New York State’s Financial Boss Offers Break for Startups as New York Develops Its “Bitlicense”

In an effort to prevent money laundering, New York State’s top financial regulator made history last year when he proposed that virtual-currency providers obtain a so-called “Bitlicense” to ensure that they have proper controls in place to protect consumers’ money. Now Benjamin M. Lawsky, superintendent of the New York Department of Financial Services, is proposing what he calls a “transitional” Bitlicense that would ease the regulatory burden on virtual-currency startups.

Lawsky, who spoke Sunday at the Money20/20 conference in Las Vegas, hoped to fast track his initial Bitlicense proposal after Mt. Gox, a leading Bitcoin exchange, failed last February. But his controversial plan generated mountains of comments, with the latest comment period ending Oct. 31. He’s now working on a new draft with several changes, a draft he hopes will be in place early next year.

One of the key worries expressed by many commentators was that the new licensing rules would prove to be a heavy burden on virtual-currency start-ups. Lawsky insisted before the audience of several thousand, which includes many tech companies active in new cryptocurrency services, that the state does not want to stifle innovation.

“This a difficult issue and we’ve been wrestling with it for months,” Lawsky said. “There has to be a way for startups to start up, and to play by the rules without getting crushed by huge compliance costs.”

With that, Lawsky said the next draft will include a “transitional” license. He was short on details, but indicated that small firms will be able to operate “within a more flexible framework for a set period of time, during which time tailored examinations would be conducted.”

Examiners will assess a small business on whether it qualifies for a transitional license based on its product set, risks posed to consumers, whether it already has to meet federal requirements, and other factors, Lawsky said. It’s possible, for example, that a company could outsource certain compliance functions rather than having to hire a compliance officer. Lawsky plans to create a team of examiners specializing in small virtual-currency firms.

Regarding the Bitlicense in general, Lawsky said a company may need to have both money-transmitter and virtual-currency licenses, depending on which services it offers. In addition, banks, which already are heavily regulated, will not necessarily be exempt from having to obtain Bitlicenses.

But New York does not plan to regulate virtual-currency software developers, Lawsky said. Nor will it regulate so-called “miners” of Bitcoin—people who use special computers to mint the leading cryptocurrency, unless they also happen to offer certain financial services for which the law calls for regulation.