New York Might Be First to Regulate Bitcoin

State regulator still positive on the virtual currency but warns it won’t be allowed to develop in a vacuum.

National Journal
Catherine Hollander
Feb. 21, 2014, midnight

Bit­coin may be emer­ging from a few weeks of neg­at­ive head­lines, but one of the most out­spoken fin­an­cial reg­u­lat­ors says he still sees prom­ise in the vir­tu­al cur­rency.

“I do think it holds a lot of prom­ise (if money laun­der­ing can be ad­equately ad­dressed), both on its own and in terms of caus­ing ex­ist­ing pay­ments sys­tem tech­no­lo­gies to up their game,” Ben­jamin Lawsky, New York’s su­per­in­tend­ent of fin­an­cial ser­vices, wrote Thursday in a two-hour ques­tion-and-an­swer ses­sion on so­cial news site Red­dit.

Lawsky has spoken pub­licly about the fu­ture of bit­coin, a de­cent­ral­ized cur­rency cre­ated in 2008 by a per­son or people un­der the pseud­onym Satoshi Na­kamoto, and its peers be­fore. Earli­er this month, he said there could be a “ker­nel of something here that will have a pro­found im­pact on the fu­ture of pay­ments tech­no­logy and our fin­an­cial sys­tem,” even as he cited re­cent prob­lems with the bit­coin ex­change Mt. Gox and ac­know­ledged reg­u­lat­ors are not the ex­perts, ne­ces­sar­ily, on crypto­cur­rency.

On Thursday, he wrote of his per­son­al evol­u­tion on the sub­ject, cit­ing a not-quite “Rocky-IV-fi­nal-scene about-face,” but say­ing he and his col­leagues had be­come more sup­port­ive as they learned more about crypto­cur­ren­cies.

If Lawsky thinks vir­tu­al cur­rency holds prom­ise, he’s also made it clear that it’s not go­ing to de­vel­op free of reg­u­la­tion, as some bit­coin ad­voc­ates have urged. His state might be the first to de­vel­op bit­coin-spe­cif­ic reg­u­la­tion, and that could be a boon to busi­ness if firms that deal with vir­tu­al cur­rency de­cide to loc­ate where there’s more cer­tainty on the reg­u­lat­ory front. It wouldn’t ne­ces­sar­ily mean that oth­er states would use New York’s frame­work as a tem­plate for their own.

“It’s pos­sible we’ll go first,” Lawsky said in an in­ter­view after his Red­dit ses­sion. He then poin­ted to an an­nounce­ment Thursday morn­ing from the Con­fer­ence of State Bank Su­per­visors that it was form­ing an Emer­ging Pay­ments Task Force — which Lawsky will be part of — to study vir­tu­al cur­ren­cies and oth­er new pay­ment sys­tems as evid­ence his was not the only state pre­par­ing to of­fer guid­ance.

“But, again, it’s not about go­ing first. It’s much more im­port­ant that we get it right,” Lawsky said. His of­fice will draft a frame­work “for the next months,” he said. He de­clined to say when that frame­work would be is­sued.

So far, Lawsky has only offered broad out­lines of po­ten­tial vir­tu­al-cur­rency reg­u­la­tions. Last week, he said New York was con­sid­er­ing a spe­cial “BitLi­cense” for firms, al­though the pre­cise re­quire­ments the li­cense would in­volve are un­known. Asked wheth­er his de­part­ment would reg­u­late bit­coin ATMs, Lawsky wrote Thursday that he didn’t yet know. He has em­phas­ized the need to find the right bal­ance — to set the guard­rails, in reg­u­lat­or­speak — that will al­low in­nov­a­tion but not per­mit money-laun­der­ing or leave con­sumers at risk.

“That’s the mil­lion-dol­lar ques­tion we wrestle with every day,” he said Thursday.

The Red­dit “Ask Me Any­thing” ses­sion was part of Lawsky’s push to write “open-source” reg­u­la­tion. Last month, the New York Fin­an­cial Ser­vices De­part­ment held a pub­lic hear­ing on vir­tu­al cur­rency reg­u­la­tion that drew 14,000 par­ti­cipants on­line, Lawsky said.

The idea for the Red­dit ses­sion came from one of Lawsky’s roughly 1,850 Twit­ter fol­low­ers, Matt An­der­son, deputy su­per­in­tend­ent for pub­lic af­fairs, con­firmed. Lawsky said it was sold as a “pro­duct­ive way to, in one fell swoop, get a lot of ques­tions and a lot of com­ments and a lot of dia­logue.” And it did garner far more ques­tions and com­ments than Lawsky answered in the two-hour peri­od Thursday af­ter­noon. Now comes the in­tern­al rule-writ­ing pro­cess.

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