, are also studying how they will treat Bitcoin-related businesses, and may do so under existing rules. Lawsky convened two days of hearings to consider whether New York should create what he called a “BitLicense” for virtual currency companies.
The price of Bitcoin rose almost 4.5 percent today to $851.10 at 2:30 p.m. New York time, according to the CoinDesk Bitcoin Price Index.
In an interview, Lawsky said the complexity of the emerging virtual currency business suggests his department needs to do more than simply adjust New York’s existing rules on money transmitters.
“It’s feeling more like little tweaks around the edges are not enough,” Lawsky said.
The idea got a skeptical reception from industry participants at the hearing, who debated with Lawsky whether regulation, especially rules aimed at stopping money laundering, could stifle innovation.
“It is difficult to determine the problems the BitLicense idea is meant to solve, or how well it would solve them,” Marco Santori, chairman of the regulatory affairs committee of the Bitcoin Foundation, a group promoting the currency, said in written testimony for the hearing.
Cameron and Tyler Winklevoss, brothers who are seeking regulatory approval for a Bitcoin exchange-traded fund, pointed out that federal regulators have said their legal tools are enough.
“We agree,” they said in a joint statement. “We also believe the same is true of state law.”
Fred Wilson, managing partner of Union Square Ventures, a New York venture capital firm, said at the hearing that existing rules on money laundering and consumer protection “are probably the right kind of regulations.”
“We should not regulate how the system itself operates,” Wilson said.
At the same time, Wilson also suggested that New York might adopt a simplified rule in which companies notify the regulator they are operating, and are in a legal “safe harbor” for a certain period of time.
Lawsky’s general counsel, Daniel Alter, countered that “simply knowing somebody is operating” isn’t enough for regulators. “It would be great for any industry if you could simply open the doors,” Alter said.
Jeremy Liew, a partner with Menlo Park, California-based Lightspeed Ventures, argued that the current system has so far worked well to stop illicit use of Bitcoin, and that new rules could push startups away
“If that same company can be started in the U.K. or Germany, maybe that innovation just gets pushed offshore,” Liew said.
Lawsky, speaking near the rebuilt World Trade Center in New York, said that regulators have to focus on how to prevent crimes like the ones on Sept. 11, 2001, not simply investigating after the fact. “The first job is to get rid of money laundering,” he said.
The hearings come one day after a federal indictment of the head of a digital currency exchange, Charlie Shrem, on charges of conspiring to launder more than $1 million in Bitcoin tied to Silk Road, an online bazaar alleged to have hosted the sale of illicit goods. Shrem, the chief executive officer of BitInstant, resigned today as vice chairman of Bitcoin Foundation, the organization said in a blog post.
The day before Lawsky and industry participants wrestled with the role of regulation, Manhattan U.S. Attorney Preet Bharara said the probe of Silk Road is “ongoing,” and warned against cutting regulatory corners.
“If you want to develop a virtual currency or a virtual currency exchange business, knock yourself out,” Bharara said. “But you have to follow the rules. All of them. And if you want to invest in such a business, you better kick the tires and make sure compliance there is not a joke.”
Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority, and uses a public ledger to verify encrypted transactions.