States still wrestling with virtual currency regulation

FinCEN’s announcement on May 5 that it fined Ripple Labs $700,000 for violating several banking laws brought to light again the current ongoing battle between regulators and cryptocurrency providers to define what is best for an industry that is still finding its place in the financial system.

At the Virtual Currency Today Summit hosted by Mobile Payments Today parent company Networld Media Group on April 29, representatives from the Massachusetts government and the FTC discussed their views on the virtual currency regulatory landscape from the state and federal level.

One thing that became clear during the panel discussion — and we saw this play out with FinCEN’s decision — is that cryptocurrency providers will be held to the same standards as mainstream financial institutions. But regulators claim they do not wish to stifle innovation while applying laws that in most instances are meant to protect consumers.

“Consumer protection and innovation go hand-in-hand,” Duane Pozza, an attorney in the Bureau of Consumer Protection at the FTC, said during the panel discussion. “The best way to gain consumer trust is … to think about how it affects consumers. Think about how you can handle consumer protection issues. These are the things we have our eyes on.”

The FTC is one of the few U.S. federal agencies that has taken action against companies in the cryptocurrency industry.

The FTC in September 2014 flexed its muscle when it closed Butterfly Labs, a Kansas City, Missouri-based bitcoin mining equipment provider. The company collected between $20 million and $50 million in pre-orders for its machines, but either failed to deliver products or delayed shipments for up to a year — rendering the machines obsolete by the time miners received them. Jilted customers worldwide flooded the FTC with complaints.

Pozza said that Butterfly Labs conducted business in a way that raised red flags, and that the agency’s actions were consistent with those it has taken previously — regardless of the industry.

While federal government agencies do their best to stay on top of virtual currency developments, New York State and other states still are attempting to figure out what works best for regulation.

At the center of those discussions is a group of regulators from nine states comprising the Conference of State Bank Supervisors Emerging Payments Task Force. The group’s purpose is to “study changes in payment systems to determine the potential impact on consumer protection, state law, and banks and nonbank entities chartered or licensed by the states.”

Virtual currency at the moment is near the top of the group’s list, especially with New York Superintendent of Financial Services Benjamin Lawsky involved. Lawsky has become the unofficial face of bitcoin regulation in the U.S. thanks to the BitLicense New York State proposed last year.

Since New York State’s Department of Financial Services (NYDFS) released the first draft of its proposed BitLicense regulations in July 2014, bitcoin enthusiasts have worried that start-ups would be at a disadvantage because they could not afford to purchase the necessary license to operate in New York.

In November 2014 at the Money 20/20 event in Las Vegas, Lawsky introduced a way for bitcoin companies to operate with a more flexible license for a set amount of time as they grow larger. The NYDFS then would consider various factors in deciding whether to grant businesses a full BitLicense.

The NYDFS expects to release the final BitLicense parameters at the end of May 2015. The Conference of State Bank Supervisors will likely use this document as a template for other states.

In related news, the NYDFS made some history on May 7, 2015 when it granted bitcoin exchange itBit Trust Company a charter under the New York Banking Law.

“Our goal is to be as consistent as possible amongst the different states,” David J. Cotney, commissioner of banks for the Massachusetts Division of Banks, said during the panel discussion.

Cotney, who is also involved with the Conference of State Bank Supervisors, said the group is routinely in discussion with different bitcoin industry stakeholders to learn as much as they can about the technology in order to make the best decisions going forward.

“We’ve gained some knowledge and experience from what they’ve done [with the technology],” Cotney said. “One of the criticisms that we’ve heard is that states are slow to react and different standards cause barriers.”

Cotney expects that, by the middle of 2015, the group will release a final framework for states to use as a starting point for virtual currency regulation. The group wants to fill some of the gaps lefts unanswered by federal agencies.

“FinCEN has been doing a good job of trying to provide guidance in a number of areas,” Cotney said. “They are trying to be helpful; they haven’t answered every question, but they came out relatively early and addressed bitcoin.”

An audience member asked Cotney whether the states have learned anything from the way other countries have approached virtual currencies. Countries such as Russia have outright banned its use while China discourages citizens from holding and using bitcoin.

Japan is among the few countries that embrace bitcoin — despite the ongoing fallout from the demise of the once-powerful Tokyo-based bitcoin exchange Mt. Gox.

“We know there is a disparity of views,” Cotney said. “I don’t think that’s going to dictate our approach. We live in a global economy, but we’re nowhere close to having a global standard.”

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