China bitcoin firms warn New York on regulation

Three of the biggest bitcoin exchanges in China teamed up on Thursday to release a joint letter addressed to New York regulators, warning them that proposed rules for the digital currency will have far-reaching consequences.

In the joint correspondence, signed by the CEOs of BTCChina, Huobi and OKCoin, the three companies argue that the proposals - which involves the issue of a "BitLicense" by New York State authorities - are too broad and that new rules should only apply to businesses with meaningful connections to the region.

"While we are companies organized under the laws of the People's Republic of China, we believe that it is not only appropriate, but also necessary for us to express our thoughts on certain aspects of the BitLicense proposal," the letter said.

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Their belief is that New York regulation could affect global exchanges as the virtual currency is decentralized and because regulations in New York have long been given great respect and thus have the capability of influencing similar moves by other jurisdictions.

The three companies are wary of the idea that a license would allow the New York State's Department of Financial Services access to information from both the companies and their affiliates. A license holder's affiliates should be allowed to only disclose relevant information to the authorities, the letter stated.

They also see problems regarding the proposed requirement that licensed firms need to perform "enhanced" customer checks on non-U.S. residents. They believe that these checks should be related to whether the customer and the applicable licensee are from the same jurisdiction, and not just on whether the customer is a U.S. person.

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Bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. The digital currency has sparked interest among venture capitalists on both sides of the Atlantic but has also run into regulatory issues in many countries.

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New York regulators are currently weighing up a raft of new rules to regulate bitcoin and other virtual currencies. On July 17, New York State's Department of Financial Services proposed issuing this "BitLicense" which it said would protect consumers, prevent money laundering and enforce cyber security.

On July 23, they begun to welcome responses to their proposals with a 45-day deadline set for any correspondence. James Smith, the CEO and co-founder of London-based digital currency storage company Elliptic, has previously told CNBC that he believes New York's measures are "very heavy handed."

"They're in danger of stamping out the business before it even takes off. The U.K. has – and Europe in general – have taken a stand-back-and-see-what-happens approach," he said at a bitcoin event back in early August.

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Many bitcoin enthusiasts remain defiant that their cryptocurrency should remain free from regulation, any centralized authority and any threat to its opaqueness. Jon Matonis, an executive director of the Bitcoin Foundation, which is a lobby group for the technology, has previously written about his concerns on regulation.

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Writing on bitcoin news website Coindesk, he said that if new regulation meant that users were required to give away internet protocol addresses - and therefore their locations - then bitcoins in that regulated jurisdiction could start trading at a discount price.

But others in the industry are in agreement that there does need to be some sort of regulation. Bobby Lee, the CEO of BTCChina, and one of the signatories on the letter, has previously told CNBC on many occasions that he backs the idea of increased regulation. Meanwhile, Greg Jarret, the CEO of Bitcoin Superfund, a U.K.-based bitcoin investment vehicle, has argued that regulation was necessary for digital currencies to really take off.

"The reality is there are a lot of great features in bitcoin and digital currencies in general for society," he told CNBC in early August. "So it's important that it becomes widely used and the only way that's going to happen if it's regulated, so people feel comfortable using it."

CNBC's Katrina Bishop contributed to this article.