TribLIVE

| Business


 
Larger text Larger text Smaller text Smaller text | Order Photo Reprints

States debate digital currency

On the Grid

From the shale fields to the cooling towers, Trib Total Media covers the energy industry in Western Pennsylvania and beyond. For the latest news and views on gas, coal, electricity and more, check out On the Grid today.

By Stateline.org
Saturday, Aug. 2, 2014, 9:00 p.m.
 

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

Most-Read Business Headlines

  1. Retailers that won’t open on Thanksgiving hope move pays off
  2. Lower gasoline prices fail to spur consumer spending
  3. Federal agency checking whether Highmark has enough doctors in Medicare plan
  4. Google applies tech to medical device
  5. Oil prices continue descent, dragging market indexes lower
  6. Thanksgiving deals called the best
  7. Household debt on the rise after 5-year decline
  8. Housing prices nudge upward as more homes on market
  9. Westinghouse to construct colossal nuke plant in Turkey
  10. Budweiser beer brand gives Clydesdales pink slip for holidays
  11. Butler County firm Deep Well Services tackles tough gas wells
Subscribe today! Click here for our subscription offers.