Over the last several months much has been made about the New York BitLicense.
Many critics of the regulation describe it as a legal framework which only hinders the innovation of digital currencies and blockchain technologies in the state of New York, starting with the $5,000 non-refundable application fee. Supporters, on the other hand, view it as necessary clarification of where financial regulators stand in reference to the new asset class of cryptocurrency.
What remains to be seen however, is how exactly the BitLicense will affect the surrounding climate of bitcoin business in the state of New York, and if this clarification will help propel competitiveness and innovation, or be counted among history's previous examples of draconian regulation.
On June 24 the BitLicense was finalized by the New York Department of Financial Services. Businesses handling bitcoin and virtual currencies had to apply for the license within 45 days. Aug. 8 was the deadline for all companies to comply.
Since that time we have seen a sizable exodus of startup companies choosing not to service the New York region precisely because of this regulation. The number of companies opting out of the State of New York – more than a dozen – is troublesome. Eric Voorhees, CEO of ShapeShift, claims that the requirements of the regulation are "unethical" and that it "unnecessarily exposes personal user information," since licensees, like other financial institutions, are required to collect their customers' personally identifiable information.
Genesis Mining, a cloud mining service, calls the regulation" unnecessary and … an obstacle to free market innovation." But it doubts the consequences are unintended:
We also believe that is exactly what it set it out to do. Companies across the world today posted similar announcements about leaving New York, and while it may seem like a victory to those who passed it, it is important to understand the difference between winning a battle and winning a war. Those who passed this [regulation] have only succeeded in winning a small battle, and as a result have set their state further behind.
Regardless of the exodus of companies leaving New York because of the new regulations, some are choosing to remain. One such company, Circle, boasted of its full compliance with the BitLicense regulations. The company states on its website, "We've been fairly vocal about our concerns with the BitLicense, especially in its initial incarnation," and later that, "though still not perfect, the BitLicense and its requirements became clear and irrefutable prerequisites for serving and supporting everyone in New York."
The bulk of the pro-BitLicense commentary on the legal framework thus far came from Ben Lawksy, the former Superintendent of Financial Services for the State of New York. Lawsky stepped aside from the position after implementation of the BitLicense, handing off the reigns of procurement to others at the Department of Financial Services. Lawksy, who now says he is "doing no work in the virtual currency space at all," states that "smart regulation puts guardrails and rules in place that hopefully won't stifle innovation" and that "the jury is still out" on the BitLicense.
Lawsky may no longer be involved with the New York Department of Financial Services, yet he is acutely aware of the transparent nature of cryptocurrency payment systems. As he states, "transparency will be a regulator's best friend," and that "transparency in virtual currency will help law enforcement, not hinder it."
Bitcoin may become a form of money that's relatively easy to regulate due to its transparent nature. Efficient and systemic regulation of cryptocurrency may come from technical solutions which monitor the data of spending patterns and draw relationships between users based on that information. Given that one the underlying requirements of the BitLicense is to gather data from customers (IP address, banking information), perhaps this is the intended endgame?
In the last couple centuries, we are gifted with examples of where regulation hurt, arguably on purpose, the adoption of new technologies. In these examples (one such being the red flag laws of the latter part of the 19th century), new laws are passed where the state warns against the dangers of the new technology in particular. In the case of bitcoin, this danger is supposedly in the form of money laundering and criminal financing. Instead of protecting the public from these dangers, however, the regulations almost always end up hurting the adoption of these otherwise masterful innovations, and stifle progress in jurisdictions where the laws apply.
As Barry Silbert, Founder of Digital Currency Group (one of the companies choosing to comply with the license), so aptly put it, "The new BitLicense has unintentionally created a deep moat around the more mature, well capitalized bitcoin exchanges" and later, "All in all, the BitLicense is bad for bitcoin, the community and N.Y....but creates real competitive advantage for those with a license." Critics of the BitLicense remain hard-pressed to craft a monologue where such regulations promote innovation, or at least preserve it.
Although history provides us with golden examples so that we may not succumb to the mistakes of our predecessors, often we do not heed its call. Even now, it appears the New York Department of Financial Services is serving up regulations which could spell the end of a dynasty in what is otherwise a jurisdiction known for its financial prowess.