New York proposes rules for virtual money

ALBANY, N.Y. – State regulators trying to curb money laundering and safeguard investors on Thursday proposed a special set of rules for firms involved in trading and storing virtual currencies.

New York is the first state to propose issuing separate regulations for virtual currencies, demonstrating the importance regulators attach to the fledgling field. New York City is home to several startups dealing in bitcoin, the most popular virtual currency, and some Wall Street firms are edging into the field as well.

Some industry firms vowed to comply. But the Bitcoin Foundation, a nonprofit organization that promotes the currency, questioned whether separate regulations were warranted and suggested operators should instead be integrated into existing financial regulations.

The proposal by the Department of Financial Services would establish a so-called BitLicense.

Merchants and consumers who use the virtual currency solely to buy and sell goods and services wouldn’t need the license, but those buying and selling virtual currency as a business would.

Bitcoin and other virtual currencies have been gaining the backing of legitimate investors and mainstream businesses. Earlier this year, Overstock.com became the first major retailer to accept digital money.

Users swap cash for virtual currency using online exchanges, then store it in a wallet program on their computer. The program can transfer payments directly to a merchant who accepts the currency or to private parties anywhere in the world, eliminating transaction fees and the need to provide bank or credit card information.

New York’s proposed regulations follow a yearlong department study. Financial Services Superintendent Ben Lawsky said his agency is trying to rein in money laundering and establish consumer protections without stifling innovation.

The proposed rules are scheduled to be published Wednesday, followed by a 45-day comment period. The regulations would require of licensed companies:

• a background check of all employees and founders with fingerprints submitted to state authorities and the FBI;

• a bond or trust account in U.S. dollars to protect customers;

• internal controls against money laundering including customer identification;

• notifications within 24 hours of aggregate individual transactions valued at $10,000 or more;

• written approval of all new business activities or offerings;

• a security program;

• quarterly financial statements;

• the retention of 10 years of business transaction records.

The department would prohibit accounts with shell entities that have no physical presence in any country and require notifying customers that virtual currency is not legal tender and not backed by the government.