Regulatory Roundup November 2014

November saw ample regulatory activity throughout Europe as governments worked to learn more about digital currencies and clarify tax issues related to the value-added tax (VAT). Russia and Ukraine continued on the path to officially banning digital currencies for payment while the Australian government began exploring ways to optimize digital currency use.

United States

The Consumer Financial Protection Bureau (CFPB) published a set of proposals on prepaid debit cards that may apply to digital currencies as well, specifically as they relate to digital wallets. The CFPB is still in the process of examining the full impact of digital currencies, as it has been since it released an advisory on the subject back in August.

Other Agencies Get in on the Act: Elsewhere in the government, a Commodity Futures Trading Commission (CFTC) commissioner stated that the agency has the authority to enforce actions against price manipulations in digital currency markets.

Australia

The Australian Senate began its hearings on digital currencies on Wednesday, November 26. The Senate inquiry included testimony by international experts, including Perianne Boring of the United States Chamber of Digital Commerce, and is aimed at maximizing the potential of digital currencies in the Australian economy while avoiding risks as much as possible.

Further Developments

The timing of these hearings follows soon after the Department of Human Services began requiring Australian pension applicants to declare their digital currency assets as part of the application process.

Russia
The Russian Finance Ministry announced its plans to ban bitcoin and other digital currencies back in August 2014. The ministry recently released more information on those proposed bans. After a public discussion of the proposed bill was held, the Ministry decided to reduce the fines to be levied for the use of digital currencies in Russia.

Motivations Unclear 
The penalty amounts are significantly lower than initially proposed but there do not appear to be specific reasons given for the numbers chosen, or why they were lowered at all.

United Kingdom
The UK government is officially looking into the potential benefits and risks of digital currencies as the Treasury issued a “Call for Information” on November 3, 2014. The official inquiry asks thirteen questions about digital currency usage and focuses primarily on digital currencies as payment mechanisms, with less attention paid to speculative investment.

Fact Gathering
The government will cull information from the public, FinTech firms, the financial services industry, regulators and law enforcement agencies. They will then examine the benefits and risks in determining what, if any, regulatory action needs to be taken. The Call for Information closes on December 3, 2014.

France
The French Autorité de Contrôle Prudentiel et de Résolution (ACPR) held a conference at the beginning of November to clarify its stance on licensing and reporting requirements for businesses in France engaging in digital currency transactions.

Waiting on EU Regulations: Ultimately, the ACPR confirmed that France will follow the European Banking Authority’s lead in developing substantial regulations. The ACPR monitors banks and insurance companies and is linked to France’s central bank.

The Netherlands
The Dutch Minister of Finance indicated recently that he did not believe that bitcoin transactions would be subject to the value-added tax (VAT) in the Netherlands. Though not an official position of the Ministry of Finance, it was confirmed that they are considering this exemption as an option, and it will have to go through the usual procedures. This includes commentary from tax advisors and businesses.

Traditional Transactions: If bitcoin becomes VAT-exempt, only the goods and services portion of a digital currency transaction would be taxed. This is similar to fiat currency.

Finland
In Finland, the Finnish Central Board of Taxes officially classified bitcoin as a “financial service” and granted it VAT-exempt status. The government stated that since commission fees charged on bitcoin purchases are in effect banking services, they fall under the existing European Union VAT rules and are therefore exempt from those taxes.

Compliance with the EU: It remains to be seen if there will be an EU-wide ruling, and if so, how that will affect existing rulings by individual European nations.

Ukraine
The National Bank of Ukraine (NBU) announced via its website that bitcoin and other digital currencies may not be used as means of payment in the Ukraine. The only legal currency in the country is the Ukrainian hryvnia and digital currencies are classified as merely “money substitutes.”

No Official Ban
Though the NBU has focused heavily on the risk factors of bitcoin, it has not officially banned the digital currency. In fact, no official laws have been passed at all regarding digital currency possession or usage in the Ukraine.

Regulatory Roundup October 2014

Every month, itBit scours the globe to bring you the latest in digital currency regulation and compliance news. Below, our Chief Compliance Officer, Erik Wilgenhof Plante, highlights the key regulations and legislation impacting retail and institutional digital currency investors around the world in the month of October.

UNITED STATES

The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a few Virtual Currency Guidance notes in response to requests for rulings on application of existing regulations to digital currencies. FinCEN clarified that digital currency exchanges cannot avoid money transmitter status. The guidance notes could likewise apply to bitcoin processors as well as exchanges.

In New York, the extended comment period for the proposed BitLicense closed on October 21, following a clarification from NYDFS superintendent Benjamin Lawsky that many individuals and companies working in the digital currency industry, including developers, miners and individuals using bitcoin, will not need to acquire a BitLicense. There will soon be an amended proposal, which will be followed by a new comment period.

JAPAN

The government of Japan recently asked members of the country’s bitcoin industry to form a self-regulatory agency to be called the Japan Authority of Digital Assets (JADA). The authority will not be regulated by any specific government office, but is supported by the Liberal Democratic Party of Japan’s IT committee; it will be headed up by bitFlyer CEO Yuzo Kano. JADA will, among other things, serve as a liaison between the digital currency industry and the government, provide aid to budding digital currency companies and audit bitcoin exchanges pursuant to its own security guidelines. The Japanese government had previously ruled that it was not necessary to regulate bitcoin sales, purchases or exchanges.

RUSSIA

The Russian government, in a bid to outlaw bitcoin, announced it will be levying fines upon those transacting in bitcoin and other digital currencies.  According to the Finance Ministry, private users could be fined up to 50,000 rubles ($1,250), public officials up to 100,000 rubles and businesses could be fined up to a maximum of one million rubles. Russia had previously stated that use of bitcoin is illegal since it is not an official currency of the country.

SERBIA

The National Bank of Serbia issued an official statement on digital currencies earlier this month, laying out the basics of bitcoin and warning that it is not a legal tender in the Republic of Serbia. The Bank pointed out that as an implication of this, bitcoin cannot be subject to sale and purchase by banks and licensed exchange dealers, nor can it be subject to protection mechanisms in place for other currencies backed by the central bank. However, the Bank stopped short of banning digital currencies, simply warning that those engaging in bitcoin transactions do so “at their own risk and responsibility.”

CANADA

The Banking, Trade and Commerce committee of the Canadian Senate met recently to discuss regulation of digital currencies. Andreas Antonopoulos, considered by many to be one of the foremost experts in bitcoin, spoke and answered questions at the session. A video of the session is available to view online. Antonopoulos emphasized that with bitcoin, there is no real need for centralized regulation or oversight, but that clarification on certain issues including tax statuses could be helpful.

EUROPE

The European Parliament this month discussed digital currencies with Britain’s Lord Jonathan Hill, the commissioner-designate for the Financial Stability, Financial Services and Capital Markets Union portfolio, in the process of questioning nominees for several European Commission posts. Lord Hill stressed the importance of balance between safety and innovation when it comes to digital currencies, particularly in the matter of protecting users. The Economic and Monetary Affairs committee submitted additional questions to Lord Hill for written responses, which were leaked to the media and also included some discussion of digital currencies.

ITBIT’S COMMENTS ON THE PROPOSED BITLICENSE GUIDELINES

October 22, 2014
At itBit, we have a special appreciation for regulation. We believe that it’s in the best interest of Bitcoin and the related ecosystem’s long-term adoption for a sustainable regulatory framework to be established. There isn’t another Bitcoin-related company that is as obsessive about compliance.

So when the New York Department of Financial Services published the BitLicense guidelines, we viewed this as an important step toward fully regulated and sanctioned operations in New York, the United States and potentially globally. We believe clear guidelines are an absolute necessity to encourage consumer confidence and adoption while creating a transparent framework for the broader financial community.

The proposed guidelines, as Commissioner Lawsky mentioned last week, are likely the most restrictive version of the potential final guidelines. However, we think it’s a very promising start, one that shows a willingness to engage and examine new and complex issues. But as is always true with government regulation, there is a fine balance to be struck between consumer protection and support of a new economy still early in its life cycle.

We took the full comment period to carefully examine the proposal and design our response. Below, we summarize what we think are the most important sticking points:

EXEMPTIONS

We suggest exemption from BitLicense regulation for the following situations:

Companies that are conducting a volume of transactions below a certain threshold: It’s too much of a barrier to require all startups and small businesses to meet many of the very stringent requirements, and would stifle innovation.

Non-financial uses of the blockchain as a public ledger: There are many ways that the blockchain can be used as an information authentication system, such as for various contracts or ownership or rights transfers; in these cases, transmission of value is not the primary purpose, and therefore these use cases should not come under BitLicense regulation.

Exchange customers (businesses) trading with a regulated NY exchange: These transactions would already be regulated by the exchange, and therefore the non-NY businesses shouldn’t have to also go through full regulatory approval. This will help encourage economic activity in New York.

MODIFICATIONS

Here are a few ways we suggest changing policy:

Instead of pre-approval for new products, the DFS should just require notification: Pre-approval could result in undefined delays and seems like an unnecessary high barrier for what could be minor enhancements. A notification should suffice to make the DFS aware of any new products or services.

Remove investment limitations on retained earnings and profits: Since these funds are separate from the reserves required for serving customers, they should not be under strict regulation and firms should be able to invest according to their own discretion.

Lower requirements for record-keeping: As they stand, the record-keeping exceed those required by the analogous NYTMA and federal BSA regulations. They should be brought in line to match.

Click Here to Read itBit's Official Comments in their Entirety

Every month, itBit scours the globe to bring you the latest in digital currency regulation and compliance news. Below, our Chief Compliance Officer, Erik Wilgenhof Plante, highlights the key regulations and legislation impacting retail and institutional digital currency investors around the world in the month of September.

SPAIN

BITCOIN IS AN ELECTRONIC PAYMENT SYSTEM, NOT LEGAL TENDER

The Spanish government ruled that bitcoin is not legal tender or electronic money and that it should instead be classified as an electronic payment system. El Ministerio de Hacienda y Administraciones Publicas, which regulates taxation and finance in Spain, additionally clarified that gambling sites located in Spain that accept only bitcoin must adhere to regulations requiring they obtain a general gambling license.

Clarifications Opening Doors: The ruling indicates that Spain is moving toward treating digital currencies as a form of payment, rather than an asset.

ENGLAND

BOE: DIGITAL CURRENCIES NOT A THREAT TO FINANCIAL STABILITY, HOLD PROMISE

The Bank of England recently released a thoroughly researched report on digital currencies, in which they found that digital currencies “do not currently pose a material risk to monetary or financial stability in the United Kingdom,” and will not do so unless they grow significantly. The Bank, however, finds this level of growth unlikely in the near future.

Promising developments: The report went on to indicate that the decentralized nature of bitcoin and other digital currencies makes it far more intriguing in the future due to its potential usefulness as a “decentralized ledger” for existing financial systems.

BANGLADESH

JAIL TIME FOR BUYING, SELLING AND TRADING DIGITAL CURRENCIES

The Bangladesh Bank, the central bank of Bangladesh, issued an order warning the country’s citizens against buying, selling or trading digital currencies. The Bank took it even further, stating that people caught using bitcoin in the country could be jailed for up to twelve years under its anti-money laundering laws, citing the fact that “bitcoin is not a legal tender of any country.”

Government Crackdown Breeds Uncertainty: Though the full ramifications remain to be seen, in light of the uncertainty, the Bitcoin Foundation Bangladesh has suspended its operations.

AUSTRALIA

UNDERSTANDING THE ECONOMIC IMPACT OF DIGITAL CURRENCIES

The Australian Senate announced that its Economics References Committee will hold an inquiry to examine the potential economic impact of bitcoin and digital currencies across various industries. The Senate intends to present its findings to parliament in March 2015.

Setting the Stage: The sentiment behind the inquiry is that Australia would like to provide a definitive framework for regulating and taxing digital currency so that the country can be at the forefront of the industry.

UNITED STATES

FIRST REGULATED BITCOIN DERIVATIVES PLATFORM IN U.S. LAUNCHES

The first regulated platform for bitcoin derivatives was launched this month, along with a bitcoin spot price index. New Jersey-based TeraExchange is currently the only regulated bitcoin swap contract in the U.S. A TeraExchange affiliate first launched as an unregulated exchange back in March. According to a press release, the company then worked with the Commodity Futures Trading Commission (CFTC) to bring the exchange’s swap and index into compliance with all requirements for regulation.

CEO and co-founder Christian Martin believes that creating a proprietary benchmark bitcoin index was integral in gaining CFTC’s approval. The price index utilizes a “dynamic algorithm that compiles and filters data on a real-time basis” from various bitcoin exchanges worldwide. CFTC regulations require these exchanges to have an information sharing agreement with TeraExchange, which then serves as the index administrator and calculation agent. President and co-founder Leonard Nuara noted that the CFTC has been cautious but receptive to regulating bitcoin swaps as long as regulatory requirements are met.

Getting in Front of the Issues: The CFTC is being proactive with its approach, announcing that it will meet October 9, 2014 to discuss its jurisdiction over bitcoin futures. There will be two panels, both open to the public. The first panel will cover “whether a clearing mandate is appropriate for Non-Deliverable Forwards” and how any action would impact foreign exchange contracts. The second panel will discuss the Commission’s jurisdiction with respect to derivatives contracts that reference bitcoin.

Last weekend I spoke on a Bitcoin conference in Bangkok. Despite the news, there is no ban on Bitcoin in Thailand and the industry is surprisingly alive. My presentation is on YouTube although the quality of the image isn't good. My part starts at 1.50.00

Regulatory Roundup August 2014

Every month, itBit scours the globe to bring you the latest in digital currency regulation and compliance news.

FRANCE
REGULATORY FRAMEWORK FORTHCOMING
The French Senate released a report at the beginning of the month stemming from a July 23 meeting of the committee on finance. The report suggests that the authorities should come up with a regulatory framework for bitcoin and other digital currencies that is “well-balanced,” so as to prevent abuse but protect innovation. The Senate determined using existing legal categories and definitions would be the best way to accomplish this goal. The report also noted that France was 'middle of the road' when it comes to the strictness of its existing regulations.
Going Forward: The French Senate believes clarification of regulatory framework for digital currencies should take place on the European and, if possible, on a fully international level. French authorities are optimistic regulations could actually create opportunities, such as payment systems and “a decentralized validation protocol.”

KYRGYZSTAN
USE OF BITCOIN MAY BE ILLEGAL
The National Bank of the Kyrgyz Republic issued a statement warning against the use of bitcoin and other digital currencies, citing the associated risks. The statement also reiterated the existence of legislation that states the country’s “sole legal tender” is the Kyrgyzstan som. As a result, any use of digital currencies within the Republic of Kyrgyz violates existing laws.
Risky Proposition: Taking it a step further, the Bank pointed out that any digital currency user is liable to “assume all the possible negative consequences of the possible violation of the legislation of the Kyrgyz Republic”.

RUSSIA
BITCOIN BAN MAY BE ON THE HORIZON
Reports out of Russia suggest that the Russian Finance Ministry is taking steps to ban bitcoin and other digital currencies. The bill would prohibit all “money substitutes, including in electric form.” Supposedly the legislation would additionally make conducting any interactions with digital currencies illegal.
Mixed Signals: Interestingly, similar reports came out of Russia in February 2014, when the Russian Prosecutor General’s Office iterated that bitcoin is illegal in the country since the only accepted currency is the ruble. However, in July 2014, it was reported that the Bank of Russia was gathering information on digital currencies and claimed it would not stand in the way of its usage.

ARGENTINA
TRANSACTION REPORTING GOES INTO EFFECT
The Unidad de Información Financiera (UIF)’s new regulations affecting digital currencies took effect on August 1, requiring all financial services companies in the country to report all digital currency transactions on a monthly basis.
Unintended Consequences: Unisend, an Argentinian bitcoin exchange company, had its accounts with its two major banking partners shut down unexpectedly. Unisend partner José Rodriguez suspected that the enactment of the new legislation may have had something to do with the sudden account closures by Banco Santander Río and Banco Gailicia.

UNITED KINGDOM
REGULATIONS PROMOTE USE OF DIGITAL CURRENCIES
Chancellor George Osborne announced new measures the British government will take to promote the use of bitcoin and other digital currencies in the UK. The government will investigate both the potential benefits as well as the potential risks within the UK’s financial sector. Osborne also indicated legislation was forthcoming that would help small- and medium-sized businesses get funding from “alternative finance providers” after getting turned down by traditional banks.
Looking Ahead: Osborne recognizes the growing popularity of digital currencies and stated that he would like to make Britain the "global centre of financial innovation".

AUSTRALIA
GUIDANCE ON BITCOIN TAXATION
The Australian Taxation Office (ATO) released a guidance paper on August 20 providing an overview on tax treatment for bitcoin and other digital currencies. Notably, the guidelines indicate that bitcoin is an asset subject to capital gains taxes, but that the supply of bitcoin is not a financial supply subject to the goods and services tax. Furthermore, people using bitcoin for personal transactions (rather than business purposes) do not have to pay income taxes or goods and services taxes for these transactions.
Required Reading: The ATO suggests that anyone dealing with bitcoin or other digital currencies should read the entire guidance document to determine how it may apply to them, and in cases where it is unclear, the ATO should be contacted.

UNITED STATES
DELAWARE
RESIDENTS CAN PASS DIGITAL ASSETS TO THEIR HEIRS
On August 12, Delaware passed a bill allowing residents of the state to bequeath their digital assets to their heirs when they die, in the same way that financial and physical assets are passed on. The bill specifically “authorizes fiduciaries to access and control the digital assets and digital accounts of an incapacitated person, principal under a personal power of attorney, decedents or settlors, and beneficiaries of trusts” and indicates that the language therein should be “construed liberally.”
Trailblazing Legislation: Delaware is the first state to pass such a law, which applies to all sorts of digital assets, including digital photos, email accounts, and presumably, digital currencies.

NEW YORK
BITLICENSE COMMENT PERIOD EXTENDED
New York Department of Financial Services (NYDFS) superintendent Benjamin Lawsky extended the comment period for its proposed BitLicence regulatory framework for digital currency firms for an additional 45 days. The proposed regulations, initially submitted for the original 45-day public comment period in July, include consumer protection, anti-money laundering compliance and cyber security rules. The new deadline for comments is October 21. If there are major changes made to the regulatory language stemming from these comment periods, the amended language will go out for further review and comments.
Work in Progress: Lawsky stated that he had already received “thousands” of comments on the proposed regulations, including from prominent members of the digital currency industry. Many bitcoin supporters had requested extending the comment period as well as a more inclusive review process including public forums.

REGULATORY ROUNDUP: JULY 2014

Below are the most important regulatory events of the last month. You can find more information on the itBit blog.

ARGENTINA
DIGITAL CURRENCY TRANSACTION REPORTING
On July 4, Argentina’s Unidad de Información Financiera (UIF) announced it was amending existing regulations to require financial institutions in Argentina to report all digital currency transactions. They must file these digital currency reports with the UIF every month.Impact: The UIF intends to use the information to prevent bitcoin and other cryptocurrencies from being used for illegal means. The document further draws a distinction between virtual currency and electric money, the latter of which is already well regulated.

POLAND
BITCOIN IS A FINANCIAL INSTRUMENT
Poland’s deputy finance minister released a document July 9 confirming that bitcoin is considered a financial instrument under existing financial regulations. Wojciech Kowalczyk had been asked to clarify the legal status of bitcoin, namely whether options and futures contracts using digital currency as their base instrument can be considered as financial instruments. Kowalczyk responded in the affirmative, and confirmed that they could be made available to Polish investors in accordance with Poland’s banking services regulations.The Catch: The Finance Ministry did maintain, however, that bitcoin is not a legally defined or universally accepted currency under the country’s regulations, since it is neither a national currency nor a foreign currency.

FRANCE
DIGITAL CURRENCY REGULATIONS FOR FINANCIAL INSTITUTIONS, USERS
France has outlined regulations for financial institutions and users of digital currencies that will be put in place by the end of 2014. The Ministry for the Economy and Finance presented the new regulations on July 11, which require bitcoin distributors to identify and verify their users. Digital currency will also be subject to taxation; a threshold of €5,000 was proposed on the margin tax. Additionally, bitcoin exchanges that handle fiat currencies will be required to report all digital currency transactions and verify the identities of the parties involved.What’s Next: Regulators must still further clarify the treatment of digital currencies in the national tax system, as well as determine a spending cap for digital currency transactions.

NETHERLANDS
ABILITY TO SEIZE DIGITAL CURRENCY FROM CRIMINALS
On July 16, DutchNews reported that in the Netherlands, the Dutch public prosecution department has the ability to seize digital currency from criminals and put them in its own digital wallet. It can then cash in and sell the digital currencies after they’ve been confiscated.Courts Pave the Way: This was made possible when several Dutch courts ruled that bitcoins are considered objects that may be subject to seizures during criminal investigations.

NEW YORK
BITLICENCE REGULATORY FRAMEWORK
On July 17, the New York Department of Financial Services (NYDFS) released its proposed BitLicence regulatory framework for digital currency firms. The proposed regulations, submitted for a 45-day public comment period, include consumer protection, anti-money laundering compliance and cyber security rules.What’s Next: After the 45-day period, the regulations may be revised based on feedback received. Digital currency firms will be required to follow these rules in order to receive a DFS BitLicense.

ISLE OF MAN
EXISTING REGULATIONS AND DIGITAL CURRENCIES
On July 18, the Isle of Man Financial Supervision Commission (FSC) issued a press release clarifying its application of existing regulations to digital currencies. Digital currency businesses are not subject to a conduct of business or prudential regime by the Commission unless they also carry on a regulated activity under the Financial Services Act of 2008, meaning there is no protection under the Act for consumers in the digital currency market.Changes On The Horizon: The FSC is in the process of drafting the Designated Businesses (Registration and Oversight) Bill, which will allow it to oversee how digital currency businesses comply with the Island’s Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) legislation. The FSC is also planning amendments to the Proceeds of Crime Act of 2008 that would apply the AML/CFT legislation to the digital currency market.

ECUADOR
DIGITAL CURRENCY BAN
On July 23, the government of Ecuador passed a bill that effectively banned bitcoin and other digital currencies.Government Control: The bill also created an official Ecuadorian digital currency that is backed up by assets in the Central Bank of Ecuador. The government will be able to make payments with this digital currency, which will exist alongside Ecuador’s official currency

Lawsky lays down the law; how practical are New York's proposed Bitcoin regulations?

Last week Ben Lawsky, New York State's Superintendent of Financial Services issued the first version of what has become known as “Bitlicense” regulations. As usual with new rules proposals they are broad and overreaching. Ben Lawsky, in an innovative turn of events, engaged the Bitcoin community on reddit and will certainly be receptive to issues and remarks coming from the industry. The Bitcoin community reacted as expected. The more anarchistic side was immediately up in arms on reddit and other social media. “Any form of regulation or licensing will cause the death of Bitcoin companies and kill innovation, even if Bitcoin itself will live on in the underground”, the message seems to be. The corporate side, including itBit, stated that they will comply with the final rules. The current proposal needs to be discussed thoroughly and probably altered substantially though.

Bitcoin regulation is here to stay and, as I have posted before, it’s a good thing. Without legal means to control the misuse of virtual currency by criminals, terrorists and other bad guys the regular financial industry like banks and investment companies will never touch Bitcoin. They have experienced the hammer of regulatory justice many times now and have absolutely no incentive to add to the risk of yet another multibillion dollar fine. Without banks the chance of merchants adopting Bitcoin is small and without the merchants the general public will stay away. Companies like PayPal, Visa and MasterCard have shown how important merchants and the general public are if you want to be gain critical mass.

Should we just accept that we now have a Bitcoin Overlord and comply with the rules as-is? Most of the fifteen paragraphs contain rules that any financial institution is already complying with. It should come as no surprise that a Bitcoin company will be expected to abide by the same standards as a bank or other financial institution.

Broad coverage

Basically any company and individual active in New York issuing virtual forms of exchangeable value is now under the supervision of Ben Lawsky and (I hope for him) his very large team.
The proposal also states that wallet-providers, payment processors and basically anyone who does anything with virtual currencies will be covered by the new rules. That seems odd, as companies that have no access to client funds and merely provide a service like secure storage should not be put under the same regime as companies that have full access. A bullion vault operator is not the same as a private bank. 
Companies like Amazon and Activision would also be covered, as they issue virtual currency. What about airlines? Oil companies? Sure, there is an exemption for merchants and consumers that “utilize virtual currency solely for the purchase or sale of goods and services” but what if an airline allows you to exchange air miles for other forms of digital currency? Forget about using your Linden dollars to buy that virtual gold in World of Warcraft.

Expensive

The capital requirements and license fees will most probably cause a departure or consolidation of most of the smaller start-ups as they would be hard pressed to raise enough capital. This will indeed be problematic if New York wants to be a Bitcoin start-up incubator. 

However, this is not Lawsky’s problem as he is not incubating tech start-ups but regulating the financial industry. If it were that easy to start there would be many more micro-banks in New York State.

Reporting

The reporting requirements are onerous and lack a risk based approach but shouldn’t be a huge issue for professional players in the Bitcoin space.

A chance for compliance professionals

Compliance and anti-money laundering have never been an area with many adventurers and out-of-the box thinkers. There simply has been no real incentive for compliance specialists to change the highly lucrative and safe financial world for the seemingly insecure and unknown waters of Bitcoin. Regulating the Bitcoin industry will hopefully attract anti-money laundering specialists and compliance professionals. There certainly is enough work to do. 

Beyond practicality

Unfortunately when it comes to due diligence, the new proposal goes out into unknown territory...

Section 200.12 (1) states that a Licensee shall hold records for “…the amount, date and precise time of the transaction, any payment instructions, the total amount of fees and charges received and paid to, by, or on behalf of the Licensee, and the names, account numbers, and physical addresses of the parties to the transaction”. 

That goes beyond the due diligence even the most secure banks perform and would be virtually impossible for Bitcoin transactions. The rule doesn’t add anything to make Bitcoin transactions more secure and will definitely add to the risk of regulatory fines.

Bank wire transactions contain mandatory information but the physical addresses of the sender and the receiver aren’t mandatory information for most transactions. That doesn’t mean that the bank shouldn’t have that information but in a lot of jurisdiction, privacy laws dictate that certain information should be kept within the financial institution and cannot be shared without a proper mandate. 

• For Bitcoin it is virtually impossible to obtain and verify the address of the sender. The receiver should be a customer and should be fully documented but the sender could be anybody. Even if the sender and receiver is one and the same person, you cannot verify that fact.
• Banks can reverse a payment if it contains insufficient information, a Bitcoin transaction is irreversible.
• A physical address can be very easily faked by providing false documents.
• People move often and don’t always update their addresses. Why would a customer bother when transactions are all online anyway and there is no reason for physical mail?

Change of approach

A risk based approach that requires Bitcoin Licensees to do due diligence on high risk and high value transactions and focus on client behaviour, instead of point-of-entry know your client documentation would not only help to create a safer and more viable system but could be used by the traditional banking industry as well. Real money-launderers will not go by the placement-layering-integration textbook laundering methods anymore. They use mules, false addresses, straw-men, whatever it takes to point law enforcement in the wrong direction.

There are numerous ways that financial technology like Bitcoin can improve on the traditional AML and CTF methods. Logging of user IP addresses, reconciliation of high risk transactions on the blockchain, automatic profiling and flagging of Bitcoin users and secure, shared document repositories are just a few. 

Conclusion (for now...)

Lawky’s regulations are a good start, but if New York truly wants to be a Bitcoin leader, they need to be practical, pragmatic and written in a way that stimulates innovation in keeping the bad guys out and the good guys in. Other jurisdictions will undoubtedly come out with their own versions which may or may not be good news. Keep in mind though that these rules are made for a reason; to keep the industry and the public safe from crooks and criminals.

Time for the internet of transportation

Terrorist acts are horrible and senseless. It gets even worse if the terrorists get the opportunity to obfuscate information and even deny others to come in and collect evidence to bring those responsible to justice. As it looks now, flight MH17 was shot down by Russian led “rebels” who received a shiny new toy from their masters in Moscow. Proudly they tweeted about their capability to shoot any plane out of the sky, falling just short of taking selfies with their deadly new gadget. Even Putin should have realised that you can’t give goons high tech equipment and not expect them to use it. When they did, 298 innocent people were brutally murdered.

To add insult to injury, instead of admitting their mistake and turning themselves in, the goons are denying aid- and recovery organisations access to the site. In a clear attempt to sweep evidence under the rug they have removed at least a few of the black boxes from what is basically a large crime scene. It is as if Al Qaeda would have had the opportunity to loot the bodies of victims and remove evidence at will after 9/11. The world is looking on and has done nothing but shake their collective fists.

Apart from the emotional and moral questions that this case inevitably creates, there is also a technical one. Why do airplanes still rely on “black boxes” to record critical information? In today’s world, where we are now talking about the “internet of things” it should be not too difficult to create a network of satellites, to provide a seamless information highway for airplanes. Flight MH370 disappeared without a trace. Collecting information on flightMH17 will be more difficult now the crime scene has been compromised.  

If there’s one thing to be learned from these two disasters it is that any form of mass transportation is vulnerable to criminals and terrorists. No amount of x-ray portals, invasive body searches and confiscation of water bottles will help you if anyone can just shoot you down from the ground.

Google is building driver-less cars. SpaceX wants to fly people to the moon for vacation. People like Elon Musk are hailed as “visionaries” when they come with highly impractical but media-sexy plans for future transportation. So why not put a fraction of that innovative thinking to good use and devise an unhackable way of sending out information? Why aren’t airplanes sending out streams and streams of data about their location, condition, flight path and anything else that may help in case of an emergency? Why do airplanes need to carry their own evidence box? Why do we need radar to find out where a plane or boat is?

It probably wouldn’t make the existing modes of transportation safer. However, it would deter terrorists like Putin’s goons to shoot down a civilian airplane if they have half a collective brain cell. They would know they wouldn’t be able to hide the  evidence.  I’m not talking about a shady government organisation owning the intel and changing whatever they see as unfit for public knowledge. Make this information instant, public and verifiable and let anyone have access.  With real time flight information gathered in a transparent way, it should be easier to find the people responsible for these acts.

itBit will be on the forefront of regulation

NEW YORK -- July 17, 2014 -- itBit today reaffirms its intention to meet full regulatory compliance with the New York Department of Financial Services BitLicense.

"We applaud the thoughtful and transparent approach that Benjamin Lawsky and the NY DFS have taken in examining consumer protection issues surrounding virtual currency and related businesses. We believe this framework is important for the ecosystem to operate in a compliant and trustworthy way, and shows the DFS’ ongoing dedication to improving the stability of the industry," said itBit CEO Charles Cascarilla. "We take every possible measure to ensure that itBit protects consumers, prevents abuse and provides security. The proposed BitLicense aligns with our current standards and practices, and we have every intention to be in compliance with the final guidelines.”

Read the full NY DFS press release here.

Inside the Bitcoin manipulation business

Since the Bitcoin rise and fall late last year, the media have been all over the virtual currency and its cryptographic brethren. Most of the news has been negative as the industry struggled with criminal users, hack and theft attempts and even the bankruptcy of the world’s largest Bitcoin exchange, Mt Gox. The fact that media love a bad story hasn’t helped either. 

The recent Bitcoin auction by the US Marshalls Office should be seen as a positive development. For the first time a government institution is selling something that can be considered controversial but could also be seen as a revolutionary new way to safely transact in a globalised and increasingly virtualised economy.

The internet has changed the news industry the same way as it is now changing the financial industry. The difference is that some news agencies don’t feel that they are bound by the same ethical standards that they continue to point out, the financial industry and especially the Bitcoin industry is lacking. Take for instance businessinsider.com, a website headed by convicted fraudster and banned-for-life banker Henry Blodget. It has become a very popular site because of the sensational style even though the articles can’t be accused of being unbiased journalistic masterpieces. 

The US centric .com site now has local variations that include more than the latest US army successes or which football player scored what in the last Super Bowl. However, it seems that businessinsider doesn’t say no to a bit of manipulation to attract the clicks though. A blatant example is the latest news about Bitcoin. Have a look at the Singapore site on the left versus the same article on the US site on the right. Keep in mind that Bitcoin prices have risen substantially since yesterday and that market manipulation is not a crime in the Bitcoin world yet, just highly unethical.

The introductory post I wrote for the itBit blog:

At itBit, regulatory compliance is our number one priority and we pride ourselves on having the highest standards in the industry. To further our efforts in this area, I’m happy to announce that Erik Wilgenhof Plante has joined itBit as our Chief Compliance Officer. 

Erik joins us from PayPal and is a respected figure in the regulatory sphere. He is network chairman and fellow of the International Compliance Association, a Financial Industry Certified Professional and a founding board member of the Singapore chapter of the Association of Certified Anti-Money Laundering Specialists. Erik will be central to our work to foster a regulated environment for Bitcoin which builds trust with consumers and investors alike. Welcome, Erik!

– Richmond Teo, CEO

As a believer in the potential of virtual currencies, I am delighted to join the itBit team. For me, building out a new sector at the intersection of technology and financial services is a continuation of what I love. I worked in the financial industry in the 1990’s when banks grappled with the arrival of the Internet. Then, like now, people across industries were not sure about the relationship between this new global network and business. As with most new transformative technologies, there were plenty of naysayers. Critics didn’t believe the Internet would amount to much at all—let alone play a central role in global commerce as it does today. 

Like the early days of the Internet, Bitcoin has already had quite a ride. When Satoshi Nakamoto introduced the concept, the world hardly noticed. Sure, some anarchists and libertarians predicted the end of government currencies and taxes. A few tech enthusiasts embraced the possibility of earning coin by using their computers. And several central banks took note. But the mainstream largely ignored the phenomenon until relatively recently when the price of Bitcoin rose spectacularly from 32 cents in 2011 to more than a thousand dollars two years later. 

Why has the value of Bitcoin risen so much? People believe in the tremendous possibilities it brings by empowering people to transfer money, very quickly, at very low cost, anywhere in the world. But to become truly valuable, it must become mainstream. And to enter the mainstream, Bitcoin must gain trust.

Yet few Bitcoin companies have bothered with regulation. Whether from naïveté or to save cost, not many are taking the necessary and required steps to know their customers or how they transact. This understandably worries regulators and law enforcement, as it opens the door to potential misuse or abuse. These are not issues to be taken lightly.

But as I've become more familiar with the Bitcoin industry, there has been only one company that stands tall above the rest in compliance matters. itBit was created with compliance, security and customer experience at its core. The company believes that experienced banking professionals and a regulated environment will build customer trust and a thriving, healthy ecosystem. That's why itBit observes the same know-your-customer practices used by banks, and works with governments to help inform their regulatory decisions. 

I'm thrilled to join this company and to help build a Bitcoin exchange which embraces regulation and protects its customers. itBit can help build the foundation for the success of virtual currencies. 

– Erik Wilgenhof Plante, Chief Compliance Officer

Marc van der Chijs VC NBC

There was an interesting article today on Coindesk.com stating that "moulding Bitcoin into the current regulatory framework simply won’t work". The author, a freelance opinion and news writer is obviously a fan of deregulation and definitely not a big proponent of governments and government oversight.

Thinking that virtual currencies are so revolutionary that governments and regulators simply don't understand the concept might be counterproductive. It is at least a dangerous underestimation of the traditional financial industry and the institutions that regulate it.

It is true that no-one needs a third party to send and receive Bitcoin. You don't need identification or even an email address. Criminals have been using a form of payment that has exactly these properties for centuries. It is known as cash (or "fiat currency" for Bitcoin enthusiasts). Of course there are a great number of rules that regulate dealing in cash. Try to pay for your condo or jewelry in cash and in most countries there will be a report going out to the local financial intelligence unit. There will always be an interest in the seedy side of anything new. The best proof of success of a new technology is if someone comes up with an illegal way to use it.

Should we therefore just give up on controls and regulations of Bitcoin? The writer states "Regulatory bodies can’t fit bitcoin into current regulatory framework. The two are simply not compatible, and that has nothing to do with any libertarian sentiments in the community. It’s fact." I would very much like to know how this "fact" was established. Even if it is a fact, it is most probably Bitcoin that needs to change if it wants to be sustainable. You can't ignore reality and substitute your own, no matter how much you want to.

Know Your Client, as I have applied it in the banking world, simply means that you only deal with customers that you know by name, you know where they live and you know how they earn their money. That way you can predict what they will do with their account after they come on board them and, most importantly, you can make a reasonable assessment of the risk they pose to your company. KYC doesn't end there though. Monitoring accounts for unusual behavior is even more important if you want to properly keep out the bad guys. If you don't perform periodic reviews and re-assess the risks you might as well open your doors and say, "here we are, misuse us"

Giving up on KYC is a terrible idea. The recent mega-fines handed to the big banks show that willful blindness will lead to criminal misuse sooner or later. Regulators will simply make you go away if you think you don't have to play by their rules. Complying in a cost effective and customer friendly way is key. We will move from an point of contact, face-to-face experience to a virtual, continuous, automated one. However, the end result will need to be the same. A thorough understanding of the customer. Not just to keep out the bad guys but to keep the good guys in.