The title of this post was inspired by Circle’s “Thoughts on the BitLicense Proposal,” by its CEO Jeremy Allaire. We agree with the positions Jeremy outlined in his post, with the positions outlined in Sean’s post and stand with our friends at Circle. In addition to voicing our support for Circle, we would like to put forth a few additional ideas for consideration by the bitcoin community and NYDFS. First, regulation of bitcoin in the right form is a necessary step on the road to maturity for the industry. Also, New York’s proposed BitLicense in its current form is the wrong form of regulation and in fact poses a threat to New York and New York consumers. Finally, we believe that at this early stage in bitcoin’s history, investing the time needed to arrive at the right regulation is time well spent.
The Right Regulation For Bitcoin
Regulation is a good thing in the correct dosage and at the right time. The bitcoin industry is in its infancy, but has already overcome enormous setbacks through market forces alone. In the wake of the rampant illegality of Silk Road and the apparent fraud perpetuated by Mt. Gox, industry leaders have emerged to legitimize and professionalize the bitcoin industry. For instance, the current generation of bitcoin companies like BitGo, BitPay, BitStamp, Circle, Coinbase and Xapo are led by teams with deep financial services and security expertise. Also, novel storage solutions like cold storage vaults, multi-signature transactions and insurance coverage have made it safer to own and use bitcoins. Finally, the bitcoin industry has come to embrace and expend vast resources to comply with the existing Anti-Money Laundering and compliance frameworks applicable to banks and money transmitters. The goal is to boost customer protection and confidence – and we as an industry have done so because our customers, not regulators, demand it.
We believe that regulation in the right form can provide further legitimacy for the bitcoin industry in the eyes of potential consumers. For this reason, we see regulation in the right form as the next step in the evolution of the bitcoin industry on the road to ubiquitous adoption.
The BitLicense is Over-Regulation
Over-regulation — as with the proposed BitLicense — however, hinders progress and serves an anticompetitive function where only the well-capitalized survive. Even in a nascent industry such as bitcoin, competition and innovation have already driven out shady operators while ushering in new and disruptive alternatives (from hosted cold storage vaults to the encryption protocols that allow consumers to store their coins on their own devices). Regulating competitors out of the industry is not a good outcome for bitcoin generally because at this stage a rising tide lifts all ships.
The proposed BitLicense will have a potentially counterintuitive effect since the leaders in bitcoin — those with professional management teams dedicated to security and compliance — will not be able to operate in New York. New Yorkers will continue to use bitcoin but will be forced to use providers that operate outside the current legitimized and professionalized cohort. The provision of services simply will not be up to the standards that we aim to provide, and New York consumers will suffer the consequences.
IP Blocking Policy: North Korea, Iran, Cuba and… New York?
In addition to the risk posed to consumers, New York is jeopardizing its leadership position. New York is one of the dominant leaders in the financial space, and has wisely engaged with the bitcoin industry and proposed a meaningful, comprehensive framework. Although we disagree with the scope of the framework, we respect that approach rather than the knee-jerk alternative of shunning innovation through restrictions, as seen in certain foreign jurisdictions.
But New York, as the global leader in all things finance and fintech, has an amazing opportunity to relive the economic heyday of decades past through the bitcoin industry. That opportunity, however, would be lost if the BitLicense were adopted in its proposed form. The bitcoin industry is on an exponential growth trajectory and is already fast becoming a well-oiled job creation engine, innovation incubator and potential source for massive tax revenues. Innovation in the Bitcoin industry will persist, but it won’t happen in Silicon Alley, it will go to California, Texas or various international venues vying for global bitcoin leadership. Out of necessity, New York will be added to each compliance department’s list of “regions to IP block”, a category which usually would not include a global leader in finance. We believe bitcoin will create more wealth and jobs than the entire internet economy combined and New York gets to choose whether to be a leader and revisit the heyday or lose its invite to the party completely.
Thoughtful, Deliberate, Timely
Substance and negative impacts aside, we still don’t believe the time is ripe for the BitLicense. We are in the very early stages of bitcoin’s history and believe an extended period of time for discovery and innovation in the space is necessary before regulations specific to bitcoin are even proposed for adoption. This should be a joint effort and many of us in the bitcoin community would be happy to collaborate with regulators to facilitate the construction of appropriate regulations that serve all interests equally. To this end, Xapo’s legal and compliance teams are at the disposal of the NYDFS. In the interim, we believe the existing regulatory landscape, such as regulations applicable to money transmitters, are sufficient for purposes of consumer protection.
Keep Up the Good Work and Get it Right
The NYDFS has spent a significant amount of its resources holding hearings, drafting the proposed regulations, reviewing comments and even braving a reddit AMA. NYDFS recently extended the comment period by an additional 45 days — another step in the right direction. We are thankful for the efforts thus far and hope the NYDFS will continue to demonstrate its thoughtful leadership in what is new regulatory territory for us all. We are at a pivotal time in the bitcoin industry and New York has an opportunity to achieve a leadership role in the space. To do so, however, we believe NYDFS should carefully consider the concerns of the broader bitcoin community regarding the substance of the BitLicense and consider a more orderly timeline for its adoption.
This is undoubtedly a historic and decisive period for bitcoin. We look forward to collaborating with the community and regulators to reach the best outcome possible for all parties.
Xapo will be submitting its comments regarding the proposed BitLicense to NYDFS directly, and we will update our blog to share these after they’ve been filed. NYDFS has opened the floor to the public to provide feedback, and we encourage everyone in the community to contribute to the conversation here.