Last month, New York's Department of Financial Services released proposed legislation for businesses that provide virtual currency financial services. Notably, this legislation does not apply to merchants and consumers that utilize virtual currency solely for the purchase and sale of goods or services. Instead, the proposed legislation focuses on businesses that provide Virtual Currency Business Activities, which it defined as any one of the following activities involving New York or its residents:
- Transmitting virtual currency or receiving virtual currency for transmission
- Securing, storing, or maintaining custody or control of virtual currency on behalf of others
- Buying and selling virtual currency as a customer business
- Performing conversion services where actual currency is converted/exchanged for virtual currency, where virtual currency is converted/exchanged for actual currency, or where virtual currency is converted/exchanged into other virtual currency
- Controlling, administering, or issuing a virtual currency
Under the proposed legislation, businesses engaged in any of the above virtual currency financial services must obtain a Bitlicense from the Department of Financial Services to operate. The Bitlicense necessitates that the businesses also be subject to a multitude of rules governing:
- capital requirements
- the custody and protection of customer assets
- record keeping
- anti-money laundering programs
- cybersecurity programs
- disaster recovery
- advertising and marketing
- consumer protection measures
- business ownership
One of the most notable aspects of the proposed legislation is the record keeping provision, which requires that information regarding all parties to a transaction (including names, addresses and account numbers) be kept for at least ten years. Such a requirement is instrumental for the regulation of virtual currency as anti-money laundering efforts and protection from theft or fraud require this information to hold people accountable for their actions. However, anonymity had been a highlight of utilizing virtual currency thus far.
As of July 23, the Department of Financial Services' proposed virtual currency legislation is in its 45 day public comment phase. After the phase ends, the Department will revise the proposed legislation and re-release it for further review. It is important to note that the final version of this proposed legislation may be very different than its initial proposal.
This proposed New York legislation, which can be accessed through a link above, is the first attempt in the United States to regulate virtual currencies such as Bitcoin. As New York moves forward with some form of this legislation (pending revisions and approval) other States will certainly take notice. Of course, the real wild card is that the federal government has not yet regulated virtual currencies. Regulation by the federal government has been much anticipated, as favorable regulations could help virtual currency prices soar or conversely, tight regulations could depress prices. Federal regulation also helps guide states, who may wish to enact stricter regulations as they see fit.
Whether businesses that provide virtual currency financial services like it or not, regulation is coming. If businesses disapprove of New York's proposed legislation, they should submit their commentary to the Department of Financial Services while the public comment period is still open.