The New York Department of Financial Services (DFS) has released a copy of proposed "codes, rules, and regulations" for companies that buy and sell bitcoin and other virtual currencies roughly a year after the agency announced an inquiry into regulating bitcoin.
The proposal, which outlines requirements for a special "BitLicense" (truly), will be entered into the record on July 23rd. The proposed rules apply to businesses that buy, sell, transfer, store, or maintain custody or control of customers' bitcoins, as well as companies that convert fiat currency to virtual currency on behalf of merchants. They will also apply to companies that convert virtual currencies into other types of virtual currencies, as well as issue virtual currency.
They do not apply to bitcoin miners, the programmers who maintain the bitcoin network in exchange for virtual currency.
Under the proposal, companies with a BitLicense must hold in reserve an equal amount of virtual currency, and in the same type of virtual currency, as their customers deposit. They must also keep records on their customers' real names and addresses, disclose to customers the risks of using virtual currency, and report suspected fraud. They must also appoint a compliance office and a computer security officer, among other provisions.
The rules also leave some questions undecided, such as how much capital a virtual currency business must keep on hand.
The public will have 45 days to comment, and the rules will likely go into effect in September.
"Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party."
Benjamin Lawsky, superintendent of Financial Services, has been clever about online outreach around the progressive initiative. He allowed Reddit to ask him anything, then posted the proposed rules on Reddit and Twitter.
"We recognize that – as the first state to put forward specially tailored rules for virtual currency firms – continued public feedback will be an important part of finalizing this regulatory framework," Lawsky said in a statement. "We look forward to carefully and thoughtfully reviewing public comments on our proposal."
New York has a robust financial regulatory infrastructure due to the proximity of the finance industry, which means it tends to set the tone for financial policy in other states.
Bitcoin businesses reacted positively to the proposal for the most part.
"We take every possible measure to ensure that itBit protects consumers, prevents abuse and provides security," Charles Cascarilla, CEO of itBit, a Singapore bitcoin trading company that recently moved to New York, said in a statement. "The proposed BitLicense aligns with our current standards and practices, and we have every intention to be in compliance with the final guidelines."
BitPay, a company that helps merchants accept bitcoin, was concerned about requirements for annual penetration testing and other security requirements, as well as a requirement to notify DFS if any transaction exceeds $10,000 in one day.
Virtual currencies boomed over the past few years, resulting in a number of high-profile thefts, scams, and crashes that were financially devastating for many. Mt. Gox, which long-dominated the marking for buying and selling bitcoin for fiat, is the prime example. The company collapsed after it failed to maintain enough reserves to cover customer deposits and is now in bankruptcy proceedings in the US and Japan. Stricter financial regulations for bitcoin businesses could prevent such disasters in the future.