New York becomes first state to propose regulations on virtual currency

According to the Washington Post, New York has become the first state to propose separate regulations for virtual currencies like Bitcoin. The New York Department of Financial Services announced yesterday in a press release that it has released it’s first draft of regulations. According to the press release, the proposed regulatory framework "is the product of a nearly year-long DFS inquiry, including public hearings that the Department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms". The proposed rules will be published in the New York State Register’s July 23, 2014 edition at which point the 45-day public comment period will begin. After the comment period, the rules are subject to additional review and revision based on that public feedback before DFS finalizes them.

Under the regulations, new "BitLicenses" will be required for companies involved in the virtual currency business, including companies that receive, transmit, secure, store or maintain custody or control of virtual currency on behalf of customers or those that convert Bitcoin to other currency or buy and sell digital money as a customer business.

Benjamin Lawsky, Superintendent of Financial Services for the state's Department of Financial Services, explained that the regulations are meant to protect customers, curb illiegal activity and stabilize the virtual currency industry. “We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets," said Lawsky in a press release.

According to Venture Beat News, while businesses like bitcoin exchanges are subject to state and federal laws regarding money laundering and transmission, few laws or regulations sepcifically address bitcoin or other virtual currencies. Venture Beat News reports that "a few states have taken a stance on virtual coins as well. The Department of Banking in Texas says that Bitcoin exchanges and ATMs may have to obtain licenses while California recently legalized Bitcoin in the state".

In addition to the press release and speaking through more traditional media outlets, Superintendent Lawsky also posted a thread on Reddit yesterday to discuss the proposed regulations. "We recognize that not everyone in the virtual currency community will be pleased about the prospect of a new regulatory framework," Lawsky wrote. "By the same token, we also recognize that – like any part of the financial industry – no regulatory framework can ever completely eliminate the risks customers face when dealing with financial firms. As such, we’ve included a strong set of consumer disclosures to help make sure customers have the information they need to make the choices that are best for them."

Earlier this year, Superintendent Lawsky hosted an “Ask Me Anything” forum on Reddit about DFS’ work on virtual currency regulation, which generated more than 1,200 public comments. Links to the proposed rules are also being tweeted out from the DFS Twitter handle (@NYDFS) and Superintendent Lawsky’s Twitter handle (@BenLawsky).