Law enforcement officials urged regulatory authorities to issue rules for virtual currencies at a New York public hearing Wednesday, as entrepreneurs pointed to the growing acceptance of the Bitcoin system and the need to attract major cybercurrency exchanges to the U.S.
“Without stronger government oversight in this area I believe we are going to be permitting cybercriminals, identity thieves and even traffickers of child pornography and other criminal actors to operate in what would be a digital Wild West,” said Cyrus R. Vance, Jr., the district attorney of New York County.
New York Superintendent of Financial Services Benjamin Lawsky called for the two-day hearing, which began Tuesday, to support a fact-finding investigation started last August that, he said, will lead to state regulations this year.
The new rules may include the issuance of what the New York Department of Financial Services (NYDFS) has termed a “BitLicense.”
New York is set to be the first state to issue virtual currency regulations, Lawsky said. There is intense interest in what sort of guidelines New York will place on virtual currencies, since New York City is a global financial capital.
Lawsky noted Wednesday that there were viewers from more than 100 different countries tuning in to Tuesday’s webcast of the packed hearing, taking place at a municipal building not far from Wall Street.
No state so far has officially deemed virtual currency exchanges and companies to be transmitters of money. So up to now, virtual currency exchanges have not been required to obtain state licenses, though they have had to register as money service businesses under federal guidelines.
“It is our position that digital currency exchanges should be licensed as money transmitters to do business in the State of New York and therefore come under that regulatory framework,” Vance said.
Virtual currency systems are “indeed a form of money transmission,” Vance said.
Depending on the rules that are established, virtual currency exchanges may also need to have regulations requiring them to do “enhanced due diligence” to establish the identities of users, Vance said.
“The anonymity offered by these payment systems attracts, from time to time, criminals,” Vance said.
“Obviously any attempt to regulate virtual currency is going to have to deal with the dark side of virtual currency,” said Lawsky, noting that earlier this week, the U.S. Attorney’s Office for the Southern District of New York made several Bitcoin-related arrests.
The Attorney’s Office has charged Charlie Shrem, CEO at online Bitcoin exchange business BitInstant, and Robert Faiella, the site’s compliance officer, with working to sell more than US$1 million worth of bitcoins to users of the Silk Road contraband website.
Shrem and Faiella contributed to money laundering and facilitating drug sales on Silk Road, the U.S. Attorney’s Office alleges. Authorities shut down Silk Road last year.
However, even though government authorities have successfully uncovered criminal activity linked to online fraud and virtual currency, they face burgeoning use of digital currency and growing potential for international cybercrime, law enforcement officials said.
“It doesn’t mean it’s all under control—it’s not,” said Richard Zabel deputy U.S. attorney for the Southern District of New York.
Zabel said that the anonymous, decentralized nature of virtual currencies means that law enforcement faces issues not only involving illegal goods and contraband on a global scale, but money laundering and tax evasion as well.
But the attractive aspects of virtual currency is helping fuel growing acceptance for its use among law-abiding users, emphasized entrepreneurs at the hearing. Transactions are processed free or for low fees, and because no personal information is exchanged, can be more secure than credit cards, according to the entrepreneurs.
Virtual currency systems like Bitcoin are eliminating the need for consumers to wait days to transfer money to other people’s accounts, as well as cutting costs for those transfers, Susan Ashley a Stanford University economics professor, said at the hearing.
Use of bitcoins, the most popular of the cryptocurrenices that use open-source cryptographic algorithms to enable transactions, is growing beyond the initial set of technology faddists, noted Fred Ehrsam, co-founder of Coinbase. Coinbase offers what it calls an international digital wallet designed to allow users to securely buy, use and accept currency based on the Bitcoin system.
The use of bitcoins seems to have reached an “inflection point,” Ehrsam said, noting that the demographic of the typical bitcoin user is changing. The percentage of female and older users, for example, appears to have increased significantly in just the last month, Ehrsam said.
Online retailer Overstock.com started accepting bitcoins on Jan. 9, according to Jonathan Johnson, the company’s executive vice president. The retailer processed 700 transaction valued at $130,000 on the first day it accepted bitcoins for merchandise, he said. The total has risen to 3,000 transactions and $600,000 in value to date, Johnson said.
Ultimately, lawful business people want a balanced approach to regulation that legitimizes virtual currency without burdening new and growing companies with bureaucracy, panelists said.
Onerous regulations could cause innovative companies to stay out of the U.S., said panelists, who pointed out that the major bitcoin exchanges are located abroad.
“The single most important thing that we can do, and that’s sort of collectively, is to get some serious exchanges established here in New York that are focused on being mature trading platforms,” said Jeremy Allaire, founder and CEO of Circle Internet Financial, a digital currency company.
“Rather than having the market maker and liquidity provider for Bitcoin be a 14-person company in Slovenia, have it be a well-financed and capable platform that is both closer to the oversight of New York and federal bodies,” Allaire said.
Panelists during the two-day hearing pointed out that separate money transmitter licenses are currently required by 48 states. Panelists asked the NYDFS to consider consulting the Conference of State Bank Supervisors to attempt a coordinated approach, and Lawsky said he had already done so. “Some of them are here,” in the room, he noted.
A clear, streamlined set of regulations and guidelines would help virtual currency fuel new businesses opportunities, panelists agreed.
“I think we need for those exchanges to clearly understand what their obligations are,” Allaire said. “If there is clarity, I think there are plenty of entrepreneurs, including some I’m sure in the room here today, and I certainly know very high quality private equity and venture capital and other investors that would invest in and build businesses.”