Yesterday, the New York State Department of Financial Services (DFS) concluded a two-day fact-finding hearing on how to regulate Bitcoin and other virtual cryptocurrencies. The purpose of the hearing was to consider whether or not Empire State regulators should have a direct role in overseeing the use of virtual cryptocurrencies, or if existing federal regulations suffice.
In his opening remarks, New York State Superintendent of Financial Services Benjamin M. Lawsky made it clear that the question wasn’t so much if New York should regulate cryptocurrencies, but how. “Right now, the regulation of the virtual currency industry is still akin to the Wild West,” said Lawsky. “That lack of regulation is simply not tenable for the long-term.” Lawsky also expressed a desire not to “clip the wings” of a promising new technology, and acknowledged the potential of cryptocurrencies to revolutionize the money transmission industry.
The first panel consisted of some of the leading investors and venture capitalists in the world of Bitcoin, including Barry Silbert of SecondMarket and the Bitcoin Investment Trust, Jeremy Liew of Lightspeed Venture Partners, Fred Wilson of Union Square Ventures, and Cameron and Tyler Winklevoss of Winkelvoss Capital Management. All five participants urged the DFS to take a light touch to avoid quashing innovation or driving the industry abroad.
When one panelist suggested that small upstarts could outsource their regulatory compliance duties to other firms, Fred Wilson of Union Square Ventures told the panel, “That sounds like a terrible idea.” He continued:
You’re talking about introducing all of the costs into the system that we’re trying to take out of the system. Let’s just understand what we’re trying to do with Bitcoin. We’re trying to create a world where transactions can move globally for free. And making these companies hire some outsource compliance firm is a bad idea.
Members of the DFS voiced concern that Bitcoin could be used to facilitate narcotrafficking and other illegal activities, as it did in the case of Silk Road, an online drug bizarre that was shut down by the government in October. On Monday, the day before the hearings began, Charlie Shrem, the founder and CEO of BitInstant and a major figure in the Bitcoin community, was arrested on charges of using cryptocurrency to launder money. The Winkelvoss brothers, who participated in the hearing, were major investors in Shrem’s firm.
Jeremy Liew of Lightspeed Venture Partners told the panel that these cases demonstrate that additional laws and regulations to protect against money laundering aren’t necessary. “Law enforcement did a fantastic job using existing regulations,” said Liew. “It appears to have been controlled.” At a later session, Cyrus R. Vance, Jr., the district attorney of New York County, and Richard B. Zabel, the deputy U.S. attorney for the Southern District of New York, argued that these recent prosecutions pointed to the need for more oversight. “There were hundreds of people engaged in criminal conduct dealing with these entities and dealing in virtual currencies and they haven’t all been arrested,” said Zabel.
But what sorts of rules are needed to help combat money laundering that don’t already exist on the federal level? The participants offered few specifics. Bitcoin investors expressed hope that any new regulations will be written broadly enough that they don’t halt innovation or drive the industry abroad. “Regulators are going to have to come up with a way to treat Bitcoin that is balanced and thoughtful,” said Barry Silbert, “but also recognize that this is a global phenomenon.”
“Bitcoin challenges the duopolistic incumbents,” said Tyler Winklevoss, “and I think that’s very healthy and I think that’s very American and it’s what we should all be striving for.”