Bitcoin Needs Tighter Rules Than Banks, Say Prosecutors
Virtual-currency firms should face regulations that are tougher than those for established financial-services providers because of their ability to hide criminal activity, according to law enforcement officials.
“Without stronger government oversight, we are allowing cybercriminals, identity thieves, traffickers of child pornography, and other malevolent actors to operate in a digital Wild West,” Cyrus Vance Jr., the district attorney for Manhattan, said at a hearing yesterday about possible state regulation of digital currencies.
Investors and entrepreneurs who spoke a day earlier at the first session of the hearings urged lighter regulation for startups. Yesterday, Vance and Richard Zabel, the deputy U.S. attorney for the Southern District of New York, recommended the opposite approach. The two days of hearings were convened by Benjamin Lawsky, the New York State superintendent of financial services.
“One aspiration with Bitcoin is for it to be a main artery of the commercial world,” Zabel said. “Its intrinsic qualities mean it needs to be treated differently.”
The prosecutors cited illegal activity linked to digital currencies, the potential for tax evasion and technologies that can be used to obscure transactions as dangers for law enforcement. They dismissed industry arguments that their successful investigation of several criminal networks demonstrates that criminal activity is under control.
On Jan. 27, federal prosecutors indicted a prominent figure among Bitcoin entrepreneurs, Charlie Shrem, for alleged money laundering linked to Silk Road, a Bitcoin-driven website allegedly used for buying drugs and other illicit goods. After closing the site in October, authorities said their probe is “ongoing.”
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.
Cameron and Tyler Winklevoss, twins who created a fund to invest in Bitcoin price swings and who testified on the hearings’ first day, say it may be an alternative to the global payment system currently dominated by companies such as Visa Inc. (V), Western Union Co. (WU) and large banks like JPMorgan Chase & Co. (JPM)
Federal regulators in March said Bitcoin-related businesses can be handled as state-licensed money transmitters -- a category that includes Western Union -- triggering a race by states to assess their own rules.
Only New York has publicly contemplated rules specifically for virtual-currency companies -- what Lawsky has called a “BitLicense” -- and its steps could set the tone for other states.
Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto and has since become a global sensation. It has no central issuing authority, and uses a public ledger to verify transactions while preserving users’ anonymity.
Vance endorsed the idea of requiring digital currency firms to obtain state money-transmitter licenses, while warning that such “action in and of itself may not be enough.” He said businesses that swap Bitcoin for traditional currency, for example, should have to conduct “enhanced due diligence” on customers.
Fred Ehrsam, the chief executive of Coinbase, a San Francisco-based digital currency exchange, said at the hearing that customers are usually willing to provide identifying information and that preventing illegal activity is crucial.
“Generally speaking, regulation could be a positive thing in this regard,” Ehrsam said at yesterday’s session, while warning against regulations that might “fundamentally inhibit the power of the Bitcoin network.”
Jeremy Allaire, chief executive of Circle Internet Financial Inc., which promotes use of Bitcoin for retail transactions, urged states to coordinate their regulatory efforts.
“We believe that there should be more guidance specifically geared toward digital currency firms and that the states should develop a streamlined approach to licensing these firms,” Allaire said at the hearing.
‘Take a Breather’
At a Bloomberg Government lunch in Washington yesterday, Bitcoin Foundation General Counsel Patrick Murck said regulators need to clarify where digital currency falls into their rules and “take a breather” to see how the existing rules pan out before creating new ones.
Vance and Zabel harshly criticized the use of Bitcoin “tumblers,” which accept a Bitcoin payment, and return the same amount with a new digital trail, obscuring its source. The process, which some virtual-currency enthusiasts embrace for privacy reasons, is sometimes called a “Bitcoin laundry.”
“In the cases I have seen they serve no other purpose than automated money laundering and identity concealers,” Zabel said.
Zabel also raised the possibility that Bitcoin could promote tax evasion as people use it to conceal dollars.
“The currency itself could become a form of tax haven, both for businesses and individuals,” he said.
Both Vance and Zabel dismissed objections raised by investors at the previous day of the hearing that recent prosecutions of alleged money-laundering efforts involving digital currency demonstrate law enforcement can handle the industry’s emergence. “It proves the opposite: this is a problem,” Vance said.
To contact the reporter on this story: Carter Dougherty in Washington at firstname.lastname@example.org