Big Stakes Involved With Bitcoin Regulation

April 22, 2015 at 9:01 am Leave a comment

Benjamin Lawsky, Superintendent of New York’s Department of Financial Services, said yesterday that he expects the State to unveil regulations mandating the licensing of virtual currency operators by the end of May, according to Banking Law 360. These regulations, which have been the subject of extensive analysis since they were proposed last July, are essentially the first draft of an attempt to regulate virtual currencies since neither the federal government nor any other state has moved to regulate them, the most prominent of which is the Bitcoin. It’s not surprising, then, that the Superintendent indicated that the regulations may be modified in response to coordinate enforcement with other states, including California.

As currently proposed, the regulations shouldn’t have a direct impact on established credit unions or banks.  It exempts entities already licensed by the Banking Department provided they get permission from the Superintendent prior to engaging in the business of virtual currency.  But the question of how best to regulate virtual currencies will have a profound impact on how finance is transacted in the coming years. Here is why.

Follow the money: although the Bitcoin has gained most of its notoriety in this country as a potential facilitator of illegal transactions — which is why the DFS is seeking to impose state level requirements on Bitcoin operators to report suspicious activities – investors are intrigued by the technological possibilities behind the currency. In March, the WSJ reported that “[a] Silicon Valley startup has persuaded some of the biggest names in venture capital to put $116 million behind its plan to turn the technology behind bitcoin into a mass-marketed phenomenon.”

Nor is the money coming exclusively from a bunch of wealthy libertarian California dreamers. The staid Swiss Banking Giant UBS also recently announced that it will be investing in virtual currency research in London and the British Government has coupled its own calls for increased regulation with the promise of an additional 10 million pounds ($15 million) for a research initiative that will look into the blockchain technology behind digital currencies.

Silicon Valley types are making these investments as the Federal Reserve is prodding the banking industry with increasing urgency to think about how the currency processing system should be updated for the 21st Century. One Fed researcher has even suggested the creation of a Fed Bitcoin. In addition, NATCHA is in the process of expediting its clearing processes, which brings us back to New York State’s regulations.

It wasn’t too long ago that the only thing most regulators and politicians knew about virtual currencies was that they were convenient tools for criminals. The discovery of a silk road website where visitors could buy and sell a laundry list of drug paraphernalia seemed to vindicate this concern.

But times are changing. Virtual currencies demonstrate just how antiquated the traditional negotiation of currency has become. Don’t get me wrong. I am not predicting that the Bitcoin is going to rival the dollar as a currency any time soon; but I am predicting that the dollar bill of tomorrow will look a heck of a lot like today’s Bitcoins. Those regulators that strike the proper balance between appropriate oversight of this technology and fostering an environment that allows for innovation will be positioning their states and their countries to reap untold riches in the coming years, not to mention enabling them to remain in the forefront of financial regulation.

Entry filed under: Advocacy, New York State, Regulatory, technology. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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