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Bitcoin regulation urged by law enforcement officials at New York hearing

Entrepreneurs want to attract virtual currency businesses to Wall Street

By , IDG News Service
January 29, 2014 05:20 PM ET

IDG News Service - Law enforcement officials urged regulatory authorities to issue rules for virtual currencies at a New York public hearing Wednesday, as entrepreneurs pointed to the growing acceptance of the Bitcoin system and the need to attract major cybercurrency exchanges to the U.S.

"Without stronger government oversight in this area I believe we are going to be permitting cybercriminals, identity thieves and even traffickers of child pornography and other criminal actors to operate in what would be a digital Wild West," said Cyrus R. Vance, Jr., the district attorney of New York County.

New York Superintendent of Financial Services Benjamin Lawsky called for the two-day hearing, which began Tuesday, to support a fact-finding investigation started last August that, he said, will lead to state regulations this year.

The new rules may include the issuance of what the New York Department of Financial Services (NYDFS) has termed a "BitLicense."

New York is set to be the first state to issue virtual currency regulations, Lawsky said. There is intense interest in what sort of guidelines New York will place on virtual currencies, since New York City is a global financial capital.

Lawsky noted Wednesday that there were viewers from more than 100 different countries tuning in to Tuesday's webcast of the packed hearing, taking place at a municipal building not far from Wall Street.

No state so far has officially deemed virtual currency exchanges and companies to be transmitters of money. So up to now, virtual currency exchanges have not been required to obtain state licenses, though they have had to register as money service businesses under federal guidelines.

"It is our position that digital currency exchanges should be licensed as money transmitters to do business in the State of New York and therefore come under that regulatory framework," Vance said.

Virtual currency systems are "indeed a form of money transmission," Vance said.

Depending on the rules that are established, virtual currency exchanges may also need to have regulations requiring them to do "enhanced due diligence" to establish the identities of users, Vance said.

"The anonymity offered by these payment systems attracts, from time to time, criminals," Vance said.

"Obviously any attempt to regulate virtual currency is going to have to deal with the dark side of virtual currency," said Lawsky, noting that earlier this week, the U.S. Attorney's Office for the Southern District of New York made several Bitcoin-related arrests.

The Attorney's Office has charged Charlie Shrem, CEO at online Bitcoin exchange business BitInstant, and Robert Faiella, the site's compliance officer, with working to sell more than US$1 million worth of bitcoins to users of the Silk Road contraband website.

Shrem and Faiella contributed to money laundering and facilitating drug sales on Silk Road, the U.S. Attorney's Office alleges. Authorities shut down Silk Road last year.

However, even though government authorities have successfully uncovered criminal activity linked to online fraud and virtual currency, they face burgeoning use of digital currency and growing potential for international cybercrime, law enforcement officials said.

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