The New York State Department of Financial Services issued subpoenas to 22 emerging payments players, including many that handle the digital currency Bitcoin, demonstrating that new payments models have not yet found their place in the eyes of the law.
The DFS is asking for information about anti-money laundering and consumer protections from businesses such as bitcoin exchanges, and it is looking into the strategies of their investors, says a source familiar the matter. It is also looking at Dwolla, which handles payments in conventional currencies but attracted attention in May
The subpoenas came at a time when there seemed to be more clarity in how bitcoin businesses are regulated. The
But current law might not be enough.
"DFS is also considering whether it should issue new regulatory guidelines specific to virtual currencies rather than simply apply existing money transmission regulations. As such, we could also move forward with new guidelines that are tailored to the unique characteristics of virtual currencies," a
Bitcoin businesses that received a subpoena include BitPay, a Bitcoin payment processor; Coinbase, a Bitcoin wallet provider; and ZipZap Inc., a cash payment network that's part of the
These companies did not respond to inquiries requesting comment. Dwolla says it is consulting legal advice.
Investors the DFS targeted include Andreessen Horowitz, Boost VC Bitcoin, Winklevoss Capital Management and Google Ventures. Boost VC Bitcoin is an incubator currently involved with a number of Bitcoin startups including
"Typically, these types of subpoenas require firms to produce documents within two to three weeks," says Adam Shapiro, director with the Promontory Financial Group, LLC. "Even if a recipient does not believe it needs to be regulated as a money transmitter in New York, it will achieve a better outcome by cooperating with the process and entering into a dialogue with the New York Department of Financial Services about how it can best respond to the subpoena."
The DFS "is trying to determine if these parties are doing money transmission and need to obtain licensing," says Terry Maher, an attorney at Baird-Holm LLP.
New York is one of the most notoriously stringent states, along with
Some Bitcoin exchanges have arduous and time-consuming registration requirements, but these processes are usually in an effort to abide by Know Your Customer rules enacted by Fincen. For example, consumers signing up for a Mt. Gox account usually have to wait about two weeks before they are set up.
The DFS probe resembles the governments attention to E-Gold several years ago. E-Gold is an online currency platform that supports international money transfers. The government started looking into several shady users of E-Gold and after 7 years wrapped up their investigation,
While Bitcoin's regulatory situation over the past several months looks similar to that of E-Gold, Bitcoin businesses more often follow the model of foreign exchange businesses, which do not require money transmitter licenses in New York, Maher says. As such, they may not fall under New York's money transmitter rules, Maher says, citing the states earlier descriptions of money transmitters and foreign exchanger businesses.
