The prize for being the first state in the United States to propose a regulatory framework for the Bitcoin goes to New York State. The New York regulatory proposal will be adopted following a 45 day review period and follows similar regulations already applied to financial firms in New York and those operating under federal laws such as FINRA and NFA.
Back in February of this year, the financial services superintendent for New York, Benjamin Lawsky, announced detailed plans to regulate the use of the digital crypto-currency by the end of this year. At that time, he proposed the issuance of ‘BitLicenses’ to all companies who deal with Bitcoins that would permit them to operate in a similar manner than they had done in the past but had the additional stipulation that all Bitcoin exchanges would be required to warn their customers of the volatility of Bitcoin value and of the irreversibility of Bitcoin transactions.
According to Lawsky, “We’ve found in other areas of the financial world that strong, clear, concise disclosures are critical to earning the long-term trust and confidence of consumers… Virtual currency is no exception.”
Regulations and Requirements
A long list of regulatory provisions accompany the current proposal including a plethora of BitLicense requirements, proper consumer disclosures, a list of anti-money launder procedures and compliance stipulations, capital requirements and a firm’s need for a full-time compliance officer. In addition, independent New York Department of Financial Services examinations and audits would be necessary every two years.
Whether all of these steps will actually be implemented is not certain as the Bitcoin was designed specifically to be unregulated and is decentralized by default, unlike conventional economic systems. Admittedly, the very nature of how Bitcoin transactions operate will make it very hard to regulate this currency.
Growth amid Uncertainty
As proof of the uncertainty of this virtual currency, Bitcoin exchanges, such as Japanese MtGox, have already closed its doors while holding millions of dollars of investor money. On the other hand, California Gov. Jerry Brown has just signed into law a bill legalizing digital currencies, such as the Bitcoin.
Many Forex brokers have already added the Bitcoin to its list of assets for trading and several independent websites are geared exclusively to the virtual currency.
Boon to Virtual Currencies
Depending on its net capital requirements, this new regulation for Bitcoins should prove to be a boon for the virtual currency industry. The laws address customer protection and a framework that is not dissimilar to US Securities regulation and once they are finalized, these rules will allow firms to operate in a clear legal manner and in a more definitive environment. All financial institutions handling the Bitcoin in any manner whatsoever will be required to abide by this proposed regulation.
One thing is certain. The Bitcoin is beginning to become formally accepted by economists as a real currency, even if it is not necessarily regarded as a legitimate one, and is no longer the designated currency for pyramid schemes and for people involved in illegal money laundering. With New York State leading the way towards formal regulation, other states will not be far behind.