“Virtual currencies” in general, and bitcoin in particular, continue to attract media attention as well as intense public and regulatory scrutiny.
In the United States, the recent establishment of the Digital Currency Working Group by the U.S. Securities and Exchange Commission (the “SEC”) reflects the SEC’s increased interest in exercising regulatory authority over virtual currencies. The New York Department of Financial Services (the “NYDFS”) is finalizing previously proposed new rules for virtual currency businesses involving New York or New York residents, which are expected to become effective in early 2015. In Asia, bitcoin has gained popularity as a convenient way for money exchange and remittance, especially among domestic helpers.
This eUpdate is the eleventh part in a series of eUpdates on bitcoin-related topics. The first part of the series described what bitcoin is. The second part explained the legal status of bitcoin and how it is approached in different countries. The third part analyzed the effects of Chinese demand on bitcoin, as well as how bitcoin is approached in China. The fourth part analyzed risks which virtual currency users may encounter. The fifth part discussed further steps taken by the Chinese government towards regulating virtual currencies and their impact on the bitcoin market. The sixth part discussed continuing concerns about bitcoin and updated on developments in the bitcoin market. The seventh part discussed Mt. Gox’s demise and its effect on the bitcoin market. The eighth part described intensified calls for government authorities around the world to start regulating virtual currencies and responses to such calls. The ninth part focused on the migration of Chinese bitcoin businesses to Hong Kong in hope of escaping regulatory restrictions. The tenth part discussed migration of virtual currency businesses to Hong Kong and a proposed regulatory framework for virtual currencies in the Western world.
Developments in the United States
On December 8, 2014, the SEC issued a press release regarding the sanctioning of a computer programmer, Ethan Burnside, for operating two online venues that traded securities using virtual currencies bitcoin or litecoin without registering the venues as broker-dealers or stock exchanges.1 In the press release, the SEC noted that the investigation of the abovementioned case was conducted in coordination with the SEC’s Digital Currency Working Group. The SEC’s formation of the Digital Currency Working Group may indicate that the SEC will have an increased focus on the virtual currency businesses. The Digital Currency Working Group was reportedly formed in 2013, however, the Burnside case appears to be the first instance in which it has been linked to a specific enforcement action. The Digital Currency Working Group is supposedly comprised of approximately 50 staff members from across the SEC’s divisions and offices nationwide.2
At the state level, in New York, more than 3,700 public comments were made to the initial draft regulations for virtual currency businesses involving New York or New York residents3 released by the NYDFS in July 2014. “In a new area like this, with very complex issues, it’s very important for regulators to listen and see where the regulation makes sense – and course-correct where necessary,” said Benjamin Lawsky, Superintendent of the NYDFS.4 Initial response from bitcoin businesspeople and advocates was positive, with a number of them welcoming the apparent attempt to encourage an innovative environment for their fledgling industry.5
The key revisions to the initial draft regulations are expected to:6
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Clarify who will not be required to obtain a license (“BitLicense”): software developers; virtual-currency miners; individual users; individuals investing in virtual currencies; merchants accepting virtual currencies as payment for goods and services (as long as they are not engaging in other virtual currency activities); customer loyalty programs; and rewards and gift cards denominated in fiat currencies;
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Provide a two-year transitional BitLicense for virtual-currency startups and small businesses that are unable to satisfy requirements for a full BitLicense. Lawsky stated the intent of the transitional BitLicense was to provide flexibility to businesses working to get off the ground. Although such companies would not be subject to full regulation during the two-year transition period, Lawsky noted they would still be required “to meet robust standards for consumer protection and provide safeguards against money laundering”;
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Drop the requirement that BitLicensees must obtain address and transaction data for all parties. According to Lawsky, BitLicensees “must now only obtain that information for their own customers or account holders and, to the extent possible, for counterparties to the transaction"7; and
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Reduce the record-keeping requirements from ten years to seven years.
The full text of the revised regulations is expected to be uploaded on the NYDFS’s website. After an additional 30-day period for public comments, the regulations will likely be finalized in early 2015.8 According to Lawsky, New York expects to grant licenses to several virtual currency firms “shortly thereafter”.9 “We believe that these proposed changes ... strike an appropriate balance between permitting innovation to proceed, while at the same time strongly protecting consumers and helping root out illicit activity,” he added.
Bitcoin in Asia
In Hong Kong, bitcoin has gained popularity as a new means of money exchange and remittance. For instance, Bitspark, a bitcoin remittance business, was set up in Hong Kong in May 2014 with the aim to be a “disruptor” (or a game changer) in the foreign exchange market.10 According to George Harrap, CEO of Bitspark, Bitspark was the first bitcoin remittance business in Hong Kong, and the first end-to-end bitcoin remittance business in the world. In Hong Kong, bitcoin operations help domestic workers to transfer money home more economically. An advantage for those receiving the money by using the bitcoin system is that they do not need a bank account and can receive money from remittance companies such as Western Union as well as post offices and even pawn shops. Other remittance companies are already showing an interest in partnering with Bitspark in other countries. Bitspark’s business has recently been expanded to Indonesia, partnering with PT ArtaBit Indonesia, to target domestic helpers from Indonesia in Hong Kong.
While the People’s Bank of China has barred state-owned bank accounts from dealing in bitcoin, and prevented bitcoin exchanges from having bank accounts, this did not stop individuals from making virtual currency transactions among themselves, or outside of the country. According to Harrap, this is also what Bitspark aims to capitalize on.11
The value of bitcoin has plunged approximately 44% since the start of 2015 and approximately 85% from its record high of US$1,165 in December 2013, which means that the virtual currency has lost US$11.3 billion in value since its peak. Remittance transactions, however, are locked into how much they receive at the other end and the transaction is done instantly so there is no chance of volatility, according to Harrap.12
In the meantime, Asia is fast adopting bitcoin and other virtual currencies, such as litecoin, dogecoin, darkcoin and nubits, especially in countries such as South Korea and Japan, and cities such as Singapore and Hong Kong. “There are new companies in Hong Kong geared towards bitcoin,” Harrap said, adding that the city could become a bitcoin hub. There are at least six bitcoin ATMs in the city, and a small but growing number of companies accepting the virtual currency for transactions.
Bitcoin naysayers are worried that governments around the world will regulate or even prohibit the virtual currency to crack down on criminals as for example Russia, which seems to be adopting this approach. A prolonged price drop could also, at least temporarily, put the future of the virtual currency in question, because the equipment and power needed to mine new bitcoins are expensive, and mining new bitcoins is a key to the technology underlying bitcoin. On the other hand, many proponents of bitcoin continue to appreciate its relative anonymity and transaction verification via a public ledger and, despite the recent drop, some of the biggest backers of bitcoin say they are not fleeing. Venture capitalists continue to pour hundreds of millions of dollars into startups that are building new software on top of bitcoin technology, and companies from Microsoft to a Lamborghini dealership have said that they would accept bitcoin as payment.13
We, as always, will continue tracking major developments on virtual currencies.
1 http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543655716
2 http://www.complianceweek.com/blogs/enforcement-action/digital-currency-working-group-helped-sec-bring-bitcoin-case
3 http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf
4 http://www.mobilepaymentstoday.com/articles/lawsky-announces-changes-to-proposed-bitcoin-regulations/
5 http://www.wsj.com/articles/new-york-bank-regulator-unveils-revised-bitcoin-licensing-plan-1418922084
6 http://www.mobilepaymentstoday.com/articles/lawsky-announces-changes-to-proposed-bitcoin-regulations/
7 http://www.wsj.com/articles/new-york-bank-regulator-unveils-revised-bitcoin-licensing-plan-1418922084
8 http://www.mobilepaymentstoday.com/articles/lawsky-announces-changes-to-proposed-bitcoin-regulations/
9 http://www.wsj.com/articles/new-york-bank-regulator-unveils-revised-bitcoin-licensing-plan-1418922084
10 http://www.scmp.com/lifestyle/technology/article/1679904/bitcoin-transactions-cut-cost-international-money-transfers
11 http://www.scmp.com/lifestyle/technology/article/1679904/bitcoin-transactions-cut-cost-international-money-transfers
12 http://www.scmp.com/lifestyle/technology/article/1679904/bitcoin-transactions-cut-cost-international-money-transfers
13 http://www.scmp.com/news/world/article/1680236/bitcoin-plummets-35-cent-two-days-after-becoming-one-worst-investments
