Wall Street watchdog sets rules for bitcoin

Wall Street watchdog sets rules for bitcoin
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A top Wall Street watchdog on Wednesday issued new rules that place stricter cybersecurity requirements on financial firms wishing to use virtual currencies.

“We think regulation is important to the long-term health of the virtual currency industry,” said Benjamin Lawsky, head of the New York Department of Financial Services (NYDFS), during remarks at a Financial Services Roundtable event. “Building trust and confidence among consumers is crucial for wider adoption. It also helps attract additional investment.”

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Under the guidelines, financial firms handling bitcoins and other digital currencies will need to obtain a “BitLicense” from the NYDFS, ensure a strong cyber defense and maintain detailed records of all bitcoin transactions.

Digital currencies only exist virtually, but are increasingly accepted at major online retailers. Bitcoin’s relative anonymity has made it popular with both digital privacy advocates as well as cyber criminals.

The technology is also seen as a way to speed up financial transactions while lowering costs.

“In a world where information travels around the globe in a matter of milliseconds, it can often take several days to transfer money to a friend’s bank account,” Lawsky said. “In an age of smart phones and on-demand technology, we still have a disco-era payments system.”

But this transition must have some safeguards, the regulator added.

“We simply want to make sure that we put in place guardrails that protect consumers and root out illicit activity — without stifling beneficial innovation,” he said.

Lawsky’s finished product is the third iteration of the rules, but does not contain any major changes from a second draft, Lawsky said.

Tech companies like reddit and digital rights advocates have pushed back against the rules since a first draft was released last year. They argue the guidelines could inhibit some of the privacy and market benefits of cryptocurrency.

Opponents take issue with requirements that companies update regulators when making software and app updates. Lawsky clarified Wednesday that the notification requirement only applies to “material changes” to products or business models.

“We have no interest in micromanaging minor app updates,” he said. “We’re not Apple.”

The cryptocurrency industry has also worried that the regulations will hammer software developers who work on digital currency technology, but do not hold on to funds or conduct financial transactions.

“We have no intention of being a regulator of software developers,” Lawsky said, “only financial intermediaries.”

Still, bitcoin backers said the final rules are unfairly singling out digital currency businesses. 

"The final BitLicense still creates a lopsided regime as between digital currency businesses and traditional money transmitters and banks," said Peter Van Valkenburgh, director of research at bitcoin advocate Coin Center. "It has cybersecurity and state-level anti-money laundering requirements that will not and have never applied to the legacy payments industry."

New York’s bitcoin oversight structure is expected to serve as a model for other states and potentially even federal regulators.

“The jury is still out on how we have met our regulatory test,” said Lawsky, who is leaving his post later this month. “I don’t think we will know how we did for some time. Over the next 5, 10, 15 years and beyond, you are going to see, I think, a fine-tuning and shaking out of digital currency regulation across the country and across the globe.”