True to the schedule he released last week, New York Department of Financial Services (“DFS”) Superintendent Benjamin Lawsky (“Lawsky”) (accompanied by DFS Assistant Deputy Superintendent Maria Filipacas, General Counsel Danny Alter, and Deputy General Counsel Dana Syracuse) presided over two days of virtual currency-related testimony this week. Noting that he did not want regulation to stifle innovation, Lawsky maintained a cordial and yet authoritative tone with each of the panels, comprised of carefully-selected academics, law enforcement, investors, and industry participants who were expected to, and did, offer varying views. The pervasive message of the testimony (offered both in writing and in-person), was that virtual currency is here to stay, and that some amount of regulation was not necessarily a bad thing. The deepest divides revolved around whether existing regulatory framework was sufficient to mitigate the perceived risks of virtual currency use, and how new regulations should take shape.
The first panel, comprised of investors including SecondMarket founder and registered FINRA broker Barry Silbert, venture capitalists Jeremy Liew from Lightspeed Venture Partners and Fred Wilson from Union Square Ventures, and the Winklevoss twins, maintained that regulation would actually encourage more investors to enter the virtual currency market, but that additional regulatory framework was unnecessary. In fact, they highlighted the recent upswing in criminal prosecution involving Bitcoin as evidence that the laws already on the books were sufficiently controlling the industry. According to Silbert, the fact that those involved with websites like Silk Road have been caught and prosecuted shows that the system is working just fine; and that, contrary to Lawsky’s concern that Bitcoin use is completely anonymous, users can be identified when necessary. The panelists pointed out that the demographic of Bitcoin users had shifted from those who wanted to remain relatively anonymous to those who enjoyed the efficiency and low cost of transacting business in Bitcoin, and noting that the surge in the value of Bitcoin following the closure of Silk Road demonstrated the overwhelming interest in its non-illicit uses.
The first panel’s opinions were in somewhat sharp contrast to those of the law enforcement panel, comprised of New York County District Attorney Cyrus Vance, and Southern District of New York Deputy United States Attorney Richard Zabel. Even though they recognized that virtual currency had legitimate uses, both prosecutors urged DFS to institute regimes requiring exchangers to keep records of all transactions, implement procedures to verify data, and file periodic applications and attestations to do business. They disputed the notion that illicit activity comprises only a small portion of virtual currency transactions, and clarified that the volume of charges filed is not necessarily indicative of the current level of illicit activity so much as the level of resources and confidence their departments have in being able to successfully prosecute the cases.
Two of the three academics, Stanford Professor Susan Athey and Princeton Professor Ed Felton, were largely in agreement with the investors, stating that it should be possible to incentivize the market to develop in a manner that does not obstruct law enforcement while still maintaining the essential nature of the Bitcoin platform. While he admitted that there were values and virtues to virtual currency use, Boston University Professor Mark Williams, on the other hand, strongly suggested that Bitcoin was fundamentally flawed, irrationally priced, and too tied with illicit activity to gain mainstream acceptance.
In the end, it remains to be seen where on the spectrum DFS will land. Lawsky wants to begin issuing BitLicenses in 2014, stating “if we want innovation to happen, and we also want to root out money laundering, and we try to get that balance right, we also want to give businesses certainty.” Although he sought input on realistic ways to regulate virtual currencies while still preserving their fundamental properties and allowing them to flourish, Lawsky was clear that, if it came down to a choice between preventing money-laundering on the one hand, and permitting innovation on the other, he would always choose preventing money-laundering first. He said he did not believe that it was worth it to society to facilitate money-laundering simply to permit innovation. Notwithstanding the fact that such an opinion is antithetical to the time-honored adage that “it is better that ten guilty persons escape than that one innocent suffer,” the testimony offered by most of the panelists provided ample fodder to challenge this notion.
For a complete video of the first panel’s comments, visit http://www.totalwebcasting.com/view/?id=nysdfs.