As the BitLicense comment period ends, lawmakers and industry leaders spar over bitcoin regulations
After months of handwringing by the bitcoin community, and a steady stream of reassurances by New York Department of Financial Services (NYDFS) superintendent Benjamin Lawsky that New York wishes to embrace and support virtual currency businesses, the comment period for the proposed BitLicense regulations has come to a close.
The process began with a set of public hearings between regulators and bitcoin industry stakeholders in January, followed by Lawsky publishing a first draft of the proposed regulations to Reddit in July and asking the community for feedback. After a stronger than anticipated response, the NYDFS extended the initial comment deadline by 45 days to today.
The two sides have hardly seen eye-to-eye during the lawmaking process, with bitcoin entrepreneurs and investors finding many of the proposed regulations too onerous or otherwise unfair, given the existing regulations placed on traditional money services businesses. Lawsky and his fellow regulators, on the other hand, appear to view bitcoin as a source of risk that must be regulated into oblivion.
Lawsky recently clarified one of the biggest uncertainties around the BitLicense when he confirmed that developers and miners would not be subject to the future law’s provisions, and instead be limited to those businesses which handle consumer funds. This means that New York will not be shut off from the kind of software innovation and startup activity that bitcoin and the blockchain platform encourages. But it still has no bearing on whether companies like Coinbase, Bitpay, Circle, and the like can reasonable afford to operate in the state, under the proposed onerous regulations, and thus whether residents of the state will have access to cutting-edge financial technologies.
Shortly before the comment deadline passed, both Circle and BitPay submitted a final round of comments for NYDFS consideration. This is not Circle’s first time weighing in, as both CEO & co-founder Jeremy Allaire and CTO & Co-Founder Sean Neville each previously shared their thoughts on BitLicense in August in respective blog posts and open letters to Lawsky. This time around, the comments came from Circle as a company, but the message was largely the same.
In its letter this week, Circle calls the proposed regulations "nearly impossible to comply with" and reiterated its threat that it would likely elect not to do business in the state of New York if the BitLicense was passed into law as written. BitPay takes a similar hard-line stance, suggesting that the BitLicense would create an "unlevel playing field" for traditional-versus-virtual currency money transmitters. Circle phrased the request, saying:
...we encourage the NYDFS to develop a regulatory framework that maintains a level playing field by establishing similar guidelines for both digital currency firms and other money transmitters. There are several areas in the proposed rule that go well beyond what is required for other money transmitters.Both Circle and BitPay asked the NYDFS to reconsider the need for merchants to collect identification during all transactions, something that isn’t present today with even the largest cash transactions.
Coinbase, which is a key competitor to both Circle and BitPay, submitted its response nearly two months ago, writing in its summary at the time:
We feel the BitLicense is duplicative of the current money transmitter regulations which are a more appropriate form of regulation for the future of digital currency.
Certain aspects of the proposed recordkeeping and anti-money laundering requirements would eliminate the core utility of Bitcoin and cryptocurrencies, substantially hindering the innovation which all of us including, purportedly the NYDFS, find so promising.
Any regulation of virtual currencies at this stage should take care to exclude non-financial use cases and companies who are not storing Bitcoin on behalf of customers. One of the first, and still most comprehensive assessments of the BitLicense came from lauded industry analyst and TBI Daily blogger Ryan Selkis, in his initial “Bitcoin at a Crossroads” overview, and more detailed three-part Bitcoin Papers series (Part 1, Part 2, Part 3). Selkis raised many of the same points as the above bitcoin companies, including the asymmetry of the BitLicense versus existing money transmitter regulations, the risk of walling off New York consumers from innovative financial products, and the risk of stifling future innovation should developers fall under the scope of the BitLicense regulations.
Across the board, one major concern has been that laws passed in New York could be viewed as a template in other jurisdictions. As I wrote earlier this month:
The overarching fear for many bitcoin supporters has been that New York is viewed globally as a leader in financial regulation, and thus, the expectation is that the BitLicense will become the framework to be followed by other states and even regulators in other countries, once signed into law. Should the BitLicense end up particularly onerous, then it could have ripple effects across the global bitcoin ecosystem. New York is also ground zero for much of the world’s institutional capital, and if it becomes an onerous place to do virtual-currency business, then that could have a chilling effect on the ability for these investors to participate in the bitcoin markets.With the initial comment period now behind us, the NYDFS will now evaluate and (theoretically) incorporate the public feedback collected during this period into a revised BitLicense proposal which, once published, will be followed by a second comment period. One major request in this process that has yet to be addressed comes from the Bitcoin Foundation, an often controversial industry advocacy group which asked that the NYDFS publish its research and any non-public comments received during the review process relating to regulating bitcoin.
As is often the case in matters of regulation and government, the BitLicense process has been a slow and often frustrating one for the bitcoin ecosystem. Many businesses, entrepreneurs, and investors are stuck in a holding pattern waiting for the clarity promised from these pending regulations. Regardless of the outcome, the certainty will be a welcome change.
An onerous BitLicense could have a chilling effect on investment and innovation around crypto-currencies in New York, and possibly elsewhere in the US. A more permissive set of regulations could have the exact opposite effect. Given the gravity of the situation – the bitcoin market totals billions in assets, and hundreds of millions in venture capital investment – it’s a process that’s worth getting right. But, with politics and many of the world’s most powerful industries involved, a “process” in the most pedantic of terms is what we’re likely to get. Settle in and grab the popcorn because this one won’t be ending any time soon.
[illustration by Brad Jonas]