New York regulator moving ahead on bitcoin regulation

An Apple Inc. iPhone5 displays the Bitcoin Wallet smartphone app.
Simon Dawson | Bloomberg | Getty Images

New York's financial regulator on Tuesday revealed new details on his agency's plans to govern virtual currency firms in the state in order to protect consumers and combat money laundering.

Benjamin Lawsky, superintendent of New York's Department of Financial Services, expects to adopt enhanced consumer disclosure rules, capital requirements and a framework for permissible investments with consumer money.

(Read more: Bitcoin falls 20% as Mt Gox highlight bug)

Lawsky has said he plans to issue a "BitLicense" for businesses that use the new currencies, and he intends to provide regulations this year, which could make New York the first U.S. state to regulate virtual currencies such as bitcoins.

In a speech in Washington on Tuesday, Lawsky said consumers need to know that virtual currency transactions are generally irreversible, and that they could lose their principal if they hold onto bitcoins for an extended period.

Trouble for bitcoin
Trouble for bitcoin

Lawsky said more challenging questions include what capital requirements firms must have on balance sheets to absorb unexpected losses, and how many risks they can take with investments using consumer money. One issue is whether the firms should be allowed to invest in virtual currencies.

"Our objective is to provide appropriate guard rails to protect consumers and root out money laundering—without stifling beneficial innovation," Lawsky said in prepared remarks for an event at the New America Foundation.

(Read more: Bitcoin could alter world as much as Internet: VC)

His agency is still wrestling with whether to ban or restrict the use of "tumblers," which obscure the record and source of virtual currencies. He said tumblers are a concern to law enforcement, but that they might have legitimate uses.

He said most virtual currencies have public ledgers which, when combined with know-your-customer guidelines, could serve as anti-money laundering controls.

Lawsky added that he is grappling with what types of firms and transactions to regulate.

The remarks follow two days of hearings in New York on the potential regulation of virtual currencies. Witnesses at the late January hearings included state and federal prosecutors, as well as industry participants such as the investor twins Cameron and Tyler Winklevoss.

Lawsky said the hearings, which were streamed on the agency's website, were watched by more than 14,000 people from 117 countries.

He spoke on Tuesday at an event hosted by "Future Tense," a partnership between Slate magazine, the New America Foundation and Arizona State University to explore emerging technologies.

Separately, Canada announced it will toughen rules targeting money laundering and terrorist financing to keep a closer eye on the use of Bitcoin and other virtual currencies, the government revealed in the federal budget on Tuesday. Online casinos will also be brought into the government's existing money laundering rules, the federal government said.

Bitstamp halts withdrawals

Meanwhile, a second bitcoin exchange halted customer withdrawals on Tuesday amid concerns about a software problem affecting the virtual currency's infrastructure.

Bitstamp, one of the largest exchanges for trading the digital bitcoin currency, said it had halted withdrawals on its platform after discovering "inconsistent results reported" by its bitcoin wallet, which it attributed to a denial-of-service attack.

Slovenia-based Bitstamp is now the second major bitcoin exchange to halt customer withdrawals in the past several days, rattling participants in the nascent market. Last Friday, Tokyo-based Mt. Gox halted withdrawals and has yet to restart them, a development that sent bitcoin prices spiraling lower.

(Read more: Bitcoin bust: CEO of currency exchange arrested)

In a statement posted Tuesday on its website, Bitstamp said withdrawals that failed on Monday and Tuesday would be canceled, and "the amounts added back to the customer account balances."

On Bitstamp's exchange, the bitcoin price was quoted at about $645, down about 6 percent on the day.

--By Reuters