Bitcoin gets two hearings – and steps closer to acceptance by David Z. Morris @FortuneMagazine January 30, 2014, 7:09 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — In a space of two days, one of the largest consumer banks in the U.S. and the state regulatory agency that often sets the baseline for nationwide financial regulation held fact-finding events about the peer-to-peer cryptocurrency bitcoin. Bitcoin has been the focus of intense scrutiny, hype, and fear over the past three months, and the dramatic arrest on Monday of bitcoin advocate and entrepreneur Charlie Shrem on charges of money laundering threatened to cast a shadow over proceedings. Despite this, both meetings were largely forward-looking, and indicate that regulators, bitcoin leaders, and traditional banks are on a path to cooperation. The New York Department of Financial Services hearings were called by Superintendent Benjamin Lawsky, who throughout the hearings displayed a deep understanding of, and even enthusiasm for, bitcoin and the protocol supporting it. Lawsky opened the meeting by reassuring the room that “our agency approaches the issue of virtual currencies without any prejudgements.” The Shrem arrest, though alluded to several times, took a back seat to discussion of more fundamental questions, with Lawsky stating that “no industry should be defined entirely by its bad actors.” Representatives of the bitcoin world generally took the position that while regulations unique to bitcoin and other math-based currencies should be kept as minimal as possible, clarification of reporting requirements and anti-money-laundering standards would in fact be welcome. Many saw the appropriate focus for regulation to be the various points where bitcoins become dollars. Fred Wilson, a bitcoin investor with Union Square Ventures, flatly stated that “we should not regulate how the [bitcoin] system works” internally. But Fred Ehrsam, co-founder of the bitcoin brokerage Coinbase, emphasized that consumer protection in bitcoin-for-dollar sales was essential to broader adoption, and that “[Coinbase] welcome(s) appropriate guardrails to ensure that bitcoin companies handling the money of others are run by reputable individuals and have appropriate practices to create a sound consumer experience.” MORE: Inside the bitcoin confab The benefits of regulation were highlighted by the testimony of law enforcement officials, whose dim view of cryptocurrency seemed to indicate increased risk for bitcoin operators. Deputy U.S. Attorney Richard B. Zabel equated bitcoin itself with both the unrelated electronic money-laundering service Liberty Reserve, and with Silk Road, the online contraband marketplace that accepted payment in bitcoin. Of course, as Jeremy Liew of Lightspeed Venture Partners had pointed out earlier in the hearing, Silk Road has been shut down quite effectively under existing regulations — one reason why, as Zabel revealed, the U.S. Attorney’s office has become a large holder of bitcoin through civil forfeiture. Even those who most fear bitcoin’s potential for misuse, it seems, now have a stake in its success. Directly after the first round of NYDFS hearings on Tuesday, some panelists headed to a similar meeting hosted by Wells Fargo in New York, though this one was closed-door. Attendees described it as organized but not dominated by representatives from the San Francisco-based bank’s merchant services, marketing, and regulatory divisions, who mostly listened to a lineup of speakers giving a crash course in bitcoin. “All in all it was pretty basic, but the panel was insightful for the beginner,” observed Rik Willard, who runs the bitcoin startup incubator MintCombine and was at the Wells Fargo meeting. Wells Fargo WFC has a reputation as one of the most progressive large banks in adopting new payment technologies, and though no statements were made about Wells Fargo’s plans, simply holding the meetings positions it as a leader in integration between bitcoin services and conventional banking. That process has been slowed by banking compliance officers’ nervousness about bitcoin’s association with criminal activity, and the scarcity of banking access for American bitcoin services is one of the major reasons it remains difficult to buy bitcoin with U.S. dollars. Currently, Coinbase is the only U.S.-based service that sells bitcoin for dollars and is serviced by a conventional bank, though it has declined to name its servicer. Wells Fargo’s seeming openness to bitcoin may signal new opportunities to develop exchange infrastructures, which would in turn greatly ease mass adoption of bitcoin payments. MORE: What the arrests say about the future of bitcoin More than anything, this kind of high-level discussion of bitcoin shows that it is being taken seriously by leaders across many sectors, primarily as a promising innovation in payments. But there was little insight to be gained from this week’s meetings about what the pace of regulation and mainstreaming will, or should, be. Superintendent Lawsky has indicated his office’s intention to propose a regulatory framework for digital currency in 2014, but it is uncertain when those might go into effect, leaving significant time for unfettered innovation and risk. This slow rollout is in line with past regulator behavior. Anil D. Aggarwal, a payment-systems entrepreneur monitoring developments in bitcoin, observed that legislators and regulators of new payments products often “give innovations the opportunity to gain traction and scale. Then they’ll legislate and regulate at appropriate times in the evolution of the product. Having hearings of this kind demonstrate that.” In the NYFSD hearing, a similar point was made by Judie Rinearson, an attorney working with emerging payment systems and representing several bitcoin-related firms. Rinearson recalled the delay in federal regulation of prepaid cards in the 1990s, which allowed for innovation and experimentation both in prepaid services and in state-level regulation of them, helping them gain their current widespread acceptance as a financial service. A quite different tone, though, was struck by Carol van Cleef, an attorney specializing in financial regulation, who urged Lawsky and his panel toward speed in establishing standards. “Time is of the essence,” van Cleef exhorted. “Innovation will adapt to new regulation, but it will not wait for regulation. [Bitcoin service development] will shift to other jurisdictions, taking jobs and the resulting wealth with it. The true losers will be U.S. residents.” Follow David Z. Morris on Twitter: @davidzmorris.