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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.

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Paying with bitcoin.(Cameron Spencer/Getty Images)

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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