BitLicense is a necessary step for the industry, but bitcoin businesses fear over-regulation.
Soon, virtual currency businesses will have to answer to BitLicense.
It’s an apt choice of name for a regulatory framework that will govern an industry whose players have included BitPay, BitGo, BitAccess, BitPagos, BitInstant, and BitWall. Companies like those, and others in the bitcoin community (and beyond bitcoin), anxiously await the final version of the policy that Benjamin Lawsky, superintendent of the New York Department of Financial Services, has spent nearly a year revising.
The policy will require digital currency companies to obtain a license in order to transmit money on behalf of customers. (Former BitInstant CEO Charlie Shrem went to prison last month for operating an unlicensed money-transmitting service, among other charges.) New York will be the first state to roll out such a policy, but broad bitcoin regulation has a long way to go in the U.S., where 48 different states have their own set of money-transmitting regulations.
“I think a lot of people are scared, because when you’re a company and you’re looking for VC funding, you worry about your bottom line and you worry about whether you’ll be allowed to do what you want to do,” says Peter Van Valkenburgh, research director for the nonprofit industry-watchdog Coin Center. “Regulation is something you worry about.”
Coin Center is one entity that recently submitted an official “comment” to the NYDFS with suggested changes to the current version of BitLicense. The NYDFS first proposed an initial draft in mid-2014. Since then, it has twice gone through the cycle of open comment period, review, and revision. “We absolutely look at the comments,” a spokesperson from Lawsky’s office tells Fortune. “We review them with the aim of putting out a final regulation that makes sense for everyone. Our hope is that it will be done by the end of May.”
In its comment, Coin Center acknowledged that the most recent iteration of BitLicense, from February, “takes into account many of the changes that we and others in the Bitcoin space suggested,” and said, “We appreciate this good faith effort.” But Coin Center still has concerns. Chief among them is the fear that if BitLicense too broadly defines which companies must be licensed, it runs the risk of restricting new startups. Among other points, Coin Center fears that, “vague definitions could require licensing for businesses which were never intended to be covered by the BitLicense,” and that the current language requiring licensees to get pre-approval from NYDFS for new products will create a “bottleneck on innovation which will hurt New York businesses attempting to compete in a fast paced global marketplace.” The strongest-worded of Coin Center’s points is that BitLicense’s AML (anti-money laundering) guidelines “go too far.”
For the most part, Coin Center’s comment is relatively tame and respectful. Others in the community are reportedly not so civil toward the plan, and don’t feel as kindly toward Lawsky, who some insiders say is using BitLicense as a platform to advance his own name.
“I’m not of the school that believes this is all a play to try and brutally shut down the viability of bitcoin because of some, I don’t know, conspiracy with banks and other entities with vested interest,” says van Valkenburgh. “I don’t think that at all. Some do. The second draft is a difficult law to comply with, but if we got the changes that we asked for, in many ways we’d be looking at a law that could help startups get clarity, help them know they’re not going to be swept into a broad and onerous regulatory law.”
Last August, after the release of the very first BitLicense draft proposal, bitcoin news site Coindesk asked 14 prominent people in bitcoin their take on the policy, and found “a unanimous opinion that the proposals presented by Lawsky and NYDFS are overly broad and restrictive, and could have a deleterious effect.”
There’s even a Change.org petition against the current BitLicense proposal. Adam Draper, founder of Boost VC, created the petition, which has nearly 9,500 signatures at the time of writing, to make two central complaints: “The rules would require some businesses to obtain two licenses for the same business, creating an expensive and burdensome environment,” and, “The rules don’t include a significantly flexible on-ramp for small startups to build and innovate their products, killing potentially disruptive technology before it can even start.”
Bitcoin supporters are split when it comes to regulation. While some welcome it (such as those rolling out insured exchanges) because it can bring the currency and the technology mainstream, many are more philosophically motivated, and were attracted to the space precisely because of its lack of regulation. The latter camp includes people like Roger Ver, nicknamed “Bitcoin Jesus,” who recently told Fortune, “Bernie Madoff… was regulated up and down and every which way, and it didn’t do any good, he ran away with everyone’s money… Without all the regulations, we could do so much more already.”
Coin Center’s van Valkenburgh, despite his concerns about BitLicense, says that the guidelines will bring “a certain amount of legitimacy.” He adds, “I think there are some people who want it both ways, and I really don’t understand their world view. Either we’re going to exist in a stateless society and have this utopian, unregulated money, or we’ll continue to exist in a governed society and have regulations, and the best we can do is hope that these regulations do not make it impossible to innovate.”
At a speech at the Bipartisan Policy Center in Washington, last December, Lawsky described his challenge in plain terms: “Come up with appropriate guardrails that help protect consumers and root out money laundering… while at the same time not stifling beneficial innovation in a fledgling industry.”
The industry is concerned enough about BitLicense that on Friday MIT Media Lab will moderate a “State of the BitLicense Roundtable” event in Manhattan, with panelists like Fred Wilson of Union Square Ventures and executives from bitcoin companies such as Coinbase, BitPay, Circle, and Xapo. According to press materials, the speakers will address questions like, “What are the most serious issues with the current NYDFS BitLicense proposal? Why is it crucial for industry to act, and why is now the time to do it? If the BitLicense were to be finalized in its current form, what consequences would you expect to see? What repercussions would it have on innovation across the industry?”
Lawsky, for his part, has suggested that he is willing to be flexible. “We’re going to see how this all shakes out,” he said last week at a Dow Jones Risk & Compliance symposium in New York. “I think there’s room for federalism, but at the same time if you have a whole series of different rules and it becomes a crazy quilt patchwork, that can get hard to comply with.”