Since securities first traded at the curb of Wall Street in the 1700s, financial innovation has been a mainstay of the New York state economy. And where financial innovation runs, financial regulation has tended to follow closely behind.
Bitcoin, a virtual currency that has facilitated online trade in both legal and illegal goods, and the institutions that handle it, are currently unregulated in all 50 states. Recently, the New York State Department of Financial Services submitted a set of proposed regulations for the virtual currency industry for public comment. The regulations are the first of their kind proposed in the U.S. They would attempt to protect consumers, prevent money laundering and set rules for cybersecurity by requiring businesses that broker virtual currency transactions to be licensed.
“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity ”” without stifling beneficial innovation,” said Benjamin M. Lawsky, superintendent of the Financial Services, in a press release announcing the proposed regulations. “Setting up common-sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”
The starting point for the proposed regulation of virtual currency is decidedly old school, according to Lawsky.
“We currently license money transmitters like Western Union that transmit in fiat currency,” Lawsky said in a thread on the social news website Reddit earlier this year. “The question we are hard at work on now is whether our existing rules for the Western Unions of the world (which were written before anyone had even thought of an Internet) are adaptable to the virtual currency world or whether we need a separate more modernized framework that is more geared to the specific characteristics of virtual currency.”
Over the past year, virtual currency drew attention from consumers and media as the value of a single bitcoin soared to a high of $1,242 in November 2013 then erratically fell and rose by hundreds of dollars before settling around $600 this summer. In addition, the highly publicized failures of bitcoin exchanges such as Mt. Gox and Flexcoin, which together cost bitcoin holders millions of dollars, drew the attention of regulatory agencies.
Among the other problems with bitcoin and virtual currencies has been a wariness of banks to deal with virtual currency and bitcoin transactions. Some banks have closed the accounts of customers who were transferring money to or from bitcoin exchanges.
“We do hope that regulation will create a level of certainty that could incentivize banks to promote not stifle these innovations,” Lawsky said in the Reddit thread. “I also suspect there are banks who are quite interested in the technology but are being risk averse for now in the absence of regulatory clarity.”
Under the proposed regulations, businesses would be required to be licensed by the Department of Financial Services to receive or transmit virtual currency on behalf of consumers; secure, store or maintain custody or control of virtual currency on behalf of customers; perform retail virtual currency conversion services; buy and sell virtual currency as a customer business; or control, administer or issue a virtual currency.
Essentially, the regulations would hold businesses handling virtual currency to the same security and reporting standards as banks that deal with hard currency. Virtual currency businesses would be required to verify account holders, report suspected fraud and money laundering, as well as have a compliance officer and an information security officer, who would be tasked with overseeing and implementing the company”™s cybersecurity program and enforcing its cybersecurity policy.
“We recognize that ”” as the first state to put forward specially tailored rules for virtual currency firms ”” continued public feedback will be an important part of finalizing this regulatory framework,” Lawsky said in the announcement. “We look forward to carefully and thoughtfully reviewing public comments on our proposal.”
Other states will likely be following New York”™s lead with regulations.
“I think most states are contemplating these sorts of regulations or will be very soon,” said Howard Pitkin, commissioner of the Connecticut Department of Banking, “We haven”™t gotten to the drafting stage yet.”
According to Pitkin, the need for regulation flows from the need to protect consumers.
“I think that disclosure of the risk is the starting point. Consumers need to understand the risks in dealing in bitcoin and other cryptocurrencies,” Pitkin said. “All that I”™ve seen has told me that there are considerable risks.”
The proposed regulations were published in the New York State Register”™s July 23 edition, which began 45-day public comment period. After the comment period, the rules are subject to additional review and revision based on public feedback before the Department of Financial Services finalizes them.
