U.S. Warms to Bitcoin, as Other Countries May Copy U.S. Regulation

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While the U.S. has been a rocky landscape for Bitcoin businesses, with some struggling to find support from banks and credit unions, several in Washington voiced their favor of the digital currency in a Senate hearing that took place Nov. 18.

However, just as U.S. policymakers are taking a more supportive approach to Bitcoin and other virtual currencies, countries that have taken a hands-off approach may soon weigh in with regulations that mirror those of the U.S.

Many foreign governments are asking the U.S. how to regulate the virtual currency, so regulations abroad will eventually catch up, said Jennifer Shasky Calvery, director of the Financial Crimes Enforcement Network, during the hearing. The U.S. acted quicker only because it had broad definitions that Bitcoin was able to fit under, she said.

In March, Fincen released guidance on virtual currency, classifying digital currency businesses as money services businesses. Many digital currency companies were then required to obtain money transmitter licensing for each state they operate in.

Under U.S. regulation, "several [virtual currency] businesses have shown they can…empower customers and expand access to financial services," Shasky said.

Shasky was on the panel with Mythili Raman, acting assistant attorney general in the criminal division of the U.S. Department of Justice, and Edward W. Lowery III, special agent in charge of the criminal investigative division of the U.S. Secret Service. The discussion was hosted by the Senate Homeland Security and Governmental Affairs Committee.

"I think policymakers are beginning to understand the huge potential benefits of Bitcoin for consumers and the economy," said Jerry Brito, senior research fellow at The Mercatus Center, in an interview. Brito was on a panel of Bitcoin supporters who spoke during the hearing.

"They of course also see the challenges, but they are beginning to understand that what they need to do is to take a balanced approach," he said. "It was very heartening to see, especially the Chairman [Tom Carper], take a very even-handed view of the issue."

Carper, a democrat from Delaware, and other governmental agency representatives were quite forward about their thoughts that digital currency has many potential benefits.  

"Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others and confused the heck out of the rest of us, including me" Carper said at the hearing. "Some proponents believe that digital currencies can prove valuable to those in developing countries without access to stable financial systems. Others believe it could prove to be the next generation payment system for retailers online and in the real world."

Patrick Murck, general counsel at The Bitcoin Foundation and Jeremy Allaire, CEO of Circle Internet Financial, a startup Bitcoin merchant services business, also spoke on the panel. And Ernie Allen, president and CEO of The International Centre for Missing and Exploited Children also spoke about Bitcoin's visible and transparent blockchain, or ledger of transactions.

Bitcoin's features, which support fast and inexpensive transactions, could widely disrupt the existing remittance industry. Bitcoin could also find a niche in micropayments and charitable giving.

But the hearing also included several mentions of the recent "bad actors" in the virtual currency market, including the digital-currency company Liberty Reserve, whose operators have been charged with money laundering and the online marketplace Silk Road's alleged founder Ross Ulbricht, who faces charges including narcotics trafficking, money laundering and hiring a hitman.

As the growth of virtual currencies continues, more criminals try to use them, said the Secret Service's Lowery, during the panel. But, he said, the regulations in place today cover these crimes and no new laws need to be enacted.

In August, Fincen hosted the Bitcoin Foundation, a trade group, in Washington D.C. Representatives from an array of government agencies, including the Secret Service, FBI, IRS and several state regulators were also in attendance.

State governments have also recently been trying to define their stance on the virtual currency. Most notably, Benjamin Lawsky, superintendent of the New York State Department of Financial Services, said the NYDFS would consider the possibility and feasibility of issuing "BitLicenses."

The agency would consider specific types of transactions and activities that would need a BitLicense and whether entities with BitLicenses need to follow specifically tailored regulatory examination requirements, anti-money laundering guidelines and consumer protection guidelines.

While it's unclear whether the Bitlicenses would be more or less burdensome to Bitcoin businesses than the current process of obtaining money transmitter licenses, the idea is different from Lawsky's earlier statements to Bloomberg that if regulation hurts a Bitcoin business, "so be it."

Other states, including California and Idaho have also weighed in on Bitcoin. And a federal judge ruled bitcoins are subject to relevant U.S. laws because they are "a currency or form of money" during a case against a Texas man accused of creating a fraudulent Bitcoin hedge fund.

In terms of consumer protection, if the Electronic Funds Transfer Act and Regulation E, the primary consumer protection statutes, were applied to Bitcoin, regulators could decide that digital currency wallet services are financial institutions, said Terry Maher, an attorney at Baird-Holm LLP in Omaha, Neb., in an interview.

"If this should happen, it would trigger a significant amount of compliance obligations and financial liability on the wallet service, as they would have to implement systems to provide the initial and ongoing disclosures required by the EFTA and Regulation E, stop-payment rights for recurring transactions, error resolution procedures, and consumer limitations on liability for unauthorized transactions, as well as implementing additional fraud controls," Maher said.

Implementing these controls would cost Bitcoin wallet services a large amount of money, and so fees for consumers and merchants would increase, he said.

While many payment companies perceive a rift between innovation and regulation, steps are being taken by regulatory bodies to understand disruptive new technology. The Consumer Financial Protection Bureau established Project Catalyst in November 2012 to hear more from companies about when existing regulations slow the progress of new technology.

Another Senate hearing, The Present and Future Impact of Virtual Currency hosted by the Committee on Banking, Housing and Urban Affairs Subcommittee on National Security and International Trade and Finance will take place today at 3:30 pm Eastern time.

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