Virtual currency dominates day one of Money 20/20 conference
For all the chatter about Apple Pay and the Merchant Customer Exchange during the past two weeks, it was virtual currency that dominated panel discussions on Sunday, the first day of the Money 20/20 event in Las Vegas.
Benjamin Lawsky, New York's superintendent of financial services, gave a keynote speech about his department's recent efforts to regulate virtual currency-related businesses, and attempted to clarify misconceptions about the proposed BitLicense regulatory framework for the state.
Since the department released the first draft of its proposed regulations in July, Bitcoin enthusiasts have worried that startups would be at a disadvantage because they could not afford to purchase the necessary license to operate in New York. But in his Sunday presentation, Lawsky revealed a potential way for those companies to avoid BitLicense costs.
"There has to be a way for startups to start up and play by the rules without getting crushed by huge compliance costs," he told attendees. "To that point, we are considering creating a special type of transitional BitLicense."
Lawsky said those businesses that are granted a special BitLicense would be able to operate with a more flexible license for a set amount of time as they grow larger. The NYDFS will then consider various factors in deciding whether to grant businesses a full BitLicense.
"To be clear, we will not waver in protecting consumers and preventing money laundering," Lawsky said. "Any firm engaging in this will face regulation."
Lawsky claimed that his intent with BitLicense is to prevent another Mt. Gox situation. The failure early this year of that once-giant bitcoin exchange prompted his department to expedite the regulation process in New York, he said.
Japan-based Mt. Gox ceased operations in February and later filed for bankruptcy after losing 774,408 bitcoins in a hack that went undetected for years.
The exchange later found some of the missing bitcoins in a digital wallet from 2011. But the damage was already done and consumers who had bitcoins in the exchange lost almost everything. Those consumers had no recourse against Mt. Gox outside of filing lawsuits against the company in an attempt to recover losses.
Bitcoin enthusiasts, however, believe that New York's proposed regulations stem from banks' concerns about how virtual currencies could disrupt their business and change the status quo of the current banking system.
One attendee asked Lawsky during a Q&A session after the keynote how many New York residents had contacted the department about regulating bitcoin and other alternative coins. Lawsky said the department did not receive any complaints from consumers after Mt. Gox failed.
"We hope our regulations will foster greater trust and confidence in virtual currencies and will make them more popular," Lawsky said. "We want to make sure we have the appropriate guardrails to protect consumers."
Lawsky expects his department to publish an updated draft by Dec. 1. At that point, another 30-day comment period will begin, allowing the industry to suggest changes and communicate its concerns. A final rule set is expected in early 2015.
Lawsky’s is not the only state or federal agency that claims to put consumer protection first when it comes to virtual currency-related companies.The FTC also wants to make sure consumers are protected from deceptive practices in their dealings with virtual currency-related businesses.
In an afternoon session, Duane Pozza, an attorney in the Bureau of Consumer Protection at the FTC, reminded the audience that his agency's actions are not limited to the virtual currency industry. This approach is at the core of the agency's operations as outlined in Section 5 of the FTC Act. "Unfair or deceptive acts or practices in or affecting commerce ... are ... declared unlawful," reads part of the act.
The FTC in September flexed its muscle when it closed Butterfly Labs, a Kansas City, Missouri-based bitcoin mining equipment provider. The company collected between $20 million and $50 million in preorders for its machines, but either failed to deliver products or delayed shipments for to a year — rendering the machines obsolete by the time miners received them. Jilted customers worldwide flooded the FTC with complaints.
The agency shuttered Butterfly Labs pending a court case. The company filed a motion last month to dismiss the FTC's claims against it.
Pozza said Butterfly Labs conducted business in a way that raised red flags and that the agency's actions were consistent with those it has taken previously — regardless of the industry.
"Don't overpromise and misrepresent [your intentions]," he said. "They promised mining machines by a certain time, but they didn't deliver."
Pozza also noted a key area regulators are debating at the moment is whether Regulation Z, the Truth in Lending Act, should apply to virtual currencies.
"Consumers are looking for trusted mechanisms to deal with these types of currencies," he said. "Consumers have to be able to trust the payment mechanism before they adopt it."
Will Hernandez Will Hernandez has 14 years of experience ranging from newspapers to wire services and trade publications. Before becoming Editor of MobilePaymentsToday.com, he spent two years as the content manager for PaymentsJournal.com, a leading payments industry news aggregator and information hub published by Mercator Advisory Group. Will spent four years covering the payments industry as an associate editor for multiple publications in SourceMedia's Payments Group based in Chicago.