Process lawmaking: NY financial lawmaker asks Reddit for feedback on virtual currency regulations

By Michael Carney , written on July 17, 2014

From The News Desk

Rather than hiding in the relative safety of his regulatory ivory tower, New York Department of Financial Services (NYDFS) superintendent Ben Lawsky is taking the lawmaking process to the streets. Or at least the streets of Reddit.

Today, as the NYDFS published a preliminary draft of its proposed BitLicense framework to govern virtual currency businesses, Lawsky posted to the r/Bitcoin subreddit inviting feedback and discussion. It’s an almost unheard of approach for most state and federal regulators, but it’s the second such major effort by New York’s chief financial lawmaker following a February AMA.

In today’s installment of “Lawsky, Man of the People,” our hero writes:

Hi Reddit – This is Ben Lawsky, Superintendent of Financial Services at the New York State Department of Financial Services (DFS)...Today, DFS is announcing that we’re publishing that proposed framework for public comment. A copy is available here on the DFS website...

While this is not a formal AMA, I’ll try to stop by this thread (and chime in from time to time) during the course of the public comment period. (However, to be clear, if you wish to submit a formal comment under our state regulatory process, you will have to visit the New York State Register.)

...continued public feedback will be an important part of finalizing this regulatory framework. We look forward to carefully and thoughtfully reviewing public comments on our proposal. Lawsky goes on to explain that this today’s announcement will be just one step in a lengthy process through the BitLicense regulations will be further refined. The NYDFS will formally published these regulations one week from today, on July 23, kicking off a 45-day public comment period. Once that period is concluded, the rules will be subject to further review and revision before beind finalized by the NYDFS.

The process of creating these regulations first began with a series of public and private hearings with bitcoin and financial industry leaders, including investors, entrepreneurs, and law enforcement. Lawsky reiterated today on Reddit that the goal of the BitLicense is “to help safeguard customer assets, protect against cyber hacking, and prevent the abuse of virtual currencies for illegal activity, such as money laundering.” He later cites the “situation at Mt. Gox” as a clear example that such protections are in fact necessary. That doesn’t mean he expects everyone to be happy about it.

We recognize that not everyone in the virtual currency community will be pleased about the prospect of a new regulatory framework. Ultimately, though, we believe that 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... Moreover, given that states have specific regulatory responsibilities in this area, we also have a legal obligation to move forward on this framework.
As for who will be impacted but these new regulations, the NYDFS document indicates that it will be any business that issues virtual currencies, buys or sells virtual currency as a business, or transmits, receives, stores, or converts  virtual currency for customers will need to obtain a license to operate in NY. Merchants accepting bitcoin as a means of payment will not be affected by these regulations.

The proposed regulation is worth reading in full, but here are a few high-level takeaways (h/t AmericanBitcoin):

  • Existing virtual currency businesses will have 45 days register with the state and register with the state. All new businesses will require written approval from the NYDFS before commencing operations
  • All employees and founders will be required to submit to background check required for all employees/founders, including sending fingerprints to the FBI.
  • All virtual currency businesses will be required to post a surety bond with the state of New York.
  • Businesses will need to submit quarterly financial statements, audited under GAAP, within 45 days of the close of every quarter and will be subject to mandatory reviews of their financial condition and operations every two years. Business owners will need to keep records of all business transactions for 10 years.
  • Any retained earnings and profits can only be invested in US dollar in struments such as federal and state bonds or money market funds
  • Businesses must include in all marketing and advertising materials, "Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services,” as well as disclose material risks of dealing with virtual currency.
  • Businesses must comply with existing cybersecurity regulations, including employing a security officer, and implementing a security plan, an information backup plan, and routine audits.
  • Virtual currency businesses must follow existing anti-money laundering (AML) and know your customer (KYC) requirements.
  • The contents of virtual currency accounts that are not accessed for 5 years must be handed over to the state.
The reactions across Reddit and other similar forums are a predictable mix of anger, confusion, and matter-of-factness about the inevitability of much of what was revealed today. As Lawsky explains, this is just a preliminary draft of what will ultimately become law. But with months of closed door debate and extensive input from across the affected constituencies, it’s a reasonable bet that the document won’t change much between now and the final draft. As the first US state to pass specific regulations pertaining to virtual currency businesses – and as the financial center of the country and world – expect the laws passed in NY to act as a framework for much of the rest of the country.

Nonetheless, Lawsky and the NYDFS should be commended for their progressive approach to lawmaking. We’ll see how much impact the resulting discussion has on the outcome. Typically, wading deep into any reddit discussion thread proves to be an exercise in idiocy and false-outrage. But the bitcoin community can, at times, be rather thoughtful and constructive. Just don’t expect them to agree on much or to accept a single line more regulation than they absolutely have to.

[illustration by Brad Jonas for Pando]