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Bitcoin investors, legal experts grilled by New York regulators

The New York State Department of Financial Services plans to issue rules for the cryptocurrency this year

By , IDG News Service
January 28, 2014 03:51 PM ET

IDG News Service - Bitcoin could gain widespread acceptance if clear government rules are put in place, but burdensome regulations could clip the wings of a fledgling industry, some of the biggest names in Bitcoin investing said at a New York public hearing Tuesday.

New York Superintendent of Financial Services Benjamin Lawsky made it clear that some sort of state regulatory guidelines are on the way this year.

The hearing, which runs through Wednesday, is part of a fact-finding investigation started last August "and will allow us to put forth a proposed regulatory framework for virtual currency firms. We believe we'll be the first state to do that," Lawsky said.

"Bitcoin is appropriate for both federal and state regulation," said Cameron Winklevoss, who with his brother Tyler testified Tuesday morning on a panel with other virtual currency investors. Like other panelists, however, the Winklevoss twins cautioned that burdensome new regulations created especially for virtual currencies could prevent small startups from growing and innovating.

"We believe the current regulatory environment is sufficient and can be applied to Bitcoin," Cameron Winklevoss said.

The New York Department of Financial Services (NYDFS) has already announced that its inquiry might lead to the issuance of a "BitLicense" for virtual currencies. So far, virtual currency exchanges and companies have not officially been deemed by states to be transmitters of money, and have not been required to obtain licenses.

Government officials, however, have argued that the fluctuations in value and the anonymous nature of the virtual currency pose risks.

The NYDFS has "seen instances where the cloak of anonymity provided by virtual currencies has helped support dangerous criminal activity, such as drug smuggling, money laundering, gun running and child pornography," Lawsky said.

Lawsky noted that on Monday, the U.S. Attorney's Office for the Southern District of New York announced that Charlie Shrem, CEO at online Bitcoin exchange business BitInstant, and Robert Faiella, the site's compliance officer, were arrested and charged with plotting to sell more than US$1 million worth of bitcoins to users of the Silk Road website. Shrem and Faiella contributed to money laundering and facilitating drug sales on Silk Road, the U.S. Attorney's Office alleges.

Silk Road was a contraband website that authorities shut down last year, seizing a cache of bitcoins when they did so.

Cameron and Tyler Winklevoss have made a $1.5 million investment in BitInstant. The identical twins gained fame by waging a legal battle with Mark Zuckerberg, whom they alleged stole their idea for Facebook after initially agreeing to help them build a social networking site.

Other investors said Tuesday that they would welcome clear guidelines, but were cautious about new rules for virtual currency that could potentially be burdensome.

"I believe the NYDFS can provide clarity," said Barry Silbert, founder and CEO of SecondMarket, an online marketplace for buying and selling illiquid assets, and founder of the Bitcoin Investment Trust. "But it's hard to know how to react to the idea of a BitLicense without knowing more about it. I'm conceptually open to it but it would be easier to use the existing frameworks to combat fraud."

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