Bitcoin, virtual currency under NY State scrutiny

New York State is trying to corral the Wild West atmosphere of virtual currencies such as Bitcoin and may create new regulations to keep the growing technology from being used in crimes.

"We have 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 Lawsky wrote in a memo on the inquiry dated Monday. He described virtual currencies as a "Wild West" for criminals that could threaten national security. He said the investigation could lead to regulations that would also benefit virtual currency, which he called an innovative product and a legitimate business enterprise.

Virtual currency is composed of digital bits and based on mathematical schemes that guard against counterfeiting. Bitcoin was started in 2009 as a currency free from government controls, an entirely digital means of exchange for a digital age. It's a rapidly growing phenomenon that has taken root as a payment method on some websites for both legal and illegal goods.

A state official said subpoenas were issued last week to 22 digital-currency companies, including BitInstant, BitPay, ZipZap and Dwolla Corp., seeking records of anti-money-laundering measures, consumer protections, and investment and promotional materials. The official spoke on the condition of anonymity because the investigation hasn't been announced yet.

Lawsky said his department is considering whether it should issue new regulatory guidelines, rather than try to adjust current laws on legal tender to include the new technology.

Lawsky said he plans to meet with members of the virtual currency industry before new regulations are created to protect consumers and national security.

Bitcoin is similar to the gold standard system in force before modern central banking began in the 1930s. Under the gold standard, each unit of currency was worth a certain amount of gold, leaving governments few means to raise the amount of currency in circulation.

No country uses the gold standard today, but some libertarians want to revive it and see Bitcoin as a modern-day alternative or complement.