The New York Department of Financial Services (NYDFS) has been tightlipped about its BitLicense resolution, announced last month. The regulator wants to know what community stakeholders think, but is proceeding with the regulation anyway.

A copy of the proposed regulation can be seen here. (PDF)

The proposed regulation declares that bitcoin operators in New York State will need licenses to move bitcoins, and would be subject to the same laws as financial services companies such as banks and money movement companies like Western Union. Perhaps most crucially, the regulation would remove what is the key feature of bitcoin to many users — users’ anonymity.

Bank Innovation got an exclusive update on the development of the BitLicense, and it appears that bitcoin regulations in the Empire State are marching ahead according to NYDFS plans.

New York State’s bitcoin regulation, if implemented, will be among the most comprehensive curbs on cryptocurrency yet implemented anywhere in the world.

The NYDFS implemented a 45-day comment period, and comments can be submitted electronically here. The purpose of the comments is not to see if regulation should be implemented, but rather how the regulation, already written, should be modified, if at all.

Benjamin M. Lawsky, New York State Superintendent of Financial Services, said in a July 17 press release, “We recognize that – as the first state to put forward specially tailored rules for virtual currency firms – continued public feedback will be an important part of finalizing this regulatory framework. We look forward to carefully and thoughtfully reviewing public comments on our proposal.”

Matthew Anderson, a spokesperson for the NYDFS, told Bank Innovation that the NYDFS would be open to not only extending the commenting period, but perhaps even holding another hearing about the licenses:

Yes, we are open to [extending the comment period.] We are very serious about taking the comments seriously. We try not to prejudge any alterations until we get a full sense of the comments and very committed to making sure we get this right. We certainly don’t have a monopoly on the truth, since it’s very new. … Any area is open to changes where we’re persuaded. If folks make a strong case, we’re willing to make sensible alterations, similar to other regulatory areas.

Regardless of the controversy, Anderson says that the comments received so far have been varied but constructive. “I think there are a broad range of views on [BitLicenses]. It’s a very important step in the evolution and maturation of bitcoin — regulation creates consumer confidence and increased adoption. So far, there’s been a pretty wide range of reactions — some welcome it, others are not enamored at the prospect of increased regulations.”

The Conception of BitLicenses
Much of the NYDFS’s eagerness to get bitcoin regulation in place is related to concerns about money laundering and other illicit activities. “New York is the financial capital of the world in many ways,” Anderson said. “So I think that we, as a state regulator, have a responsibility to manage money transmission, which is regulated at the state level. As we took a longer look at this, there’s been an increased use in bitcoin, anti-money laundering discussions, and interest from consumers and very serious investors. As we saw all those factors, we felt compelled to move forward.”

One of the most controversial stipulations in the BitLicense resolution essentially eliminates bitcoin anonymity — one of the cornerstone principles of bitcoin.

Anderson explained why that was necessary:

We need a way to identify on whose behalf these transactions are being made, and need a way to track them back. I think that there’s also this question of bitcoin and whether it’s truly anonymous. I think we want to have a balance that protects financial privacy, but also provides protections for money laundering.  We put f0rth a proposal and heard comments. We’re not going to prejudge — just thoughtfully consider input…. The majority isn’t involved in bitcoin for illicit purposes, but we try to get a balance, similar to banks and other financial rules.

Anderson says that the comments received so far have been varied but constructive. “So far, there’s been a pretty wide range of reactions — some welcome it, others are not enamored at the prospect of increased regulations.”

Influence from Banks?
The BitLicense resolution is a natural step for a burgeoning financial technology, but many bitcoin purists think the regulation is too broad. According to attendees at the recent Digital Currencies conference in New York, the license may have been drafted with the help of banks instead of bitcoin experts.

Charlie Shrem, founder of BitInstant and former VP of the Bitcoin Foundation, agreed, telling Bank Innovation that the NYDFS “definitely talked to everyone, but who they listened to is most probably banks. These financial services control the ‘payments roundtable,’ which is what it was called when the NYDFS first wrote money transfer license rules. These financial services want to make sure that bitcoin needs to go through the same regulatory issues that they went through.”

Some of the proposed provisions for companies dealing in bitcoins — fingerprints of all employees filed with the state, ten years of transaction logs, etc. — would appear to make it difficult for nonbanks to be in compliance.

Anderson told Bank Innovation, that, on the contrary, a broad range of cryptocurrency stakeholders had input into the regulation. “We solicited input from folks in the bitcoin industry and the primary input was from experts in the virtual currency industry,” he said. “There was a wide range of people from the hearings, which was fairly representative of those in the industry — including academics, law enforcement officials… I can’t speak to every person that we spoke to, but we had a pretty broad range of input.”

Anderson said that “those involved in virtual currency” had a say, and that the NYDFS “wrote the regulation in an independent manner.” He did not explicitly say that the banks were not involved.

As for the NYDFS’s view on bitcoin — whether it will follow the IRS and classify the cryptocurrency as a commodity or regulate it as heavily as other financial institutions — that remains to be seen. “The IRS and us, we’re dealing with separate issues: tax vs regulation… we are trying to tailor the rules so they make sense and not necessarily view it in that sort of premise [commodity or currency]. There’s a unique nature of virtual currency and we want to make sure we get it right.”