Bitcoin will officially be part of the mainstream financial world next month when New York State's Department of Financial Services (NYDFS) publishes a regulatory framework governing the virtual currency. The move will allow virtual currency exchange itBit to become the first-ever legitimate Bitcoin bank.
The NYDFS is set to publish its final "BitLicense Regulatory Framework for Virtual Currency Firms" in the next couple of weeks. Most of the provisions contained inside will become immediately applicable.
This means any company that has applied to become a virtual currency exchange will be able to legally launch in New York – the center of the world's financial systems – as a bank. So far, however, just one company has applied: itBit Trust Company LLC.
The bank regulation means considerable regulatory oversight and financial management. It adds a considerable cost layer, effectively forcing the new technology to compete with incumbent banks. In short, the regulation protects current banks and makes it difficult for anyone to disrupt their business with the new currency. Which is just the way the big, somewhat-criminal banks, want it
itBit has been preparing to launch for the past year – beginning with moving its headquarters from Singapore to New York.
The exchange put in its application for a banking license late last week and has hired three big names to guide its way: former Federal Deposit Insurance Corporation Chairman Sheila Bair, former Financial Accounting Standards Board director Robert Herz, and former New Jersey Senator Bill Bradley. All of whom will not come cheap. Expect fees of the new product to rival those of traditional banks, which is the design of the regulations.
Last month, VC-backed itBit also revealed that it was one of three successful bidders in an auction for Bitcoins seized from online drugs market Silk Road. It said it 'won' 3,000 of the 50,000 being auctioned, a sum currently worth around $675,000.
"Built by Wall Street professionals," its website proudly says, as if to convey some sense of security despite the numerous bailouts and criminal prosecutions to hit The Street in recent years.
"itBit is institutional-grade and 100 per cent compliant within every jurisdiction it operates. The company’s stringent compliance program ensures the highest level of customer security and protection."
The compliance aspect is regarded as critical in building up Bitcoin's credibility and New York will be the first place to formally build it into its systems.
The NYDFS' BitLicense Regulatory Framework was first proposed in August 2013 with a notice of inquiry [PDF]. The agency then held public hearings in January 2014 based on its initial plans for how to regulate a virtual currency.
The plans were sped up following the collapse of Mt Gox, the world's largest virtual currency exchange, in March 2014. The NYDFS asked for proposals to establish regulated virtual currency exchanges in New York, and one set of proposals released in July 2014 and put out to public comment for 90 days received hundreds of comments, most of which were from banks and other invested parties that feared disruption by the cheap payment system.
On February 25 of this year, the NYDFS offered revised rules for public comment for another 30 days.
Now the NYDFS is fairly sure it has a viable set of rules and it plans to release them in the next few weeks, according to a spokesman.
Of most concern has been the compliance costs for new or fledgling virtual currency enterprises. In response, the NYDFS said it was considering a special "Transitional BitLicense" that would allow small businesses and start ups to operate within a more flexible framework for a set period.
The rules address such issues as consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms. The Licenses will be required for companies that receive or transmit virtual currency on behalf of consumers, that store or secure virtual currency on behalf of customers, that carry out retail conversion services, and basically all other forms of bridging the virtual currency and the real world.