1. INITIAL THOUGHTS ON REGULATION FOR
BITCOIN AND VIRTUAL CURRENCIES
REGULATORY GOVERNANCE & COMPLIANCE EXPERT
MARK MCKENZIE CONSULTING
FEBRUARY 23, 2014
2. Objective of Presentation
To promote discussion on the way forward
for regulating Bitcoin and Virtual Currencies
3. Purpose of Regulation
Promote markets which are fair, efficient, orderly
and clean; and
◦ Market failure test
– Regulation is deemed necessary if we determine that the Bitcoin
market is unable to produce an efficient outcome
– e.g. can Mt. Gox resolve its challenges without creating
disruption in the wider market?
◦ Cost/benefit test
◦ – Regulation will do more good than harm for Bitcoin
◦ – E.g. in light of the Liberty Reserves case regulation can
be deemed necessary to mitigate the risk of abuse by
organised crime groups
Ensure that Bitcoin customers get a fair deal.
4. Purpose of Regulation
A key consideration:
How best to implement regulation that will be
pragmatic while at the same time enhance the
growth and technological development of Bitcoin?
◦ The key is tp allow for Bitcoin innovation while controlling
Some parallels for Bitcoin can be drawn from
mobile and Internet banking:
◦ Poor or the absence of regulations can constrain business
◦ Prevent motivated players from participating in ecosystem
(e.g. traditional banks and Financial Institutions) and
◦ Absence of regulation might adversely affect uptake,
competition and result in sub-optimal customer experience.
5. What Should Legislators Be
Bitcoin Market seem:
Fragmented and opaque
The creators seem to control enormous
Bitcoin is gaining greater/wider acceptance from the
general public (speculative?)
Without appropriate checks and balance, the risk of
abuse be realised
Regulation can enforce accountability
and transparency of Bitcoin and market
6. What Might Regulation Entail?
A system of registration/licensing requirements.
A point noted by the Lawsky, the superintendent of New
York Financial Services Department – he called it
What will be the conditions for registration/licensing?
Who will be allowed to register?
Should Bitcoin be considered merely as a risky alternative
Capital requirements – what will be the
requirements for capital?
Fit and proper requirements for company
directors and management including competency
This will call for more information on the people behind
7. What Might Regulation Entail?
Requirements for liquidity and
Will we get to point where virtual
currencies are backed by gold
reserves or some other form of
reserve currency or basket of
Will Bitcoin eventually be replaced by
Vitual USDs or EUROs or another
8. What Might Regulation Entail?
Requirements for governance, internal controls, risk management, privacy and
Bitcoin/Cryptocurrencies are sophistication and complexity
The safety, integrity, and balance of all ledgers guarded by miners
Miners actively protect the network by maintaining a high hash-rate difficulty for their
chance at receiving a randomly distributed small fee.
Subverting the underlying security of a cryptocurrency is mathematically possible, but the
cost may be unfeasibly high.
Transaction ID (TX ID)
However, Malleability – Denial of Services Attacks - Mt. Gox and Bitstamp - of
concerns to regulators
Traditional banks and financial institutions use complex internal quantitative
models for capital, credit, operational and market risks
Basel 111 and Internal Capital Adequacy Assessment Process (ICAAP)
Could regulation disclose of information on their capital, risks and models used to determine
9. What Might Regulation Entail?
Requirements for AML/ATF compliance to mitigate money
laundering and terrorist financing risks.
Effective AML Compliance
A designated compliance officer + professional team
Written policies and procedures + operational controls:
Licensing, renewal and reporting procedures
Registration, record-keeping and report filing procedures
KYC and EDD
Monitoring, analysis and investigating procedures
Sanction check and terrorist financing check list
Response to official information requests
Privacy and information security protection protocols
10. What Might Regulation Entail?
An Effective AML Compliance Regime
An on-going training program
An independent compliance auditing
AML requirements could impose significant
regulatory costs on Bitcoin operators
It will likely look like rules for MSBs.
11. What Might Regulation Entail?
There may even be requirements for the creation of safety net
similar to a depositors’ insurance scheme.
◦ On the traditional financial system we already have discussions taking place
on the too big to failure issue.
◦ Taxpayers should not have to pay for failure of any Bitcoin firms that might
spillover into the financial system.
◦ Increasing market discipline by introducing regulations and capital requirement
can reduce this risk.
Regulation can be useful to guard against crises, speculation and
Should Bitcoin firms should be left to their own devices?
Should the state set and enforce rules for Bitcoin?
Will Bitcoin form a key component of the financial system of the
12. What Might Regulation Entail?
Registration and capital requirements seem a
must for the future of Bitcoin and virtual
Firms should be required to demonstrate their
resilience to crises.
For example, Mt. Gox should be required to
demonstrate that it can address its challenges in
an orderly fashion.
What types of activities or trades should be
permitted? What should be banned?
13. What Might Regulation Entail?
There has to be increased
At the same time governments and
regulators including law enforcement
need appropriate tools and skills to
monitor and regulate Bitcoin and
guard against abuse.
14. Are there any other concerns?
The regulation that emerges should not
hinder technological development and
It should be pragmatic.
Regulations should not force Bitcoin
15. Mark McKenzie
Regulatory governance and compliance expert