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NY Rolls Out ‘BitLicenses’ for Digital Currency

MANHATTAN (CN) - Unveiling BitLicenses in the Empire State, New York's top financial watchdog Benjamin Lawsky came to Washington this week with a clear message: If you can't beat 'em, regulate 'em.

In a speech at a conference called the BITS Emerging Payments Forum, Lawsky told an audience in the nation's capital: "Financial regulators and policymakers need to recognize that when it comes to digital currencies and other new payments technology - the genie is already out of the bottle, and those that try to turn back the clock risk facing the same fate as the Luddites."

Lawsky commented that BitLicense framework produced on Wednesday marks the "third and final" iteration of an idea shaped over the course of a two-year inquiry into how to keep a leash on digital currencies.

Spanning 42 pages, the regulation contains 22 sections devoted to combating money laundering, consumer protection, financial disclosures, cyber-security, advertising and marketing, and many other topics.

"Digital-currency companies have already sought to work with us to put in place consumer and anti-money laundering protections," Lawsky said. "In fact, one firm recently received a New York State charter to operate under the banking law. And we expect additional companies will follow in the weeks and months to come - whether under the banking law or through the BitLicense."

The rise of digital currencies has left prosecutors and policymakers scrambling to catch up to technological advancements.

Lawsky's remarks fell less than a week after the life-without-parole sentencing of Ross Ulbricht, the 31-year-old founder of the underground narcotics website Silk Road.

Operating on the so-called DarkNet, Silk Road gave users then-unprecedented privacy to sell nearly anything they wanted - including drugs, fake IDs, money laundering services and even cyanide - through heavily encrypted channels.

Through his online alter-ego Dread Pirate Roberts, Ulbricht spawned legions of imitators to create an online black market.

Only visitors who disguised their IP addresses by using the Tor browser could even access the page. The site's rules mandated the use of PGP email systems, false addresses through the U.S. mails, and crucially, payments made exclusively in bitcoins, which went through a so-called "tumbler" to make it harder to link a payment to any user.

Although U.S. District Judge Katherine Forrest condemned Ulbricht to life inside a federal prison for his invention last week, her decree hardly caused imitators to jump ship. One independent researcher documented more than 70 Dark Web drug markets, Wired Magazine recently reported.

While Lawsky did not mention Ulbricht's high-profile sentencing in his remarks, the regulator gave a nod to the head-spin that emerging technologies have caused for law enforcement.

"How exactly does someone go about banning computer code?" he asked rhetorically. "The answer, of course, is that you cannot."

Many in the online community have denounced law enforcement's approach as an attempt to turn back the clock and meting out far-too-harsh penalties for online conduct that would have been treated more lightly in real life.

Addressing this controversy in his remarks, Lawsky said: "Regulators should not simply ban or dismiss technology that they find unfamiliar. Or work to protect entrenched incumbent companies - which is the very definition of regulatory capture. That said, technologists also have a responsibility of their own to meet. They cannot simply ignore the rules they do not like and try to create 'facts on the ground.'"

"Generally speaking, consumer-protection rules exist for good reason," he added.

Lawsky acknowledged that the new regulations are "not going to satisfy everyone," especially in certain techno-utopian communities.

On the day of his arrest, Ulbricht sat in a San Francisco library where he unwittingly chatted online with an undercover federal agent. The agent had posed as a Silk Road administrator who claimed to have shut down a currency exchange that he operated on the website for tax reasons.

Using his "dread" handle, Ulbricht wrote, "damn regulators, eh," moments before he ended up in handcuffs.

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