Bitcoin continues to come under fire from law enforcement agencies as high profile cases against Silk Road and Liberty Reserve (illicit markets that used Bitcoin) proceed, but some New York regulators are showing that they are more interested in creating a healthy business environment than clamping down on virtual currencies.

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Bitcoin necessitates regulatory innovation: Lawsky

“While I don’t think anyone would call virtual currency a systemic risk anytime soon it does represent a good example of the necessity innovation not only in the technological sphere but also in the financial regulatory sphere,” said Benjamin M. Lawsky, Superintendent of Financial Services at the New York State Department of Financial Services (DFS), speaking at a New America Foundation conference last week.

Money transmitters, such as Western Union, have to follow consumer protection laws that force them to keep certain amounts of collateral on their books and prevent them from investing in certain types of securities to ensure that they aren’t risking their clients’ money as exchange rates or valuations fluctuate. While Lawsky doesn’t think the same exact rules will work for Bitcoin (for one thing virtual currencies are far more volatile than hard currency) he doesn’t see why the same principles shouldn’t apply. He also argues that a combination of know your customer laws and public ledgers, such as Bitcoin’s block chain, can go a long way toward fighting money laundering, but he clearly isn’t interested in demonizing Bitcoin either.

Law enforcement concerned about money laundering

Law enforcement agencies tend to be a lot less keen on the idea of virtual currencies because it makes financial surveillance more difficult (echoing years of opposition to strong encryption).

“The perpetrators feel they can more easily conceal their activity, their identities and their proceeds,” said Deputy U.S. Attorney Richard Zabel at a DFS hearing, reports Tom Hays for the Associated Press. “[On Silk Road], users were able to purchase drugs from drug dealers located anywhere in the world, essentially with a push of a button.”

While the capacity to use Bitcoin for illicit means certainly exists, it’s not fundamentally different than any other currency or payment system.

“Let’s be frank, a lot more money has been laundered through large banks than has been laundered through virtual currency,” said Lawsky, who said that his goal is to work with other state and Federal regulators to create a set of rules that would “separate the wheat from the chaff” and attract businesses who are interested in offering legal Bitcoin financial services.

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