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A sticker on the window of a pub in Germany show Bitcoins are accepted for payment.

(Getty Images)

TRENTON — There's an effort in the New Jersey Legislature to put the state at the forefront of a growing new electronic industry: digital currency.

Two north Jersey lawmakers recently proposed a 30-page bill (A4478) that would create a regulatory framework for the companies that deal in digital currency and offer tax breaks to companies that service or exchange it.

"I want to encourage innovation here in New Jersey. I think there's an opportunity for job creation," said Assemblyman Mukherji (D-Hudson), who introduced the measure along with Assemblyman Gordon Johnson (D-Bergen).



The industry is based on Bitcoin, an online currency that was introduced in 2009. It's a complicated concept and one that industry advocates spent two hours explaining to legislators during an Assembly Financial Institutions and Insurance committee hearing in February.



"Bitcoin today looks very much the internet did in 1995," Jerry Brito, an advocate for "cryptocurrency" technology like Bitcoin, said at an Assembly Financial Institutions and Insurance Committee hearing in February. "Then some dismissed the internet as curiosity, but because it was an open platform, you could build on top of it. You maybe couldn't imagine what you could build on top of it. We couldn't imagine Skype or Netflix or Facebook. But we could see the pieces were there to build something."



Unlike traditional online payment systems like Paypal, a bitcoin payment is like a cash transaction between two people. There is no third party enabling and keeping tabs on transactions as there is in a service like PayPal, and there is no central bank involved. Instead, a ledger called a "blockchain" records every transaction and is publicly distributed.



"You can make online payments between two persons without the use of an intermediary. And that is completely new," said Brito.

It also allows for anonymous transactions, making the currency popular with hackers and civil libertarians.

Internet users called "miners" verify and process the transactions, for which they're compensated with newly-created bitcoins.

Companies that work with digital currency tend to oppose stricter regulation like the plan put forward in New York. But some are pushing for the type of regulation contained in the New Jersey legislation, dubbed the "Digital Currency Jobs Creation Act," which is more friendly to the industry.

The bill would prohibit municipalities from putting their own regulations or taxes on digital currency. Companies who deal in the industry would have to register with the state Department of Banking of Insurance, including a business plan, registration fee to be set by the commissioner, and fingerprints and photographs of "key members" of the organization, among other things.

The companies would be required to establish and maintain "an effective cyber security program" and designate an employee as a chief information security officer to oversee it. And they'd be required to keep records of their activity for at least five years.

The legislation also has incentives aimed at drawing the companies into New Jersey. Companies that create at least 10 jobs would get favorable treatment under the state's tax credit program, qualifying for up to $5,000 for each new job they create in addition to the base tax credit they qualify for. And the companies — which often use energy-consuming computer equipment — would be exempt from paying taxes on money they spent on electricity.

"You need a lot of firepower by way of technology to be in this business," Mukhjerji said. "It would try to ease some of that burden."

At least one New Jersey state department, the treasury, has officially recognized bitcoin, issuing an April 2 memo that explained how sales tax should be applied to its transactions. The memo angered \bitcoin advocates because it treats the transactions like barter and "double taxes" the currency.

Bitcoin has had its problems. In 2013, enthusiasm for the currency drove its value extremely high, reaching $1,150 per bitcoin. It crashed, and each bitcoin's value now is about $238.

Brito called that a "correction" based in part on early overenthusiasm fort he currency.

And the first major bitcoin exchange, a Japanese website called Mt. Gox, collapse in 2014 as hundreds of thousands of bitcoins went missing, likely stolen.



"They were not prepared for this to become a billion dollar industry, essentially, overnight," Brito said. "And when they got there they found themselves totally unprepared. The website they built was not really up-to-snuff. Something happened. We don't know exactly what happened, if they were hacked or if it was an inside job. There's an ongoing investigation."

Mukherji said he wasn't sure if his bill, which has not yet been introduced in the state Senate, would advance. But he said some sort of regulation will be needed.



"The legislation clarifies where digital currency stands sort of in the rubric of New Jersey law. In other states that's been confusing," he said. "I think this would be the first statute of its kind in the country. We would be establishing the framework legislatively."

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Matt Friedman may be reached at mfriedman@njadvancemedia.com. Follow him on Twitter @MattFriedmanSL. Find NJ.com Politics on Facebook. e