By Emily Flitter and Karen Freifeld
NEW YORK (Reuters) - New York's top bank regulator on Tuesday revealed new plans to regulate businesses handling transactions in bitcoin this year, saying the state may issue new financial services licenses tailored to virtual currencies.
Benjamin Lawsky, New York's financial services superintendent, raised his idea for a "BitLicense" in a hearing a day after a prominent bitcoin entrepreneur was arrested on money laundering charges.
"The first job is to get rid of money laundering," said Lawsky, speaking to panelists at the hearing whose panelists included the investor twins Cameron and Tyler Winklevoss and the venture capitalist Fred Wilson.
Officials from New York's Department of Financial Services asked panelists how they could best imagine businesses handling bitcoins meeting regulatory requirements equivalent to those directing other financial firms to combat money laundering and keep track of customer activity.
While bitcoin experts testifying in the hearings said they agreed with the need for regulation, they warned an overly arduous system could stifle innovation and push startup companies and bitcoin transaction activity offshore.
The dialogue exposed a core conflict in the relationship between regulators and bitcoin enthusiasts. When it was first created in 2009, the digital currency, which is not controlled by any company or central bank, appealed mostly to a group of tech specialists, many of whom harbored strong mistrust in governments and were looking to escape government control.
The investors at Tuesday's hearing acknowledged activity in the bitcoin community has shifted away from this sentiment and said they wanted regulators to step in with rules for bitcoin businesses to follow. But, they said, too much regulation would damage bitcoin's growth.
"I sympathize with Jamie Dimon," Wilson said at one emotional moment during the hearing, which he later described as a "rant."
"He runs an overregulated business," Wilson said of Dimon, chief executive of JPMorgan Chase & Co, which paid nearly $20 billion over the past year to resolve various regulatory and legal problems.
"I'm not sure I share all the sympathy," Lawsky said, adding he believed that the terrorist attacks of September 11, 2001 would have been more difficult to carry out if better anti-money laundering laws for financial firms had been in place.
An effort similar to New York's to regulate virtual currencies is underway in California, according to a source familiar with a series of private meetings between bitcoin business leaders and state officials.
PROMINENT ADVOCATE RESIGNS
In another sign of the bitcoin community's push to appear more responsible, the Bitcoin Foundation, an advocacy group, said one of its officials, Charlie Shrem, had resigned. The announcement came a day after U.S. prosecutors charged Shrem with conspiring to commit money laundering.
According to prosecutors, Shrem conspired to sell more than $1 million in bitcoins to users of Silk Road, an illicit online drugs bazaar that authorities shuttered last year. Shrem was CEO of BitInstant, a bitcoin exchange company that closed last summer.
Lawsky said Shrem's arrest cast a cloud over the industry, but that virtual currencies could benefit the financial system.
"It could force the traditional payments community to 'up its game' in terms of the speed, affordability and reliability of financial transactions," Lawsky said.
Lawsky said that while he wanted to set up clear rules, he also wanted to preserve flexibility, given the constantly evolving nature of the technology.
"That is, in part, why we're evaluating whether our agency should issue a so-called 'BitLicense' specifically tailored to virtual currencies," he said.
(Reporting by Karen Freifeld and Emily Flitter; Editing by Leslie Adler and David Gregorio)