On July 17, 2014, New York became the first state to propose guidelines to regulate virtual currencies such as Bitcoin. The proposed rules issued by the New York Department of Financial Services (“NYDFS”) would require entities engaged in the “virtual currency business” to obtain a “BitLicense” and comply with other regulations if their activities involve the state of New York or a New York Resident. The “BitLicense” rules cover virtual currency exchanges and companies that secure, store or maintain custody or control of the virtual currency on behalf of customers. Merchants that accept virtual currency for payment would not need to apply for a license. The proposal is the product of a nearly yearlong review, and includes rules on consumer protection, the prevention of money laundering, and cybersecurity.
The rules were published in the New York State Register on July 23, which began a 45 day public comment period, after which the NYDFS intends to make changes to the rules and send them back out for review before they are finalized.
According to Benjamin Lawsky, the Superintendent for the NYDFS, the rules for virtual currency companies are in line with New York’s existing regulations for banks and other financial institutions, but are also tailored to address the specific issues facing virtual currencies. For example, the rules would require such companies to have stronger cybersecurity programs because they are more vulnerable to such risks. “We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. 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,” Superintendent Lawsky said of the new rules.
Although Bitcoin began five years ago primarily as a currency for computer hackers, it has since grown into a viable online payment form that has attracted investors seeking to profit from fluctuating values. Despite its growing popularity, securities regulators have not yet enacted regulations applicable to the currency – both the SEC and FINRA have said the currency is risky but neither has enacted regulations. Highlighting the riskiness of the currency is the collapse of Mt. Gox, one of the largest Bitcoin exchanges, which in February 2014, went dark and filed for bankruptcy in Japan amid reports that nearly 800,000 Bitcoins had been stolen by hackers. Following the announcement of the bankruptcy filing, prices for the already volatile currency dropped 23 percent.
The NYDFS’s proposed regulations are a good first step towards making the currency safer and more stable, however, until other regulators establish their own guidelines, being licensed in New York can only go so far because many of these companies operate across state lines and international boundaries.