In the course of testifying before members of the New York State Department of Financial Services on Wednesday, two government prosecutors as much as admitted that Bitcoin represents a technological breakthrough and perhaps is, as many Bitcoin proponents have long argued, a better form of money than any that had previously existed.
You had to listen closely to hear it. When asked by state financial services superintendent Benjamin Lawsky whether virtual currencies are qualitatively different from other technologies, such as prepaid "burner" mobile phones, that criminals might use to further their illegal activities, Cyrus Vance, district attorney of New York County, said they are.
"I think there is a qualitative difference, and that is that we have seen the digital currencies becoming part of the mainstream currency market and financial transactions market," Vance said.
Misuse of digital currencies in a world without adequate regulation, therefore, could open a door "into financial transactions around the world," he added.
His fellow panelist, Richard Zabel, a deputy U.S. attorney for the Southern District of New York, agreed, saying that some of Bitcoin's "intrinsic qualities make it need to be treated differently, even though in essence it is trying to be treated like cash."
Although the prosecutors admitted that digital currencies are not specifically designed to facilitate criminal activity, their overall depiction of Bitcoin and its digital alternatives was far less rosy than the one painted by investors and entrepreneurs. Of course, some of the features they singled out as potential dangers -- Bitcoin's "combination of anonymity and ease of movement," for instance -- are the same features that have attracted many users in the first place.
"Regulators are understandably concerned about the anonymity that Bitcoin transactions may offer," says Alex Rozman, a senior manager at Deloitte Transactions and Business Analytics LLP who consults on anti-money laundering programs. "But there are existing regulations currently applicable to money services businesses and money transmitters that regulators could leverage for Bitcoin use. The challenge is to implement suitable regulations balancing the interests of commerce and technological innovation with the need to prevent funding for illegal activities."
'Enhanced due diligence'
Vance and Zabel spoke on the second day of hearings organized by New York state's top banking regulator to discuss whether and how cryptocurrencies such as Bitcoin should be handled. The first day's panelists, many of whom were investors in digital currencies or related startups, tended to express the view that existing regulations, tweaked to apply to digital-currency businesses, would be sufficient to police this emerging ecosystem. By contrast, Vance and Zabel urged regulators to issue tighter guidelines for Bitcoin businesses.
At minimum, said Vance, digital currency exchanges should be required to perform "enhanced due diligence with respect to their customers' identities." That would mean storing customers' names, addresses, and information about their businesses in addition to maintaining transaction records. They would also need to ensure that each digital wallet used by a customer truly belonged to its purported owner. Finally, exchanges should be required to register as money transmitters, a legally defined business category with certain barriers to entry.
Zabel went even further, saying anyone or anything -- like an ATM -- that accepts cash and converts it into bitcoins should be regulated. The same goes for merchants who accept digital currencies as payment, as large retailers like Overstock and TigerDirect now do.
Although high-profile arrests have been made, most of the people who conducted illegal business with online black market Silk Road and with Liberty Reserve, a money-laundering operation, both of which required the use of virtual currencies, are still at large, Zabel said.
Vance was equally skeptical that existing laws are enough to pursue all the bad actors in a Bitcoin world. "Virtual currency is a relatively recent phenomenon, and I certainly don't think that the fact that we have made significant cases and arrests in this arena means it's all under control," he said. "It's not."
But another lawyer, Judith Rinearson, a partner at Bryan Cave, testified on the first day of hearings that there is at least one precedent for the free-for-all nature of Bitcoin. Prepaid debit cards were once described as "candy for criminals," she said, and the regulatory landscape was characterized as a "Wild West," just like that of digital currencies today. In the 1990s, the Federal Reserve Board considered regulation that would have greatly restricted prepaid cards, but instead it held off and states simply adapted existing money transmitter laws to the new financial instrument.
"The framework is already there to license these kinds of businesses," Rinearson told Entrepreneur.com in an interview. "I would urge that any regulation be done with a light hand and with a lot of care not to stifle this important, nascent industry."
Entrepreneurs rush in
Meanwhile, Bitcoin startups aren't waiting for regulation in order to act. Mint, a personal finance app created by Intuit, announced today that it is partnering with Bitcoin wallet and exchange service Coinbase to give users who hold bitcoins a more complete picture of their financial life. Mint's 14 million users can now view their Bitcoin holdings alongside traditional bank and investment accounts.
In a statement, a Mint representative said the new feature "better serves consumers' changing financial needs." Mint is the first money management tool to integrate a digital currency into its service. Its partner, Coinbase, which is located in San Francisco, hosts more than 870,000 consumer wallets, more than the number of customer accounts at many mid-sized banks, according to a release.
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