States debate digital currency
Now that consumers can use digital currencies such as Bitcoin to buy rugs from Overstock.com, pay for Peruvian pork sandwiches from a food truck in Washington, and even make donations to political action committees, states are beginning to explore how to regulate the emerging industry.
Digital currencies allow people to transfer value over the Internet but are not legal tender. Because they don't require third-party intermediaries such as credit card companies or PayPal, merchants and consumers can avoid the fees typically associated with traditional payment systems.
Advocates of virtual currencies say that because personal information is not tied to transactions, digital currencies are less prone to identity theft.
With about $7.8 billion in circulation, Bitcoin is the most widely used digital currency; others include Litecoin and Peercoin. All are examples of cryptocurrencies, a subset of digital currencies that rely on cryptography to function.
Many of the headlines generated by Bitcoin and other digital currencies to date have focused on problems with the system. In January, for example, federal prosecutors charged the chief executive officer of BitInstant, a major Bitcoin exchange company, with laundering digital currency through Silk Road, an online drug marketplace. Mt. Gox, based in Tokyo and once the largest Bitcoin exchange in the world, stopped trading in February and filed for bankruptcy protection, saying it had lost half a billion dollars in virtual money.
Although digital currencies are far from widespread in acceptance, their growing popularity — and potential for misuse — has prompted states to weigh in on what was uncharted territory.
“As far as we know, most state laws are completely silent on this topic,” said David J. Cotney, chairman of the Conference of State Bank Supervisors' Emerging Payments Task Force, which in March began exploring virtual currency.
Among the questions the task force will consider, Cotney said, is whether bitcoins should be classified as currencies, investment securities or commodities, which could determine which regulators should apply.
The idea for bitcoin emerged on a cryptography mailing list in 2009 from someone using the name Satoshi Nakamoto, according to the Bitcoin Foundation, which advocates for the digital currency industry. Consumers can receive bitcoins in exchange for goods or services, purchase them through exchanges, or earn them through “mining,” or spending computer power to process transactions in the bitcoin system in exchange for bitcoins.
So far, many states are looking at digital currencies as payment systems, which means they could fall under states' money transmission laws that typically cover money transfer services such as PayPal and Western Union, as well as prepaid credit cards. Within about a year, the state banks supervisors' task force hopes to make recommendations for how to deal with digital currency with the hope of promoting consistency among the states.
In April, the task force presented model consumer guidance to help states provide consumers with information about digital currencies. A number of states, including California, Massachusetts and Texas, have issued warnings to consumers that virtual currencies are not subject to “traditional regulation or monetary policy,” including insurance, bonding and other security measures, and that values can fluctuate dramatically.
At the federal level, the Department of Treasury's Financial Crimes Enforcement Network issued a guidance in March clarifying that digital currencies are subject to rules targeting money laundering and that virtual currency exchanges are required to register with FinCEN.
Later that month, the Internal Revenue Services announced that it would treat bitcoins as property, rather than as a currency, for federal taxing purposes. The Government Accountability Office has also recommended that the Consumer Financial Protection Bureau participate in inter-agency working groups addressing virtual currencies.
New York ‘BitLicenses'
New York became the first state to propose regulations for the digital currency industry when it announced earlier this month a broad-ranging proposal that aims to address consumer protection, money laundering and cybersecurity.
“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity without stifling beneficial innovation,” said Benjamin M. Lawsky, the New York Superintendent of Financial Services. “Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”
The proposed rules, which could be finalized by the end of the year, would require bitcoin exchanges and companies that receive, store, transmit or issue virtual currencies to obtain “BitLicenses.” Customers and merchants that simply accept bitcoins as payment would not have to obtain licenses.
The rules would require virtual currency firms to hold as much virtual currency as they owe to customers, hold a bond or trust account in American dollars, provide receipts with every transaction and comply with anti-money laundering provisions, among other requirements.
Some in the industry argue the proposals are so tough they will inhibit innovation in the industry.
David Landsman, executive director of the National Money Transmitter Association, a trade association, said the proposed rules were as strict as those for traditional money transmitters, but with added cybersecurity provisions.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Jump in home loans, trading commissions lead to profitable 1st quarter for banks
- Google’s changes to search results formula expected to shake up mobile economy
- Is Big Brother a backseat driver?
- Renewed fears of Greek default whack stock market
- Here’s how to clean your car
- Pa. employers shed 12,700 jobs in March; unemployment rate rises to 5.3 percent
- Review: Chevrolet Trax is an affordable SUV option
- Mylan discounts speculation of a possible takeover by Teva
- Glaxo to close Moon office, affecting 274 workers
- PPG axes 1,700 jobs as part of global restructuring
- Hearings set on new environmental rules for gas, oil drilling in Pa.