New York Financial Regulator Solicits Virtual Currency Proposals

At a time when some government agencies are backing away from virtual currency, New York’s top financial regulator is taking a big step forward.

On Tuesday, Benjamin M. Lawsky, the superintendent of the state’s Department of Financial Services, issued his first public order on virtual currencies like Bitcoin, calling for proposals for creating regulated exchanges.

“The companies that are now being asked to come apply in this order are going to largely be the companies that say we have the desire, wherewithal and the resources to do this the right way,” Mr. Lawsky said in an interview. “We are creating a situation where we’ll hopefully be driving consumer confidence in the firms that want to come here now and set up their exchanges with all the appropriate protections in place.”

Soliciting companies to formally register with Mr. Lawsky’s office is notable, if only for the lack of regulation elsewhere.

Governments around the world are now struggling to figure out how to oversee Bitcoin, a computer-based form of money without a central location, amid mounting concerns about money laundering, drug trafficking and other illicit transactions.

“I think it’s a very big deal,” Gil Luria, a managing director at Wedbush Securities who has written about virtual currency, said of Mr. Lawsky’s order. “I think this is the type of regulatory treatment Bitcoin was hoping for.”

Bitcoin has quickly gained a loyal following of technology entrepreneurs, venture capital firms and anti-establishment libertarians drawn to a payment system that circumvents the traditional banking industry.

But the collapse of one of Bitcoin’s largest exchanges last month turned up the heat on federal authorities to issue better regulations. Mt. Gox, which at one point handled 80 percent of all Bitcoin transactions, filed for bankruptcy protection in the United States and Japan, claiming to have lost nearly 750,000 of its customers’ Bitcoins, worth close to $500 million.

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, put out a warning to investors on Tuesday about fraud and other risks it associates with the virtual currency.

Mr. Lawsky has in the past made his openness to Bitcoin clear. He said on Tuesday that his office will be looking for sufficient cybersecurity protections and capital reserves, and will conduct background checks on any potential management teams.

Mr. Lawsky’s office has not yet come out with the regulatory framework that would ultimately guide any proposals, however. In a statement, the office says it that intends to come out with such framework “no later than the end of the second quarter of 2014,” and that it was working on a “BitLicense” for companies operating in New York.

But until other states and countries implement their own virtual currency guidelines, registration in New York can only go so far for companies that operate in multiple jurisdictions.

“If we do it right, it could be a nice model for other states,” Mr. Lawsky said.