New York State’s Department of Financial Services seems ahead of the game in formulating regulations for Bitcoin and other virtual currencies. The department has been gathering recommendations from a number of stakeholders recently with the aim of introducing a regulatory framework for virtual currencies by the end of 2014. As part of that information-gathering effort, the department’s superintendent, Ben Lawsky, participated in a public Q&A on Reddit yesterday to elaborate the department’s efforts around virtual currency regulation.
“The key is finding the most effective methods to root out and deter money-laundering without having an overbearing impact on those who are just trying to use the systems legally without driving firms out of business with extraordinary compliance costs,” Lawsky said during the public forum.
[Check Out More of Our Bitcoin Coverage: Bitcoin: Friend or Foe to Banks?]
The issue of avoiding overly burdensome compliance costs for those participating in virtual currencies was a central theme during the reddit forum. When asked how the Department of Financial Services will ensure that small startups and sole traders will be able to afford to comply with regulations, Lawsky answered:
We face similar problems in our regulation of smaller community banks. Dodd Frank, for example, was designed to address problems created by our largest institutions but at times has hit these smaller banks (who had little to do with the causes of the financial crisis) disproportionately in terms of compliance costs, etc. We've had some success in getting these regulations amended so they don't crush smaller community banks. Any regulations we issue for virtual currency firms will have to be carefully tailored with this in mind.
But with the current anti-money laundering laws in place, there is a significant burden for all organizations in having record-keeping and monitoring systems in place, says Bill Stern, a partner in the business law department at Goodwin Procter. “At a basic level [organizations] need to have that compliance infrastructure in place… and that’s difficult for smaller organizations. I don’t see the regulators backing down from that,” Stern observes.
At the same time Lawsky admitted that it would be advantageous for regulators to encourage Bitcoin exchanges and businesses to operate in New York. In addition to the benefits of encouraging innovation taking place in New York rather than elsewhere, Lawsky said that bringing Bitcoin business here would give regulators better visibility into the intricacies of virtual currencies.
It would be far easier if we had some exchanges locally that we could interact with, allowing us to better understand these issues so as to protect those engaging in trades with the exchanges. We're hopeful that clear regulations, if done in a smart, modern way, may incentivize some of these exchanges to come ashore (hopefully here in NY).
“Bringing Bitcoin businesses onshore would allow regulators to know what they’re doing, rather than having [those businesses] working in the shadows, so to speak, overseas,” Stern agrees.
In addition Lawsky said he hoped that a clear regulatory framework would give banks the certainty they need to start working with Bitcoin exchanges and businesses. “We do hope that regulation will create a level of certainty that could incentivize banks to promote not stifle these innovations,” he related.
New York State can start formulating new regulations by looking at its own requirements for licensing money transmitters, which go above and beyond federal regulations from FINCEN, says Bill Stern. Additionally, the New York State regulators will probably want to provide additional consumer protections in any new virtual currency regulations. “If you have fraudulent transactions on a credit card, you have laws that protect the consumer against liability. But right now virtual currencies are more like cash. If it get stolen there’s no liability [protection]… and, to the extent that these currencies become widely accepted, what would happen if a Bitcoin exchange failed? Regulators are concerned if that happens,” Stern explains.