NYDFS head announces ‘BitLicense’ in virtual currency regulation

Benjamin Lawsky, head of the New York State Department of Financial Services (NYDFS), announced on Wednesday the third and final update for its "BitLicense" proposal bill at the BITS Emerging Payments Forum in Washington, D.C. The bill is a set of proposed state regulations concerning virtual currencies. 

The updated set of proposals will impose stricter cybersecurity requirements on financial firms that use virtual currencies, such as Bitcoin

“We simply want to make sure that we put in place guardrails that protect consumers and root out illicit activity – without stifling beneficial innovation,” Lawsky said.

Most notably, the regulations state that these financial firms will now have to obtain a “BitLicense” to ensure guidelines are met to protect consumers and prevent money laundering. The license will be administered through the Department of Financial Services. To obtain the license they must adhere to consumer reporting regulations and comply with anti-money laundering capital adequacy, changes of ownership and cyber security requirements.

A license will not be required to write computer code or software for virtual currencies. 

Lawsky went on to say that his agency knows the new legislation won't satisfy everyone, but that it is the first step toward the regulation of virtual currency transmission.

NYDFS has used public feedback over the course of two years to improve regulations and clarify discrepancies. Lawsky said that the final version doesn't include any major changes from the second draft. The first draft was heavily criticized as being too restrictive of innovation by tech companies and digital advocacy groups. The second draft clarified that software developers, Bitcoin users, and merchants who accept Bitcoin, and their customers, would not have to get a license. 

In a release, Jerry Brito, executive director of virtual currency advocacy group Coin Center, commended the agency for listening to public recommendations, but feels there's more work to be done.

“The new language is vague and unclear about how compliance with federal regulations will exempt a BitLicensee from those state-level obligations,” Brito said.

He went on to say that BitLicense will create a discriminatory, state-level anti-money laundering reporting obligation.

Other criticisms included the requirement for Licensees to be pre-approved by the NYDFS superintendent for any new products, altered products, services, or activities that affect New York or New York residents. The bill was also criticized as presenting another hurdle to startups who would now have to comply with more regulations.  

Brian Hussey, global director of incident response & readiness at Trustwave, told via email that some regulation was necessary due to Bitcoin being the primary currency for purchasing illicit materials on the dark web.

“I think that legislation like this was inevitable, Hussey said. “Some level of regulation has to occur but the level of regulation has to be carefully balanced to not stifle the growth of this nascent industry.”  

Hussey added that the final version of the proposal "seems to take this into account and looks to be a good balance.”

The updated proposal will go into effect June 10 of this year when it is published in the New York State Register, a weekly government-issued guide to proposed rule makings.

New York is the first state to implement rules governing virtual currencies. 

California's State Assembly also approved a bill this past Wednesday calling for businesses that store and and exchange virtual currency to be required to get a license from the California Department of Business Oversight. Government agencies, FDIC-insured banks, merchants and consumers using virtual currencies for the sale of goods and services would be exempt from the legislation.

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