My presentation from an OpenSim conference back in 2013. A lot has changed since then the virtual currency world.
New York is the first state to undertake a broad-scale regulation of the growing virtual currency market. Department of Financial services has proposed a set of rules that would apply to businesses that are involved with virtual currency. (See my previous article on that particular topic)
Just like FinCEN’s previous regulatory action has affected the virtual currency in a profound way, this one has the potential to change the landscape too. One of the virtual currencies affected by FinCEN was the Linden Dollar – a product of Linden Research. Linden Research itself had to register as a Money Services Business. But now that states are jumping into the regulatory pool, this will once again change the landscape for the Linden Dollar and the companies that deal with it.
Just by way of background, a Linden Dollar is a virtual currency used in Second Life – an online gaming platform created by Linden Research where people interact by way of avatars. Inside the game people can buy and sell virtual goods and services. The medium of exchange for those goods and services is the Linden Dollar.
People can buy their Linden Dollars either through an official exchange or through a number of the authorized resellers
Under the new set of New York’s proposed rules – BitLicense (full text available here), both Linden Research and numerous authorized resellers would likely have to apply for a license.
The rules state that person or entity that engages in Virtual Currency Business Activity needs a license. Virtual Currency Business Activity is in turn defined as “buying and selling Virtual Currency as a customer business” where it involves New York or a New York Resident.
The bit talking about involving “New York of a New York Resident” part is really important. Virtual currency is a cross-border transaction almost by definition, and Linden Dollar is no exception. And according to the proposed regulation, once a New York resident has bought or sold Linden Dollars, the regulation kicks in automatically and subjects the business to Bitlicense regulations.
BitLicense rule potentially creates barriers to entries. First, by virtues of the application process itself which will probably be time-consuming and costly. Second, the regulation calls for a bond, which creates an extra financial burden. Third, AML compliance requirements are cumbersome and likely to discourage some businesses from entering the New York market.
While Linden Research is not likely to be discouraged by having to apply for a BitLicense, it is not that far fetched to think that certain authorized linden dollar resellers – especially startups – will avoid New York customers because dealing with the extra regulatory headache may not be worth the effort.
The penalties for non-compliance are not clear. The proposed regulation itself does not indicate the penalty for failure to obtain the license or violating any of the regulations. But since the regulation derives its authority from several sections of New York’s Financial Services Law including Section 309. Section 309 of the Financial Services Law grants to the Department of Financial Services power of injunction. Department of Financial Services itself does not have the power to impose criminal penalties.
But at this stage, the rules are likely to be revised many times over after the initial “wait and see” period.
P.S. The author is partner at Gill & Kadochnikov P.C. lawfirm. Feel free to check out his website and see what they are about. http://www.gklawfirm.net