As the first of their kind, the proposed regulations may add legitimacy to virtual currencies, but the new regulatory regime could stifle innovation and development.
On July 23, 2014, the New York State Department of Financial Services (NYSDFS), the governmental agency that regulates the financial services and insurance industries in New York, released proposed regulations governing the use of virtual currencies in New York State (Proposed Rule). The Proposed Rule is open to a 45-day public comment period that will end on September 5, 2014, after which the NYSDFS will consider the comments and possibly amend before deciding on the final form of the regulations. This Client Alert discusses the history of virtual currencies, provides an overview and summary of the key requirements of the Proposed Rule, highlights some of the similarities between the Proposed Rule and other NYSDFS rules that regulate aspects of the financial services industry in New York, and discusses the potential impact of the Proposed Rule on the virtual currency industry.
Virtual Currencies: A Brief History -
Virtual currencies and other cryptocurrencies, such as Bitcoin, are financial and technological instruments that incorporate characteristics of money, accounting, networks and remittances into one concept. Bitcoin has been gaining traction as a decentralized, digital currency since it was officially launched in 2009. Although virtual currencies are not considered “lawful money” in the United States, the number of virtual currency users is growing rapidly beyond the scope of the banking industry. As such, the need to implement regulations to reduce the operational and systemic risks associated with the virtual currency industry and to protect consumers from financial harm is paramount to ensure the survival of a multibillion-dollar system with more than one million users.
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