New York gives stamp of approval to Bitcoin Exchange

4 August, 2015

After a much anticipated wait, New York State has finally granted its stamp of approval and issued the final rules for bitcoin and other virtual currencies. The new rules help to ease regulations regarding the types of companies eligible to apply for a license.

According to the Superintendent of Financial Services for New York, Benjamin Lawsky, the new rules will be focused on providing oversight only for financial intermediaries and would not impact individual users, software developers, or currency miners. Additionally, merchants who accept virtual currencies as a form of payment would not be affected. Those new rules, referred to as BitLicense, are a first for New York and are designed to provide comprehensive guidelines for the regulation of digital currency firms.

With such regulation now in place, any companies operating in New York State holding customer funds that exchange those funds for virtual currencies will know be required to apply for a BitLicense. The ultimate goal behind the regulations is to protect consumers and ensure that the consumer's funds do not simply disappear. In addition to consumer protections, the new BitLicense rules also include cybersecurity and anti-money laundering protections.

Such regulations have been the subject of much discussion as digital currencies have fallen victim to criticism for failing to protect consumer funds and even for attracting criminal elements, including drug dealers. Among the most notable issues involving bitcoin occurred last year with the fall of Mt. Gox, when some $500 million in consumer bitcoins were lost after the exchange was hacked.

How companies will be affected by the new rules

Supporters of the bitcoin industry have been quick to point out that New York's new rules still contain many issues, but admit that the new rules are an improvement over original proposals introduced last year. Under the current rules, companies providing digital currency services would be required to obtain approval prior to making any material changes to their business models or products. This includes any wallet firms providing exchange services. No prior approval would be required for obtaining standard software updates. The new rules are also only applicable to businesses operating in New York State. Such businesses may have customers from other states, with the exception of states that have objections.

Last month, itBit became the first bitcoin exchange to receive a banking charter. The company avoided the need to apply for a license by instead apply for a charter, which involves even stricter requirements. After receiving a banking charter, itBit was allowed to open legally and server customers from around the United States. ItBit, which has offices in New York as well as Singapore, has announced that it will provide FDIC insurance and full asset protection. The firm is expected to receive full licensure in the near future.

The New York State Department of Financial Services has worked toward developing the special license rules for the past two years. The final rules were the third version of the rules to be introduced. Currently, the New York State Department of Financial Services is still accepting applications from other companies to receive licensing approval.

Shortly before issues the rules, Lawsky announced that he would be leaving the agency in order to set up a consulting company. Lawsky has come under fire for that move, as his new firm will advise companies regarding financial matters that could potentially include bitcoin and other digital currencies.

While there has been some concern that licensure requirements might increase the entry cost for businesses, the general consensus seems to be that licensure is necessary to provide consumers increased peace of mind.