Whether or not early adopters or true believers want it, regulations are coming to bitcoin land. The push for a solid rulebook, not surprisingly, is happening in New York, and it's being led by the state's top banking regulator, Superintendent of Financial Services Ben Lawsky, with a zeal that could be described as, well, bitcoinish. On Thursday, he took to Reddit to conduct an AMA, in the first public Q&A about bitcoin to involve a government official.
"Our expectation is that – during the course of 2014 – the information we’ve gathered in our fact-finding effort will allow us to put forward a proposed regulatory framework for virtual currency firms operating in New York," Lawsky wrote in his preface to the Q&A. Lawsky, who once served as special assistant to then-Attorney General, Gov. Andrew M. Cuomo, has in recent years pursued money laundering on Wall Street, exacting millions in fines from Standard Chartered Bank and Deloitte Financial Advisory Services over money laundering involving Iran.
Despite the bitcoin community’s well-known disdain for regulation, some skeptics have been warming up to Lawsky since he led a hearing on bitcoin regulation last month, featuring Fred Wilson, the Winkelvoss twins and a bevy of experts from law enforcement and academia.
The hearings came amidst a chill in the Bitcoin community, a day after one of Bitcoin's top evangelists was arrested on money laundering charges related to the Silk Road. But Lawsky, who denies the arrest was timed to coincide with the hearings, brought an affable demeanor and enthusiasm to the proceedings, as he did recently on his Twitter account.
— Ben Lawsky (@BenLawsky) February 18, 2014
“Ben Lawsky comes across as both level-headed everyman and optimistic populist, both in person and on paper,” wrote Ryan Galt of Coindesk, in a piece wondering if the career public servant was “Friend or Foe,” adding that “[Lawsky] is, by all accounts, a good guy.”
Still, given the scene’s penchant for ideology, there were worries that the Q&A might get tense. “For some reason the /r/IAmA moderators found it necessary to ask /r/Bitcoin folks try to keep things civil,” wrote /r/Bitcoin moderator judah_mu in a separate Reddit post. “Would this be possible?”
“We have a reputation problem,” user Kerrai responded, the top reply. “Let’s work on solving it.”
In the end, the hecklers were few. Over the course of the afternoon, Lawsky answered a fair share of the hundreds of questions that poured in. Here are the responses that I found most interesting.
He thinks bitcoin and its growing industry needs clarity, soon:
We hope regulatory clarity will attract exchanges to the United States. I suspect that they are staying offshore right now because they don't know what the rules of the road here are or will be We do hope that regulation will create a level of certainty that could incentivize banks to promote not stifle these innovations. I also suspect there are banks who are quite interested in the technology but are being risk averse for now in the absence of regulatory clarity.
Why regulations are needed: terrorism:
It is worth repeating that without massive money laundering it is very hard for terrorism to thrive. So we see our anti-money laundering (AML) work as one of our more important obligations. Now that doesn't mean we should be undertaking unreasonable and/or ineffective means to find and address money laundering. But the Know Your Customer (KYC) rules we have for banks are important. The key is finding the most effective methods to root out and deter money laundering without having an overbearing impact on those who are just trying to use the system legally and without driving firms out of business with extraordinary compliance costs.
He’s aware of the kind of financial burdens associated with regulations, especially for small businesses:
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.
He believes individual privacy is important, but wonders how to balance it against law enforcement concerns:
I think financial privacy is an important value. I certainly don't love the fact that when I purchase something online, I quickly receive a bunch of email solicitations which clearly show that my information has been sold to other companies. At the same time, there is an important competing value in preventing money laundering which often requires that those engaging in financial transactions (especially when large) provide some identifying information so we can make sure we're not permitting things like terrorist financing. The tricky question is whether we can come up with smart rules that might require personal identifiers for certain transactions at certain entry points into the system while still protecting financial privacy while moving around within that system. We're obviously still in progress on this topic.
We need new rules because the old ones were drafted before the Internet:
We currently license money transmitters like Western Union that transmit in fiat currency. The question we are hard at work on now is whether our existing rules for the Western Unions of the world (which were written before anyone had even thought of an Internet) are adaptable to the virtual currency world or whether we need a separate more modernized framework that is more geared to the specific characteristics of virtual currency.
On whether or not BitInstant CEO Charlie Shrem’s arrest was connected to regulatory hearings in New York:
Let me be clear on this. Absolutely not true.
Does he own any bitcoins? Does he have a sense of humor?
I don't. But I hear Preet* is looking to offload some! [*Preet Bharara, the U.S. Attorney for the Southern District, who seized bitcoins from the Silk Road]
He seems pragmatically pro-bitcoin:
Hard to put the genie back in the bottle. I can't predict the future but Bitcoin is certainly a new powerful technology that holds a lot of promise for the future if we can mitigate some of the potential negatives like money laundering.
And he sees the benefits of cryptocurrencies for upgrading the banking system:
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.
What he thinks about his new nickname, “supernintendo”:
I love it. No one knows what Superintendent means anyway.
The question we are hard at work on now is whether our existing rules for the Western Unions of the world (which were written before anyone had even thought of an Internet) are adaptable to the virtual currency world.
At the end of the AMA, Changetip, a startup that focuses on using bitcoin for tipping, tweeted Lawsky to tell him they had paid him $0.42 USD in BTC. He retweeted it. Later he gave a nod to Neal Stephenson's scifi classic novel Cryptonomicon, which involves cryptographic currencies:
— Ben Lawsky (@BenLawsky) February 20, 2014
While Lawsky has captured the spotlight, he's certainly not the only regulator looking at bitcoin. On Friday, Senator Tom Carper, chairman of the Homeland Security and Governmental Affairs Committee, chimed in after the Conference of State Bank Supervisors announced that they will create a task force to study virtual currencies.
"As virtual currencies, like Bitcoin, and similar technologies continue to be increasingly utilized, we have to ensure that governments are adequately protecting consumers and addressing lawbreakers without hindering innovation," Carper wrote, adding that "while there is still more work to be done, this is an important step."