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Wall Street watchdog publishes its ultimate rules on Bitcoin biz

Hoping to find the right balance between safety and innovation

By Kieren McCarthy, 3 Jun 2015

The New York State Department of Financial Services (DFS) — the financial regulator for Wall Street — has released its final regulations for Bitcoins.

The BitLicense Framework will regulate the use of digital currency in New York and tries to strike a balance between preventing fraud while staying open to innovation in a rapidly changing market.

DFS Superintendent Benjamin Lawsky spoke at what will probably be his last big speech before stepping down from the post at a conference in Washington DC, and gave a thoughtful appraisal of the new rules.

"Setting the exact contours of the new rules of the road in these areas is extraordinarily difficult," he said. "Regulators are not always going to get the balance precisely right. Much like some startups – there are going to be some false starts." But, he added, "we need to begin somewhere."

It has taken the regulator four years to reach the "third and final version" of the rules and unlike like the last iteration, the third version does not have major changes.

But in trying to "promote and support companies that use new, emerging technologies" while also putting "appropriate regulatory guardrails in place", Lawsky highlighted five key elements of the framework:

  • Companies will not need prior approval to carry out software or app updates. "We have no interest in micro-managing minor app updates. We’re not Apple," he told attendees.
  • The regulator will not be regulating software developers — only the financial intermediaries. If you are not holding funds, you don't need a licence.
  • BitLicense applications won't need their own special application — they can be applied for at the same time as the more common money transmitter license.
  • Companies will not have to send duplicate reports of "suspicious activity" just because something happens with Bitcoins — digital and non-digital currency will be treated the same
  • Bitcoin companies will not need prior approval from the DFS when raising venture capital, unless the investor is planning to direct management or policy changes

Lawsky reflected a little on the process of developing the rules, noting that when he took the job he expected to be dealing with money laundering or electronic trading not crypto currencies.

Ban this

He also mocked initial calls for Bitcoins to be banned. "How exactly does someone go about banning computer code? The answer, of course, is that you cannot."

Noting that "the genie is already out of the bottle", Lawsky noted that the financial system may be ripe for some change. "I think it would shock most consumers to learn that – at its core, despite modest improvements – our bank payments has changed little since it was created four decades ago in the 1970s. It generally takes you longer to transfer money electronically than it would to physically transport that cash to another state or country."

He is also cautiously optimistic about what digital currency may bring. "Frankly, we do not know what digital currency is going to look like in five or ten years – and there are a lot of interesting possibilities. "There might be – at the very least – a kernel of something here that has a profound impact on the future of payments technology and the financial system. Regulators are not always the experts on such matters, but my gut now is that it’s likely."

The future

And to show that the four-year process has in fact imbued the DFS with what looks like a surprisingly good grasp of the technology behind Bitcoin, Lawsky even looked past Bitcoin to the future.

"We hadn’t originally appreciated how the Bitcoin blockchain represented a major advance in cryptography, which could have significant applications in a multitude of areas.

"That the technology underlying Bitcoin could be used not just as a currency, but potentially as a means to transfer all manner of personal property (such as deeds) securely over the Internet. That – when it comes to Bitcoin – platforms could be built upon platforms could be built upon platforms by future innovators.

"Frankly, we do not know what digital currency is going to look like in five or ten years – and there are a lot of interesting possibilities."

The framework is out today. The NYDFS and Superintendent Lawsky hope it will be "a good start." ®

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