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Ben Lawsky: Bitcoin Regulation 'Will Separate The Wheat From The Chaff'

Feb 22, 2014, 00:54 IST

REUTERS/Eric Thayer

We recently explained why we think last week's Bitcoin hacks, and the return of price volatility that followed, was a major setback to mainstream adoption of the digital currency.

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The attacks came as New York State Department of Financial Services Superintendent Ben Lawsky considers how to regulate Bitcoin.

So we wanted to know whether the hacks had changed how Lawsky would think about new Bitcoin statutes.

In an interview with BI late Thursday, Lawsky said that while regulations won't necessarily be able to account for these kinds of incidents, they can help dissipate the uncertainty that continues to build around digital currencies.

"One side effect of regulation will have is separating the wheat from the chaff," he said. "You'll hopefully see firms who want to do right, innovating the best, coming up with all the new interesting powerful products that can be built on top of different platforms."

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The recent attacks came in two flavors. The first affected most major Bitcoin exchanges: an unknown entity took advantage of an unusual feature of Bitcoin's code to scramble transaction confirmations, causing exchanges that had not properly coded their wallets around the issue to halt withdrawals. That coincided with seemingly more profound issues at MtGox, the one-time leading Bitcoin exchange.

Bitcoin prices have declined nearly 30% since Gox first halted withdrawals. Lawsky acknowledged that the incidents show Bitcoin, and everyone's full knowledge of its capabilities, remains in its infancy.

"I don't think I'd say it's too early to regulate, but regulation has to be smart, and regulators need to understand what they don't understand and what they don't know yet," he said. Crimes have already occurred, and his overarching responsibility remains to stop them, he said.

"We do have an obligation to deal with money transmission firms, an obligation to make sure there are efforts to mitigate money laundering" he said.

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The other hack was directed at a group generally accepted as the successor to The Silk Road. All Bitcoins stored by users at the site were stolen. You could of course argue this was karma. But it did provide an example of the potential for people to lose large Bitcoin holdings in a single stroke.

In comments made in Washington recently, Lawsky raised the prospect of building in capital controls for large Bitcoin firms to provide a hedge in case of such losses. He elaborated on those remarks to us: "It's something we worry about with the largest banks, it's no different," he said, adding that those firms spend "hundreds of million to prevent cyber attics - something that's harder for smaller banks, and services in the virtual currency industry, question is, how do we help ensure that there's enough protections in place to prevent these massive attics, something we'll have to work at." Lawsky has said he hopes to formalize the regulations in the coming months.
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