New York supervisor speech on bitlicense for virtual currencies

A week ago, the New America Foundation organised a meeting on the topic of virtual currencies and regulation in New York. During the meeting, a speech was given by Benjamin M. Lawsky, Superintendent of Financial Services, New York State Department of Financial Services (DFS). He outlined the current thinking on the envisaged bitlicense for virtual currencies in New York.

Bitlicense regime to be expected in 2014
In his speech, Lawsky outlined the remit of the NY Department of Financial Services (DFS). It acts as the supervisor for money transmission companies in New York. Its  starting point is therefore how to adapt money transmitter regulation to suit the business of companies that facilitate and execute transactions with virtual currencies.

The DFS is looking to have the regime put in place later this year; it has therefore engaged the bitcoin community in the debate and has held hearings. It is expected that the regulation will include a transitioning regime providing safe harbour for companies that fulfil basic requirements, and which commence the process of obtaining a license.

The elements of the bitlicense regime
The bitlicense regime will consist of:
–  Customer disclosure requirements, requiring companies to clearly set out that transactions are irreversible and that the virtual currency may be very volatile,
–  Adherence to anti money laundering requirements, including know-your-customer obligations,
– Provisions for capital requirement, ensuring that the company will be robust and able to withstand market events that may occur when dealing with a volatile virtual currency,,
– Security and soundness obligations, ensuring quality of operations and consumer protection.

The DFS is still contemplating whether or not the scope of supervision should extend to all transactions relating to virtual currencies (for example would the creation, exchange, sale and purchase of currencies all be within scope?) and the desirability for a public ledger for such transactions. Similarly, there is some uncertainty as to their position in relation to anonymous transactions.

Next steps
The DFS is likely to hold a public consultation on the proposed regime before its introduction. It’s aim is to move rapidly and provide legal clarity for companies that wish to offer their virtual currency services in new York.