NY Seeks Bitcoin Exchange Regulations - InformationWeek

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Government // Cybersecurity

NY Seeks Bitcoin Exchange Regulations

Proposal would require state's digital currency dealers to follow strict anti-money-laundering and consumer protection rules.

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New York is moving to bring some order to the largely unregulated world of digital currencies by proposing state licensing requirements for dealers that would include strict anti-money-laundering safeguards and consumer protections.

The state's Department of Financial Services proposed the regulations under existing law. Although the proposed regulations do not mention Bitcoin, the department refers to the proposal as "BitLicense." It is a response to the growing popularity of electronic money and its potential for misuse in burgeoning underground online economies.

The proposal has been released for public comment. If approved, a person or business engaged in "virtual currency business activity" would have to be licensed by the state unless already chartered to engage in currency exchanges. Dealers would undergo background checks and would have to show that business would be conducted "honestly, fairly, equitably, carefully, and efficiently."

[In a New York state of mind? See Google To Turn NYC Payphones Into WiFi Hotspots.]

Digital or virtual currencies are not completely uncontrolled. The US Treasury Department's Financial Crimes Enforcement Network (FinCEN) in 2013 issued guidance on how FinCEN regulations apply to virtual currencies. Essentially, when convertible currencies are transferred for something other than personal or internal corporate use, FinCEN does not distinguish between "real" and virtual or digital money. Virtual currency exchanges must register with FinCEN under current anti-money-laundering requirements. Forty exchanges had registered as of December 2013.

The Government Accountability Office in a recent report identified at least nine interagency working groups addressing the challenges of virtual currencies as well as additional informal collaborations between agencies.

"Thus far, interagency efforts have had a law enforcement focus, reflecting the attractiveness of virtual currencies to those who may want to launder money or purchase black market items," the GAO said. "If virtual currencies become more widely used, other types of regulatory and enforcement issues may come to the forefront. For example, recent events suggest that consumer protection is an emerging risk..."

Image credit: zcopley on Flickr.
Image credit: zcopley on Flickr.

The "recent events" include the failure of several Bitcoin exchanges and wide fluctuations in the value of Bitcoin, from about $13 per Bitcoin in January 2013 to more than $1,100 by December. In July 2013, the Securities and Exchange Commission brought charges of defrauding investors against an individual and a company in a Bitcoin-based investment scheme.

The New York proposal defines virtual currency as "any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology," and does not include currency intended exclusively within gaming platforms or customer reward programs.

Licensees must have written policies for anti-fraud, anti-money-laundering, cyber security, privacy, and information security and would have to maintain adequate capital and abide by all applicable federal laws.

New York is in the lead among a number of states that are working on virtual currency regulation, says Carol Van Cleef, a member of the Financial Services and Banking practice at the law firm Manatt, Phelps & Phillips. She says the Financial Services Department is working in an "appropriately deliberative process."

That said, the question of whether it is too early in the development of new types of electronic money to begin regulation is a valid one, says Van Cleef. "Is it here to stay?" There is a lot of infrastructure for the currencies being built out, but "this could be relatively short-lived."

She believes that virtual currencies in some form will survive. Although "the world of digital and virtual currencies is still experimental," there are organizations that believe it is worthwhile to invest in a regulatory structure that would help put it on a more stable basis.

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William Jackson is writer with the <a href="http://www.techwritersbureau.com" target="_blank">Tech Writers Bureau</A>, with more than 35 years' experience reporting for daily, business and technical publications, including two decades covering information ... View Full Bio

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User Rank: Apprentice
7/24/2014 | 2:24:38 AM
Bitcoin processing platform for the regulated sector - www.Polycoin.io
Polycoin is the only payments platform out there that is offering a solution fsuited or regulated organizatons such as Forex and gambling operators. to learn more, visit us at www.polycoin.io
User Rank: Apprentice
7/23/2014 | 11:41:05 PM
Re: How is this enforceable?
Has anyone heard of the newest cryptocurrensy Latium? It is a very interesting concept for distribution. The earlier you get in the more coins you can accumulate. I suggest the opportunists check it out: http://btcpioneer.com/latiumcoin
User Rank: Ninja
7/23/2014 | 11:15:51 AM
Re: Making Bitcoin safe
I agree 100%. Government needs to *not* get involved in trying to stabilize Bitcoin or make it safe. Bitcoin must stand or fall on its own.
IW Pick
User Rank: Ninja
7/23/2014 | 10:59:02 AM
Making Bitcoin safe
I don't think it's the job of governments to make Bitcoin safe to use and I think that doing so would strengthen its position as an alternative currency.  If the hard money theories that are the basis of Bitcoin are correct, then it will survive and prosper on its own; if they're wrong (and I think they are), then it should be allowed to fail; either way, we won't know if governments undertake to regulate it.

I see this as another case of socializing risk while leaving potential gains private; which is, in my humble opinion, the worst of both worlds.

User Rank: Ninja
7/22/2014 | 11:38:19 PM
Re: How is this enforceable?
It is indeed very complicated. It is not issued by a government, it is not accpeted everywhere. It is not where people would pu their pension money. It requires regulation -but what is the benefit for the enforcer? If US Govt. takes charge of Bitcoin and maintains the system, what would they gain in return?
User Rank: Ninja
7/22/2014 | 7:53:37 PM
Avoid .... or Evade?
I'll be the first to admit that I don't know much about Bitcoin, but everything I read about it tends to revolve around not trusting Uncle Sam, or wishing to evade taxes. The first question is if these folk don't trust a solid old-timer like Uncle Sam, why trust some upstart corporation? For those whose purpose is to evade taxes, a few nice federal prosecutions involving prison time would seem to be most in order.
David F. Carr
David F. Carr,
User Rank: Author
7/22/2014 | 4:46:40 PM
How is this enforceable?
I'd think it would be very difficult for the state or even federal government to force a Bitcoin exchange based offshore to comply with a registration requirement or much else. Maybe they can entice some that want to legitimize themselves with a certification / registration badge issued by the government. But isn't part of the point of these exchanges to operate outside of government scrutiny? The people who make that choice ought to know they're taking their chances and can't rely on government protection.
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