California Says State Law Grants Right to Oversee Bitcoin

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California officials are considering whether to regulate digital currencies such as bitcoin after concluding they have the authority to do so under existing law.

Staff at California’s Business Oversight Department have determined that a state law governing money transmitters, used to regulate businesses such as Western Union Co., may also apply to digital currencies, in which units of money are created and exchanged independent of central banks, said Tom Dresslar, a spokesman for the department.

“The consensus among staff is that the department and commissioner could regulate virtual currency, to some extent, under current state law,” Dresslar said in a telephone interview from Sacramento. “Consumers would be the prime concern of any regulatory structure we build -- making sure they are fully aware of the risks associated with virtual currency and providing effective, reasonable safeguards against those risks.”

The question of how and whether to regulate bitcoin has confounded regulators around the world since it emerged in software form in 2009 from a paper authored by an anonymous computer scientist and cryptographer. Bitcoin proponents and some financial regulators say the digital currency is an important innovation that makes payments easier and cheaper.

Venture Capital

Venture capitalists in Silicon Valley and elsewhere have invested hundreds of millions of dollars into digital-currency startup companies. At the same time, law enforcement has tackled companies and individuals over bitcoin’s use in online drug bazaars and consumer frauds.

California, the world’s eighth-largest economy, has a history of setting the agenda for the nation and the world on everything from banning plastic shopping bags to climate change regulations and immigrant rights. Home to Silicon Valley, California would become the largest U.S. state by population to regulate virtual currency.

“It will be good to see California move forward in a responsible way, applying their existing regulations and providing some clarity and certainty for digital currency businesses,” said Patrick Murck, executive director of the Bitcoin Foundation, an advocacy group for the currency.

Money Laundering

In March 2013, the U.S. Treasury Department’s Financial Crimes Enforcement Network, which polices money laundering, said virtual-currency firms may be regulated as money transmitters. As a result, U.S. states, which regulate traditional money transmitters such as Western Union and MoneyGram International Inc., have stepped up to determine if and how their existing laws would apply to a novel form of money.

New York’s Department of Financial Services in July proposed the creation of a “BitLicense,” a special category of permit that would apply to virtual currency. The move has drawn heavy criticism from bitcoin companies for being unduly burdensome. Benjamin Lawsky, the department’s chief, has stressed the need to combat money laundering in any new regulations.

California would build any regulatory regime for bitcoin around consumer protection, Dresslar said, though issues related to money laundering would also play a role.

Transmitters Statute

The Business Oversight staff concluded some types of virtual currency may qualify as mediums of exchange under the money transmitters statute whether or not they are redeemable in money, Dresslar said. Bitcoins are not now in wide circulation, but can be used to purchase everything from hotel rooms to psychiatric services to coffee.

A meeting of an internal task force at the Business Oversight Department in mid-December could lead to new rules specifically for the embryonic industry, Dresslar said. They haven’t decided whether a signoff from Governor Jerry Brown, a Democrat, is required, Dresslar said.

Venture capital firms, especially those based in California’s Silicon Valley, have invested about $403 million in bitcoin-related companies, according to the website CoinDesk. The money has gone to startups that swap bitcoins for fiat currencies such as the U.S. dollar, ones developing ways to secure bitcoins and firms that process payments in virtual currencies.

Any new regulations would also impose other requirements before virtual currency companies would obtain a California license, Dresslar said.

Applicants would have to show they have sufficient capital to operate and a qualified management team, which would have to undergo criminal background checks. They’d also have to be bonded at levels consistent with size and maintain reserves, called “eligible securities,” equal to the amount of their outstanding money transmissions.

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