 Isn't it wonderful that Washington is actually seems on top of this? Imagine that Our our next presenter is Benjamin Lossky who is You talk about the powers of the states well, he's walking in the door right now Benjamin is New York State's first superintendent of financial services. He is in New York's top financial regulator Benjamin led Governor Andrew Cuomo's initiative to make the department financial services and The department supervises approximately 4,400 organizations with assets of six point two trillion. So Benjamin, what's the state of play? Thank you very much Thank you first of all to future tense and the new America Foundation for having me. It's great to be with all of you This is obviously a very very well-timed event for a number of reasons As you may know the New York Department of Financial Services DFS where I work Held hearings recently After we held an extensive There an extensive amount of work Investigating and looking at virtual currencies in Bitcoin. So as far as I'm concerned, this is perfectly timed There's obviously a lot going on as well in the virtual currency world I think even believe it or not as I speak if you're watching your Your Twitter feeds I think today's event really represents a great opportunity to share some of what we've learned at DFS and give you a little bit of information about Our initial thoughts at the Department of Financial Services on the Path forward for regulation I'm gonna try and speak quickly today, and I hope that's okay with you because What I'd like to do is have time at the end to take questions Which I'll either answer or dodge depending On the question, but I do like to always have more of a dialogue than a monologue You know one of the first questions we get asked at DFS when it comes to virtual currency And I am guessing the last panel may have alluded at least to this issue is Why is a little old state regulator worrying about this? Why isn't this a big national issue or a big international issue? What are you mr. State regulator doing? Working on this and I think that's a fair question But let me just tell you a little background about DFS first of all because some of you may not know who we are exactly Governor Cuomo created our agency about three years ago, and we emerged two previously Existing agencies the New York State Banking Department, which was created in 1851 And the New York State Insurance Department, which was created in 1859. So while we're new, we're also old As a new unified modern financial regulator, we obviously strive to adjust and adapt to You know constantly evolving and changing Financial world and while I don't think anyone would call virtual currency A systemic risk any anytime soon it does represent a good example of the necessity of innovation not only in the technological sphere, but also in the financial regulatory sphere and I think DFS as we strive to be a modern Financial innovative regulator that's different than other regulators We feel that we're well attuned to Take a leading role with other regulators in working on how we effectively regulate virtual currencies in addition DFS like Other state financial regulators is responsible for the oversight of what are called money transmitters and if you're not familiar with that term think of big entities like Western Union and Moneygram indeed when people say the word money transmission They usually think if they think of anything at all They think of firms that were formed more than 150 years ago when we were still our country was still exploring the western frontier But I seriously doubt And I seriously doubt the people who wrote those statutes related to money transmission Ever contemplated the notion of the internet let alone cryptocurrencies Let alone cryptocurrencies based on an internet mem featuring a dog But nonetheless DFS. I'm glad some of you get that joke Nonetheless DFS has serious concerns that certain virtual currency firms may be engaging in money transmission Which would mean that our department has a specific legal? Responsibility to license examine and regulate those firms if they're offering their services in New York So it's sort of a long-winded answer to why DFS is deeply involved in the regulation potentially of virtual currencies Moreover, there have been serious and documented concerns which I'll discuss in greater detail in a minute About the use of virtual currencies for illicit activity and money laundering as such in August of 2013 Our department launched an extensive inquiry into the appropriate regulatory guardrails That should be put in place for virtual currency firms now over the last six months We've had dozens and dozens of meetings with a wide range of industry participants We've spoken to leading academics to law enforcement to investors And we've reviewed thousands of pages of documents reports and other materials and after doing that work We thought it made a lot of sense to hold public hearings And those hearings as I mentioned took place about two weeks ago on January 28th and 29th in New York City I recognize some of the hi berries some of the faces here today In the crowd from those hearings Now the goal of those hearings was to provide a 360 degree view of this new and constantly evolving industry Both its promises and its potential pitfalls. We sought to bring together a wide diverse group of Witnesses with an array of different perspectives law enforcement regulators Of course, but we also wanted to hear from investors technologists merchants and a number of other interesting individuals who were on the ground floor Of this fledgling industry now those hearings I think serve two important purposes in moving our regulatory efforts forward first They provided us with a very good opportunity to convene and question some of the leading figures in the virtual currency and law enforcement community And from a regulatory perspective, I can tell you that was extraordinarily helpful in thinking through many of the complicated issues We face but second and perhaps even more importantly the hearings also generated a significant amount of Additional public discussions surrounding the subject of how to regulate this new financial technology at DFS We try to approach emerging issues and financial regulations such as virtual currencies with a healthy healthy dose of humility We recognize very much that we do not have any kind of monopoly on the truth and Innovation is constant and that the playing field, especially with respect to things like virtual currencies is Constantly is the playing field is still experimental and still shaking out Now ultimately despite all that it's our expectation that the information we've gathered in our fact-finding effort Will allow us to put forward during the course of 2014 a proposed regulatory framework for virtual currency firms operating in New York I believe we'd be the first state to do that, but clearly when it comes to virtual currencies Regulators are in new and uncharted waters and when we move forward We want to make sure that we have heard a broad range of voices and that we are armed with the most forward-looking thinking To that end you'll be interested to know we streamed the hearing on our agency's website the two days of hearings and more than 14,000 people from a hundred and seven 117 countries tuned in Less than half of those people Were in the United States It probably won't surprise you to learn that that's not the typical audience we get for hearings at DFS and If you're really interested if you had the eye we had a pool I made people guess in my office what country besides the US had the largest number of People watching the hearings It happened to be China Now it was it was very heartening to us And this is an important point that the hearings produced a number of very thoughtful blogs Articles op-eds and other posts from people who weren't in the room Which discussed the path forward on virtual currency regulation? I can tell you we typically I typically try not to worry too much About what the press says We do what we do because we think it's right and the press will cover it the way they want to But in that case having those blogs and articles and op-eds and even Tweets at us We're we're very helpful because we face a very challenging Interesting task we have to determine the appropriate licensing Examination and collateral requirements for the virtual currency industry and in doing so our objective is to provide appropriate Gar rails to protect consumers and root out money laundering without stifling beneficial innovation And that is a tough balance to strike, but we're trying to proceed in a careful and thoughtful manner Now I'll be honest It's hard to say precisely what the future holds for virtual currency and its associated technology Currently there is not widespread adoption of virtual currencies among the general public and some doubt whether there ever will be The recent issues we saw as recently as yesterday with mount gox and over the weekend for example Have prompted some financial commentators to write bitcoins obituary or to at least question the viability and reliability behind virtual currency technology But I think there is at the very least a kernel of something here that will have a profound impact on the future of payments technology And our financial system now Let me add though that regulators are certainly not the experts on these matters But my gut is that this is likely and that's why we want to proceed in a careful and thoughtful manner With that in mind, let me share with you some of our takeaways from our hearings at DFS We're increasingly coming to the conclusion that simply applying our existing money transmission regulations to virtual currency firms will not be sufficient as We've noted previously certain aspects of virtual currency do not fit neatly into the traditional categories We think of in financial regulation. We're used to talking about things like banking and insurance In many ways with virtual currencies. It's neither fish nor foul We do not we think have to throw out all of our existing rules for money transmitters or banks Which have generally served consumers well when rigged rigorously enforced indeed certain aspects of virtual currency could dovetail With existing regulations that said our agency will likely have to proceed with issuing some form of specially tailored License a bit license. Let's call it that adapts those rules to the world of virtual currency as With most regulatory endeavors, however, the devil will be in the details to that point Let me outline a few of the questions. We're grappling with right now when it comes to crafting a specially tailored Bit license and all its attendant requirements We have some initial thoughts on these matters, but given the open-source nature of virtual currency technology It seems appropriate for us to outline some of the issues. We're considering publicly at an early stage in the hopes of spurring additional public debate Think of it as open-source code regulation My hope is that we'll see another round of blogs articles and posts discussing the questions. I'm about to pose Let me start with consumer education and disclosures It seems fairly clear to us that a strong set of specially tailored Model consumer disclosure rules should be required of virtual currency firms There are of course potential risks for consumers associated with many different types of financial products not just Virtual currencies, but let's faith. Let's face it crypto currencies are unlike pretty much anything an average consumer Has ever used before Right now for the most part it appears that Bitcoin and other virtual currencies are primarily the province of sophisticated technology savvy early adopters if virtual currencies ultimately garner wider adoption among the general public it Will be important for consumers to be armed with the information they need to make the financial choices that are best for them For example, consumers should be aware that many virtual currencies do not provide for charge backs Meaning that transactions are for the most part irreversible in other words is generally no money back guarantee when it comes to crypto currencies Consumers should also be warned about the importance of keeping their private keys just that private as well as the potential Consequences if they fail to do so given the irreversibility of most transactions if a consumer has their private key stolen They could potentially lose their virtual currency Irretrievably moreover consumers should be informed up front about the documented Volatility of virtual currency and the potential for loss of dollar denominated principle if they hold on to that virtual currency For an extended period of time. This is something of course that most mutual funds do right now Those are just a few examples of potential consumer disclosures for virtual currency firms There are of course others that could be crafted, but the broader concept is what's important We found in other areas of the financial world that strong clear Concise disclosures are critical to earning a long-term trust and confidence of consumers and protecting those consumers Virtual currencies should be no exception Now I think enhanced disclosure requirements. I hope are likely something most people can agree on But there are some other more challenging questions that we have to address including capital collateral net worth and investment requirements Traditional money transmitters and banks you may or may not know have to abide by certain net worth permissible investment Require and permissible investment requirements to help ensure that they are operating in a safe and sound manner They for example need to have a large enough cap need to have large enough capital buffers on their balance sheets to absorb Unexpected losses and financial shocks without going under they are also limited in the types of investments They can hold so they are not taking reckless risks with consumer with customer money in the search of windfall profits Virtual currency firms should abide by similar requirements But the really tricky question for regulators is how we structure those type of rules in light of the fact that the funds these firms hold are not denominated in dollars or other forms of Traditional fiat currency Moreover that issue is further complicated by the fact that the value of virtual currencies relative to traditional currencies can fluctuate Significantly on a day-by-day basis or if not even on an hourly basis Now we need to consider questions like whether we have to create a new yardstick for measuring how well capitalized the firms we regulate are Or whether virtual currencies themselves should be allowed virtual currencies themselves should be allowed as permissible investments Net worth capital and permissible investment requirements are among the most important consumer protection requirements We can put in place as regulators We've seen instances where exchanges and other virtual currency firms have frozen redemptions for extended period of periods of time Which can be very damaging to consumer confidence The long-term strength of the virtual currency industry will require robust safety and soundness requirements So customers have faith that their money won't get caught in a virtual black hole And if we get those rules, right perhaps we can make New York I have a particular interest in New York, but other places in the United States a Magnet for legitimate well-regarded exchanges and other virtual currency firms We heard over and over at our hearings two weeks ago that all the exchanges were overseas and to the extent We can put the kind of rules in place that attract Exchanges to really hub here in the u.s. I think that can only be for the betterment Now another issue we heard a lot of testimony about at the hearing from both Participants in the industry and law enforcement is the importance of the public ledgers for Bitcoin and other types of crypto Currencies many though not all virtual currencies have open publicly accessible ledgers on the internet and In an ideal world setting aside the recent issue with mount gox Those ledgers record essentially every single transaction that has occurred in a specific Virtual currency since it came into being the most well-known example of course is the Bitcoin blockchain now in this way some people pause it that it is more appropriate to think of many virtual currencies as suit anonymous Rather than anonymous having trouble with that word a regulator may not immediately know what person is associated with every single transaction But they can see every transaction which can be important for law enforcement in spotting red flags for further investigation And when coupled with appropriate know your customer requirements for virtual currency firms Public ledgers can help mitigate some of the documented concerns related to money laundering and this new technology The question then is should regulators require that licensed virtual currency firms only use public ledgers and an Associated question is what to do about so-called tumblers, which are of particular concern to law enforcement tumblers are a technology used to obscure the record and source of virtual currency transactions Understandably, that's a prospect. We heard at the hearings that gives pause to those officials who are charged with enforcing laws against money laundering But other panelists contended that tumblers could potentially have legitimate uses such as keeping the financial information of a lawful merchant that accepts Virtual currencies private from their competitors Given all that should the use of tumblers be banned or restricted or at least disclosed That's a difficult question that we're wrestling with at DFS right now And we're interested to hear from all sides as we do that wrestling another issue we're grappling with is For what points of entry in the virtual currency ecosystem? Regulators should provide oversight in other words. What types of firms and transactions should we regulate? Miners are obviously a vital part of the ecosystem But some regulators have determined that they do not meet the threshold for proactive oversight It would also seem difficult to impossible for instance for financial regulators to provide oversight of every single Individual peer-to-peer transaction unless there is evidence of specific specific criminal or civil wrongdoing We do not for instance require policing of every single individual transaction involving cash But should we as some suggest only regulate transactions where virtual currencies are exchanged for dollars and other traditional fiat currencies Given the gradual but accelerating growth of virtual currencies and online and brick-and-mortar transactions as well as other less legitimate Enterprises that could leave a gaping loophole for misconduct if this technology gains wider adoption Indeed law enforcement officials at our hearing noted the capacity of virtual currency to really scale up Money laundering in a way that is not necessarily possible with physical cash When it comes to using fish physical cash for legal activity Criminals are constrained in certain respects to what they can physically carry and transport There are no such limitations when it comes to virtual currencies This is not to say that our goal is to unduly single out virtual currency Let's be frank a lot more money has been laundered through large banks than has been laundered through virtual currency If you look at our history at DFS you'll see that something about which we are acutely aware and are working aggressively to combat More broadly, it's simply the responsibility of regulators to be cognizant of the new and emerging risks that virtual currencies Present for illicit conduct and to try and find ways to mitigate them Now there are many other issues we're considering as part of our regulatory inquiry such as the specific Licensing and examination requirements for virtual currency firms or whether there should be a regulatory safe harbor Through which virtual currency firms assuming they have met certain basic anti-money laundering and consumer protection requirements Can notify their regulators and keep operating during a licensing process? And that was an intriguing idea raised during the hearings But we have a limited amount of time today And I wanted to provide just a flavor of some of the things we're thinking about Indeed, I think it's clear that 2014 is going to be a critical year for the future of virtual currencies And it's feeling more and more like that every day We are at a bit of a crossroads regarding whether virtual currencies will become an important part of the future of our financial system Or primarily a tool for illicit activity at this stage in our inquiry Regulators have been accused by some of having more questions than answers. I actually think that's healthy Particularly if we're going to be true to our stated goal of proceeding without pre judgments We're committed to proceeding thoughtfully since virtual currencies could ultimately have a number of benefits a number of very exciting Benefits for our financial system it could for example force the traditional payments community to up its game in terms of the speed affordability and reliability of financial transactions I think many consumers myself included are Mystified that in a world where information travels around the globe in a matter of milliseconds It can often take several days to transfer money to a friend's bank account to use a personal example I can tell you I have a credit card with a particular bank And I also have my bank account at that same bank and once a month I pay my credit card bill by transferring money from that bank to that bank to pay the bill But nevertheless it takes several days for that payment to go through now to be fair I after I said that at the hearings came up randomly at the hearings I got a call from someone. I will not name but he's a very big deal CEO at a very big deal bank Who said that he said he called me and said I want your business Because if my bank that doesn't happen and it transfers right away. So Not all banks are that slow I'm told So I think it's fair to say obviously there's room for additional innovation In the financial world and payments technology and we want to be careful to get the balance, right? I think banks are certainly taking notice of what's going on in the Bitcoin world and a race to the top to do better When it comes to payments and financial technologies can only be a good thing in my opinion I want to thank you all for the opportunity to speak to you today, and I'd be happy to take Questions until they kick me off the stage I'm gonna ask one question that we're gonna open up the audience and my question is simply that Before you talked about at the hearing and also today about issuing guidance in 2014 Before you actually issue that do you plan on offering it for public comment or do you expect that? It'll just be issued without that opportunity first. Yeah So whenever we do you guys hear me, okay whenever we do a regulation It goes out for public comment unless it's an emergency regulation I can't promise but I my gut is I doubt that we would do this as an emergency reg And I think we're actually gonna try and be even more transparent as I said we want to make this sort of open source Hello open source code Regulation where we'll really You know get more input than we normally would even before we put the proposal out It's one of the purposes of coming to speak with you all today, and we are getting I can say it's For whatever reason the Bitcoin world we're getting a lot of feedback Particularly over things like Twitter where a lot of people have opinions and they're sending us their thoughts So it'll be sort of very robust Information coming in Jim Harper with the Cato Institute. I heard you say but I didn't gather well What the differences are between? Financial services provided in conventional ways and financial services provided using Bitcoin or other digital currencies could you review again? How those are different sure so I Think what you're referring to is I was saying our regs that currently exists for money transmission are not that easily adaptable to virtual currencies they were as I mentioned You know written well over a hundred years ago many of them They do not contemplate whatsoever the kinds of Anonymity for example that virtual currencies or pseudonymity that virtual currencies provide They certainly don't contemplate the speed with which you can do international transactions They don't think about the the regs are not well suited to Really just the whole virtual currency system and the more we've looked at it Take for example the permissible investment requirements The more we've looked at it. They've always They're all designed to be fiat currency But if you require that of virtual currency firms for example Where? The value of Bitcoin is spiking up and down Lately on a daily basis, but certainly Quite often it gets very hard To say to a virtual currency firm potentially that the permissible investments should all be thought of In dollars so those are all sort of different ways in which we think we're gonna have to Adapt our licensing requirements and make them more modern look I think it's something we should be doing more broadly as financial regulators in general It's not just with virtual currencies with mobile payments payment systems in general. There have been so many developments over the last 20 years I think because of technology and the more we can do to have our Regulatory frameworks keep pace and make sense With that modern world, I think that's for the better. I think cashmere hill here that question This is this is probably the last question I think I'm cashmere hill. I write about Bitcoin for Forbes. I was just wondering who Who will be required to have these these bit licenses? Is it kind of any any company that gets involved in Bitcoin is kind of inherently involved in money transmission? So I'm just curious how how big the the universe of licensing is going to be yeah, look, I think that's one of the Questions we're wrestling with is what point of entry do you make in the ecosystem to decide I? Think certainly exchanges Are going to be at the heart of it and FinCen has already gone there Which was great and very I think helpful in a way that that definiteness was put out there I think as you broaden out from that the question is who gets included in that regulatory circle and Who doesn't and I don't think we've made that Determination yet. I think it's a it's a tricky question and as I implied in in the talk If it's if you're only if it's too narrow You may not be taking into account some of the unique characteristics of virtual currencies And you may be leaving out some important firms. So but we're still working on that So we've got time for one more very brief question that we saw all the way in the back I see somebody's got a got a hand up there Hi, my name is Andrew McCurack from Federal Deposit Insurance Corporation I was wondering you mentioned and other panelists have also mentioned that a lot of these exchanges are moving off shore Do you as a state regulator? Are there any reach that you have to enforce actions against those organizations and also? Is there any regulatory risk in terms of less visibility or Less ability to enforce that you would see if this offshoring trend continues It's a very good question. Did you say you're from the FDIC? I Have questions for you And you've only got 60 seconds to answer Look, I think offshoring is something we really worry about and Although I think we take an expansive view of our jurisdiction at the FS I think it's hard for us to do much Offshore it's hard enough to go out of New York and But look, I think we're hoping that if you create a smart regulatory scheme and you coordinate with Federal counterparts and other regulators including state regular other state regulators and CSPS And you create a smart scheme The idea is to separate the wheat from the chaff and the the good firms who want to do this the right way As opposed to those who want to do it in the illicit way Will hopefully succeed But as you separate the wheat from the chaff the key is you don't want to drive large segments of the industry further offshore That ends up being Counterproductive so that is going to be the challenge as we do these regulations We want to actually I'm hoping we'll make New York an attractive place for those who want to do this the right way those who want to Create all the benefits potential benefits of virtual currency without having the money laundering We want to attract them frankly to New York and have New York be a place where these exchanges are hub so But we certainly worry all the time about the unintended consequences of all of our regulations and here Certainly with a nascent industry you want to keep it from going offshore where it's even harder to regulate Okay, well, let's thank mr. Lasky for a really interesting presentation