June 9, 2015
New York State issued extensive new rules for companies that operate in virtual currencies such as bitcoin. New York Superintendent of Financial Services Benjamin M. Lawsky and his team had been working to build these regulations for the last two years taking criticism into account. The new rules finally arrive just weeks before Benjamin M. Lawsky steps down from his role.
Department of Financial Services states that the new rule is the first comprehensive guideline related to regulation of digital currency firms published by any state. The final set of rules was announced by Mr. Lawsky at the 2015 BITS Emerging Payment Forum. The rules state that any digital currency companies operating in New York State has to apply for a "BitLicense" from the Department of Financial Services.
Mr. Lawsky feels that the new rules regarding cryptocurrency will prevent anti-money laundering and will provide cyber-security protection. The new rules are also expected to boost consumer sentiments which had received a strong blow after the collapse of Tokyo-based currency exchange Mt. Gox. In 2014, the company claimed that it had lost around $500 million because of malicious trade. The company said they had lost almost 750,000 of its customers' bitcoins and around 100,000 of its own bitcoins.
The new regulation framed by the New York State says that digital currency companies must obtain prior approval for material changes to their products or business models. This means that compliance is also needed from wallet firms offering exchange services. Moreover, the presence of a compliance officer is compulsory and every firm has to maintenance capital reserves determined by the New York State Department of Financial Services.
Companies seeking funding would not need approval from the state for every round of venture capital funding or standard software updates.
There are companies who hold and exchange virtual currencies for dollars or other currencies and also act as a money transmitter. These companies can work with the state regulator to have a one-stop application submission that covers both the requirements.
However, the rules are not applicable to software developers, individual users, customer loyalty programs, gift cards, currency miners, or merchants who accept bitcoin as payment.
BitLicense is expected to be a model framework; other states might also come up with such rules. This will help in building trust among consumers. Moreover, the increase in cost to entry for cryptocurrency business will also ensure that only genuine players operate in the market.
The popularity of bitcoin and other virtual currencies is growing rapidly among the global technology community and also on Wall Street. Almost every month we’re witnessing large companies and investors investing in bitcoin companies.