Article

Governments worldwide continue scrutiny of virtual currencies

New York's proposed BitLicense regulatory framework is one of several current initiatives developing around the globe.

July 22, 2014 by Will Hernandez — Editor, NetWorld Media Group

Virtual currency enthusiasts face a dilemma.

Last week, the New York State Department of Financial Services issued for public comment a proposed BitLicense regulatory framework for New York virtual currency businesses. The proposals were not met with much gusto from that industry's advocates.

The community's overwhelming response to New York's attempt to regulate businesses such as Bitcoin exchanges is that the proposals are costly for startups to comply with and do much to strip away the anonymity of virtual currency transactions. Many users believe New York's plans are downright nefarious. And therein lies what could be viewed as a problem for virtual currency enthusiasts as governments worldwide closely examine the technology.

"It comes down to the fact that Bitcoin advocates can't have it all," Nathalie Reinelt, an Aite Group analyst who tracks virtual currencies, told Mobile Payments Today in an interview. "Either they want the cryptocurrency to go mainstream or they don't, and if they do, they should expect the government to wrap regulations around the protocol to prevent another Mt. Gox."

Mt. Gox was the Bitcoin exchange that ceased operations earlier this year and filed for bankruptcy when it lost 774,408 bitcoins in a hack that went undetected for years. The exchange later found some bitcoins in a digital wallet from 2011. But the damage was already done and consumers that had bitcoins in the exchange lost almost everything.

Those consumers had no recourse against Mt. Gox outside of filing lawsuits against the company in an attempt to recover losses. New York regulators want to prevent a similar situation, but many virtual currency advocates believe new laws will cripple innovation because compliance costs will burden startups and force them out of business.

New York's proposals are the latest example of a local, state, national and regional authority determined not to let virtual currencies run wild.

Oh, Canada

Virtual currencies are under scrutiny in multiple regions worldwide as Canada recently took the early lead to establish significant regulation around units such as Bitcoin.

Last month, the Canadian government passed a law that relates to how virutal currencies are taxed and regulated. Virutual currencies will be viewed as what is defined as a money service business. That designation means such businesses will “subject to the record keeping, verification procedures, suspicious transaction reporting and registration requirements," noted Bank Innovation in an article about the new law.

Virtual currency sellers also must register with the regulatory body FINTRAC and “implement a complete anti-money laundering compliance regime.”

Europe

In comparison, Europe is nowhere close to what the Canadian government has implemented.

Earlier this month, the European Banking Authority recommended that financial institutions across the continent avoid dealing with virtual currencies such as Bitcoin until proper regulations are in place. The authority's warning was not an outright ban, but the message was clear.

The EBA did admit in a document it released to the public that virtual currencies have their benefits, but said that the risks far outweigh them. The document outlined some 70 potential risks, from money laundering to fraudsters that attack exchanges.

The EBA told Mobile Payments Today in an email it would be up to the European Union Commission to determine a timeline for if and when regulation is developed.

Tristan Hugo-Webb, associate director of the Mercator Advisory Group international payments practice, said not to expect a decision anytime soon.

"You have to get 26 countries to agree on similar standards and that's why you are seeing individual countries taking a stronger stance than others," Hugo-Webb told Mobile Payments Today in an interview.

European financial institutions might have an interest in dealing with virtual currencies due to EU's continuing struggle to recover from the financial crisis that rocked the region in the last few years, Hugo-Webb said.

"They're looking at additional ways of making some revenue with what they view as innovative customer retention strategies," he added.

The EBA did confirm to Mobile Payments today that some financial institutions are interested in virtual currencies.

"They probably do so for different reasons, depending on their business model, approach to financial innovation and other such factors," a spokesperson wrote in an email. "We are also aware that some credit institutions have considered offering accounts that are denominated in virtual currencies, which in effect is a form of holding virtual currencies that we do not want to see."

Meantime, Hugo-Webb believes that should Bitcoin and similar virtual currencies truly carve a niche in low-cost remittances, regulators might treat them as such until specific laws are passed.

US movement

Federal agencies in the U.S. mostly are keeping tabs on the money laundering aspect of virtual currencies, but the Government Accountability Office recently proposed that the Consumer Financial Protection Bureau examine them in the name of consumer protection.

The GAO is most concerned about the risks involved with virtual currencies, mainly the near anonymity that such transactions involve, especially for illicit goods and services. The agency asked the CFPB to "take steps to identify and participate in pertinent interagency working groups addressing virtual currencies in coordination with other participating agencies," according to a press release.

The GAO did not respond to a request for comment from Mobile Payments Today.

How the CFPB addresses virtual currencies is anyone's guess, especially since Bitcoin copycats and services built around those technologies seem to sprout almost every day. The real question then becomes how the agency can future-proof regulations.

"I think that's the challenge," Michelle Jun, an attorney who has dealt with the CFPB in the past, told Mobile Payments Today. "It's not just the CFPB. It's various state regulators that have to deal with various financial services entities. I don't think it's something that should be so tailored to a specific technology, but taking a step back and examining what method people may pay with in the future."

The CFPB could eventually use states such as California, New York and Texas and as the basis for future recommendations or regulations around virtual currencies. But even that will present its challenges.

"I can imagine they can work in conjunction with each other and I think that's part of the challenge is trying to piece together everything," Jun said. "I don't know if this is something that will be seamless, but I'm sure the CFPB will consult with state regulators who may be closer to what's going on."

Virtual currency advocates, to their credit, are proactive in their attempt to help regulators and politicians understand this technology.

The Chamber of Digital Commerce announced its creation and mission statement last weekend at the North American Bitcoin Conference in Chicago. Perianne Boring, a former congressional staff member, heads the group. She told attendees the group will seek to promote Bitcoin's underlying values to those in Washington while saying that this type of lobbying effort is necessary to protect the industry's best interests.

Jumio, a credentials specialist, recently formed a network of Bitcoin startups called BISON that seeks to proactively self-regulate its products and adopt best practices in an effort to stymie interference from government regulators.

But self-regulation has already proven not to be enough, at least based on New York's proposals.

Photo courtesy of Francis Storr.

About Will Hernandez

Will Hernandez has 14 years of experience ranging from newspapers to wire services and trade publications. Before becoming Editor of MobilePaymentsToday.com, he spent two years as the content manager for PaymentsJournal.com, a leading payments industry news aggregator and information hub published by Mercator Advisory Group. Will spent four years covering the payments industry as an associate editor for multiple publications in SourceMedia's Payments Group based in Chicago.

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