Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

Domestic Developments

New York.  On June 24th, New York became the first US state to formally adopt a custom-made regulatory approach to bitcoin and virtual currencies following the publication of the BitLicense framework in the New York State Register.

The publication marks the start of a 45-day application period during which time companies and individuals that offer digital currency services to New York residents must apply for a BitLicense. The 45-day grace period will end on the 8th of August.

Obtaining a BitLicense requires paying a non-refundable $5,000 application fee (along with any subsequent fees to be determined by the New York State Department of Financial Services), and disclosing details about the company’s operational plans, as well as its legal and financial history. Once an application is submitted, the applicant is considered to be compliant with the licensing requirement until an eventual determination on their application is made. If an application is eventually denied, that applicant must immediately stop doing business in New York. Alternatively, any entity that fails to apply for a license “shall be deemed to be conducting unlicensed virtual currency business activity” and could face possible of sanctions. Although the scope and severity of these sanctions are uncertain, the NYDFS is expected to update their official website clarifying the details of the 45-day application grace period.

The controversial regulatory framework’s licensing requirements have already led to the exodus of several cryptocurrency service operators: prompting some to terminate their services in New York altogether, while others indicated they would simply deny their services to New York IP addresses.

Connecticut.  On June 19, the Connecticut Governor, Dannel P Malloy, approved and signed into law, Substitute House Bill No. 6800, which would require a company seeking a money transmission license from the Connecticut Banking Department to specify that it plans to offer digital currency services. State regulators would then be empowered to assess whether or not to reject that applicant’s request based on the potential risks to consumers. The bill defines virtual currency using many of the same concepts as the Guidance on Virtual Currency released by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, including “centralized repository,” “administrator,” “decentralized,” and the concept of creating virtual currency through “computing or manufacturing effort.” The definition of virtual currency specifically carves out those virtual currencies used within “online gaming platforms with no market or application outside such gaming platforms” and those virtual currencies used “exclusively as part of a consumer affinity or rewards program” that “can be applied solely as payment for purchases with the issuer or other designated merchants but cannot be converted into or redeemed for fiat currency.

FTC.  The FTC’s Office of Technology Research and Investigation recently published guidelines for consumers making online payments with bitcoin.

Although the guidelines referenced some of the risks commonly associated with bitcoin payments (including price volatility, irreversibility, and a lack of standard legal protections), the post emphasized the importance of purchasing from a reputable seller and understanding the seller’s refund and return policies before completing the transaction.

The post also noted that “the FTC has received hundreds of complaints involving bitcoins and other virtual currencies”, but failed to mention that these hundreds of complaints occurred in the midst of over two and half million other complaints received by the FTC in 2014, according to the FTC’s Consumer Sentinel Data Book, a national ranking of consumer complaints. Of the hundreds of complaints involving virtual currencies, it is not clear how many actually refer to reports of fraudulent payment via bitcoin (as opposed to other virtual currencies), or to complaints related to delayed delivery of bitcoin mining hardware devices, such as those at the core of the FTC action against Butterfly Labs.

International Developments

  1. The UK’s Home Office, the government department responsible for immigration, counter-terrorism, police and drug policy, responded to the Treasury’s recent call for information on digital currencies by proposing that the government consider creating its own, alternative, digital currency in order to limit the anonymity and irreversibility of transactions.

The Home Office’s submission indicated that the best way to maximize the benefits of digital currencies while mitigating the associated downsides might be for “any digital currency for the UK being created and owned by the central government.”

The proposal would limit a digital currency’s potential use for criminal and terrorist purposes through enhanced monitoring and traceability mechanisms. The proposal also suggested that a government-created cryptocurrency be designed with a mechanism to reverse fraudulent transactions. Finally, the proposal called for the licensing of exchanges, whose licenses would be withdrawn if they failed to meet reporting requirements, essentially subjecting the exchanges to the same requirements as other traditional financial institutions.

Overall, the Home Office proposal echoes many of the same themes presented by financial institutions like Master Card (whose report emphasized the risks of digital currencies), Citi (who previously suggested that the Treasury should consider creating its own digital currency), and Accenture (who urged the UK government to consider regulating bitcoin wallets in the way it regulates banks).

For an updated summary of the status of virtual currency regulations across jurisdictions, please see our chart.