California, N.Y. to drive virtual-currency regulatory effort

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California and New York, home to Silicon Valley and Wall Street, are preparing to write rules of the road for entrepreneurs driving a surge of interest in bitcoin and other virtual currencies.

The outcome could determine how big a threat bitcoin poses to established payment companies including JPMorgan Chase & Co. and Visa Inc. as well as where venture capital and talent converge to form a geographic hub for U.S. startups.

"If a state becomes bitcoin-friendly, it will see a huge increase in companies," said Adam Ettinger, an attorney with San Francisco's Strategic Counsel Corp., which advises technology investors. "That will mean the brightest minds working on some of the most innovative payment technology we've seen in awhile."

Bitcoin, a 5-year-old protocol for issuing and moving money across the Internet, has gained traction with merchants selling everything from Sacramento Kings basketball tickets to kitchen mixers on Overstock.com. Venture capitalists see promise in it as an alternative to the global payment system currently dominated by companies including Visa, Western Union Co. and large banks.

Bitcoin's legal status has been uncertain. In March, the U.S. Treasury Department's Financial Crimes Enforcement Network, which polices money laundering, said virtual-currency firms may be regulated as money transmitters. The move set off the race among states, which license such firms, to determine if and how their laws apply.

Stephanie Newberg, president of the Money Transmitter Regulators Association, a group of state officials, said bitcoin will dominate her association's agenda precisely because its legal status is unclear.

Bitcoin was introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto. It has no central issuing authority and uses a public ledger to verify encrypted transactions.

Regulators and law enforcers have expressed concern that bitcoin could facilitate money laundering and sales of drugs and other illegal goods. In October, U.S. authorities shut down Silk Road, the most prominent online bazaar using bitcoin, and arrested its operator for hosting illegal transactions.

Successful virtual currency startups will have to commit to being regulated by the states, said Fred Ehrsam, chief executive of Coinbase in San Francisco, a company that helps users buy and sell bitcoin.

"We think California and New York will set the tone for everything else," Ehrsam said. "When that tone is established, we're ready to hand in licensing applications immediately."

California and New York have so far adopted different approaches. New York's superintendent of financial services, Benjamin Lawsky, moved publicly against bitcoin startups last year, issuing subpoenas for information on their business, a move the companies complain has forced them to spend seed capital on lawyers. Tuesday Lawsky is scheduled to convene two days of public hearings to consider whether New York should establish what he has called a BitLicense."

By contrast, officials in California have been quietly meeting with lawyers and compliance experts for advice before making public moves.

California law requires companies that transmit monetary value to obtain licenses from its Department of Business Oversight, spokeswoman Alana Golden said. Its lawyers are currently weighing whether companies that only transmit a digital currency fall under this definition, Golden said.