[2014-07-17] Bitcoin regulation in state of New York is announced.

[Melbustus]

The #2 above is particularly distressing.  I can't understand how they would enforce that or why they would want to.  For a company like ours, holding a reserve of virtual currency becomes a requirement.  So from an accounting point of view it does absolutely nothing.  Ok we retain earnings as USD and then we buy BTC to increase our virtual currency operating reserve.  The requirement is just regulation for regulation sake.

That one seems particularly ripe for removal as a result of the commenting period. As you note though, while odd, it's not particularly meaningful.

A meaningful item that should be revised is 200.10: The requirement to get prior written approval from DFS before introducing a new product or service, or making a "material" change to an existing product or service. That really stifles experimentation and is just crazy-talk to anyone who's ever worked in a startup.

[cbeast]

The #2 above is particularly distressing.  I can't understand how they would enforce that or why they would want to.  For a company like ours, holding a reserve of virtual currency becomes a requirement.  So from an accounting point of view it does absolutely nothing.  Ok we retain earnings as USD and then we buy BTC to increase our virtual currency operating reserve.  The requirement is just regulation for regulation sake.

That one seems particularly ripe for removal as a result of the commenting period. As you note though, while odd, it's not particularly meaningful.

A meaningful item that should be revised is 200.10: The requirement to get prior written approval from DFS before introducing a new product or service, or making a "material" change to an existing product or service. That really stifles experimentation and is just crazy-talk to anyone who's ever worked in a startup.

This is also an opportunity for Bitcoin hedge funds and ETFs to fill the space and create new regulatory headaches, or simply outsource to another jurisdiction.

[LiteCoinGuy]

good move, we should be glad that it is so positive.

whats the rest of the world will do is something different. i guess some countries will not have any rules at all  

[laurentmt]

Some requirements are weird

Each Licensee shall maintain the following information for all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency: the identity and physical addresses of the partieS involved, the amount or value of the transaction, including in what denomination purchased, sold, or transferred, the method of payment, the date(s) on which the transaction was initiated and completed, and a description of the transaction.

Don't know how a company operating an online wallet will be able to provide information related to the payees of transactions sent by company clients.

[acoindr]

I hope everyone realizes this is the way the game is played. Governments can and will do only what they are allowed to get away with. Regulators will tend to err on the side of caution, so they can't ever be blamed (ousted from office) for negligence. Wielding their hammer everything looks like a nail. The public commenting period lets them gauge whether they've gone too far (public outrage).

[Melbustus]

I hope everyone realizes this is the way the game is played. Governments can and will do only what they are allowed to get away with. Regulators will tend to err on the side of caution, so they can't ever be blamed (ousted from office) for negligence. Wielding their hammer everything looks like a nail. The public commenting period lets them gauge whether they've gone too far (public outrage).

Agreed. We all need to file well-argued, intelligent, and respectfully written comments during the 45-day period. Looks like this is where to start: http://www.dos.ny.gov/info/register/instruct.htm

[Bit_Happy]

http://www.marketwatch.com/story/bitcoin-regulations-proposed-by-new-york-state-2014-07-17?siteid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A%20marketwatch%2Fmarketpulse%20%28MarketWatch.com%20-%20MarketPulse%29

No matter what the content, this is a Major milestone on the road to legitamacy for bitcoin, i'm amazed the price has not reacted more than it has. Perhaps word is slow to leak out, though it's been mentioned on CNBC already, interviews with the guy later today also.

Bitcoin prices are moderately higher, so the market seems to like this news.  

[Ragnarly]

I'm shocked at the comments on this thread. Do you all work for JP Morgan or FinCen? The reddit thread has a deeper, broader analysis: http://www.reddit.com/r/Bitcoin/comments/2aycxs/hi_this_is_ben_lawsky_at_nydfs_here_are_the/

Highlight:

Proposed Regulations (TL;DR):

    45 days for existing businesses to comply with the new regulations and register with the state.

    Background check required for all employees/founders.

    Fingerprints of the above submitted to FBI.

    Requires a bond held with New York State.

    Requires written approval of all new business activities/offerings.

    Requires that you keep 10 years of records of business transactions.

    Virtual currency accounts not active for 5 years must be handed over to the state.

    Retained earnings and profits of the company can ONLY be invested in US dollars: Federal bonds, state bonds, or money market funds.

    Mandatory reviews every 2 years: financial condition, safety/soundness of business, policies...

    Quarterly financial statements required within 45 days of the closing of each quarter.

    Financial statements must be audited, use GAAP.

    Typical AML/KYC requirements.

    Cybersecurity requirement: requires security officer, security plan, audits, backup plan.

    In marketing/advertising, you must include "Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services."

    Must disclose a long list of material risks with dealing with virtual currency: e.g., "not legal tender, backed by any government"

[Bit_Happy]

I'm shocked at the comments on this thread. Do you all work for JP Morgan or FinCen? The reddit thread has a deeper, broader analysis: http://www.reddit.com/r/Bitcoin/comments/2aycxs/hi_this_is_ben_lawsky_at_nydfs_here_are_the/

Highlight:

Proposed Regulations (TL;DR):

    45 days for existing businesses to comply with the new regulations and register with the state.

    Background check required for all employees/founders.

    Fingerprints of the above submitted to FBI.

    Requires a bond held with New York State.

    Requires written approval of all new business activities/offerings.

    Requires that you keep 10 years of records of business transactions.

    Virtual currency accounts not active for 5 years must be handed over to the state.

    Retained earnings and profits of the company can ONLY be invested in US dollars: Federal bonds, state bonds, or money market funds.

    Mandatory reviews every 2 years: financial condition, safety/soundness of business, policies...

    Quarterly financial statements required within 45 days of the closing of each quarter.

    Financial statements must be audited, use GAAP.

    Typical AML/KYC requirements.

    Cybersecurity requirement: requires security officer, security plan, audits, backup plan.

    In marketing/advertising, you must include "Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services."

    Must disclose a long list of material risks with dealing with virtual currency: e.g., "not legal tender, backed by any government"

Requires a bond held with New York State.
Does any know the amount of the bond?

The above list does look awful, why was everyone (including me) so quick to react like a crowd of (mostly) happy sheep?   

[DeathAndTaxes]

Requires a bond held with New York State.
Does any know the amount of the bond?

No it is to be determined.  As I pointed out up thread, the application fee, capital requirements, bond amount, and annual license fee are all "to be determined".  So at this point nobody can say the regulations are "good" or "even acceptable".  If NY determines the minimum capital requirements are $100M and the required bond is at least $10M well that would defacto exclude everyone except banks and existing financial services companies (Western Union, GreenDot, et al).  Even once the regs are finalized a lot of it is subjective.  We won't really know how viable the regulations are until Bitcoin startups start applying and the regulator approves or denies the application.

[DeathAndTaxes]

There's an interesting one in software too, propitiatory code subject to annual 3rd party review.

The worst kind of regulation.  How many third party auditors know the best practices for bitcoin related software?  So it becomes a "do nothing", check the box cost. A pay to play (just like the annual license fee).  Nobody is safer and the cost is just passed on to the consumer in the form of higher fees.

[cbeast]

NYDFS is not even trying. They are clueless. The market will decide where to bring Bitcoin business.

[Rygon]

200.3 c 2 is nice and clear:

(c) Exemption from licensing requirements. The following Persons are exempt from the licensing requirements otherwise applicable under this Part:
...
(2) merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services

Yeah, this is key. The regs overall basically formalize, into a Virtual-Currency specific charter, what is already required to comply with existing AML/KYC/BSA regs for money-transmitting/exchanging businesses. Thus, the uncertainty is removed, but nothing *really* changes; however, the explicit assurance that consumers and merchants are free to transact without regs is huge - that's really the only avenue a western gov would likely use to attack/constrain bitcoin, so the explicit carve-out is very nice.

That isn't exactly true.  At the federal level FinCEN has provided guidance that the exchange of virtual currency constitutes money transmission under federal law and thus entities must register as a MSB with FinCEN.  FinCEN's "guidance" is actually very poor and contradicts existing guidance (exchanging USD for EUR is not money transmission).   It would have been preferable for FinCEN to do as NY has done and create a new regulated class (or expand "currency exchanger" to cover virtual currencies).  They didn't and what is done is done.  Still FinCEN's guidance doesn't apply to state regulations.  They opened the box and created a huge amount of uncertainty.

No two states even share the same definition of "money transmission" or "money" at the state level and thus the applicability of existing money transmitter regulations on entities that exchange virtual currency for real currency is a huge legal gray area.  Only a few states have provided any public information on the applicability of existing regulations.  In some states existing regs could apply although that probably won't be certain until after some court decisions.  In other states due to the wording it is highly unlikely that the existing regulations could cover virtual currency exchangers without a modification of the statute.  This is going to take years if not decades to play out.

Agreed that a federal framework which supercedes states regs would've been preferable....but as you note, that ship sailed already.

On another note, Reddit seems very upset with these regs: http://www.reddit.com/r/Bitcoin/comments/2aycxs/hi_this_is_ben_lawsky_at_nydfs_here_are_the/

A couple valid points made (I'll have to read the regs closer to verify) are:
1) Entities like changetip would fall under this licensing
2) Companies must hold profits and retained earnings in dollars, not bitcoin.
3) Alt-coin exchanges fall under the regs.

I hope the above, plus the bonding issue, are addressed/contested strongly during the 45-day comment period. Also, one thing that would've been nice to see, and which can maybe be addressed in the comments period, is a scaling-up of regulatory burden with increase in business activity (ie, Fred Wilson's "on ramp" suggestion during the hearings in Feb) instead of the regs fully applying to all from day 1.

The folks over at Reddit would be complaining with any kind of regulation that even mentions bitcoin. This is a pretty reasonable compromise. Basically it just applies existing KYC/AML rules to bitcoin companies that are exchanging currency. The fact that it doesn't apply onerous regulations to the average person buying something with bitcoins, or the average company accepting bitcoins in exchange for goods is huge. It sets a good precedent that won't hamper bitcoins growth.

To the points above on Reddit:
1. Changetip is a redundant layer to Bitcoin anyways. The bitcoin protocal already allows microtransactions.
2. The section in question effectively says that these companies (MSBs) can't reinvest profits in other ventures. That's fantastic. If the owners of those companies (Bitpay, Coinbase, etc) want to invest in another business, they can take their profits in bitcoin and start another business. It's reducing the risk that deposits are inadvertedly lost through poor investing. I definitely support that.
3. Why should alt-coins be any different? There's risk on those exchanges also, makes sense that they adhere to the same rules. I'm sure there will always be plenty off-shore crypto-only exchanges to go to anyways.

[HarmonLi]

this is pretty exciting, though the reddit post about it makes it sound a bit discouraging for businesses...

[BittBurger]

There isn't a real valid reason why customers would need to identify themselves with a BTC address when conducting business.  You don't do that with cash.

+1

[Its About Sharing]

What will be interesting is how many exchanges (and for how long) just won't deal with NY residents (or in NY). I mean that is essentially what this is about, no?
This isn't a Federal law or the like, this is for NY (albeit the financial center of the US). Perhaps later the Federal government follows in their footsteps,
but I don't think that will be within the next 1-2 years.

IAS

[DeathAndTaxes]

202 (n)

(n) Virtual Currency Business Activity means the conduct of any one of the following types of activities
involving New York or a New York Resident:
(1)  receiving Virtual Currency for transmission or transmitting the same;
(2)  securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3)  buying and selling Virtual Currency as a customer business;
(4)  performing retail conversion services, including the conversion or exchange of Fiat Currency or
other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other
value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or
(5)  controlling, administering, or issuing a Virtual Currency.

It would appear that creating a new cryptocurrency could be interpreted as licensed activity in NY.  Now one might argue it is unenforceable, but unenforceable really means selectively enforceable.  That is always a bad thing and should be discouraged.  The law could go unenforced for years or decades and then used to attack some altcoin developer who resides in NY because he made the wrong people angry.  Legal landmines like that should not be included in any regulation.

[laurentmt]

It seems that coinjoin, sharedcoin, ... are not welcome to NYC. Section 200.15 (f) basically denies user's right to privacy (coinjoin, sharedcoin, ...)

No Licensee shall engage in, facilitate, or knowingly allow the transfer or transmission of Virtual Currency when such action will obfuscate the identity of an individual customer or counterparty. Nothing in this Section, however, shall be construed to require a Licensee to make available to the general public the fact or nature of the movement of Virtual Currency by individual customers or counterparties.

[xyzzy099]

202 (n)

(n) Virtual Currency Business Activity means the conduct of any one of the following types of activities
involving New York or a New York Resident:
(1)  receiving Virtual Currency for transmission or transmitting the same;
(2)  securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3)  buying and selling Virtual Currency as a customer business;
(4)  performing retail conversion services, including the conversion or exchange of Fiat Currency or
other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other
value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or
(5)  controlling, administering, or issuing a Virtual Currency.

It would appear that creating a new cryptocurrency could be interpreted as licensed activity in NY.  Now one might argue it is unenforceable, but unenforceable really means selectively enforceable.  That is always a bad thing and should be discouraged.  The law could go unenforced for years or decades and then used to attack some altcoin developer who resides in NY because he made the wrong people angry.  Legal landmines like that should not be included in any regulation.

That section worried me too, it looks like miners need a licence and that's not good. The multimillion operations mining Bitcoin these days would have to jump through all these hoops and the kid setting his gaming rig to mine some obscure alt certainly shouldn't be expected to, in legal terms there's no difference between them.

I don't think that's true - at least this article: http://www.businessinsider.com/nydfs-bitlicense-draft-2014-7 claims that this clause does not effect miners.  I believe that's accurate because miners don't issue bitcoin in any meaningful sense.  All 21 million bitcoin that will ever exist are defined by the protocol itself.

[DeathAndTaxes]

I don't think that's true - at least this article: http://www.businessinsider.com/nydfs-bitlicense-draft-2014-7 claims that this clause does not effect miners.  I believe that's accurate because miners don't issue bitcoin in any meaningful sense.  All 21 million bitcoin that will ever exist are defined by the protocol itself.

That is one way to look at it.  What matters is how regulators (or more importantly old people in black robes) interpret it.  Even if miners are not directly covered, mining pools (other than those like p2pool and Eligius) would probably fall under 202 (n) 2.