To many, virtual currencies—of which Bitcoin is the best-known—are anything from a fad that will soon fade to an unwitting tool of drug runners that should and will be shut down soon. But in New York—a world financial leader since the 17th century—both the state Department of Financial Services and the local U.S. attorney's office are voicing opinions on the future of virtual currencies. And some sophisticated people in the legal and financial communities joined them in exploring tantalizing and troubling world of virtual currencies, while thousands listened and the press took notice.

The DFS held two days of hearings on virtual currencies on Jan. 28 and 29 in New York City, and according to the department, more than 14,000 viewers from 117 countries tuned into the event, which was streamed online. The DFS has set up a page with the archived webinar and key printed testimony.

DFS Superintendent Benjamin M. Lawsky opened the hearings by announcing his intention to create a regulatory framework for virtual currencies, making New York the first state to do so. He set the tone by saying that "serious people—in the technological and investment community—are taking virtual currencies seriously" and regulators cannot turn a blind eye to that.

Many cite Libertarian-oriented arguments that virtual currencies should remain completely unfettered. However, the Winklevoss twins of Facebook fame, who are now venture capitalists heavily involved in Bitcoin development, submitted testimony saying they agreed that some regulation is necessary. They suggested that traders who sell Bitcoin for fee or commission be licensed. On the other hand, they warned against overburdening those who use Bitcoin but who are not in the money transmission business.

Also testifying was attorney Judie Rinearson, whose practice focuses on payment laws. Previously, she built a strong reputation as a payment expert while group counsel for the American Express Global Travelers Cheque and Prepaid Service Group. She said that after much study, she concluded that Bitcoin and similar products were "essentially beneficial products that consumers and businesses will increasingly use and rely on, on a global basis," as an alternative to, rather that replacement for, dollars, euros and yen.

Rinearson called for reasonable and responsible regulation and agreed some sort of "BitLicense" would do the job. This wouldn't even be breaking much new ground, she noted, saying such a license could be similar to what is already required for money transmitters and currency exchanges.

The Feds Put in Their Two Bitcoins

Deputy U.S. Attorney Richard B. Zabel, from the Southern District of New York, also submitted testimony. He did echo others in pointing out that virtual currencies could be a practical product—but he highlighted both possible and actual criminal cases. He did not suggest a particular regulatory framework, but with his long list of all the harmful ways virtual currencies can be used, the implications of failing to create regulations were clear. And he did note that regulation cannot stop at New York's borders or even the country's, saying that since many of the cases his office has prosecuted extended into other countries, "it has been important that we and our federal partners have developed relationships in the cybercrime area with prosecutors and law enforcement all around the world."

Perhaps, just as auditing and accounting standards are becoming international, virtual currency regulation and enforcement will have to be international as well.

Coincidentally (or not), Zabel's boss at the Southern District, Preet Bharara, issued a lengthy press release the day before the hearings, announcing charges against an underground Bitcoin exchanger and the compliance officer of a Bitcoin exchange company for engaging in a scheme to sell Bitcoins to users of "Silk Road." This is an underground website that allegedly enabled users to buy and sell illegal drugs anonymously.

If nothing else, the hearings focused attention on the DFS: the Financial Times, Wall Street Journal and New York Times all covered the event.

Just the Beginning

It's possible, even likely, that regulations and legislation will come to the "Wild West" of virtual currencies, spurred on by these hearings. As Lawsky said, "It’s hard to say precisely what the future holds for virtual currency and its associated technology. Currently, there is not widespread adoption of virtual currencies among the general public. And some doubt whether there will ever be. But the same has been said about many other technologies that have since become everyday features of our lives."

For those who want to know more, NYSSCPA/FAE is presenting a technical session titled "Bitcoin Tax Issues" on Feb. 6.