Bitcoin Firms Will Get Regulatory Framework in 2014

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“On behalf of the New York State Department of Financial Services (NYDFS), I’d like to welcome everyone to the first of two days of hearings on the regulation of virtual currencies.

“As you may know, over the last six months, our agency has been conducting an extensive inquiry into virtual currencies.

“We’ve had dozens and dozens of meetings with a wide range of industry participants. We’ve spoken to leading academics and law enforcement officials. And we’ve reviewed thousands of pages of documents, reports, and other materials.

“Today’s public hearing is the next step in that inquiry.

“Ultimately, it’s our expectation that the information we’ve gathered in this fact-finding effort will allow us to put forward, during the course of 2014, a proposed regulatory framework for virtual currency firms operating in New York.

“I believe we would be the first state in the nation to do so. Clearly, when it comes to virtual currencies, regulators are in new and unchartered waters.

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“Moreover, the Department of Financial Services – like many other state financial regulators – has a specific legal responsibility to license and regulate money transmission. And to the extent that some virtual currency service providers are engaged in money transmission, we do have an important role in writing and enforcing the rules of the game for financial firms.

“Our role is perhaps best described as that of a referee. We want to make sure everyone is playing by the rules and preventing misconduct, such as money laundering. But, at the same time, we also want to make sure that we don’t clip the wings of a fledgling technology before it gets off the ground. We want to make certain that New York remains a hub for innovation and a magnet for new technology firms.

“Indeed, virtual currency could ultimately have a number of benefits for our financial system. It could force the traditional payments community to ‘up its game’ in terms of the speed, affordability, and reliability of financial transactions.

“I think many consumers – myself included – are perplexed that, in a world where information travels around the globe in a matter of milliseconds, it can often take several days to transfer money to a friend’s bank account.

“Moreover, the open-source nature of this technology, relatively low (financial) barriers to entry, and nascent nature of this industry mean its constantly evolving.

The virtual currency industry – as currently constituted – may or may not ultimately see wide-spread adoption among the general public. It’s open for debate. There are, for example, serious questions about whether – given its volatility – it can serve as a stable source of value for transactions.

“But regardless of that, there might be – at the very least – a kernel of something here that has a profound impact on the future of payments technology and the financial system. That’s why we want to proceed without any prejudgements.

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“Right now, the regulation of virtual currency industry is akin to a virtual Wild West. (There is even a modern day Gold Rush among miners in the virtual currency community.) That lack of regulation, however, is simply is not tenable for the long term.

“Fashioning appropriate guardrails for virtual currencies presents challenging questions for regulators. Virtual currency is not easily categorized within the divisions we traditionally think about when it comes to the financial system (such as banks, insurers, or money transmitters). It’s neither fish nor fowl.

“And while we want to set up clear rules of the game, we also want to preserve sufficient flexibility given the constantly evolving nature of this new technology.

“That is, in part, why we’re evaluating whether our agency should issue a so-called ‘BitLicense’ specifically tailored to virtual currencies.

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“There is, we acknowledge, distrust among some in the virtual currency community about regulation. However, we believe that – for a number of reasons – putting in place appropriate regulatory safeguards for virtual currencies will be beneficial to the long-term strength of the virtual currency industry.

“First, serving as a money changer of choice for terrorists, drug smugglers, illegal weapons dealers, money launderers, and human traffickers can expose the virtual currency industry to extraordinarily serious criminal penalties. Taking steps to root out illegal activity is both a legal and business imperative for virtual currency firms.

“Second, safety and soundness requirements help build greater confidence among customers that the funds that they entrust to virtual currency companies won’t get caught in a virtual black hole. Indeed, some consumers have expressed concerns about how quickly their virtual currency transactions are processed. There have also been public reports of virtual currency lost – perhaps irretrievably – through hacking and other cyber security vulnerabilities. Addressing those issues through enhanced safety and soundness requirements would be important to building greater confidence in this technology among the general public and promoting wider adoption.

“We look forward to a spirited discussion on all of these issues.”

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