Ben Lawsky of New York DFS Talks Bitcoin Regulation on Reddit AMA

Financial regulation is a been a central topic for Bitcoins and other digital currencies.  The lack of framework regulating Bitcoins has created a major difficulty for businesses active in the space.   For exchanges, this has meant that forming banking partnerships for receiving and sending customer funds is filled with question marks, with no guarantees that flexibility of transactions that exist today will be there tomorrow.  However, the lack of clarity has been slowly changing as an increasingly longer list of financial regulators have begun to analyze the topic with various regions appearing to be poised to issue official framework governing digital currencies in 2014.

Within the US, Bitcoins have been at the forefront of government discussion, debated on the floors of both federal and local halls. Among government officials active in the process of creating Bitcoin regulations is Benjamin Lawsky, Superintendent of the Department Financial Services (DFS) for the State of New York.  Per demand, last Friday, Lawsky launched an AMA (Ask Me Anything) session on Reddit on the subject of Bitcoin/Virtual Currency.

Lawsky has been highly active in working with the Bitcoin/virtual currency community to explore ways of bridging their world with his, having hosted a series of hearings last month on the future of online currencies, and in the intro to his AMA wrote that “more than 14,000 people from 117 countries tuned into those hearings online”.

The AMA was highly anticipated and attracted a huge turnout with over 1200 comments.

The prevailing theme throughout was that they are working hard toward the ideal recipe: the need to balance structure and regulation which will protect the broader society and prevent illegal activities versus helping bitcoin and virtual currencies thrive and gain wider acceptance with the broader financial and general communities. This had also been the gist from the hearings in New York.

He also acknowledged that he’s learned a great deal about virtual currencies since those hearings- a sign that education and knowledge are key when it comes to putting solid rules in place, especially when it comes to the “cryptic” and often poorly understood world of cryptocurrency. Among overriding themes, Lawsky mentioned money laundering as a serious issue that the DFS is aiming to prevent. As a result, the reality is that any framework advised by the DFS for Bitcoins would need to fit within their requirements to curb money laundering.

Some of the notable Q&As:

Q:Most banks lately are closing Bank accounts with Bitcoin related activity, like transfers to Coinbase, etc. Some merchants are afraid that they will loss their bank account if they get involved with Bitcoin, as already happened to some of them.

Why do you think Bank are doing this? Will your proposed regulation help us address this issue?

Lawsky: I can’t tell you exactly why particular banks are taking certain actions but they may have some concerns related to Bitcoin being new, its price volatility, as well as the recent criminal cases. I think new, careful regulations, especially related to preventing money laundering, will make banks more comfortable with Bitcoin-related activity over time.

One of the key problems with existing AML/MoneyTransmitter legislation is that it’s simply impossible to comply with unless you have a multi-million dollar legal budget. How will you make sure that it’s possible for small startups and sole traders are able to comply with the new legislation?

Lawsky: This came up a lot at our hearings. We face similar problems in our regulation of smaller community banks. Dodd Frank, for example, was designed to address problems created by our largest institutions but at times has hit these smaller banks (who had little to do with the causes of the financial crisis) disproportionately in terms of compliance costs, etc. We’ve had some success in getting these regulations amended so they don’t crush smaller community banks. Any regulations we issue for virtual currency firms will have to be carefully tailored with this in mind. Thanks for raising this.

In regards to MtGox, Lawsky was asked about his opinion on the struggling exchange and about what his team has learned- and how they understood about it./strong>

Lawsky: The Mt. Gox shutdown was a reminder that this is still a young industry and there are still problems getting worked out sometimes on a daily basis. I think we should stay positive about that. We’re seeing a shaking out of the industry and that’s as it should be — it will lead to improvements. According to Professor Felten at Princeton, the problems with the Bitcoin protocol that caused the Mt. Gox shutdown have been known about for some time and supposedly code can be written to deal with those flaws in the protocol. If that’s the case then this may not be a long lasting problem. Maybe more importantly, the Mt. Gox issue underscored for us that it would be far easier if we had some exchanges locally that we could interact with, allowing us to better understand these issues so as to protect those engaging in trades with the exchanges. We’re hopeful that clear regulations, if done in a smart, modern way, may incentivize some of these exchanges to come ashore (hopefully here in NY).

We have a very smart, good, hard-working regulatory team. Are they programmers? No. That’s one of the reasons we’re studying these issues hard and seeking input, thoughts, advice, etc. from many, many quarters.

What are your views on the adoption and potential for Bitcoin to make financial service leaps in the developing world? How do you think we can get our local central banking authorities to see BTC in a light that is more opportunistic than threatening?

Lawsky: I think this is an extremely exciting aspect of Bitcoin that holds huge potential. Many people don’t realize how so many parts of our world do not have modern banking systems.

Separately, Bitcoin holds the potential to bring the costs of international transactions way down. That could be huge for the thousands and thousands of New Yorkers who today send money back to their families in their home countries at great expense.

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