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Bitcoin investors, legal experts grilled by New York regulators

Marc Ferranti | Jan. 29, 2014
The New York State Department of Financial Services plans to issue rules for the cryptocurrency this year.

"I believe the NYDFS can provide clarity," said Barry Silbert, founder and CEO of SecondMarket, an online marketplace for buying and selling illiquid assets, and founder of the Bitcoin Investment Trust. "But it's hard to know how to react to the idea of a BitLicense without knowing more about it. I'm conceptually open to it but it would be easier to use the existing frameworks to combat fraud."

New York, like most states, requires businesses to have a license to receive customers' money for transmission. One hurdle for businesses is that they have to get such money transmitter licences in each state where they provide services, noted Fred Wilson, a partner at Union Square Ventures, which has invested in Coinbase. Coinbase provides what it calls a digital wallet designed to allow consumers to securely use bitcoins.

"It's important to recognize that many of these companies are going to be two-, three-, four-person companies and that's very different from JP Morgan Chase," Wilson said. Small virtual-currency startups don't have the resources to keep servers up and running and apply for money transmitter licenses in all 50 states, he said.

Established online payment systems such as PayPal have had to obtain money transmitter licenses, noted Judith Rinearson, a partner at law firm Bryan Cave in Manhattan.

Rinearson, who was set to speak at the hearing Tuesday afternoon, has worked for established financial institutions like American Express and now represents several smaller Bitcoin companies, which she declined to name. Nevertheless she is not opposed to virtual currency regulation. "Consumers want to know they are not dealing with crooks," Rinearson said. "Investors want these companies to be legitimate."

Federal authorities might be able to provide regulatory guidelines, though that has not happened so far, Rinearson said.

Last March, however, the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department, set the stage for states to examine the issue of regulating Bitcoin when it issued guidance specific to virtual currencies, stating that exchanges are required to register but users are exempt.

In May, the seizure by U.S. authorities of funds of the largest Bitcoin exchange, Mt. Gox, was triggered by an alleged failure of the company to register as a "money transmitting business," according to a federal court document.

Though the hearing Tuesday was not officially announced to specifically investigate Bitcoin, it is the most popular of the cryptography-based, virtual currency systems, also called cryptocurrencies. Bitcoin is a peer-to-peer payment system that uses open-source cryptographic algorithms to enable transactions and create units of digital currency called bitcoins. Bitcoins are created or "mined" as computers in the peer-to-peer network solve algorithms used to verify transactions.

 

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