Having scared off most Bitcoin merchants to the Isle of Man, Ben Lawsky is making some token changes to his proposals for a virtual currency licencing regime.

Having scared off most Bitcoin merchants to the Isle of Man, while exempting banks from his 'Bitlicence' idea, Ben Lawsky of the New York Department of Financial Services is making some token changes to his proposals for a licencing regime for virtual currencies in his state.

Lawsky intends to post the full, updated text of the relevant regulation on his website (www.dfs.ny.gov) and in the New York State Register for a new round of public comments in the coming days.

The changes, according to the superintendent of financial services, are “primarily focused on providing additional flexibility for virtual currency startups to innovate.” In a recent speech Lawsky also pleaded: “I think there may have been some who mistakenly assumed our initial regulation was a take-it-or-leave-it, all-or-nothing proposal that would take effect in a matter of days or weeks.” During the public comment period he received a staggering 3,700 replies, most of them hostile.

The revised regulation will state unequivocally that Lawsky does not intend to regulate software developers who create and provide wallet software to customers for personal use. Customer loyalty programs, rewards, and gift cards denominated in fiat currency will not fall under the BitLicense. Virtual currency miners will also not be required to obtain BitLicences. Individuals who are solely purchasing and holding onto virtual currency as a personal investment will also not be required to obtain BitLicences. Merchants who accept virtual currencies as payment for goods and services – and their customers – will not be required to obtain BitLicences, if that is the only activity that involves virtual currencies in which they engage. All these points were obvious to anyone who read the original proposal, but Lawsky felt the need to make them explicit this time, perhaps to give people who read the new regulation the illusion that he is changing more than is actually the case.

The issue of virtual currency start-ups (and compliance costs for new virtual currency enterprises) is, in Lawsky's mind, the most contentious part of the reform process. In response to this, the revised regulation will offer a two-year transitional BitLicense, which may be issued to those firms who are unable to satisfy all of the requirements of a full license, and will be tailored to startups and small businesses. Those firms will still be required to meet 'robust' consumer-protection and anti-money-laundering standards, so costs will remain sky-high.

Additionally, licensees will be encouraged to apply to the NYDFS for a declaration that it does not deem certain named people to be 'control parties' if they are truly not involved in the day-to-day or major management decisions of the companies in question. This is designed to encourage 'angel' investment in virtual currencies.

With a nod to General Alexander Haig, Lawsky has also announced a desire to use the reforms to 'operationalize' the regulations. There are 3 points here:

• the shortening of the record-keeping requirement for licensees from ten to seven years;

• a decision not to require licensees to obtain the addresses and transaction data for all parties to a transaction, instead only having to obtain that information for their own customers or account holders and, when possible, for counterparties to the transactions in question;

• a broader range of financial assets, including virtual currency, that can count toward licensees’ capital requirements.

When the full revised regulation is posted, another 30-day comment period will begin. Final regulations are expected by early 2015.