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Home » Uncategorized » Superintendent of Financial Services Ben Lawsky Answers Regulation Questions

Superintendent of Financial Services Ben Lawsky Answers Regulation Questions

Ben Lawsky
There have been a couple breakthroughs within the U.S regarding crypto-currency regulation. I have included some information below to direct you to various articles and threads where great questions and topics are being discussed.

I think the most important thread to link here would be Ben Lawsky’s “AMA” (ask me anything) post on Reddit. Ben Lawsky is the Superintendent of Financial Services for the State of New York, and decided to answer questions from blog members. I will outline the main questions/anwers below to save you the searching. But check at the bottom of this page for entire blog post.

 

 

 

Intro:

“We’re still in the process of formulating our views on a number of these issues – given that this is an ongoing regulatory process. So I may not be able to provide final or definitive answers to all of the questions you ask. But I’ll do my best to try and provide a window into some of our thinking at this stage. (I may even ask a few questions of my own during the course of the conversation, if that’s okay.) We’re trying to proceed without any prejudgments and solicit a broad range of views on virtual currency. I’m looking forward to a substantive and informative discussion. ”

“For those of you interested in some background on our agency’s work in this area, NYDFS has been conducting an inquiry on the appropriate regulatory guidelines for virtual currency firms for the last seven months. As part of that inquiry, in January 2014, NYDFS held public hearings in New York City on virtual currency. More than 14,000 people from 117 countries tuned into those hearings online, which was not the usual turnout we get!”

 

 

Q: Do you believe, from an ethical/moral perspective, that an individual has a right to financial privacy? Specifically, ought every individual be compelled to reveal their transactions and holdings of wealth to the United States government?
Ultimately, it is to this moral question that the Bitcoin debate, and all policy surrounding it, will come.

A: I think financial privacy is an important value. I certainly don’t love the fact that when I purchase something online, I quickly receive a bunch of email solicitations which clearly show that my information has been sold to other companies. At the same time, there is an important competing value in preventing money laundering which often requires that those engaging in financial transactions (especially when large) provide some identifying information so we can make sure we’re not permitting things like terrorist financing. The tricky question is whether we can come up with smart rules that might require personal identifiers for certain transactions at certain entry points into the system while still protecting financial privacy while moving around within that system. We’re obviously still in progress on this topic.

Q: One of the key problems with existing AML/MoneyTransmitter legislation is that it’s simply impossible to comply with unless you have a multi-million dollar legal budget. How will you make sure that it’s possible for small startups and sole traders are able to comply with the new legislation?

A: This came up a lot at our hearings. We face similar problems in our regulation of smaller community banks. Dodd Frank, for example, was designed to address problems created by our largest institutions but at times has hit these smaller banks (who had little to do with the causes of the financial crisis) disproportionately in terms of compliance costs, etc. We’ve had some success in getting these regulations amended so they don’t crush smaller community banks. Any regulations we issue for virtual currency firms will have to be carefully tailored with this in mind. Thanks for raising this.

Q: Most banks lately are closing Bank accounts with Bitcoin related activity, like transfers to Coinbase, etc. Some merchants are afraid that they will loss their bank account if they get involved with Bitcoin, as already happened to some of them.
Why do you think Bank are doing this? Will your proposed regulation help us address this issue?

A: I can’t tell you exactly why particular banks are taking certain actions but they may have some concerns related to Bitcoin being new, its price volatility, as well as the recent criminal cases. I think new, careful regulations, especially related to preventing money laundering, will make banks more comfortable with Bitcoin-related activity over time.

Q: Hi Ben Lawsky, thanks for doing this! My question is why is money laundering still a priority for regulators? As former Federal Reserve Governor Lawrence Lindsey noted:

Between 1987 and 1995, the government collected 77 million currency- transaction reports, something on the order of 62 tons of paper. Out of that, it was able to prosecute 3,000 money-laundering cases. That is roughly one case for every 25,000 forms filed. In other words, entire forests had to be felled in order to prosecute one case. But it gets worse: Of the 3,000 money-laundering cases prosecuted, the government managed to produce only 580 guilty verdicts. In other words, in excess of 100,000 reports were filed by innocent citizens in order to get one conviction. That ratio of 99,999 to one is something we normally would not tolerate as a reasonable balance between privacy and the collection of guilty verdicts.

A: At DFS, we’re regulators not prosecutors. So we don’t have indictment power or bring criminal cases. However, we do have an obligation to help ensure the integrity of the financial system and as part of that to prevent money laundering. It is worth repeating that without massive money laundering it is very hard for terrorism to thrive. So we see our anti-money laundering (AML) work as one of our more important obligations. Now that doesn’t mean we should be undertaking unreasonable and/or ineffective means to find and address money laundering. But the Know Your Customer (KYC) rules we have for banks are important. The key is finding the most effective methods to root out and deter money laundering without having an overbearing impact on those who are just trying to use the system legally and without driving firms out of business with extraordinary compliance costs.

Q:

  1. The regulatory barriers to setting up an exchange in the U.S. are extremely high, in large part because of the requirement for exchanges to obtain 47 separate money transmitters licenses. In light of the fact that there isn’t a single major Bitcoin exchange located in the U.S., it seems clear that to some extent this regulation is driving innovation out of the country. Do you have any personal opinions on how state and federal regulators might address this issue?
  2. There have been several cases of users receiving warnings or even having bank accounts closed simply for dealing with legitimate Bitcoin related companies like Coinbase. Is one of your goals with regulation to clarify the legal status of cryptocurrencies so that this ceases to be another barrier to innovation?
  3. At the senate hearings last fall, comments by Jen Shasky of Fincen and the member of the secret service seemed to indicate the federal law enforcement officials have all the tools they need in order to prosecute crimes involving cryptocurrency. The failure of multiple silk roads and the arrest of Charlie Shrem among others seems to support this. In light of this fact, what are your thoughts on the recentcomments by Treasury Secretary Jack Lew?

“As a policy matter, what we have to look at across all the different forms of payment is that the same rules apply, it’s a level playing field,” he said. “Just as with cash or checks, if there’s virtual currency or online payment methods, they’ll have to comply with all the same laws that everybody else complies with. It’s not going to be ok to do elicit activity, whatever form of currency you’re using.”

A: Your questions are all good and I hope my previous answers mostly addressed them. Just a few additional notes: 1. We hope regulatory clarity will attract exchanges to the United States. I suspect that they are staying offshore right now because they don’t know what the rules of the road here are or will be. 2. We do hope that regulation will create a level of certainty that could incentivize banks to promote not stifle these innovations. I also suspect there are banks who are quite interested in the technology but are being risk averse for now in the absence of regulatory clarity. 3. I think Secretary Lew was expressing that money laundering, in whatever form, needs to be dealt with seriously.

Q:

In the hearings you said “The choice for the regulators is: permit money laundering on the one hand, or permit innovation on the other, and we’re always going to choose squelching the money laundering first. It’s not worth it to society to allow money laundering and all of the things it facilitates to persist in order to permit 1000 flowers to bloom on the innovation side.” To be honest this statement is rather concerning …..do you really mean this?

Surely you would not support the shut down Wall St. tomorrow to let those jobs move elsewhere, right? That would stomp 1000 flowers and also have a much bigger impact on reducing money laundering than Bitcoin.

It seems that part of what America is about is innovation and creation of jobs.

Couldn’t you stop a great deal of money laundering tomorrow by simply regulating all the existing Wall Street banks out of existence?

A: I was giving a hypothetical at the hearing that used a very stark choice in order to underscore how important it is for all of us that we get the balance right and ensure that we have appropriate bsa-aml protections in place while at the same time not stifling innovation. In context, I was also trying to emphasize that money laundering is not to be taken lightly — in many ways it is the lifeblood of terrorism around the world. My hope is that if we can get appropriate guardrails in place to prevent money laundering, we can take a deep breath and really focus on trying to ensure that virtual currency firms flourish and continue to develop and innovate. I’m very excited about what the future could hold for this very powerful technology.

Q: The UN states that over a trillion dollars per year is laundered through mainstream financial systems….over 100 times the size of all Bitcoin in existence….is it worth so much effort to regulate a new fledging technology which could create jobs compared to focus on existing banking systems?

A:

I don’t think the two are mutually exclusively. We do a lot of work on money laundering at banks. The money laundering that goes on at banks is awful and we treat money laundering, wherever it occurs, with the utmost seriousness. I’m a former prosecutor who (a bunch of years ago) worked on terrorism cases in the years after 9-11. So I think we pay extra attention to money laundering issues in all its forms at DFS. I doubt you all have patience for a regulatory agency tooting its own horn, but if you are interested in some of the work we’ve done related to bank money laundering, this CoinDesk article runs through some of it. Most importantly, our work in this area in continuing and will remain a top priority.

EDIT: Sorry, adding link: http://www.coindesk.com/ben-lawsky-friend-foe/

Q:  Tax law has a concept of a “defensible position”. That is, ultimately, the tax authority may decide you are wrong, but it if you have a defensible position you’ll be held accountable for only the taxes and interest and not the penalties.

However, AML law seems to say either you did or did not; there is no try.

How can bitcoin based businesses operate in the absence of digital currency law and not fear for civil and criminal penalties?

Alternatively, doesn’t waiting for regulation leave those same businesses open to jurisdictional arbitrage from companies starting in foreign jurisdictions?

A: This is one of the reasons why we’d like to put out the regulatory framework for Bitcoin sooner rather than later. We do think that regulatory clarity could have many benefits for these businesses. At the same time, we want to move carefully and not go so fast that we fail to see the unintended consequences of the framework. And, most of all, we want to hear from as many varied voices as possible — one of the reasons we’re hear today.

Q: Mr. Lawsky, how effective do you believe issuing bit licenses will be at deterring “unregulated” bitcoin transactions? If you believe bit licenses are necessary, why don’t we have cash licenses to protect consumers?

A: Mr. Lawsky, how effective do you believe issuing bit licenses will be at deterring “unregulated” bitcoin transactions? If you believe bit licenses are necessary, why don’t we have cash licenses to protect consumers?

Q: Many bitcoin enthusiasts think that the widespread adoption of some form of cryptocurrency is an inevitability and that unfriendly governments such as China and Russia will ultimately be powerless to stop it. Do you share this view?

A: Hard to put the genie back in the bottle. I can’t predict the future but Bitcoin is certainly a new powerful technology that holds a lot of promise for the future if we can mitigate some of the potential negatives like money laundering.

Q: What is your advice to colleague regulators overseas (I live in Europe)?

A: It’s not really my place to give advice to other regulators. But certainly for DFS it has been worth taking the time to really study the industry and understand not only potential negatives but also the very real potential positives of virtual currencies.

Q: Given the high profile arrests and shutdown of the Silkroad, along with comments from Law Enforcement during the Senate hearings, does there even need to be any more regulation regarding bitcoin? During the Senate hearings and with the arrests, it seems that law enforcement can capably find and arrest any bad actors with the current laws and regulations already. IMO, adding any more regulations will just lead to innovation elsewhere.

A: I hear you and understand your point. The law enforcement we had at the hearing did not agree and said that building cases in this area against those committing crimes is still quite onerous. We certainly are hoping our regulations will lead to more innovation here not less. And to the extent there are firms engaging in money transmission, we are affirmatively obligated to regulate and put in a licensing scheme.

Q: Are Bitcoin ATMs legally safe if they are in compliance with state and federal laws? Are you going to regulate or make the installation of these ATMs clear on a legal standpoint. Basically so that investors feel safe installing them without fear of the state changing its mind and outlawing bitcoin ATMs?

A: We’re taking one step at a time. Don’t have answers yet re: ATMs. It’s a question we will have to face down the road. We;ve moving as quickly as possible ot provide clarity.

Q: I’m concerned about the bias you bring to the table related to your previous career in law enforcement. If I spent years fighting against money laundering I’d think it was the absolute evil, to be fought at all costs. I’m glad you’re seeking outside opinions. I just hope you use them rather than falling back on that bias. There’s a bigger picture here that you’d otherwise miss.

A: I hear you and I think it is important for all of us to understand the potential biases and perspectives we all bring to the table based on our prior experiences. I certainly feel very strongly about the dangers and impacts of money laundering. But we also see the potential that virtual currencies may hold and the great innovations we may see in the future. I actually think that working hard to mitigate money laundering in the virtual currency industry will in the long run certainly benefit the industry both reputationally and practically.

Q:  What are your views on the adoption and potential for Bitcoin to make financial service leaps in the developing world? How do you think we can get our local central banking authorities to see BTC in a light that is more opportunistic than threatening?

I live in the Middle East & North African region where the majority of individuals sport a cash-based mentality and 67% of the population (500M+) are un-banked. BTC can change it all.

A:  I think this is an extremely exciting aspect of Bitcoin that holds huge potential. Many people don’t realize how so many parts of our world do not have modern banking systems.

Separately, Bitcoin holds the potential to bring the costs of international transactions way down. That could be huge for the thousands and thousands of New Yorkers who today send money back to their families in their home countries at great expense.

Q:

Canada has already gone through the regulatory process with cryptocurrency, and it has set up an ideal model in my opinion.

I have a question, is it possible that the US will set up rules similar to Canada, where the main requirements are around security of the depositing institutions (the major Canadian one being the Vault of Satoshi)? Also is it possible for there to be an agreement with Canada that regulations are at least very close to each other so an international conflict of laws can be avoided there, especially for those of us who have been actively engaged in the Canadian regulatory environment for cryptocurrency?

I know this is about striking the right balance for you as a regulatory agency. I am open to reasonable regulation as long as cryptocurrencies are permitted. Canada has obviously struck a balance many of us who own, trade, and mine cryptocurrency can agree with, Russia has gone a direction that bothers many of us who are actively involved with. I am not against reasonable regulation, as it can protect those who deal in the market. It’s just an authoritarian model such as Russia’s which scares many of us. Many of us wish to use cryptocurrency for legitimate means, like internet tipping, cryptocurrency trading, and purchase of legitimate goods and services. I rather this be done in the daylight of a reasonable regulatory environment than a completely underground economy. I am hoping that the regulatory environment is one which allows the market for cryptocurrency to be mostly free. Additionally California has likewise moved in a positive direction recently as well.

A:

Canada has already gone through the regulatory process with cryptocurrency, and it has set up an ideal model in my opinion.

I have a question, is it possible that the US will set up rules similar to Canada, where the main requirements are around security of the depositing institutions (the major Canadian one being the Vault of Satoshi)? Also is it possible for there to be an agreement with Canada that regulations are at least very close to each other so an international conflict of laws can be avoided there, especially for those of us who have been actively engaged in the Canadian regulatory environment for cryptocurrency?

I know this is about striking the right balance for you as a regulatory agency. I am open to reasonable regulation as long as cryptocurrencies are permitted. Canada has obviously struck a balance many of us who own, trade, and mine cryptocurrency can agree with, Russia has gone a direction that bothers many of us who are actively involved with. I am not against reasonable regulation, as it can protect those who deal in the market. It’s just an authoritarian model such as Russia’s which scares many of us. Many of us wish to use cryptocurrency for legitimate means, like internet tipping, cryptocurrency trading, and purchase of legitimate goods and services. I rather this be done in the daylight of a reasonable regulatory environment than a completely underground economy. I am hoping that the regulatory environment is one which allows the market for cryptocurrency to be mostly free. Additionally California has likewise moved in a positive direction recently as well.

Q:

Thank you for joining us here. As a Bitcoin user, I truly appreciate your concept of Open Source Regulation, and I think there is a lot for both the Bitcoin community and regulators to learn here.

I have a couple simple questions for you:

  1. Do you believe that Bitcoin, or the underlying technology, will change the world for the better?
  2. Do you want to see Bitcoin, or the underlying technology succeed? In your experience, do most of your peers share this stance, or is the general perspective much more bleak?

A:

  1. I think Bitcoin or the underlying technology has a lot of potential on numerous levels. As Professor Athey said at our hearings, even the experts don’t know today how the technology will evolve and what it will ultimately look like. But I do think it holds a lot of promise (if money laundering can be adequately addressed), both on its own and in terms of causing existing payments system technologies to up their game. I’ve personally evolved a lot on the issue the more I have learned. I wouldn’t compare it to a Rocky-IV-final-scene about-face and it has taken time for all of us at DFS to get our minds around it, but certainly our views have changed.

Q:

Thanks for taking the time to speak with us. Two questions:

  1. What have you learned from watching the MtGox Exchange problems? What type of controls would be of assistance in a situation like this?
  2. Relevant to the MtGox issue – how many people working closely with you have a functional technical understanding of how Bitcoin works? Can you truly say that people on your team understand the ramifications of the “transaction malleability” issue and how it led to MtGox recent stoppage?

Thanks again, I know that there are many people in our government trying to keep it functioning as a representative democracy.

A:

  1. The Mt. Gox shutdown was a reminder that this is still a young industry and there are still problems getting worked out sometimes on a daily basis. I think we should stay positive about that. We’re seeing a shaking out of the industry and that’s as it should be — it will lead to improvements. According to Professor Felten at Princeton, the problems with the Bitcoin protocol that caused the Mt. Gox shutdown have been known about for some time and supposedly code can be written to deal with those flaws in the protocol. If that’s the case then this may not be a long lasting problem. Maybe more importantly, the Mt. Gox issue underscored for us that it would be far easier if we had some exchanges locally that we could interact with, allowing us to better understand these issues so as to protect those engaging in trades with the exchanges. We’re hopeful that clear regulations, if done in a smart, modern way, may incentivize some of these exchanges to come ashore (hopefully here in NY).
  2. We have a very smart, good, hard-working regulatory team. Are they programmers? No. That’s one of the reasons were studying these issues hard and seeking input, thoughts, advice, etc. from many, many quarters.

 

Original Reddit Thread Here.