I can hear the supporters of virtual currencies now: “Permits? We don’t need no stinkin’ permits.” And they’re probably right, or are they?
The New York Department of Financial Services intends to hold a public hearing on virtual currency regulation in New York City “in the coming months.” The November 14 statement by the department announcing those plans stems from concerns that “the cloak of anonymity” inherent to virtual currencies “has helped support dangerous criminal activity, such as drug smuggling, money laundering, gun running , and child pornography.”
Similar things have been said about another “anonymous” currency: cash. Cash, however, is bulky, so hiding and exchanging large amounts of it is relatively risky. Digital currency has no mass because there’s no physical presence, though large transactions can be detected. Rather, it’s maintained in a computer database somewhere. Banks, the leading providers of cash, must be licensed, so why not providers of virtual currencies?
The largest virtual currency is bitcoin, which has felt most of the pressure from regulators. In August, the New York Department of Financial Services subpoenaed 22 bitcoin-related firms seeking input on how they operate. That would be important to know if the department plans to regulate them, right? Of course, being a political issue and all, the statement acknowledged the importance for “regulators to balance both allowing new technologies and industries to flourish, while also working to ensure that consumers and our country’s national security remain protected.”
And there you have it, in case you missed. When it comes to virtual currencies and our national security, New York’s in charge. Never mind that the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury, issued guidance in March requiring purveyors of convertible virtual currencies to register as money transmitters. Convertible virtual currencies have either an equivalent value in actual currency or act as a substitute for real currency, according to FinCEN. Besides registering, such entities also have responsibilities related to anti-money laundering, recordkeeping and reporting to comply with FinCEN’s requirements.
With the U.S. Treasury already tackling the issue, why then, does New York feel the need to step in? Well, it’s not alone. In fact, it’s at the state level “where all the action is,” Marco Santori, a business attorney and chairman of the Bitcoin Foundation’s regulatory affairs committee, noted in a multi-part series designed to help digital currency entrepreneurs understand the state of U.S. law affecting them.
Federal agencies oversee federal banks, while state agencies oversee state banks. Application of a parallel logic with virtual currency regulation, however, is a bit murky.
‘Times Have Changed’
By design, decentralized currency is a borderless medium of exchange, so businesses must address each state’s licensing practices to determine whether they must be licensed as a money transmitter. And that’s no easy task when most states’ laws don’t even address the bitcoins of the world. But, as Santori points out, “times have changed.”
New York’s money transmission laws require money transmitters to be licensed, for example, but they don’t define “money” or “money transmission.” Such issues complicate the analysis of each state’s laws. For lawyers, the situation has created a whole new world of potentially lucrative business trying to figure them all out for clients.
So, it shouldn’t seem so far-fetched that a state would act as New York apparently is in trying to bring its money-transmitter licensing regulations into the 21st century. But, just as providers of prepaid cards have faced in trying to comprehend and comply with each state’s legal variations, so too must entrepreneurs hoping to cash in on the emerging virtual currency market.
Libertarian philosophy aide, there are obvious needs for providers of virtual currencies to be regulated. Though they provide a fresh alternative to ailing government currencies, they must legitimize themselves to get past their product’s primary role now as an investment opportunity for speculators hoping to profit from their rising value. One of the best ways to accomplish that is be complying with money transmitter laws wherever necessary, however costly it might be.
Still, I have to wonder whether their lawyers are accepting payment with their own virtual currencies. For lawyers concerned about legitimacy, something tells me that’s likely not the case.
For more of PYMNTS.com Senior Analyst Jeff Green’s commentary, click here. For more analysis on bitcoin and its ability to solve for friction in payments, read Karen Webster’s latest announcement here.