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Bitcoin Regulation Update- 02/21/14

Op-ed - Bitcoin Regulation Update- 02/21/14

Though no major policy developments were announced this week, the highlight seemed to be New York’s Financial Services Superintendent Benjamin Lawsky agreeing to a request for a public question and answer session (“ask me anything”) with users of online content aggregator Reddit. Though many users were clearly skeptical of Lawsky’s answers and anxious about Bitcoin regulation, the tone of the discussion was somewhat more positive than the public flogging of Lawsky that might have been expected. If you don’t care to read the entire thread for yourself, Lawsky’s comments could be summarized by the following statements:

· Regulation is coming, probably before the end of 2014.

· Lawsky’s agency is sensitive to the fact that compliance is expensive and is attempting to develop proposals that effectively balance the agency’s mission to protect consumers with the desire to promote new business in the State of New York.

· Money laundering is still a big deal to regulators, even though the data seem to suggest that the existing regulatory framework does little to combat it. Detection of money laundering is likely to play a central role in proposed regulations.

Following the model of former New York governor Eliott Spitzer and current governor Andrew Cuomo, Benjamin Lawsky seems to have chosen Bitcoin as a high profile issue to leverage into political advancement. Though regulation by the state of New York is likely to have a significant impact on Bitcoin in the United States, it is important to remember that Lawsky speaks only for himself and for the agency for which he is responsible, not the State of New York or the US as a whole.

Indonesia’s central bank issued a statement this week declaring that it doesn’t recognize Bitcoin as a legal currency and advising Indonesians to exercise caution with the crypto currency. This is a reversal from the stated position of the country’s government of several weeks ago, that Bitcoin is illegal on the face, and may serve as an early indicator of the difficulty faced by governments trying to outlaw or heavily regulate crypto currency. Developing countries are especially likely to have difficulty martialing the technical resources necessary to control crypto currencies without resorting to draconian measures, such as wholesale blocking of the parts of the Internet that Bitcoin needs to operate. Incidentally, developing countries are also the most likely to impose restrictive capital controls on their citizens that can easily be subverted using Bitcoin.

Joining what is becoming a long string of admonishments from governments and banks worldwide, the Hungarian Central Bank advised citizens of that nation this week to be careful when dealing with Bitcoin, without either taking specific regulatory action or indicating an intent to do so in the near future. As with other countries, the theme of the bank’s statement seemed to be that Bitcoin isn’t like regular money, ergo Bitcoin is patently dangerous. Ironically, that Bitcoin is different from conventional currencies is precisely the attribute that has attracted millions of crypto enthusiasts to Bitcoin and its smaller adjuncts. As with securities registration requirements in the US, the risk of losses by unsophisticated Bitcoiners is likely to be one of the main drivers to increased government oversight in the near future.

At the risk of being repetitive: the Israeli government is reportedly contemplating Bitcoinregulation, and also issued a statement this week warning its citizens of the risks associated with crypto currencies.

Future crypto currency fund managers Tyler and Cameron Winklevossannounced the launch of a Bitcoin price index that merges the bid and ask rates at the largest three exchanges and displays them as a single price. The “Winkdex,” as it is known, will serve as the pricing service for the Winklevoss Bitcoin Trust, a Bitcoin denominated exchange traded fund (ETF) awaiting approval from the SEC in the United States. Tyler Winklevoss and Cameron Winklevoss are known to be among the largest publicly acknowledged holders of bitcoins, with their horde estimated to be in the $30 million to $50 million range. These holdings would likely be sold to the Trust in the event that the proposed IPO is approved, given the difficulty of purchasing the quantity of Bitcoins necessary to capitalize it without moving the market in a big way. Check out the Winklevoss Bitcoin Trust’s registration statement on file with the SEC here.

The US market’s first Bitcoin ATM, a machine produced by RoboCoin, wentonline at HandleBar in Austin, Texas on Thursday, prompting much rejoicing among Austin’s tech set. Whether or not HandleBar, a Hipster themed public house located in Austin’s downtown amusements district, accepts bitcoins in exchange for intoxicants could not immediately be ascertained. The placement of the machine was likely to have been heavily influenced by the upcoming South by Southwest music, technology and film festival, which will run from March 7th to March 16th. Purveyors of Bitcoin ATMs have thus far struggled to enter the US market due to unusually restrictive anti-money laundering rules that require operators to identify and maintain records concerning users of the machines. Though RoboCoin’s machines use scanners to capture images of government issued identification, other solutions, including biometric readers, are reported to be either in deployment or under development.

Italy imposed a 20 tax withholding requirement on all inbound money transfers, retroactive to February 1st. In an effort to combat tax evasion in general and money laundering specifically, Italian tax collection authorities have mandated that Italian banks must withhold and remit taxes on inbound money transfers unless the taxpayer has previously claimed an exemption and provided documentary evidence that the incoming funds are not taxable. This is similar to US backup withholding requirements that are imposed on taxpayers who habitually underreport taxable dividends and interest. While this isn’t strictly a Bitcoin-centric development, Italy’s efforts to combat chronic and widespread tax evasion are yet another example of how Bitcoin is reducing the sources of friction that hinder movement of wealth across borders.