The New York State Department of Financial Services (NYDFS) is in the middle of a two-day-long series of hearings regarding virtual currencies (go here to watch the live stream). The public hearings were called by Financial Services superintendent Benjamin Lawsky following an earlier inquiry and subsequent subpoenas and will feature bitcoin investors and entrepreneurs, early adopters within the ecommerce industry, academics, and members of law enforcement.
The bitcoin community has embraced this process as an important attempt by legislators and industry governing bodies to educate themselves on the intricacies of bitcoin and other altcoins before passing any new regulations, including the NYDFS proposed creation of a ‘BitLicense’ specific to virtual currencies. NYSDF compared this framework to “guardrails for this industry to help root out money laundering and other misconduct.”
The first session, which concluded today at 1:30pm EST, was titled “The Investor Perspective: The Future of Virtual Currencies” and included SecondMarket founder and CEO Barry Silbert, who also founded Bitcoin Investment Trust, Lightspeed Venture Partners partner Jeremy Liew, Union Square Ventures partner Fred Wilson, and Winklevoss Capital Management principals Cameron and Tyler Winklevoss.
PandoDaily caught up with Liew immediately following the session to ask his impressions of the hearing.
“It was clear that [the government] had spent the last several months educating themselves about this topic – they were well prepared,” Liew says. “It’s obvious that they’re trying to responsibly balance the risk that the currency could potentially create while being careful about not stifling innovation.”
The two potential risks receiving the most attention were money laundering and terrorist finance, according to Liew. As we reported yesterday, the Justice department indicted Charlie Schrem, the CEO of prominent US-based bitcoin exchange BitInstant and a Vice Chairman of the Bitcoin Foundation, along with Robert Faiella, operator of an underground bitcoin exchange called BTCKing. The two are accused of conspiring to commit money laundering and operating an unlicensed money transmitting business.
While this is not the kind of attention that the bitcoin community wanted, Liew points out that such arrests suggest that the current system is working and that law enforcement has the tools necessary to identify and prosecute criminal activity. With this in mind, Liew advised NYDFS to avoid creating technology-specific regulation and to do everything possible to use existing regulatory frameworks to address virtual currencies.
It’s the potential for stifling innovation that has Liew and his fellow investors and entrepreneurs concerned. It’s not just excessive legislation that can have this effect, he points out, but also a lack of regulatory clarity – something that is very much the case today in the US. As Liew notes, the areas where regulation is the clearest, namely payments, is where the US dominates. The two most widely adopted bitcoin payment platforms, Coinbase and Bitpay, are both based in the US. On the other end of the spectrum are exchanges, which are ambiguously regulated and subject to onerous requirements where regulation does exist. Subsequently, all the largest exchanges are overseas.
“Today, if you want to buy bitcoin as an American, you need to wire your money to Japan or wherever,” Liew says, adding that this is an undesirable situation for American consumers and businesses.
Liew left the hearings hopeful that the virtual currency ecosystem would receive more clarity from regulators going forward. “I get the sense that there’s a lot more open-mindedness and a lot more understanding,” he says. In the meantime, investors and entrepreneurs will need to be mindful of regulatory risk when pursuing new business opportunities, he adds.
Superintendent Lawsky appears to agree, saying during today’s hearing:
Serious people – in the technological and investment community – are taking virtual currencies seriously. They are putting significant amounts of time, attention, and capital behind them. We, as a regulator, cannot turn a blind eye to something like that. We don’t really have a choice. Right now, the regulation of virtual currency industry is akin to a virtual Wild West. (There is even a modern day Gold Rush among miners in the virtual currency community.) That lack of regulation, however, is simply is not tenable for the long term.
Thankfully, bitcoin is no longer seen as the financial boogeyman that it once was. Then again, credit cards went through a similar evolution a half-century ago. The next step is for virtual currencies to reach a level of familiarity and ubiquity that credit cards enjoy today. The results of this weeks NYDFS hearings may go a long way toward determining how realistic such a future really is.
[Image via BockoPix Flickr]