Regulators can loosen crypto rules, but they can’t change minds

States are changing how they regulate bitcoin, but convincing merchants and consumers to jump-start a dreary cryptocurrency payments market is another matter.

The Pennsylvania Department of Banking and Securities recently ruled cryptocurrency business operators do not have to have a money transmission license under the state’s Money Transmitter Act. This should help companies build new payment services, and niches such as gun shops show promise for crypto in retail payments.

But more than deregulation may be necessary. Cryptocurrency payments have not taken off at mainstream retailers, and most early initiatives convert cryptocurrency to traditional money before the payment is made so the merchant does not have to directly accept cryptocurrency. In other cases, hedges such as stablecoins are used to mitigate currency volatility.

Other companies are making moves that could similarly promote cryptocurrency payments in limited contexts. Facebook this week hired U.K. blockchain payment and smart contract experts, a possible move toward expanding cryptocurrency transactions. Other companies are also viewing the dip in bitcoin valuations as a sign to get in the cryptocurrency payments market with less expense; and Square's stock jumped when it received a New York BitLicense.

Pennsylvania's ruling raises some hope for these and other plays, since removing a money transmitter license requirement could ease compliance if the concept spreads.

For businesses that want to use bitcoin for payments, or to accept payments, or offer cryptocurrency purchases or trades, there's less to worry about, according to Sean Keefe, a managing partner at Philadelphia-based Straight Up Capital, which invests in cryptocurrency technology, distributed ledger and related assets.

“Pennsylvania is taking a hands-off approach to regulations compared to some other states like New York," Keefe said. Straight Up did not release portfolio holdings; the fund is a private offering only for accredited investors, and, pursuant to SEC regulations, cannot make public disclosures regarding material fund details, Keefe said.

Pennsylvania’s regulatory posture potentially removes cryptocurrency compliance worries tied to payment processing, Keefe said.

“Businesses can feel safe in that crypto is not money, so they are not subject to the rules,” he said. “If you want to use a point of sale platform to take crypto at your business, your processor isn’t holding funds that would make it a money transmitter.”

Current initiatives face challenges as they go up against established payment networks, which would be hard for even recognizable brands such as Facebook and Square to overcome.

Worse still, most recent numbers from Chainanalysis suggest bitcoin payment volume is cratering, though complete data on transactions is hard to come by and the value is negatively weighted by the currency's value.

“Most bitcoin owners already have other means of payment that they prefer to use,” said Tim Swanson, founder and director of research at Post Oak Labs who has studied and analyzed cryptocurrency usage. “Even if there were specific carve-outs and exemptions for cryptocurrency payments with respect to [transfer] licenses, it is doubtful that these same coin owners would suddenly begin to use bitcoin for payments rather than for speculation.”

While Pennsylvania deregulates, other states have different rules, so there isn't a standard. New York, which was one of the first jurisdictions to regulate cryptocurrency when it debuted its Bitlicense about five years ago, is considering updating the license to accommodate more complex use cases for blockchain and cryptocurrency that have evolved in the past few years. That’s a tighter standard than Pennsylvania, and a court in Florida recently ruled against unregulated cryptocurrency transfers.

And even if money transmitter license requirements are removed, it's not as though all payment or financial rules disappear.

“While a transmitter license isn’t needed" in Pennsylvania, "the entity better be adhering to state and federal regulations specific to investment instruments,” said Tim Sloane, vice president of payments innovation at Mercator. “Any entity that think its can exchange crypto for [traditional currency] without adhering to any regulations is exposing itself to risk.”