Dawn of Cryptocurrency Regulation
A cloud of uncertainty has shrouded the cryptocurrency landscape since rumblings of regulation were heard from the U.S. government in early 2013. The cryptocurrency community’s sentiment on regulation ranges from outright contempt to begrudging acceptance. Many have adopted the latter attitude given the inevitability of regulation.
This was made clear by a statement from the newly elected executive director of the Bitcoin Foundation, Patrick Murck, in his recent Reddit AMA:
“For a lot of the traditional financial companies regulation is seen as validation. Whether you agree with that or not, some level of appropriate regulation/ seems inevitable”
Spearheading cryptocurrency regulation is the New York Department of Financial Services. After a whirlwind 90 days, the open comment period on NYDFS initial Bitlicense proposal has closed. Superintendent Ben Lawsky recently discussed how input from the cryptocurrency community during this time period has forced his department to re-evaluate their efforts to draft regulation at Money 20/20 in Las Vegas.
Much of the public outcry against the proposed Bitlicense has been prompted by the perceived blanket jurisdiction NYDFS would have over any Bitcoin transaction in the state of New York. Lawsky moved to clear the air of this misconception, stating that only financial intermediaries will be required to have a Bitlicense, not software developers, miners or individual users who want to make Bitcoin transactions with New York IP addresses.
Furthermore, businesses do not need to go through what Lawsky described as a “cumbersome and duplicative process” of applying for several different licenses that serve the same purpose (e.x. money transmitter license and a virtual currency license). The application process will instead be streamlined and cross-satisfied.
Such was one illustration of Lawsky’s effort to convey his department’s willingness to be flexible. The superintendent was also careful not to show favoritism to banks, noting that traditional financial institutions choosing to act as a financial intermediary of cryptocurrency would be subject to the same regulations as virtual currency businesses.
Arrival of the Transitional Bitcoin Bitlicense
While banks may be able to afford the compliance costs of the Bitlicense, fledgling virtual currency enterprises may find it difficult to bear the financial burden. Lawsky addressed this concern by introducing the most notable development in Bitcoin regulation as of late, the “transitional Bitlicense”.
“ The (transitional Bitlicense) would allow small businesses and start-ups to operate within a more flexible framework for a set period of time, during which time tailed examinations would be conducted. In considering whether or not to grant a (transitional bitlicense) the following factors would be considered
- The nature and scope of the applicant’s business and the associated consumer risk.
- The anticipated transactional volume
- Registry with FinCen as a Money Services Business
- The mitigating risk controls for example, a bond or other insurance.”
Essentially, transitional bitlicenses give young cryptocurrency businesses a way to “start up and play by the rules without getting crushed by huge compliance costs”. Each transitional bitlicense would be tailored to a firm’s specific “risk-profile” which is determined in part by the 4 factors previously listed above and the firm’s financial solvency.
A large portion of compliance costs come from the licensing process itself, usually costing $300,000 to $500,000 with the use of in-house compliance officers. This figure according to Judith Rinearson, a partner at Bryan Cave LLP, and a recognized authority in payment systems and electronic payments. The $300,000-$500,000 does not even include the costs of paying an experienced in-house compliance officer an annual salary between $100,00-$200,000.
Ben Lawsky also highlighted where the transitional bitlicense could prove beneficial for cryptocurrency start-ups:
“We are also considering designating a small group of specialized examiners at DFS to deal with startups and their license applications. This will help give them expertise and a greater understanding of the unique challenges smaller companies and startups face, and will enable us to better tailor our regulatory requirements to the firms’ particular situations.”
The aid of such a specialized group could cut the costs of compliance dramatically and allow companies to concentrate more of their focus on the development of their technology.
Bitcoin Regulations: Protecting Consumers vs. Encouraging Innovation
Lawsky claims finding a balance between not being a hindrance to innovation, and doing what is required for protecting the consumer, and preventing money laundering, is the guiding principle behind the drafting of regulation. Whether or not regulations will strike this balance will not be known until they are put into effect. Regulators and market participants alike are keeping a keen eye on the precedent being set by NYDFS.
According to Superintendent Lawsky, a new draft of regulations containing changes to the initial proposal will be released in the beginning of December, triggering another 30-day period of comments.