Ben Lawsky, Superintendent of the New York State Department of Financial Services, spoke with Bloomberg TV’s Trish Regan today on the future of Bitcoin and virtual currencies on the internet and the ability of law enforcement to police their use as they become more anonymous.

When asked whether the dark web can really be policed, Lawsky said: “Yeah, I think so…I think prosecutors will eventually bring the hammer down if these sites are being abused and people are dealing in illicit drugs, just like they would do if it was happening in the real world, not the virtual world.”

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Lawsky spoke on cyber hacking and cyber security, saying “[this is] the most important issue we deal with for the remainder of this year and throughout 2015.” He said, “It is an enormous threat. I don’t think regulators and prosecutors alone can solve it. It’s got to be something we do in collaboration with industry and the firms themselves. We have to work together. We have to spend a lot more money. We have to take it a lot more seriously, and we have to pull out all stops, and we have to be really imaginative about how bad it could get. And that’s not a fun thing to do. It actually keeps you awake at night.”

On Bitcoin regulations he would like to see put in place, Ben Lawsky said: “We’d like to see consumer protection. So when people entrust their money to a bitcoin wallet or a bitcoin exchange or another service, that we don’t have a situation like we had in Japan last year with Mt. Gox…We want to see sufficient cyber security to prevent terrible hacking, and we want to see enough capital requirements on the entities themselves so they don’t collapse under their own weight.”

We Can Police Bitcoin: Ben Lawsky

TRISH REGAN: The superintendent of the New York State Department of Financial Services Ben Lawsky joins me now with more. Ben, in regular society you can operate on a cash basis. Shouldn’t you be able to do the same maybe online?

Ben Lawsky: Look, I think the fear that people have and the fear that law enforcement has with something like virtual currencies or the use of Tor is that it’s very hard for example to travel overseas with $5 million in cash. It would be virtually impossible to do that. If you don’t have the right protections though for the online world, you could see someone who wanted to engage in illicit activity, someone who wanted to fund terrorism, engage in other types of money laundering, could easily ship millions of dollars overseas.

REGAN: Is in fact bitcoin that anonymous that a terrorist could send millions of dollars to another terrorist in another part of the world with not being tracked?

Ben Lawsky: It’s interesting. Bitcoin is not exactly anonymous because any kind of transaction in bitcoin goes on the block chain. And we could talk for a long time —

REGAN: The block chain is basically –

Ben Lawsky: A ledger.

REGAN: The ledger.

Ben Lawsky: An online ledger.

REGAN: That is not actually linked to names but to IP addresses.

Ben Lawsky: Correct. So law enforcement can do a pretty good job usually of finding out who’s on the other end of virtual currency transactions It gets harder when someone is deliberately trying to disguise their identity using other kinds of technologies like tumblers, et cetera. But —

REGAN: And there is a community of people that are working very hard to make sure that the government can’t actually detect their identity. There’s something, an open source code peer-to-peer project known as the Dark Wallet, and in this project it’s being designed in order to make bitcoin 100 percent anonymous.

Ben Lawsky: Look, there are people who definitely want to be anonymous. And some people want their privacy for perfectly good reasons. Some people want their privacy and to be anonymous for perfectly bad reasons. And I think that’s what makes it hard. As regulators, we want to allow the online world to flourish, software to develop, entrepreneurs to innovate. And there are many good things that bitcoin, should it develop, could bring. At the same time, you have to do it in a way that does something about the people who want to do bad things with the anonymity that they would enjoy.

REGAN: Well I don’t know how you stay ahead of this because it’s – it’s an environment where people are constantly trying to innovate. Let’s talk for a minute about Silk Road, which had been called the eBay of drugs. The government shut it down last year and the alleged creator is in federal prison awaiting trial next month. What was interesting in this case is that instead of the fed serving as a deterrent, we’ve actually seen this huge increase in the number of sites online, everything form Evolution to Agora to Silk Road 2.0, and these sites have gotten more aggressive than Silk Road in terms of what they’re selling. It’s a whole lot more than just illicit drugs. Can you ever really police the dark web?

Ben Lawsky: Yeah, I think so. I think prosecutors – I’m not a prosecutor. I used to be one. But I think prosecutors will eventually bring the hammer down if these sites are being abused and people are dealing in illicit drugs, just like they would do if it was happening in the real world, not the virtual world. But you’re right. They run behind and it’s a question of how quickly can they catch up.

REGAN: What regulations would you like to see put into place for bitcoin?

Ben Lawsky: Well in the first instance as a regulator, we’d like to see consumer protection. So when people entrust their money to a bitcoin wallet or a bitcoin exchange or another service, that we don’t have a situation like we had in Japan last year with Mt. Gox collapsing where the entity that was holding people’s bitcoin basically just disappeared. It was in Japan. There was no regulator. There was no regulation and it just basically went away. So I think we want to see consumer protections. We want to see sufficient cyber security to prevent terrible hacking, and we want to see enough capital requirements on the entities themselves so they don’t collapse under their own weight.

REGAN: Look Ben, these are all fair points and fair issues and they’re issues that we’re dealing with not in the cyber world necessarily but in the real world here with bank accounts like JPMorgan. Something that this takes us to here is this rise in illegal cyber activity. We’ve been covering this JPMorgan story obviously very carefully and closely here at Bloomberg, and according to our sources the hacker who raided the data on the banks at JPMorgan Chase & Co. (NYSE:JPM) used computers that are now linked to possible attacks of at least 13 more financial companies. So again I get back to how can you police this? You’re dealing with this obviously with bitcoin, but you’re also doing with it with people’s accounts at places like JPMorgan Chase.

Ben Lawsky: Yeah. The cyber hacking issue and cyber security I believe will be the most important issue we deal with for the remainder of this year and throughout 2015. It is an enormous threat. I don’t think regulators and prosecutors alone can solve it. It’s got to be something we do in collaboration with industry and the firms themselves.

REGAN: So the two of you work together.

Ben Lawsky: We have to work together. We have to spend a lot more money. We have to take it a lot more seriously, and we have to pull out all stops, and we have to be really imaginative about how bad it could get. And that’s not a fun thing to do. It actually keeps you awake at night. But I think we need to sit around and game out all the possible really bad ramifications that hacking can lead to, prepare for them, and then hope they don’t happen.

REGAN: Do you blame Tor at all, which I began this segment? It’s known as the Onion Project and it’s basically a browser that people can download onto their computers that makes them totally anonymous. It was created by the government in fact to be able to do a little cyber snooping themselves on terror activity and now it can be used by anyone rendering them entirely or mostly anonymous.

Ben Lawsky: I don’t think I’d point the finger at any one person or place. I think that there are so many different sources for the cyber attack problem and I think we need to do just a lot better as regulators but also for the financial industry to really do something to prevent these attacks in the future.

REGAN: Ben Lawsky, superintendent of the New York State Department of Financial Services. Thank you very much for your time.