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NY’s Proposed Bitcoin Regulations Challenged

(CN) - Proposed regulation in New York for digital currencies like Bitcoin drew fire Tuesday from the Electronic Frontier Foundation, reddit and the Internet Archive.

With Bitcoin lacking a central bank or any tangible regulation, the New York Department of Financial Services has recommended that any state resident who participates in a "virtual currency business activity," or anyone whose business involves New York, must first obtain a "BitLicense" from it.

The Electronic Frontier Foundation says such licensing would require a background report from an investigative agency, fingerprinting, photos, financial statements and "details of all banking arrangements."

Maintenance of those licenses then requires compliance with substantial recordkeeping and reporting requirements, but "it is not clear what the outer limits of 'virtual currency business activity' are," according to an objection the EFF filed Tuesday with the website Reddit and nonprofit digital library Internet Archive..

"For example, the definition covers anyone who 'controls,' 'administers,' or 'issues' a currency," the groups' comment states.

This definition might cover software developers who create programs related to digital currency, operators of peer-to-peer nodes that allow users to swap money, members of the Bitcoin Foundation, or even currency miners, whose computing efforts are the source of new Bitcoins, according to the filing.

Digital-currency transactions also provide greater privacy than normal currency transactions because they are linked to an anonymous key rather than an individual's name and address, the groups argued.

"Unfortunately, the BitLicense framework would eviscerate this feature by compromising the privacy of average consumers, developers, and entrepreneurs," their comment states.

This is an issue particularly of concern for the privacy rights organization, as it takes Bitcoin donations from donors who wish to remain anonymous.

"Consider a Federal Bureau of Investigation or National Security Agency employee who would like to donate money to support EFF, which is in ongoing litigation against the government over warrantless surveillance activities," its comment states. "Or consider a teenager who wants to buy contraceptives without anyone knowing, or a grassroots political organization raising money for the legal defense of a political prisoner.

"In each case, there are reasons why a person may want to spend money without having that fact linked to his or her identity for a decade," the comment continues. "This is possible with cash transactions. Given the privacy-protective nature of digital currency protocols, it should be possible for digital currency transactions, too."

Linking Bitcoin keys to personal-identity information would moreover attract hackers precisely because individuals tend to use Bitcoin for sensitive transactions, the groups said, noting that such concerns are especially relevant in light of recent major security breaches at banks and corporations.

"Bitcoin is not just a unit of value or a way to transact payments; the protocol is a platform for other uses with expressive and associational value," the groups said. "The BitLicense proposal could chill these expressive activities because it would require prior approval from NY DFS before people can engage in a wide variety of activities using digital currency protocols - including activities that have nothing to do with payments."

For example, Reddit recently announced that it is considering issuing a digital currency to let members buy an ownership interest in their community, with voting rights potentially attached to their ownership in the site.

This creative potential for digital currency would allegedly be directly subject to the requirements of BitLicense.

"If implemented as currently written, the proposal would impose a system of prior restraints upon protected expression without providing adequate procedural safeguards, impermissibly undermining First Amendment values," the comment states.

EFF Special Counsel Marcia Hoffman, who signed the objection, said in a statement that "the courts have long recognized that code is speech protected by the First Amendment."

"At their core, digital currency protocols are code," she added. "Attempts to regulate code must include robust protections to ensure constitutionally protected speech is not stifled, and the BitLicense proposal would undermine those First Amendment principles."

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