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New York’s Financial Services Subpoenas Bitcoin Firms To “Root Out Illegal Activity”

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Twenty-two Bitcoin companies received a letter from New York’s top banking regulator to determine whether they respect the current financial regulatory guidelines. More importantly, the authority wants to create a new set of rules to make sure that bitcoins are not used for illegal activities.

“We have also seen instances where the cloak of anonymity provided by virtual currencies has helped support dangerous criminal activity, such as drug smuggling, money laundering, gun running, and child pornography,” Financial Services superintendent Benjamin M. Lawsky said in a statement. “Taking steps to root out illegal activity is both a legal and business imperative for virtual currency firms,” he added later in the statement.

Companies include Bitcoin startups Coinbase and BitPay, as well as major Bitcoin investors such as Winklevoss Capital Management, Andreessen Horowitz, Google Ventures, Founders Fund and Union Square Ventures. They will have to show what they are currently doing to prevent money laundering, to protect customers and more generally where the money is coming from and why they care about Bitcoin.

A federal judge already declared that Bitcoin is indeed a currency and should therefore follow the same regulation guidelines as any currency. The original appeal of Bitcoin was that there was no central bank, but financial authorities now want to tax its transactions. Finally, as a result of today’s news, Bitcoin companies will have to register as money transmitters in the state of New York.

With Federal Services overseeing Bitcoin companies, it will become harder to found a Bitcoin startup. Yet, the authority is very confident that it will actually increase Bitcoin’s legitimacy. It even considers it an entirely new industry. Bitcoin offers great new opportunities for entrepreneurs, investors and traders, and Bloomberg terminals now even provide a Bitcoin ticker — a first step toward widespread Bitcoin trading.

But the virtual currency now faces a great challenge. If it is regulated and taxed like U.S. dollars, will it actually be useful? Let’s hope that it won’t just become a financial instrument for traders, like any stock on the NASDAQ or NYSE. You can’t pay your web-hosting provider using General Electric shares.

In May, the feds took down Liberty Reserve because it was used for child porn activity. In his statement, Lawsky goes so far as to say that Bitcoin’s existence depends on the responses to those subpoenas. “If virtual currencies remain a virtual Wild West for narcotraffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise.”

According to Forbes, here’s the full list of companies subpoenaed by the New York State Department of Financial Services:

- BitInstant
– BitPay
– Coinabul
– Coinbase Inc.
– CoinLab
– Coinsetter
– Dwolla
– eCoin Cashier
– Payward, Inc.
– TrustCash Holdings Inc.
– ZipZap
– Butterfly Labs
– Andreessen Horowitz
– Bitcoin Opportunity Fund
– Boost VC Bitcoin Fund
– Founders Fund
– Google Ventures
– Lightspeed Venture Partners
– Tribeca Venture Partners
– Tropos Funds
– Union Square Ventures
– Winklevoss Capital Management