NY Mulls Bitcoin License

New York Department of Financial Services Superintendent Benjamin Lawsky said the agency is considering a “BitLicense” in hearings held Jan. 28-29 in New York City. The Department will develop a virtual currency regulatory framework sometime in 2014 covering businesses operating in New York, according to Lawsky. The Department’s concerns center on the unique characteristics of Bitcoin and other virtual currencies, including pseudonymous transactions, and whether those characteristics make virtual currencies particularly susceptible to illicit activity.

The specter of bad actors and large-scale financial fraud loomed over the hearings, fueled by the recent arrests of Bitcoin advocate and BitInstant CEO Charlie Shrem and virtual currency trader Robert Faiella. Lawsky acknowledged as much in his opening question to the first of five panels slated for the two-day hearings, commenting on the cloud that recent law enforcement action has placed over the industry.

Overall, however, the Department appeared to recognize the potential benefits of virtual currencies and seemed intent on fostering the budding industry. Through repetitive iterations of the Bitcoin-as-black-market theme, the hearings largely dealt with the nuts-and-bolts of regulating an industry that the Department admittedly doesn’t fully understand. Panels attended by the Bitcoin headline grabbing Winklevoss twins, Bitcoin Investment Trust founder Barry Silbert and virtual currency venture capitalists Jeremy Liew and Fred Wilson gave the most insight into the Department’s willingness to account for industry perspective in its rule making process. Lawsky and his colleagues questioned the panel about the intricacies of virtual currency economics and how regulation might affect the industry.

The Department’s questions focused on which actors should be subject to any proposed regulations:

Who do you think should be regulated in the [Virtual Currency] ecosystem? Why should some actors in the marketplace be regulated and others not? It sounds like [Bitcoin] miners have a tremendous amount of power in the infrastructure; the concern that we’ve discussed internally is bad acting miners that are looking to corner the market in order to manipulate it, why shouldn’t we regulate miners?

And on how the proliferation of virtual currencies might play out in the near-term:

About half of Bitcoin’s market cap is held by under 1,000 people, how do we get past this price speculation phase of the currency? The assumption is that hording Bitcoins is antithetical to creating a robust Bitcoin payment system.

The Department also showed concern for price volatility, consumer benefits, and potential fees for financial services in the virtual currency industry. Geographic and jurisdictional issues were also discussed, relating to how New York should factor into the global footprint of Bitcoin and other similar technologies.

In a panel attended by Charles Lee, creator of Litecoin, a Bitcoin alternative, and several financial regulatory attorneys, the Department honed in further on the specifics of potential virtual currency regulation. Lawsky questioned the panel about the adaptability of money transmitter licensing to virtual currency businesses. Practical concerns about currency risk in the surety bonds, permissible investment requirements for money transmitter licensees and dollars-to-Bitcoin conversion mechanics framed the afternoon discussion.

Day two saw a bit more Bitcoin skepticism from Manhattan District Attorney Cyrus Vance, Jr. and U.S. Attorney Richard Zabel, who both were involved in Monday’s arrests, as well as the shutdown of the black market website SilkRoad, that notoriously accepted only Bitcoin as payment. However, even these law enforcement agents acknowledged that closely regulated virtual currency exchanges located the U.S. would benefit law enforcement efforts.

Throughout the hearings, the Department focused on the exchange point, where virtual currency is traded for fiat currency, and Lawsky’s questions seemed to hint at a licensing framework that may closely resemble current money transmitter licenses. The Department seemed unwilling to permit illicit activity in the name of financial innovation, with Lawsky clearly stating that it is“simply not worth it to allow those activities.” But the panelists unanimously echoed, over the two days of hearings, that quelling Bitcoin-enabled illegal activity and encouraging the growth of the nascent virtual currency industry into a viable alternative payment system for consumers are not mutually exclusive goals. The Department seemed to accept the argument that fostering the development of a regulated U.S-based virtual currency industry is the appropriate means by which to prevent money laundering, terrorist financing, and the other illicit activities inherent in any money transfer system.

The Notice of Intent to Hold Hearing on Virtual Currencies can be found here.

A video archive of the NYDFS Virtual Currency Hearings and copies of written testimony can be found here.

FinCEN: Money Services Business Registration Not Required for Bitcoin Miners, Certain Bitcoin Investment Activity, and Virtual Currency Software Providers

Following on the heels of its March 2013 Virtual Currency Guidance, FinCEN recently published two Bitcoin-related opinion letters that further clarify the applicability of the guidance to certain actors in the Bitcoin economy. The Bitcoin system relies on the participation of thousands of Bitcoin “miners”, whose collective activity verifies the authenticity of each transaction, and who compete with one another for a Bitcoin reward for helping to secure the system. The March guidance appeared to state that a Bitcoin miner who “creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent” is a money transmitter, but is not a money transmitter if she uses the Bitcoins she has mined to purchase goods or services. The opinion letter clarified that miners who convert Bitcoin rewards into real currency are not money transmitters, so long as the transaction is solely for the miner’s “own purposes and not as business service performed for the benefit of another.” The opinion letter did note that Bitcoin miners who purchase goods or services using Bitcoins at the direction of a third-party such as a seller or a creditor may be considered money transmitters. Prior to this opinion letter, individual members of large Bitcoin mining pools and guilds (many of whom are hobbyists and who earn very little Bitcoin through their participation) worried they would be treated like large financial institutions from FinCEN.

The second opinion letter addressed whether a company offering software that facilitates the purchase and sale of virtual currency is considered a money transmitter subject to Bank Secrecy Act regulation. FinCEN stated that the “production and distribution of software in and of itself does not constitute acceptance and transmission of value, even if the purpose of the software is to facilitate the sale of virtual currency.” In addition, FinCEN stated that a company that buys and sells virtual currency from counterparties, “all exclusively as investments for its own account, is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons,” and is therefore not a money transmitter. However, if the company was to offer virtual currency-related investment or brokerage services, the company may be required to comply with FinCEN’s BSA/AML regulations.

The full text of the FinCEN opinion letters can be found here and here.

Bitcoin is “Money” under the WA Uniform Money Services Act

Washington’s Department of Financial Institutions issued a statement declaring that Bitcoin (and other virtual or crypto-currencies) is “money” for purposes of state money transmitter law, and that companies that wish to transmit virtual currency on behalf of Washington residents should contact the Department for a determination of whether a state money transmitter license is required. However, the Department did not address whether Bitcoin would be considered a component of a licensed entity’s permissible investments for purposes of licensure, nor did it provide any indication whether any particular Bitcoin business model would require licensure. The announcement is significant because any Bitcoin company with an active footprint in the state of Washington is now effectively on notice to contact the Department to determine whether it should obtain a money transmitter license there.

The Department’s statement can be found here.