The New York State Department of Financial Services has proposed a set of rules to regulate virtual currencies so people using digital currencies such as Bitcoin can be better protected.

According to Benjamin Lawsky, New York State’s Superintendent of Financial Services, the proposed regulation is not intended to hinder innovation of virtual currencies or make using them more difficult. Rather, he says it’s a way to protect people in case another incident like what happened to Mt.Gox happens again.

“We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity — without stifling beneficial innovation,” Lawsky said in a statement. “Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.”

Mt.Gox’s demise left many Bitcoin enthusiasts badly burned. Thousands of its customers lost money, either because it did not have sufficient reserve funds to cover alleged stolen Bitcoins, its incompetence, or simple theft by the owners.

Now, the New York State Department of Financial Services is proposing that entities dealing in digital currencies be regulated through licensing.  Applicants must apply for a license to operate Virtual Currency Business Activity or an exchange market, then pay a licensing fee. A superintendent will then conduct an investigation regarding the applicant’s financial condition and responsibility, financial and business experience, and character and general fitness of the applicant. If the applicant’s business is deemed honest, fair, equitable, efficient and seen as trustworthy by the community, the application will be granted. If not, the applicant will be denied and won’t be allowed to operate the business.

If the applicant’s license is granted, the licensee is to abide by applicable federal and state laws, rules and regulations and will need a designated person who will make sure that it does so.

Though the regulations may be directed at virtual currency exchange markets, one section in the proposal will surely catch the attention of virtual currency enthusiasts.

Section 200.12 Books and records, states that exchange markets are required to make, keep, and preserve all of their transactions records in their original or native file format for a period of ten years. Records of each transaction will include the amount, date, precise time of transaction, any payment instructions, the total amount of fees and charges received and paid to, by, or on behalf of the licensee, and the names, account numbers and physical addresses of the parties involved in the transaction. If exchanges were to abide by these rules to the letter, the pseudoanonymity offered by Bitcoin would no longer exist.

Lawsky explains that this will help authorities clamp down on illegal transactions as well as remove the stigma from Bitcoin that it’s only good for black market transactions.

The public has 45 days to comment on the proposal.

Nick Spanos, co-founder of the NYC Bitcoin Center, said that the proposal, somewhat predictably, doesn’t bode well for many in the Bitcoin community, especially younger entrepreneurs. However, he said understands why there is a need to make exchange markets more accountable.

“If you’re going to take people’s money and hold it as a third party, you should be scrutinized,” Spanos said.