How bad is NYDFS' proposed BitLicense? Even China's exchanges are up in arms
China’s relationship with bitcoin has been a rocky one. With the country going from the leader in terms of transaction volume and home (briefly) to the world’s largest exchange, to a place where the government prohibits payments companies like Alipay (China’s PayPal, owned by Alibaba) from integrating with bitcoin company.
And yet, despite this hostility within its own borders, China’s three largest bitcoin exchanges are deeply concerned about the BitLicense regulations proposed by the New York Department of Financial Services (NYDFS). OKCoin, BTC China and Huobi have joined together in submitting a joint letter criticizing the broadly reaching and overly penal nature of the regulations – an opinion shared by nearly all US-based bitcoin businesses.
In the letter, the companies’ CEOs Mingxing ‘Star’ Xu (OKCoin), Bobby Lee (BTC China), and Lin ‘Leon’ Li (Huobi), all of which have global ambitions – notably, BTC China is backed by Lightspeed Venture Partners, a US-based venture capital firm – express concern over the cost and difficulty of both applying for and later complying with the terms of the BitLicense as they are currently written. The most likely outcome, according to the CEOs, is that international bitcoin businesses such as theirs would be forced to geofence New York and refrain from doing business in the state.
The greater concern, however, is that New York is viewed globally as a leader in financial regulation. Accordingly, the Chinese exchanges rightly fear that regulators in other countries may follow in New York's lead should these proposed regulations be signed into law unmodified.
Many leading US-based bitcoin businesses have expressed similar objections to the proposed BitLicenses in the weeks since the draft was first published for comments.
The internet has made the world flat, enabling consumers from around the globe to easily transact with one another. This freedom, however, comes with obvious risks. As far as the NYDFS is concerned, money laundering, terrorist and drug finance, and basic consumer protection are the primary concerns, and rightly so.
But it's nevertheless a sticky issue as to whether (and when) international virtual currency businesses should be forced to comply with US or New York state laws when doing business with citizens of those jurisdictions. If OKCoin, BTC China, and Huobi avoid opening US offices and do not seek integrations with US banks, should the NYDFS regulations apply simply because the consumer lives in the state of New York? It's a complicated question, but there's a strong case to be made that the answer should be no.
The concern expressed by these Chinese companies, and shared by bitcoin business around the world seem entirely justified. Borrowing from the Mark Zuckerberg character in the fictional "Social Network" movie, we don't even know what this virtual currency thing is yet. It would be foolish to laden the industry with such onerous regulations as to kill all potential innovation before we see what it can and will become.
Regulation is absolutely necessary. But any good and thoughtful BitLicense should include considerations for the size of the business being regulated and avoid placing excessive compliance requirements on small businesses that will kill innovation before it even starts. While there are many things wrong with the Sarbanes–Oxley Act and the JOBS Act, what each did right was to graduate the application of their provisions based on the size and stage of each business. The NYDFS could learn something from this approach.
The CEOs conclude their letter by saying:
Along with virtual currency businesses in the United States and elsewhere in the world, we look forward to assisting the NYDFS in its endeavor to make the BitLicense regime an exemplary framework that thwarts financial crimes, safeguards customer assets and unleashes the enormous potential virtual currency and its underlying blockchain protocol have to offer.
***View the entire letter to NYDFS Superintendent Lawsky and the attached BitLicense comments embedded below: