New York's financial regulator had sights set on becoming a global hub for innovations like bitcoin when it adopted trailblazing virtual currency rules last year. But the state lost that momentum when the agency's chief left, putting a licensing process in limbo and allowing rivals to catch up. Since June 2015, New York has required virtual currency firms doing business there to get a "BitLicense" to hold customer funds and exchange virtual coins for dollars and other regular currencies. Benjamin Lawsky headed the Department of Financial Services (DFS) when it developed those rules, acting as an early advocate of virtual currencies when other regulators were still skeptical. Although it remains unclear whether such currencies will ever gain mainstream acceptance, they are now part of a broader, rapidly-growing industry that blends finance and technology, and which leading financial centers are keen to attract.

Bitcoin with QR code Benoit Tessier | Reuters

For companies, a stamp of approval from a tough regulator offered a chance to win over customers who remained dubious about the product. For New York, it was an opportunity to get ahead of rivals around the world that were also trying to woo "fintech" business. Yet just after the regulations came into force, Lawsky left the agency. Some senior staffers with BitLicense expertise soon followed him out the door. Since then, DFS has issued just two BitLicenses. Another 15 applications are still pending, with four others withdrawn and four denied, a spokesman said. Two more virtual currency companies have received trust charters, which treat them more like traditional banks. "By putting the regulations together and having key staff members leaving almost thereafter, they really put the industry behind the eight-ball in terms of competing with traditional service providers," said Patrick Murck, a lawyer and fellow at Harvard University's Berkman Klein Center for Internet & Society. Most companies that were operating in New York when the regulations took effect can still do business there while waiting for a license. However, start-ups may face trouble raising money or expanding their business, Murck said. The virtual-currency industry is miniscule compared to traditional finance, but it has grown rapidly since bitcoin's launch in 2009. There are now other virtual currencies, and broader uses for underlying technologies that create and distribute them. The bitcoin market is now worth about $10.7 billion, compared to less than $1 billion just three years ago, according to the information site CoinDesk.

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