ellievsbear
Lint Roller? I Barely Know Her
Kaledo Art
JVL
Show & Tell
No title available
Cosmic Funnies
Game of Thrones Daily
occasionally subtle
JBB: An Artblog!
Love Begins
hello vonnie
Origami Around
★
styofa doing anything
TVSTRANGERTHINGS
One Nice Bug Per Day
Mike Driver
Not today Justin
🪼
seen from Brazil
seen from Canada
seen from United States
seen from United States
seen from United States
seen from South Africa
seen from United States
seen from United States
seen from United States
seen from United States
seen from United States
seen from United States
seen from United States
seen from United States
seen from United States
seen from Argentina
seen from United States
seen from United States
seen from United States
seen from United States
@coin-compliance
itBit was granted a trust charter by the New York Department of Financial Services last week. What does that exactly mean? Houman B. Shadab, a professor at New York Law School and the Editor-in-Chief of the Journal of Taxation and Regulation of Financial Institutions wrote an excellent article on the subject. It answers some interesting questions that have cropped up in the media concerning the status of the charter outside the state of New York. You can read it here
Exploring and understanding the uses of digital currency was a key theme around the globe in March. Finding ways to fit digital currency under the umbrella of existing laws and regulations, particularly with respect to anti-money laundering efforts, was also a major push seen in several countries.
North America
California: Bill proposes license requirement for bitcoin businesses A bill introduced in the California legislature would prevent digital currency businesses from operating in the state unless they have been licensed by the Department of Business Oversight and received an exemption. The bill comes from Assemblyman Matt Dababneh, chairman of the California Banking and Finance Committee. A spokesman for the assemblyman told CoinDesk, “This bill is something that has been in the works in the state for a couple of years, and as the leader of that committee, Matt dedicated himself on the issue and thought it was the right move to make for the state of California at this time.” Licensing requires businesses to pay a non-refundable $5,000 for registration and also ask companies to hold a certain portion of their funds in “investment-grade permissible investments.”
Asia
Hong Kong: Official says legislation not needed for bitcoin regulation Secretary for Financial Services & the Treasury Prof KC Chan said that because bitcoins are not widely used in Hong Kong, legislation that would ban or regulate virtual commodities from trading remains unnecessary. In his statements, Chan reiterated that such currencies were speculative, and thus posed a risk to users. He also noted that his office would keep a watchful eye on digital currencies and said that, should the need arise, regulators could utilize existing laws to deal with issues of fraud or crime related to digital currencies.
Europe
U.K.: Report on digital currency regulation released The U.K. Treasury Department released a report about digital currencies in March, which outlined current views on digital currency and noted potential regulatory actions. According to the report, “The government considers that digital currencies represent an interesting development in payments technology.” The report also goes on to say that such currencies could have advantages for micro-payments and cross-border transactions. The document also relays plans to apply Anti-Money Laundering laws to digital currencies. The government would seek comment on the potential action, and its impact, later this year. Isle of Man: Regulation for digital currency introduced Starting on April 1, digital currencies operating in the Isle of Man will be subject to the country’s AML laws after the government amended the 2008 Proceeds of Crime Act to cover bitcoin companies. According to CoinDesk, that means that those operating in the digital currency business will have to adopt certain know-your-customer (KYC) practices. This includes collecting ID information, which would be given to the authorities if money-laundering activity is suspected. The country is also set to amend the Designated Businesses (Registration and Oversight) Bill 2014, which would subject digital currencies to required registration and oversight by the Isle of Man Financial Services Commission.
Around the Globe
FATF takes a pragmatic view on Bitcoin The Financial Action Task Force has indicated that banks should take a risk-based approach when it comes to opening bank accounts for Bitcoin companies. The regulatory think tank has warned of the risk of virtual currency in the past. The FATF has published a report that establishes a conceptual framework of key definitions to form the basis for further policy development.
Exploring and revising digital currency legislation were the key trends in February. A number of state and federal governments continued to do their due diligence with hopes of identifying the best way to regulate bitcoin usage and digital currency companies.
North America
New York: Revised BitLicense Proposal The New York Department of Financial Services (DFS) introduced its revised proposal for the BitLicense legislation.Several changes were made following the last round of comments on the previous iteration of the proposed legislation, including but not limited to the following: Companies that use digital currencies for non-financial purposes, such as miners and technology firms, will no longer be required to register for a license. The two-year conditional BitLicenses that will be available to startups and small businesses will now be eligible for renewal if a company continues to meet the operating criteria. The proposal also includes a requirement that firms report suspicious transactions to the DFS. Changing Requirements: The requirements that licensees report addresses and other data from all transactions have been removed. These firms will only be require to record information from their own customers. The licensees must also disclose the risks of digital currencies to their customers. New Jersey: Exploring Regulation Earlier this month, New Jersey lawmakers held a panel on bitcoin with nine business owners and legal experts to discuss the potential approaches to regulating digital currencies. Legislators asked the panel, which included itBit CEO Charles Cascarilla, about the advantages and risks of bitcoin and about how other states have approached the technology thus far. Marco Santori, global policy counsel for Blockchain.Info, outlined the main approaches that other states have taken in digital currency regulatory guidance and suggested a new approach for New Jersey, one that considers new legislation that would incentivize digital currency businesses to base themselves in the state, balanced with assurances that these businesses will be monitored in how they manage money. Clarity Above All: Regulatory clarity seemed to be important to all panel members. Coin Center’s Jerry Brito, for instance, strongly urged clarification in how existing regulations apply to bitcoin, as well as encouraging an eye toward innovation in future legislation. Vermont: Shuts Down Lone Bitcoin ATM Vermont Department of Financial Regulation Commissioner Susan Donegan spoke with CoinDesk following the controversial decision this month to shut down Vermont’s only operating bitcoin ATM. Donegan claimed the issue was that the company operating the machine was not licensed in Vermont. Title 8, Chapter 79 of the Vermont Statutes, which deals with money services, references “monetary value evidenced by digital record,” which the state believes applies to bitcoin and other digital currencies. Donegan believes bitcoin falls under the definition of monetary value, even if it is neither currency nor money. Face-To-Face Contact: Under the existing legislation, digital currency businesses must meet with the state to discuss their business plan before getting licensed. Canada: New Digital Currency Regulations in Quebec Québec has enacted new regulations governing digital currency in the province. As of this month, any business operating either a bitcoin ATM machine or a platform by which digital currency is traded must obtain a license issued by the Autorité des Marchés Financiers (the “AMF”). Existing Regulations Evolving: The AMF has modified the policy statement of its previously existing Money-Services Businesses Act of 2012, which regulates people and entities who operate any money-services businesses in Québec.
Europe
Spain: Proposal for Bitcoin Regulation Unión Progreso y Democracia, a social liberal political party in Spain, submitted a proposal for bitcoin legislation to the Spanish Congress in January. The submittal outlined the risks inherent in digital currencies and outlined the importance the party believes regulation will have upon improving security and preventing fraudulent and criminal activity. Slow But Steady Progress: The Spanish government had ruled back in September 2014 that bitcoin and other digital currencies should be treated as electronic payment systems. Italy: Bitcoin Intermediaries Asked to be Cautious The Financial Intelligence Unit (FIU) of Italy’s Central Bank issued a public statement on February 2, stating that since those dealing with and in digital currencies are not subject to money laundering legislation in the country, those intermediaries dealing with bitcoin and other digital currencies should exercise prudence and evaluate such transactions carefully, reporting any suspicious transactions to the FIU whenever possible. High Levels of Responsibility: The FIU stressed that it is the responsibility of those required to report suspicious transactions to raise awareness among those staff members responsible for the evaluation of suspicious transactions, and to develop appropriate means of evaluation. Isle of Man: Law Amended to Address Digital Currencies Brian Donegan, the Isle of Man’s head of operations for digital development and e-business, told CoinDesk that the 2008 Proceeds of Crime Act is in the process of being amended to address bitcoin and other digital currencies. The proposal will be put in front of the island’s parliament for approval at some point later this year. Hurry Up and Wait: It was first reported back in July 2014 that the Isle of Man government was in the process of attempting to address concerns with the effects of digital currencies on existing regulations. It appears the island is now close to achieving some semblance of regulation in this area.
December was a busy month for digital currency regulation in the United States as Congress and a number of states were actively involved in creating and passing legislation. Outside of the U.S., the regulatory climate improved for bitcoin exchanges in Australia while the hardline stances taken by India and Russia towards digital currency thawed a bit.
United States
Feds Get Involved in Digital Currency Regulation A new bill has been submitted to Congress by US Representative Steve Stockman regarding digital currencies. HR 5777 proposes holding off on enacting any statutory restrictions or regulations regarding digital currencies for a five-year period beginning June 15, 2015. The bill also proposes changing the taxation of bitcoin mining to apply at the point of conversion rather than at the point of creation. Other Federal Involvement: While the Commodity Futures Trading Commission does not have specific policies or procedures that apply to digital currencies, Timothy Massad, its chairman, recently testified before a US Senate committee and stated that digital currency derivatives fall within his agency's jurisdiction. Massad noted that the agency’s broad definition of “commodity” could apply to derivatives linked to currencies. Framework for State Regulation On the state side of things, the Conference of State Bank Supervisors (CSBS) developed a Draft Model Regulatory Framework to support consistent state regulation of digital currency activities. They have requested feedback to help inform state regulators as the CSBS works to develop a regulatory structure for digital currencies. Comments will be accepted until February 16, 2015. Comprehensive Framework: The Draft Framework includes, among other things, licensing requirements, cyber security requirements and consumer protection guidelines. California Officially Makes Digital Currency Use Legal A new finance bill was ratified in the state of California stating that other national and digital currencies can now legally be used in the state. Previously, only US dollars were officially recognized in California.
Further Developments
Earlier in December, the Department of Business Oversight spoke about their work toward determining whether the bitcoin industry should be regulated by the state. The Department had previously determined that it did in fact have the power to regulate digital currencies. Latest Round of BitLicense Revisions Announced In New York, State Department of Financial Services superintendant Benjamin Lawsky recently announced the latest round of revisions to the Department’s proposed BitLicense language. The new version of the regulation includes a shorter record-keeping requirement period and requires less in the way of data collection from licensees. Once the full revisions are completed and posted, there will be another 30-day comment period. No Sales Tax: Meanwhile, the state’s Department of Taxation and Finance recently announced that though certain taxes and fees would apply, digital currency transactions will not be subject to sales taxes. Australia Digital Currencies Are Not a Financial Product The Australian Securities and Investment Commission (ASIC) released a report this month. In it, ASIC determined that bitcoin and other digital currencies do not fall within the current definition of financial product. As a result, bitcoin exchanges do not need to maintain any license. Full Statement Still Forthcoming: The Australian Senate plans to release a full report of their findings in March 2015. Brazil Report Examines Potential Impact of Digital Currencies The Federal Senate of Brazil commissioned a study to determine what the potential impact of digital currencies on the Brazilian economy. The 18-page report was authored by Cesar Rodrigues van der Laan, a researcher at Banco Central do Brasil, and concludes that currently there is no need for Brazil to regulate bitcoin. Looking Toward the States: It is also recommended in the report that should digital currency usage spread in Brazil, United States policies with regard to bitcoin taxation should be used to develop a regulatory solution. Russia Response to Russian Bitcoin and Digital Currency Ban The Russian Ministry of Finance previously announced plans to ban bitcoin and other digital currencies, then announced reductions in fines for ignoring those bans. The Russian Ministry of Economic Development responded this month by stating its belief that the ban could have a negative impact on the Russian economy. Unintended Consequences: Specifically, as the law has been drafted, retailers, telecom operators and banks may find some of their current marketing campaigns caught in the crossfire. India Digital Currency Adoption Inevitable in India Raghuram Rajan, Governor of the Reserve Bank of India, gave a television interview in which he discussed digital currencies, and his belief that India will inevitably adopt digital currencies in the future. Future Regulations: There is some speculation that India may be exploring options for a system where people could use bitcoin through a government approved intermediary. Estonia Estonia Reaffirms Position on VAT As part of an ongoing bitcoin tax case before the European Court of Justice, Estonia reaffirmed its position that Value Added Tax (VAT) should be applied to the full amount of bitcoin trades rather than just to the commission or service fees. Court Ruling Imminent: The Court will determine whether or not VAT is applicable to bitcoin under the European Union's VAT directive, which outlines which transactions should be subject to VAT. The Swedish tax authority has taken the position that bitcoin is not VAT exempt.
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
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 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
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.
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.