The New York Department of Financial Services issued an order on Wednesday that it will immediately start accepting applications and formal proposals for the establishment of virtual currency exchanges. NYDFS Superintendent Benjamin Lawsky said that recent problems at several Bitcoin exchange firms “further demonstrate the urgent need for stronger oversight of virtual currency exchanges, including robust standards for consumer protection, cyber security, and anti-money laundering compliance.” He also said that his department “will continue to proceed swiftly and thoughtfully to provide rules of the road for reputable virtual currency firms seeking to conduct business on-shore in a responsible manner.”
Lawsky gave notice that a regulatory framework would be proposed by the end of the second quarter of 2014 and approved exchanges would “ultimately” be expected to comply with such rules. The order states that “any appropriate framework should include strong legal and operational controls, including robust BSA/AML requirements.” The concept of a “BitLicense” still appears to be on the table as part of this initiative.
The Texas Banking Department also announced last week that it will be issuing regulations addressing virtual currencies in the next 60 days.
Virtual currency, and Bitcoin in particular, continue to attract attention in Washington, D.C., as well. Sen. Joe Manchin (D-W.Va), a key member of the Senate Banking Committee, has proposed the United States issue a ban on Bitcoin in a letter to federal financial regulators. “This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy,” he wrote to Chair of the Federal Reserve Board Janet Yellen and Treasury Secretary Jack Lew, among others.
One lawmaker responded to Sen. Manchin’s with his own letter to regulators, tongue firmly in cheek. Rep. Jared Pollis (D-Colo.) suggested that banning cash would be just as effective as banning Bitcoins, writing that “[d]ollar bills are present in nearly all major drug busts in the United States and many abroad.” Cash allows for anonymous transactions perfect for illegal activity “from drug purchases, to hit men, to prostitutes,” Rep. Pollis wrote, noting that digital currencies are also carbon neutral and more environmentally friendly than cash.
Testifying at a hearing of the Senate Banking Committee, Chair of the Federal Reserve Board Janet Yellen said her agency has no plans – and no jurisdiction – to issue regulations.
Yellen told lawmakers that Bitcoin and other digital “payment innovations” are outside the Board’s purview. “To the best of my knowledge, there is no intersection in any way between Bitcoin and banks that the Fed has the ability to supervise and regulate.” Responding to a question from Sen. Manchin (D-W.Va.), Yellen said, “the Fed does not have authority with respect to Bitcoin.”
Instead, Yellen said virtual currency would fall under the purview of the Justice Department and/or the Financial Crimes Enforcement Network within the Treasury Department. “They have indicated that their money laundering statutes are adequate to meet their own enforcement needs,” she said.
The Chairwoman proposed another possible regulator: Congress. “It certainly would be appropriate, I think, for Congress to ask questions about what the right legal structure would be for virtual currencies that involve nontraditional players,” she told the Committee.
The recent failure of several Bitcoin exchanges generated statements from other legislators. Some – like Sen. Tom Carper (D-Del.) – called for regulation as an attempt to protect consumers. “U.S. policymakers and regulators can and should learn from this incident,” he said in a statement. “As any industry matures it will face growing pains.”
To read the New York Department of Financial Services’ issue on public order on virtual currency exchanges, click here.
To read Sen. Manchin’s letter, click here.
To read Rep. Pollis’ letter, click here.
Why it matters: A road map for regulation of virtual currency is beginning to emerge as more states appear willing to consider issuing licenses for entities offering exchange and other services involving virtual currency. While immediate action at the federal level seems unlikely, several states are expected to be acting on new regulations soon. Most importantly, Bitcoin and virtual currencies businesses can start the process of getting a license to serve customers in one of the most desirable markets in the US. (Click here to read our previous newsletter.) Whether or not federal lawmakers will take action remains to be seen.