NY State Releases “BitLicense” Regulations Draft for Businesses

There have been times, especially during the last several years, when it seemed like the American Congress was completely incapable of any action, let alone rapid action. They might need to take lessons in action from the New York State Department of Financial Services who, only seven months after holding extensive and highly publicized meetings on cryptocurrency regulations, has already released a draft of proposed rules for regulating virtual currencies.

Finance Department Superintendent Benjamin Lawsky released the surprisingly short 40-page draft explaining that it was intended only to put some sort of regulatory framework around digital currencies that were operating in New York State. The rules are set for official publication on July 23, 2014 and this will also begin a forty-five day public comment period. Lawsky said in the press release about the draft:

“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation.  Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”

The proposed rules will still have to be adopted but that does not seem to be a real problem. After the regulations come into effect, any business offering virtual currency services must apply for a license to do business in the state and meet the regulatory requirements - not only maintaining certain levels of capital and good bookkeeping but also comply with any FinCEN regulations concerning money laundering, fraud and cyber-security.  Bitcoin business would also have to agree to two year inspections by the Bureau of Financial Services (BFS).

Director Lawsky has taken the lead in New York as far as determining the fate of virtual currencies and has proven to be very open-minded on the issue, keeping as his main concern protecting the consumer while promoting innovation to strengthen these currencies, which will add another layer of consumer protection. During the earlier meetings he heard statements from some of the industries main leaders, including Litecoin creator Charles Lee, Coinbase co-founder Fred Ehrsam, Cameron and Tyler Winklevoss and SecondMarket’s Barry Silbert. Cameron Winklevoss said via email:

 “We are pleased that Superintendent Lawsky and the Department of Financial Services have embraced Bitcoin and digital assets and created a regulatory framework that protects consumers. We look forward to New York State becoming the hub of this exciting new technology.”

But the question is how well the rules will go down with people who actually use Bitcoin, especially people who got in at the beginning. These people, most commonly known as “cryptoanarchists” use Bitcoin precisely because of its decentralized, unregulated nature and many of these people are looking forward to opening a Bitcoin startup or a business accepting BTC. If the comments in at least one Reddit Feed are an example of the general attitude, the backlash is already here. Additionally,