The release of the New York Department of Financial Services’ (NYDFS) proposed regulatory framework for bitcoin companies operating in New York has brought mixed reaction within the digital currency industry.
With varying viewpoints dominating Twitter and reddit throughout the day, CoinDesk reached out to a number of bitcoin and digital currency leaders to get their perspective on the proposed regulations.
Throughout the discussions, pillar topics regarding the proposal emerged, largely centering around the document’s clarity, its potential effect on other US states and the question of exactly what the proposed BitLicense means for an industry in the midst of a surge in innovative development.
While largely positive, reactions differed as to the full ramifications the proposed rules would have if put into effect, with lawyers, investors and startups all weighing in on the day’s biggest story.
Proposal provides clarity
Many in the cryptocurrency industry are applauding NYDFS Superintendent Ben Lawsky for taking on what is broadly considered to be a difficult subject. Business leaders, in particular, largely agreed regulatory clarity is something they have been seeking, and a burden they have been prepared to shoulder.
Charles Cascarilla, CEO of bitcoin exchange itBit, told CoinDesk:
“The guidelines we saw today were no real surprise to us. We expect to achieve full compliance as the necessary requirements are largely in place due to our careful attention to consumer protection.”
Cascarilla said that itBit already verifies account holders and has a compliance officer, as well as a cybersecurity program. Further, he acknowledged that established rules are needed to ensure a functioning business ecosystem:
“[These] guidelines are actually helpful as they outline exactly what needs to be implemented by a bitcoin company to operate.”
For some observers, there’s something deeper about the nature of the new regulations: the fact that bitcoin is achieving greater recognition in the eyes of the law. James P. Jalil, chair of the cybercurrency practice at law firm Thompson Hine, said the BitLicense proposal represents a major step for bitcoin’s legitimacy.
“The [framework addresses] safeguarding client funds, anti-money laundering, books and records, compliance requirements and procedures,” said Jalil. “These things are very common in the regulation of the banking and financial services industries.”
Jaron Lukasiewicz, CEO of bitcoin trading exchange Coinsetter, agreed that the existence of a digital currency business licensure is a positive step overall:
“As a New York City-based company, the BitLicense is an important asset that will allow us to provide US banking and regulatory protection to our target customer group. I’m happy to see the New York DFS making tangible progress towards offering the first achievable regulatory bitcoin license in the country.”
Evan Greebel, an attorney working with Cameron and Tyler Winklevoss on their bitcoin-related ventures, remarked that one distinctive clarification that emerged today was the focus on keeping consumers safe. Rules on advertising, terms of service and customer asset management represent a push for legitimacy on the part of businesses themselves.
He noted:
“DFS has designed the BitLicense with an intent to protect US consumers by ensuring that only reputable businesses are participating in the identified parts of the bitcoin ecosystem.”
Concerns about innovation
One of the questions that remains to be answered is whether or not the rules – and future ones that may mirror the agency’s proposals – will hold back innovation in the bitcoin sector.
Some observers reacted to the NYDFS proposals by saying they will dampen innovation in the state’s bitcoin space. Others argued that the clarity provided actually makes New York a more fertile ground for digital currency businesses.
If improved financial privacy is considered a bitcoin innovation, then yes government choke points do stifle innovation. #bitlicense — Jon Matonis (@jonmatonis) July 17, 2014
ItBit’s Cascarilla noted that in the realm of problem-solving, knowing which rules to play by can actually assist innovators as they develop new ideas. He said:
“It may mean the industry has to in fact get more innovative in finding solutions to how we work within these guidelines, but overall it’s a step in the right direction to building a compliant and trustworthy Bitcoin ecosystem for the general consumer.”
BitPay chief compliance office Tim Byun pointed specifically to a few issues he had with the framework. This included the reporting of purchases over $10,000 completed in a single day, which he said could be problematic as “purchases via credit or debit cards over $10,000 are not reported”.
Byun said that the BitLicense proposal needs to have a bit more appetite for risk-taking since many companies in the virtual currency space are, at heart, entrepreneurial firms:
“The framework may benefit from a more risk based program or establishing nominal thresholds that would enable innovation while ensuring controls or transparency to protect consumers.”
Global competition questioned
There is some concern that because of the possible regulatory rules in New York, cryptocurrency development could simply leave the US for friendly jurisdictions, driving the industry to places with less friction.
Gil Luria, partner at Wedbush Securities who has written extensively on the topic of bitcoin for his firm, believes that in creating a framework the NYDFS is building a blueprint that other US states will end up using.
“I wouldn’t be surprised if other states were to adopt a similar standard, a similar framework,” he said.
Greebel, the legal counsel for the Winklevoss twins, commented that it would be ideal if other states were to adopt the same principles of the proposed BitLicense:
“From a standpoint of providing legal and regulatory advice to bitcoin businesses, it would be easiest if other states adopted the New York BitLicense to create a uniform regulatory environment.”
However, not everyone sees future regulation making things easier. Others agree the issue of state regulation in particular could influence bitcoin firms to move elsewhere.
“In the US, state-to-state reciprocity is an open issue. Will other states compete with New York, or will they adopt NYDFS guidelines largely as-is?” bitcoin core developer Jeff Garzik questioned.
Garzik added:
“Bitcoin businesses must deal with 51x legal jurisdictions, with associated licensing and surety bond costs. Today’s regulatory model is what I call the ’51x cost’ model, which remains a killer for small business and jobs.”
Some say the regulations may keep businesses out of the country entirely. This includes digital currency exchanges, which don’t have a large domestic presence in the US and may be enticed not to open their doors owing to the regulatory environment.
As noted by financial journalist and pundit Max Keiser:
New York’s BTC BitLicense scheme seems like it will empower regions like Isle of Man to dominate Bitcoin, IMO. — Max Keiser (@maxkeiser) July 17, 2014
Still, Luria believes the idea that exchanges won’t want to operate in the US could change in the near future should the BitLicense proposal come into effect. That might help build a strong bitcoin economy in the US, and help to make it a leader in the industry over the long haul.
Luria said:
“If you look at the exchanges, the reason we don’t have a robust US-based exchange is just because an exchange can’t really operate in the US without broadly violating money transfer rules. So having an avenue and an outlet for bitcoin exchanges and wallet services will encourage more and more companies to participate.”
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