New York planning a reality check for virtual currencies

WASHINGTON/NEW YORK Tue Feb 11, 2014 6:32pm EST

A chain of block erupters used for Bitcoin mining is pictured at the Plug and Play Tech Center in Sunnyvale, California October 28, 2013. REUTERS/Stephen Lam

A chain of block erupters used for Bitcoin mining is pictured at the Plug and Play Tech Center in Sunnyvale, California October 28, 2013.

Credit: Reuters/Stephen Lam

WASHINGTON/NEW YORK (Reuters) - New York's financial regulator on Tuesday revealed new details on how the state plans to govern virtual currencies such as bitcoin, just as problems in the nascent market took a turn for the worse.

Benjamin Lawsky, superintendent of New York's Department of Financial Services, expects to adopt consumer disclosure rules, capital requirements and a framework for permissible investments with consumer money.

"Our objective is to provide appropriate guard rails to protect consumers and root out money laundering without stifling beneficial innovation," Lawsky said in a speech at the New America Foundation in Washington.

Lawsky said last month that his agency plans to issue rules for businesses handling virtual currencies, including a "BitLicense", which could make New York the first U.S. state to regulate virtual currencies such as bitcoins.

Bitcoin proponents like the fact that it and a host of other currencies generated by computer programs are not backed by a government or central bank, and that their value fluctuates only according to demand.

But the industry has been plagued by scandals. Last month, the vice chairman of a trade group was charged by U.S. prosecutors with conspiring to commit money laundering using Bitcoin.

On Tuesday, Slovenia-based Bitstamp became the second major bitcoin exchange to halt customer withdrawals in the past several days, citing "inconsistent results", and blaming a denial-of-service attack.

That was a day after the value of bitcoin slid to its lowest in nearly two months after Mt. Gox, the best known digital marketplace operator, said a halt on withdrawals would continue indefinitely.

The price of bitcoin, which has gained wider acceptance in recent months, also varied dramatically from one exchange to another. On Tuesday, it was quoted at $645 per coin on Bitstamp's exchange, down 6 percent on the day.

TRICKY QUESTIONS

Still, Lawsky also highlighted positive aspects of the new technology, saying there was room for a thriving industry as long as it stuck to the rules, avoided money laundering, and did not duck regulation off-shore.

"I'm hoping we'll make New York an attractive place for those who want to do this the right way," he said.

Consumers needed to be told clearly about risks in the virtual currency, such as the fact that transactions are generally irreversible, and that they could lose their money if they hold onto bitcoins for an extended period.

More challenging questions include capital requirements for firms to absorb unexpected losses, and how many risks they can take with investments. One issue is whether the firms should be allowed to invest in virtual currencies.

"The really tricky question for regulators is how we structure those type of rules in light of the fact that the funds these firms hold are not denominated in dollars or other forms of traditional fiat currencies," Lawsky said.

Lawsky expected to release the regulations in the spring or the summer of this year, and said the agency would seek public comment once it had published the plan in a so-called notice for proposed rule making.

His agency is still wrestling with whether to ban or restrict the use of "tumblers", which obscure the record and source of virtual currencies. Tumblers are a concern to law enforcement, but they might also have legitimate uses.

He said most virtual currencies have public ledgers which, when combined with know-your-customer guidelines, could serve as anti-money laundering controls.

Lawsky added that he is grappling with what types of firms and transactions to regulate.

The remarks follow two days of hearings in New York on the potential regulation of virtual currencies. Witnesses at the late January hearings included state and federal prosecutors, as well as industry participants such as the investor twins Cameron and Tyler Winklevoss.

Also on Tuesday, Canada said it will toughen rules targeting money laundering and terrorist financing to keep a closer eye on the use of virtual currencies.

(Reporting by Douwe Miedema in Washington and Karen Freifeld in New York. Editing by Andre Grenon)

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