If you’ve been paying attention to bitcoin news over the last few weeks, you would have heard about the release of the draft New York ‘bitLicense’ regulations. These proposed regulations have been met with a great deal of animosity from some portions of the bitcoin community, with many feeling that they are too onerous for nascent bitcoin start-ups.
Before going any further, it’s important to note that these are only in draft form. Specifically, they have been released for comment and feedback. In this regard, the final form of these regulations may be radically different to the ones currently presented in the “regulatory framework” – one way or the other. Having said this, the smart money is on these provisions being very similar to the final ones issued by the New York Department of Financial Services (NYDFS).
What’s The Big Deal?
By way of background, for those unfamiliar with the proposed ‘bitlicense’ regime, back in November last year the NYDFS signalled that they’d consider issuing ‘bitlicenses’ to those looking to operate certain types of virtual currency businesses in New York (See HERE for the press release). In January of this year, they held hearings on virtual currencies with many well known names from the industry asked to provide their views. During the hearings a number of heavy weights in the tech industry called for clarity on bitcoin regulation. After the hearings, the NYDFS noted that they’d take these comments onboard in coming up with any further guidelines around the licensing of virtual currency businesses. Then on 17 July 2014 they issued the proposed bitlicense framework for comment (See HERE for the press release and HERE for the framework).
Much has been made of the broad nature of the proposed regulations and how they might impact start-ups looking to enter the New York market – and more broadly, what it might signal for the regulation of virtual currencies in the US.
Most of the concerns have revolved around the impact these regulations might have on innovation. The thrust of the argument presented by those who have an issue with the proposed regulations is that they create onerous requirements for new bitcoin start-ups. Specifically, some have suggested that requiring:
- US dollars to be held on trust or being bonded (note: the amount has not yet been set)(see S 200.8);
- audits and security testing of company infrastructure (see ss 200.14 and 200.16); and
- the reporting of transactions in aggregate exceeding $10,000 in a day (see s 200.15(d)(2))
favours well heeled incumbents who can afford the compliance overheads associated with these types of requirements (see for example THIS article in TechCrunch). They go on further to say, that this will in turn hamper innovation and the growth of bitcoin and other virtual currencies.
Some have also raised questions about the broad applicability of the provisions to a range of virtual currency services. As they stand, it seems that the regulations would capture most businesses in the virtual currency space – the most notable exclusion being merchants and consumers who accept virtual currencies for the sale of goods of services (they’re carved out under s 200.3(C)(2)). Specifically, wallet providers, exchanges and altcoin makers amongst others would likely be required to obtain a bitlicense.
A Reality Check
Although many have been surprised by the depth of the regulations, the reality is that many bitcoin start-ups, by their nature, squarely position themselves in the financial services sector – which is in general a heavily regulated industry. In this regard, few should be surprised by the coverage of the proposed regulations.
Unfortunately, an inconvenient truth is that those creating and administering the law in this space will always look to create huge safety nets for consumers – whether warranted or not. You might say ‘this isn’t in the spirt of bitcoin’, however, financial regulation at its core will always be constructed (and construed) with the ‘unsophisticated’ consumer in mind. From the fictional regulator’s perspective, there is just too much downside to letting a ‘currency’, which at best, has had some ‘bad press’ be regulated in a laissez faire manner.
As the framework stands, it creates a huge hurdle for those from foreign jurisdictions looking to enter the US. With many jurisdictions seeing bitcoin as an opportunity to build a new type of financial services industry (e.g. Isle of Man) these types of regulations may reduce the attractiveness of New York (and the US more generally) as a base for bitcoin innovation – or so the argument goes. However, the US is still the epicentre for bitcoin with most investment coming from US based investors for US based start-ups (see the Coindesk “State of Bitcoin” Q2 report HERE – TL;DR 78% of investment is going into US based bitcoin start-ups). Furthermore, the market size and its appetite for bitcoin seems like a prize many will want to keep chasing – regardless of the barriers to entry. Knowing this, regulations that place a high standard on actors in the market should be expected.
So What Does This Mean For Bitcoin Start-ups?
Most start-ups looking to enter the US market should take this as a clear signal that unless you’re very well funded and have a great team of lawyers the US might be out of bounds. A harsh, but true reality.
Having said this, an alternative view exists, which is that the first companies to navigate these provisions will have a big advantage over those who come after them. It really doesn’t take a crystal ball to realise that the likely outcome is that whatever regulations are adopted by NYDFS will likely be adopted by other states in the US (and potentially around the world). This means that if you’re able to build comprehensive systems designed to meet the regulatory requirements in New York, you’ll likely be in good stead to apply for similar licences in other states (and/ or countries).
It’s also worth noting that where there is money, there are lawyers looking to apply their skills to finding ‘gaps’ in the regulations. For example, there is already talk of how the provisions may apply to some forms of bailment arrangements and multi-signature wallets. In this regard, it looks like there’ll be at least one clear set of winners from these provisions – the lawyers.