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Show Me the Money: Officials Working to Regulate Bitcoin

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NY1's Tara Lynn Wagner continues her series on bitcoin by looking at the darker side of virtual currency and how it can be reigned in. She filed the following report.

It may be new and relatively unregulated, but conducting financial exchanges using the virtual currency bitcoin is completely legal.

"Here in our country, unless there's a law that says you can't do something, you can go ahead and do it," says Kenneth Chin, the head of the banking and finance group at Kramer Levin.

Which isn't to say you can use bitcoin to skirt the laws that are in place. Unfortunately, one of its selling points - the perceived but not entirely anonymous nature of the transactions - has made it a popular currency for funding illegal activity.

"Because there's some, if not anonymity, pseudonymity when you are in the bitcoin ecosystem, there are dangers of money laundering, there's dangers of drug trafficking. We’ve seen some cases of that," said Benjamin Lawsky, superintendent of the New York State Department of Financial Services.

That includes the crackdown on the Silk Road website, which allegedly served as a black market for drugs and other illegal activity for hire. The FBI seized more than 170,000 bitcoins in connection with that case.

Law enforcement agencies aren't the only ones interested in how bitcoin and its users operate. The New York State Department of Financial Services held hearings earlier this year to try to better understand the marketplace. They were hoping to put out some regulations by the end of the year, and then the massive Tokyo-based bitcoin exchange known as Mt. Gox collapsed, taking millions with it.

"And for us, that created a lot more urgency to try and get these regulations out soon," Lawsky says.

Chin says greater regulation might open up the bitcoin market to more mainstream users.

"I think your ordinary pedestrian consumer might find some regulation to be attractive and some safety to be attractive, as well as some legal recourse," he says.

It may also close some of the loopholes exploited by those with less than legal intentions.

"They may have to go back to some of their traditional means of financing, bags full of cash or something like that," Chin says.

It's not likely that any move by New York State or even the federal government will completely prevent illegal activity from taking place in the bitcoin market.

"We have a war on drugs, but there's still drug dealing," Lawsky says.

However, Lawsky says careful regulation can go a long way toward rooting out the bad while still allowing enough room for innovation and creativity to thrive.

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