New York will adapt existing rules to license digital-currency firms even as it considers law-enforcement calls for tough measures to prevent money laundering, the state’s top financial regulator said.
“We do not have to throw out all of our existing rules for money transmitters or banks, which have generally served consumers well when vigorously enforced,” Benjamin Lawsky, superintendent of New York Department of Financial Services, said yesterday in a speech to a New America Foundation conference on Bitcoin in Washington. “Certain aspects of virtual currency could dovetail with existing regulations.”
Bitcoin entrepreneurs urged Lawsky in January to avoid writing new rules that could stifle the fledgling technology’s promise to get lower costs and less fraud than in the existing payments system dominated by companies such as Visa Inc. (V:US) and JPMorgan Chase & Co. (JPM:US)
New York will “likely have to proceed with issuing some form of specially tailored BitLicense that adapts those rules to the world of virtual currency,” Lawsky said. He said on Jan. 27 that his agency will propose regulations this year.
At hearings Lawsky held on Jan. 28, law-enforcement officials called for the state to impose tough anti-money-laundering rules on digital currency businesses. Manhattan District Attorney Cyrus Vance Jr. urged “enhanced due diligence” for Bitcoin exchanges beyond what is required for banks.
New York is considering a system that piggybacks on existing federal regulations on money laundering without making its own separate set of rules, Lawsky said in an interview after his speech.
The key, he said, will be “know-your-customer” rules that demand digital-currency businesses be cognizant of clients’ suspicious activity, combined with the public record of transactions that is part of Bitcoin’s underlying technology.
That approach “is not overbearing but gives law enforcement what it needs,” Lawsky said in the interview.
The Treasury Department’s Financial Crimes Enforcement Network said in March that virtual-currency businesses may be regulated as money transmitters, and that they should register with Fincen, as it is known. Since states license such companies, the decision set off a rush by states to decide how to treat the embryonic industry.
Bitcoin, introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, has no central issuing authority and uses a public ledger to verify transactions that are authenticated by encrypted signatures. It is accepted by merchants selling legitimate products while also being used in illegal transactions.
Jennifer Shasky Calvery, the Fincen director, said at the Washington conference that “many virtual currency exchanges” haven’t registered with the network. Companies that have are “doing a great job” in reporting suspicious transactions, a central requirement of U.S. money-laundering rules.
Calvery also said that even individuals who exchange dollars for Bitcoin privately for customers they meet online may need to register with Fincen. “Essentially you’re taking money from the public and giving them value in return,” she said.
Two men Florida men were arrested Feb. 6 on money-laundering charges after allegedly selling Bitcoin to undercover police officers who told them the digital currency would be used to buy stolen credit-card numbers. The officers said they found the men through a website called LocalBitcoins.com.
Lawsky said in his Washington comments that the department will probably include “a strong set of specially tailored, model consumer-disclosure rules” for digital currency firms. For example, consumers should be aware that Bitcoin transactions are generally irreversible, he said.
Traditional money transmitters such as Western Union Co. (WU:US) and MoneyGram International Inc. (MGI:US) also have to follow rules on safety and soundness, including requirements that they hold capital buffers to ensure they can handle unexpected shocks. They are also limited in which kinds of investments they can make with customer money.
New York is also considering whether licenses should be limited to digital currencies that have public ledgers, and whether there should be limits on technology that makes transactions anonymous, Lawsky said.
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