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Payments executives today are trying to assess the legacy of Benjamin Lawsky, New York State’s controversial top financial regulator who proposed the first regulations on virtual currencies. Lawsky, who became superintendent of the state’s Department of Financial Services in 2011, announced Wednesday that he plans to step down in June to open a legal and consulting business and become a visiting scholar at Stanford University.
Lawsky stunned the payments industry in 2013 when he proposed what was dubbed a “BitLicense,” a framework for regulating virtual currencies. Die-hard supporters of Bitcoin and other virtual currencies argued that the new payment systems, which can facilitate inexpensive and fast cross-border person-to-person and consumer-to-business transactions, shouldn’t be regulated at all. Others said any regulation should be on the federal level, not from states.
But Lawsky pressed on, saying virtual currencies could be used for money laundering and that new payment systems should be subject to anti-money-laundering and related rules with which traditional money transmitters must comply. Lawsky, however, did show a willingness to listen to the new payments players. At last November’s Money20/20 conference, he announced a stripped-down version of the BitLicense for startups so that they wouldn’t face a heavy compliance burden as they got their payments businesses off the ground.
The BitLicense plan has generated thousands of comments and been revised during its lengthy gestation process, but a final draft is expected to take effect soon.
George Peabody, a partner at Menlo Park, Calif.-based consultancy Glenbrook Partners who follows the virtual-currency industry, notes that Lawsky had a bold streak. “Certainly one of the biggest question marks around the BitLicense was there wasn’t a legislative mandate to create it,” Peabody tells Digital Transactions News. “It was the regulator’s own effort to define how these businesses should operate. The fact that there was no legislative [mandate]—that’s certainly going to be part of the legacy.”
John McDonnell, chief executive of San Francisco-based Bitcoin merchant processor Bitnet Technologies Corp., says he doesn’t have a problem with the concept of regulations for the new payments niche. “In general, our position at Bitnet is that regulations are good, regulations that we can technologically comply with only serve to bolster confidence by the banks to work with us,” he says.
Bitnet and some other companies, however, did submit comments that haven’t made it into the current draft of the BitLicense proposal. In effect, the commentators asked that an exemption in current money-transmitter regulations for firms that do not deal directly with consumers be incorporated into the BitLicense. For Bitnet, which collects invoices on behalf of merchants, the lack of such an exemption will mean more rules to comply with, according to McDonnell.
But earlier this month, New York granted a banking license to a Bitcoin exchange firm called itBit.
The BitLicense idea has spread to other states, including North Carolina, New Jersey and California. Some states say their plans are less burdensome than New York’s, the nation’s financial center, and could help attract new payments businesses. But McDonnell says a virtual-currency regulation bill in the California Legislature is based on a earlier version of BitLicense, not the most recent draft. He describes his reaction to it as, “Holy smokes, they went back in time.”
