Digital currencies — also known as virtual currencies or cash for the Internet —allow people to transfer value over the Internet, but are not legal tender. Because they don’t require third-party intermediaries such as credit card companies or PayPal, merchants and consumers can avoid the fees typically associated with traditional payment systems.
Advocates of virtual currencies also say that because personal information is not tied to transactions, digital currencies are less prone to identity theft.
With about $7.8 billion in circulation, bitcoin is the most widely used digital currency; others include Litecoin and Peercoin. All are examples of cryptocurrencies, a subset of digital currencies that rely on cryptography to function.
“As far as we know, most state laws are completely silent on this topic,” said David J. Cotney, chairman of the Conference of State Bank Supervisors’ Emerging Payments Task Force, which in March began exploring virtual currency.
Among the questions the task force will consider, Cotney said, is whether bitcoins should be classified as currencies, investment securities or commodities, which could determine which regulators should apply.
New York became the first state to propose regulations for the digital currency industry when it unveiled earlier this month a broad-ranging proposal that aims to address consumer protection, money laundering and cybersecurity.
Until recently, California prohibited the use of alternative currencies. Last month, Democratic Gov. Jerry Brown signed legislation to allow the use of alternative currencies, including digital currencies.
The Texas Department of Banking said in April Texas will not treat bitcoin and other digital currencies as money. “What it means, from our perspective, is just simply that it’s not money for the purposes of money transmission or currency exchange,” said Daniel Wood, an assistant general counsel in the department. “A bitcoin is basically property.” However, most bitcoin exchanges would be considered money transmitters and exchanging digital currency for sovereign currency would in most cases be considered money transmission.
Last month, the Kansas Office of the State Bank Commissioner issued a guidance that, like Texas, concluded that digital currencies are not considered money under the Kansas Money Transmitter Act."
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