This is perhaps New York’s biggest ever news week when it comes to bitcoin. Some of it is positive, and some negative. This morning sees the beginning of a two-day hearing on bitcoin from the state’s financial regulator. Elsewhere in the city, luminaries will meet at a breakfast hosted by the Economic Development Forum, to talk about the future of the currency. And then, there’s Charlie Shrem.
New York has been an uncertain place for bitcoin-based businesses. Although regulations at the federal level have moved forward slightly, things are still inconsistent and unclear. And New York is the financial centre of the US, which makes the lack of regulatory information there particularly vexing.
The Department of Financial Services announced in November that it would hold the hearings, taking place today and tomorrow, after showing interest in how virtual currencies were unfolding in the state.
Who will be there
It describes the event as a fact-finding mission, where it will also discuss the possibility of a state-level regulations specifically for digital currencies, called a ‘BitLicense’.
The hearings will see representatives from the financial, legal, government, and academic sectors. They will include Barry Silbert, founder of the Bitcoin Investment Trust, and the Winklevoss brothers, who are in the process of launching their own bitcoin ETF.
Charles Lee, the creator of litecoin, will testify, as will his employer Fred Ehrsam, co-founder of CoinBase. Venture capitalists Jeremy Lieu from Lightspeed Venture Partners and Fred Wilson from Union Square Ventures will be there, as will legal experts Julie Rinearson from Bryan Cave, and Carol Van Cleef, from Patton Boggs. Computer scientist Ed Felten will testify alongside Susan Athey, Prof of economics at Stanford.
Most speakers were unwilling to talk to CoinDesk before the event, although Circle’s Jeremy Allaire, who testified at the Senate hearings on bitcoin in Washington DC last November, is a veteran by now.
Don’t reinvent the wheel
Allaire will be testifying at the New York hearings today. He acknowledges the need for a special digital currency licence, but is hoping that each state doesn’t reinvent the wheel.
“Unlike traditional MSBs (Money Services Businesses), using digital currency brings unique requirements around disclosure, as well as security and risk management for the protection of digital assets,” Allaire says.
In particular, digital currency money services businesses don’t get to store their customers’ assets with federal reserve-backed commercial banks. Instead, they rely on private keys, and have to deal with new security requirements, such as cold storage and associated physical security protocols, he says.
But Allaire wants a standard state licensing framework, which he says should be managed by something like the CSBS (Conference of State Banking Supervisors).
“We would be very concerned if each and every state financial department sought to categorize, classify and regulated digital currency firms with differing approaches, which would increase the cost of operating businesses in this important and innovative market,” Allaire warns.
Businesses in the wings
The NYC’s fact finding began a while ago. In August 2013, it sent subpoenas to 22 businesses that it felt were involved in the bitcoin space. One of them was operated by New York-based Andre De Castro, owner of RightClick LLC, who sought to launch a bitcoin service called eCoin Cashier.
De Castro asked FinCEN for a ruling on whether his would be a money services business, shortly after it issued its own guidance on virtual currencies last March.
He found out earlier this month that his business would not be an MSB under FinCEN rules. But he’s still in the dark over his own state’s approach, and whether it will be affected by the FinCEN ruling.
“I cannot be 100% sure how New York State will respond to the ruling,” he told CoinDesk. But he’s still close to opening the business, at both a physical location and through a software application.
“I believe that my business process, coupled with the FinCEN ruling will makes most states as comfortable as FinCEN has been with the ruling.”
With a FinCEN blessing behind him, De Castro may feel confident, but other businesses in New York will likely welcome more clarity. Those probably include the likes of Willard Ling, who mothballed a bitcoin ATM while he awaited a decision on state licensing.
The hearings this week may be soured a little by the arrest of Charlie Shrem, the founder of apparently-defunct firm BitInstant, and one of New York’s own. Shrem was arrested for facilitating trades through the Silk Road website, and even purchasing drugs himself with bitcoins. BitInstant received $1.5m in funding in the fall of 2012 from the Winklevosses, who will be testifying today.
“When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws – including money laundering laws – and we expected nothing less,” said the pair in a statement. “Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest.”
They then called for clearer regulation on the purchase and sale of bitcoins.
The timing couldn’t be worse for the arrest of Shrem, who for a while was a leading light in the bitcoin community, right in the heart of the financial community.
Just one day after the arrest came to light, members of the bitcoin community will be defending its utility and benefits to a state regulator that has already expressed concern over “narcotrafficking”.
While luminaries testify at the hearings this morning, the New York City Economic Development Corporation, effectively a government body, will host a breakfast discussion about the virtual currency, said reports.
The event, which is being co-hosted by the Partnership Fund for New York City, is called “The rise and risks associated with increasing Bitcoin usage.” Clearly, government interest in digital currencies is rising from all sides.
Check in to CoinDesk for more, as we report from the State regulator’s hearings today.
New York image courtesy Shutterstock