Today, Ben Lawsky, Superintendent of the New York Department of Financial Services (NYDFS), revealed the first state level attempt to regulate digital currencies such as Bitcoin: a BitLicense. One particularly thorny point in the sides of many Bitcoiners is the fact that the NYDFS chooses to refer to Bitcoin as a “virtual currency” as opposed to “digital money” or “digital currency.” The NYDFS’s language is consistent with the IRS, the Texas Department of Banking, and even across the pond with the European Central Bank. The full draft of the proposed regulations can be found here.
The NYDFS’s definition of Virtual Currency is as follows:
“Virtual Currency means any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology. Virtual Currency shall be broadly construed to include digital units of exchange that (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. Virtual Currency shall not be construed to include digital units that are used solely within online gaming platforms with no market or application outside of those gaming platforms, nor shall Virtual Currency be construed to include digital units that are used exclusively as part of a customer affinity or rewards program, and can be applied solely as payment for purchases with the issuer and/or other designated merchants, but cannot be converted into, or redeemed for, Fiat Currency.”
The NYDFS then defines Virtual Currency Business Activity as follows:
“Virtual Currency Business Activity means the conduct of any one of the following types of activities involving New York or a New York Resident:
(1) receiving Virtual Currency for transmission or transmitting the same;
(2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3) buying and selling Virtual Currency as a customer business;
(4) performing retail conversion services, including the conversion or exchange of Fiat Currency or
other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other
value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or
(5) controlling, administering, or issuing a Virtual Currency”
Do I Need A BitLicense?
A BitLicense is required by any person or company that services New York residents with Virtual Currency Business Activity. Entities chartered under the New York Banking Law that have existing licenses to conduct exchange services are allowed to engage in Virtual Currency Business Activity. Furthermore, and most importantly as a baseline for regulation negotiations, is that “merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services” are exempt from licensing requirements. The proposed addition to the Regulations of the Superintendent of Financial Services contains many more nuanced points that readers will undoubtedly want to look through (Yes, (5) means that Satoshi Nakamoto would have needed a BitLicense to release Bitcoin to New Yorkers).
BitLicense Regulation Will Be Open For Public Comment
Ben Lawsky himself, as /u/BenLawsky, posted the NYDFS’s proposed BitLicense regulatory framework to the Bitcoin subreddit, in a continued show of transparency following his February AMA. The proposed regulations won’t be available for public comment until 7/23/14. Public comments will have to be submitted in a formal manner as dictated by the NY State Administrative Procedures Act, interested Bitcoiners should visit this site to learn how to do so.
“In developing this regulatory framework, we have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. These regulations include provisions to help safeguard customer assets, protect against cyber hacking, and prevent the abuse of virtual currencies for illegal activity, such as money laundering.
We recognize that not everyone in the virtual currency community will be pleased about the prospect of a new regulatory framework. Ultimately, though, we believe that 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. (We think the situation at Mt. Gox, for example, made that very clear.) Moreover, given that states have specific regulatory responsibilities in this area, we also have a legal obligation to move forward on this framework.
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.”
Ironically, a Bitcoiner on Reddit used changetip, a service that would likely be identified as requiring a BitLicense, to send Ben Lawsky a Bitcoin tip for his post. However, the tip remains unclaimed.