New York Department of Financial Services Holds Virtual Currency Hearing

January 29, 2014 By: Kevin Xu

The New York Department of Financial Services concluded their two-day hearing, which invited a host of digital currency investors, innovators, regulators, and academics to all speak their piece.

NYDFS Virtual Currency Hearing Day One

On the first day of the hearings that took place on January 28 to 29, NYDFS Superintendent Benjamin Lawsky along with his colleagues, probed investors Barry Silbert, Jeremy Liew, Fred Wilson, Cameron Winklevoss, and Tyler Winklevoss.

Lawsky seemed generally open-minded to bitcoin and digital currencies from the get-go and in general, and more than hinted that he understood the money transmission regulations in place were outdated.

He states, “One of the potentials to bitcoin is bringing the fees down when doing a money transfer.” From a perspective of a New Yorker, Lawsky understands that many residents send money back to their families and friends residing overseas. Digital currencies are disruptive of the current system that skims a portion of the money sent, and could save New Yorkers a hefty sum in remittance fees.

Given the high-profile exposure of the bad actors in bitcoin, Lawsky and his colleagues hovered around the topic of money laundering and the usage of digital currencies to enable purchases of illicit goods and services.

Lawsky asked the investor panel how bitcoin exchanges and services would deal with preventing “exchanging dollars for bitcoin and buying drugs.”

Silbert replied, “Bad guys are going to do bad things and they will use whatever technology is available to them.”

There was scant mention of the so-called “BitLicenses,” which would theoretically apply specific regulatory requirements to digital currency services. Both sides of the hearing were feeling out how current regulations could apply to these developing bitcoin markets.

Lightspeed Venture Partners’, Jeremy Liew claimed that stringent regulation would lead to jobs and innovation to get “pushed off-shore.”

Understandably, the investors see bitcoin as a means to groundbreaking ideas and profit; the bitcoin protocol is a base for global and “permission-less” innovation, as Union Square Ventures partner Fred Wilson put it.

All of the investors questioned did not believe that a specific set of rules should be put upon digital currencies, and that regulations in place would be sufficient.

There was discussion of scaling and even out-sourced compliance, since a bitcoin exchange startup for instance, would not have the resources to provide for an onsite compliance officer or carry out anti-money laundering actions.

Judy Rinearson of Bryan Cave LLP in the Regulatory segment of day one’s hearing likened the current regulatory uncertainty to the days of prepaid cards. Rinearson said, “The first true regulators of prepaid cards were the states, I believe it is feasible to adapt the existing framework” [and apply them to digital currencies].

Both panels spoke out against how uncertainty from regulators and the IRS in classifying digital currencies (as either commodities/securities, etc.) is hindering innovation and putting digital currencies as a global payment network, merchant acceptance, and bitcoin as a trading platform in a grey area.

NYDFS Virtual Currency Hearing Day Two

The second day of the hearing gathered the perspectives of law enforcement, e-commerce leaders, and academics.

District Attorney of New York, Cyrus Vance, Jr. and Deputy U.S. Attorney Richard B. Zabel brought up the issue of anonymity of digital currencies and the usage of coin tumblers as effectively a money laundering service.

Vance mentioned that bitcoin could be used as a “strategic opening,” and “facilitate money connected to crime.”

Zabel had said there were substantial hurdles in figuring out identities behind illicit activities in digital currencies, but as long as dollars get turned into bitcoins and vice versa, there would be a chance to know the criminals’ true identities.

The e-commerce panel, which included representatives from Coinbase, Circle Internet Financial, and Overstock.com were questioned about the viability of bitcoin as an alternative and ultimately, primary form of global payments.

Fred Ehrsam, co-founder of bitcoin exchange Coinbase, responded that it would take a strict adherence and a “responsibility to follow AML guidelines,” and working with “financial institutions and regulators for bitcoin to succeed.”

Jeremy Allaire, CEO of Circle Internet Financial, made a point that it would take a global approach, and that regulators internationally would have to collaborate.

Overstock.com’s Jon Johnson, represented the merchant perspective on bitcoin. In his most important point, Johnson revealed that Overstock.com’s fraud prevention department screens 14 percent of all orders, and cancels around two percent due to fraud. By integrating bitcoin, “[fraud] goes way down.”

The academic panel featured Boston University Professor, Mark Williams, Professor Susan Athey of Stanford University, and Professor Ed Felten of Princeton University.

Williams was noticeably down on bitcoin, criticizing it as a bubble that’s already popped and saying that the price of the currency would “fall to single digits by June of this year.”

Athey was more pragmatic and said that bitcoin “might go big, or it might go bust.”

Regardless, everyone who was questioned seemed to want clear and effective regulation to some degree. Williams, a former risk management professional also stated, “Hopefully we will have policy and incentive for banks to get involved.”

When the NYDFS first announced the hearings as a fact-finding mission and an opportunity to explore issuing “BitLicenses,” they may have ended up receiving more than they’ve bargained for.

There is no doubt that Lawsky and his colleagues will have to sift through the massive wealth of information provided by passionate digital currency believers and skeptics alike.

Though not much headway was made in regards to “BitLicenses,” these first hearings may have been a solid foundation for the frameworks of regulatory actions and changes in the coming year.