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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Comments (3)
riposte wrote:
another get rich , quick event, blows up in the participants faces…will we ever learn?

Feb 11, 2014 4:43pm EST  --  Report as abuse
paintcan wrote:
How can Bitcoins claim they are independent and a hedge against traditional banking and currencies? The Bitcoin couldn’t work without the traditional elements of currency and banking from the looks of what I could find briefly, for free, online. You still have to translate it back into local currency and that is accessible as long as the power doesn’t go out or the very private (and somewhat murky) industry behind it doesn’t file for chapter 11 or simply close shop one night and abscond with the traditional funds? I imagine there will be legal ways to close shop and all the Bitcoin holders will have to suffer through that issue the way any bankruptcy case is dealt with.

They are really just digital shoppers tokens that some towns have tried (one in Vermont maybe a decade ago) at the behest of the local Chamber of Commerce.

A $250.00 study to find out why the Bitcoin might be a potential scam?

Grass roots coinage is nothing new. That was life in the Middle Ages before central governments were able to coordinate and control the currencies nationwide. Why is this invention possibly considered an improvement over Fiat currencies, so called? After a while, few believed in the local currencies, so anyone having to deal with large amounts of it had to have means to assay the coins in house.

And since when has anything, without some kind of discipline, and that appeals to everyone anywhere, likely to be stable? It’s failure to maintain a firm value may even make the movements of traditional currencies look glacial by comparison.

Wasn’t the problem of the last ten years – at least until the credit crash – the fact that banks and Walls Street were both moving hysterically and doing many of the same things? It doesn’t sound like the Bitcoin is going to take the shakes, jitters and erosion of value out of the use of money or of economies. It even looks like it will be speculated somehow. If that happens will there be Bitcoins that win and other issues that loose? They can be made in endless supply so how can that possibly be an improvement over printing press currency? How are they really any different that paying up front on one’s credit card and spending its down? That would be a hedge against inflation too.

Isn’t open source software where money is concerned something like the Treasury saying, we are going to start circulating the printing plates to stabilize and help grow the economy because we have decided to allow the demand for the paper currency to determine the value of that currency without any interference from a central authority. How do the Bitcoin “miners” reign in too much coinage online to prevent it from becoming worthless?

Do people really believe that will work?

One might as well “invest” in gift certificates or pay the store upfront for a guaranteed price on future purchases? . They don’t suffer swings of value either if you use them quickly enough.

Feb 11, 2014 10:01pm EST  --  Report as abuse
wakslob wrote:
I got Free Bitcoins when I signed up on Cryptsy using the code below. Enter it into the field where it asks for a referrer. Enjoy =)
f117533ffe641c9fe91de6212e21d831f8114ebf

Feb 12, 2014 5:27am EST  --  Report as abuse
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