New York’s Bitlicense – What is it, Who is In and Who is Out?
New York’s Bitlicense has become quite the lightning rod for both criticism and praise concerning governmental efforts regulate bitcoin in particular and cryptocurrencies in general. The application process consists of a 500 page application document and a $5,000 non-refundable fee. of course, $5,000 does not accurately depict the total cost of applying; navigating a 500 page brick of New York State bureaucracy requires contracting specialized legal services for those who do not have an in-house legal team, not to mention fulfilling the requirements held within those 500 pages (like submitting detailed plans, undergoing financial history reviews, and sorting background checks for employees).
And the actual price has proven to be much higher. Coinsetter (now defunct) CEO Jaron Lukasiewicz told Fortune that the actual cost of submitting the license was $50,000, while BitStamp spent approximately $100,000. For startups operating at a loss on shoestring seed money budgets, this is out of the question.
Additionally, new offerings or services, the meaning of which is open for interpretation, requires reopening the application process. For an nascent technology with new applications being uncovered literally every day, this is about as anti-innovation as it gets. It all feels a bit Soviet.
And perhaps even more distressing, the AML/KYC requirements call for even greater disclosure of customer information to the government. Not only is this, according to a very large demographic of bitcoin enthusiasts, anathema to the very spirit of bitcoin, the government has proven itself to be completely incapable of protecting its databases of private information, to the delight of China.
And the result, many say, is that businesses will simply locate their businesses in more accommodating financial centers like London, and it is the New York economy and its residents that will ultimately suffer. Indeed, many start ups – and even larger-sized companies, have closed up shop in New York as a result.
On the other hand. While perhaps not masterfully crafted, the Bitlicense is an extremely important step towards the mainstreaming of bitcoin. And while criticism rightfully focuses on the prohibitive nature of the process for many start-ups, New York, like governments around the country and world, are struggling to formulate a correct regulatory balance. This technology is disruptive in new previously unthought of ways, with potential impact directly in areas that have traditionally been strictly the role of governments – like issuing currency. How can this type of innovative technology be accommodated and safely nurtured, while ensuring that consumers are protected and that there are adequate safeguards in place to prevent the technology from being abused by terrorists and other baddies?
We outline below the companies who have responded to the BitLicense in one way or another.
Bitcoin Companies Leaving New York
Kraken: In a blog post entitled “Farewell, New York”, Kraken explains why it has decided to suspend services to New York residents: “While we are sure that the protection from New York law enforcement is valuable [Is that sarcasm? Can’t tell…] it comes at a price that exceeds the market opportunity of servicing New York residents”. And there you have it – economically, the license makes no sense for their business. Kraken is one of our favorite exchanges out there, but their focus is outside the US. Not a big surprise.
Bitfinex: A statement on the world’s leading bitcoin exchange by USD trading volume has advised that “Bitfinex is not applying for a Bitlicense at this time”, and requests that New York residents “withdraw all cryptocurrency balances held on Bitfinex”. Bummer, Bitfinex is a pretty sweet exchange. It most likely was not the cost that was prohibitive, but the 500 page document – the corporate structure has been pretty closely guarded, perhaps there are things there that they did not want to disclose.
ShapeShift: Company CEO Erik Voorhees has led an impassioned charge against bitlicense, framing the issue as one in which meddling financial bureaucrats futilely attempt to hold on to their relevance by shackling new technologies they see as threatening. It is themselves, not the consumer they are protecting as the NYDFS can only “combat fraud by writing thousands of pages of words. Markets combat fraud by inventing systems that are not susceptible to it.” Right, no surprise he was the first to pull out. Shapeshift’s application most likely would not have been accepted in any event.
LocalBitcoins: A platform connecting buyers and sellers of bitcoin to engage in monetary exchange off the grid? Yeah, would have been difficult to get regulated. It is a blow to New York bitcoiners, but they will have to do without.
BitQuick: See bitcoins, local. Alas, not big enough income to justify taking a stab at a regulatory process in which success or failure would be a coinflip. A shame because bitquick is a great little innovation by a clever ohio state student – just the type of spirit New York should be seeking to encourage.
Poloniex: CEO Tristan D’Agosta gave the same reason as Kraken – economics don’t justify the cost.
Applying for BitLicense
Coinbase: No big shocker here. This bitcoin behemoth will regulate wherever possible and has the deep pockets and legal firepower to sort it. However, they have been very public in their criticism of two aspects of the bitlicense:
First, it duplicates federal AML requirements with more stringent local ones which undermine the privacy of NY residents and second, it duplicates existing state money transmission laws. Coinbase already received a money transmitter license from New York State – now it must go through an additional bitlicense process. This is requiring of bitcoin a level of regulation above and beyond that required of businesses such as Western Union.
Circle: (now defunct, sort of)Circle CEO Jeremy Allaire was an early outspoken critic of the Bitlicense in its first 2014 iteration, claiming that if it should pass, calling it “devastating” for bitcoin, and asserting that Circle would have no choice to close its doors to New Yorkers. Thankfully, the revisions must have been enough to assuage Mr. Allaire, as it appears Circle will indeed submit for licensing.
Coinsetter: (now defunct) Though the $50k estimated price no doubt smarts a bit, there was little doubt that Coinsetter, which has based its brand on being the wall street exchange, would stay in New York. According to Mr. Lukasiewicz, “it sends a message that we wanted to send to our customers”, who are largely institutional. No doubt the message is – yes, bitcoin is legitimate and so are we.
Bittrex: Bittrex is an ok consolation prize for losing Poloniex, but it’s sort of like drinking Pepsi when you were expecting Coke. Still cold and sparkly but not as good. Anyway, filing for the license does bring the exchange some street credit, which they’d lost, at least in our book, by shilling for obvious scam coins to the detriment of their customers.
BitStamp: They must be confident in their ability to go toe to toe with Coinbase and crew on its home turf to drop $100,000 on the bitlicense. Good for them, hope it is worth it.