Bitcoin regulatory development

BITCOIN REGULATORY DEVELOPMENT
GLOBAL PERSPECTIVE

MARK MCKENZIE
REGULATORY GOVERNANCE & COMPLIANCE EXPERT
MARK MCKENZIE CONSULTING
FEBRUARY 18, 2014

Objective of Presentation



To provide information on regulatory
developments from around the world

“ Virtual currencies
promise to benefit
commerce on many
levels, from serving the
unbanked to new
financial products. I
challenge our
innovators: devise
creative solutions to
prevent virtual
c u r r e n c y a b u s e .”
FinCEN Director Jennifer Shasky Calvery

“It is important to continually
i m p r o v e C a n a d a ’s r e g i m e t o
address emerging risks,
including virtual currencies,
such as Bitcoin, that threaten
C a n a d a ’s i n t e r n a t i o n a l
leadership in the fight
against money laundering and
t e r r o r i s t f i n a n c i n g ,” s a i d
Finance Minister Jim Flaherty
in the budget document.

The budget went on to
promise “anti-money
laundering and antiterrorist financing
regulations for virtual
currencies, such as
B i t c o i n .”

Regulatory Developments
• Benjamin Lawsky, superintendent of
New York's Department of Financial
Services
• Revealed new details of plans to
govern virtual currency firms in the
state in order to protect consumers
and combat money laundering.
• Expects to adopt enhanced consumer
disclosure rules, capital requirements
and a framework for permissible
investments with consumer money.
• "Our objective is to provide
appropriate guard rails to protect
consumers and root out money
laundering—without stifling beneficial

• Plans to issue a "BitLicense" for
businesses that use the new
currencies, and he intends to provide
regulations this year,
• Could make New York the first U.S.
state to regulate virtual currencies
such as bitcoins.
• 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.

• The more challenging questions are:
• What capital requirements firms must
have on balance sheets to absorb
unexpected losses?
• How many risks they can take with
investments using consumer money?
• Should firms be allowed to invest in
virtual currencies?
• What types of firms and transactions
to regulate.

• His agency is still wrestling with
whether to ban or restrict the use of
"tumblers.“
• Tumblers obscure the record and
source of virtual currencies.

• 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

- Russian Perspective
• The Bank of Russia has warned that
Russian legal entities providing
services for the exchange of “virtual
currency” in rubles and foreign
currency, as well as for goods (works,
services) will be considered as a
potential involvement in the
implementation of suspicious
transactions in accordance with the
legislation on counteraction to
legalization (laundering) proceeds of
crime and financing of terrorism.”
Source: terrorism.” - Statement issued on January 27th by the Central Bank of the Russian
Federation

- India‟s Perspective
• Bitcoin community fearful of arrests and raids by tax officials
• Many Indian Bitcoin businesses have (at least temporarily)
shutdown.
• Reserve Bank of India issued a warning on the risks of digital
currencies
• Bitcoin community of India is seeking legal help in order to
clarify the legal landscape of doing business in the country.
• In the third week of February, The Bitcoin Alliance of India will
be meeting with the Reserve Bank of India to discuss the
future of digital currencies in India.
• Increased lobbying in India for a “clear regulatory framework
on digital currencies.”

- China‟s Perspective
• In mid-December 2013, The People‟s
Bank of China ruled:
•

That merchants were not allowed to accept Bitcoin and

•

Banks and payment processors were forbidden from coverting
Bitcoin in yuan.

•

Deposits into Chinese Bitcoin exchanges were banned, and the
price of Bitcoin tumbled nearly 50% overnight.

• There is hope as Bitcoin wasn‟t all out
banned, just harder to purchase.
•

BTC China has since found a loophole to continue business
whereby “customers can now buy bitcoins from the exchange by
depositing their funds directly into the company‟s account.”

- Canadian Perspective
• Financial Transactions and Reports
Analysis Centre of Canada
(FINTRAC),
• When such laws emerge, they will
most likely take the lead
• Financial intelligence unit
• Responsible for preventing money
laundering and other financial acts that
could support terrorism.

• FINTRAC‟s hands-off approach
• Enabled numerous start-ups to flourish
in Canada,
•

Said Michael Patryn, director of the Vancouver Bitcoin Co-Op, and
of new Vancouver bitcoin exchange QuadrigaCX.

• “Entrepreneurs are comfortable with
their country‟s regulatory stance, and
are therefore able to offer new
services and create new jobs without
the burden of excessive regulatory
requirements stifling their innovation,”
he said

• Jesse Heaslip, who runs Vancouver-based white label
exchange software company Bex.io, also argued that
FINTRAC‟s hands-off approach has been a good thing for the
industry.

• “When I compare where Canadian entrepreneurs
are focusing their attention in the bitcoin ecosystem
compared to our American counterparts there is no
question that we are spending more time, effort and
energy on innovation,” he said, pointing to projects
like Ethereum, CoinKite, and his own Bex as homegrown examples.
• “They need to make a decision and figure out what
regulations need to be or not be in place, sooner

• FINTRAC has been so hands off in the past that
Canadian exchanges have had a hard time getting
it to take notice of them. Mike Curry, founder of
Toronto-based Vault of Satoshi, tried to apply for an
MSB license last year, but was refused, on the
basis that as a bitcoin business he didn‟t need one.
It‟s time for some clarity, he said.
• “Thus far we‟ve been treating digital currency with
the same care as we do with fiat (in terms of
AML/KYC),” Curry acknowledged. “I think they
need to make a decision and figure out what
regulations need to be or not be in place, sooner
rather than later.”

• Like many south of the border, Heaslip wants
consistency. “The best possible outcome would be
if there was one global license that was required
rather than having an application for each individual
country and or state,” he said. “That would limit the
mental and financial burden on entrepreneurs
around the regulatory issues and allow us to focus
on innovation in the marketplace.”

• Changing attitudes to bitcoin
• FINTRAC has practically ignored bitcoin since its
inception, but things may be changing.
• An internal report from the organization, obtained
through an Access to Information request, has
revealed that the agency is contemplating a range
of regulatory measures.
• Options that the agency may be considering
include an potential plan to “choke bitcoins oxygen”
by denying Canadians access to foreign exchange
markets, said reports.
• It is also said to have considered forcing bitcoin
exchanges underground, but acknowledges the
potential downside for consumers.

• Eric Spano, director of finance at the Montrealbased Bitcoin Embassy, which is an affiliate chapter
of the Bitcoin Foundation, said that the Canadian
government had let bitcoin breathe for a while
without regulatory smothering, and welcomed the
next step.
• “Now that Canada is becoming a hub for Bitcoin
enthusiasts and businesses, we‟re very happy to
see FINTRAC‟s interest in the technology,” he said.
“The establishment of a regulatory framework that
mitigates money laundering and fraud risks, while
continuing to enable Canadian businesses and
startups to create innovative technologies and
services, will continue to attract talent and venture
capital from around the world.”

• When FINTRAC turns its attention to a subject, it
has a history of aggressive reporting. Two separate
audits have found the agency to exceed its
mandate when pursuing and storing personal
information, for example. It was discovered to have
been processing reports of financial activity without
explaining why they should have been considered
suspicious. The Canadian bitcoin community will be
watching its next move with interest.

• Likely to be shaped by Liberty
Reserve Case

• In the FinCEN Guidance FIN-2013G001
• Think of MSBs, Internet Banking and
Mobile Banking

Sources
•

Bradbury, Danny. “What the „Bitcoin Bug‟ Means: A Guide to Transaction Malleability.” February 12, 2014.
http://www.coindesk.com/bitcoin-bug-guide-transaction-malleability/

•

Felten, Ed “Understanding Bitcoin‟s transaction malleability problem.” February 12, 2014. https://freedomto-tinker.com/blog/felten/understanding-bitcoins-transaction-malleability-problem/

•

Fuller, Cameron. “MtGox Blames Bitcoin For Withdrawal Suspension, Core Developers Say Otherwise:
Who Is Really At Fault?” February 11 2014. http://www.ibtimes.com/mtgox-blames-bitcoin-withdrawalsuspension-core-developers-say-otherwise-who-really-fault-1554512

•

Matthew, Jerin. “Singapore's ItBit Capitalises on Transaction Malleability Issue at Other Bitcoin Exchanges.”
February 17, 2014. http://www.ibtimes.co.uk/singapores-itbit-capitalises-transaction-malleability-issue-otherbitcoin-exchanges-1436680

•

Neal, Ryan W. “Silk Road 2 Hacked: Entire Bitcoin Wallet Drained, $2.7 Million Stolen.” February 13 2014.
http://www.ibtimes.com/silk-road-2-hacked-entire-bitcoin-wallet-drained-27-million-stolen-1555433

•

https://bitcoin.org/en/faq

Mark McKenzie
Regulatory governance and compliance expert
markymmckenzie@rogers.com
1-647-406-4622

Bitcoin regulatory development

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