As a community, we all knew that regulation would come down onto virtual currencies at some point. In fact, it is incredible that a BitLicense hasn’t been proposed before now.
The New York Department of Financial Services (hereinafter NYDFS) is the first institution to attempt to make a BitLicense framework that could both protect the general public and provide clarity for virtual currency entrepreneurs so that they can continue building their businesses without fear of being in violations of any laws.
I have, in the past, alluded to how regulations would affect the Virtual Currency Community and why regulations are necessary (NY Bitcoin Conference, 2013.) Many people rejected this idea that regulations are necessary- yet here we are today, faced with a BitLicense proposal that could either stifle the market OR aid it in growing to its full potential.
This first draft of the BitLicense is important. The weight and levity of this document cannot be stressed enough. Once this document, with its regulatory clauses and sub-clauses, is passed it will set precedent for all BitLicenses to come.
As it stands, it is very much a well-rounded and well-thought through document. As many of you can see, it is also very biased (in favor of stringent regulation.) NYDFS has given the Virtual Currency Community an opportunity to have its voice heard, albeit in a totally unreasonable timeframe of 45 days. Many small entrepreneurs (majority of bitcoin startups) do not have resources at their disposal to properly analyze and respond to this proposed legislation in such a short period of time.
Market and community leaders have voiced strong opinions on the majority of the document including the need to extend the time for comments by several months. To effect real change in the document itself, however, there cannot be a mass of incoherent complaints, suggestions and opinions. If the Virtual Currency Community could band around a few of the proposed changes surely we could affect some change in the framework.
Some of my observations on the BitLicense framework (what needs to be changed/paid more attention to):
- Clarifying the definition of digital currencies (what’s included, what’s not). This is not a simple task, but it must be done.
- Limiting licensing requirements to apply only to custodial relationships such as exchanges (those involved in buying and selling currencies) not other categories like multi sig wallets, software providers or anyone who receives or transmits crypto currencies
- Applying licensing requirements only to exchanges based in NY or those doing buy/sell orders with people in NY
- Creating several tiers of licensing for start ups (less than $1M in annual volume, no license needed), small enterprises ($1M-$10M/yr, one page application), medium enterprises ($10M -$100M/yr, long form application with small bond and fee requirements ), large enterprises ($100M-$1B/yr, audited financials, higher fees and bonds) and global enterprises ($1B+/yr, highest fees and bonds, annual audits). Tiered licensing has proven to be a successful tool in allowing smaller businesses to abide by regulations while not crippling them.
- Changing “Permissible Investments” to allow investments in digital currencies for all using their own funds and to vary for custodial funds depending on licensing tiers proposed above (e.g. no regulation for startups and small enterprises, moderate “guidelines” and controls for larger enterprises for risk management and asset allocation purposes).
- Limiting KYC requirements to purchases made in excess of $1000 (similar to prepaid cards bought at grocery stores)
- Changing Reserve requirements to mirror that of banks and credit unions. The capital reserve requirements for a business in Virtual Currencies should not be any different than capital reserve requirements for existing banking and financial institutions. To force larger reserve requirements on virtual currency businesses would give an unfair advantage to the already-established banking and financial services businesses. By holding virtual currency businesses to the same standards as existing financial institutions it will increase the accountability of the new virtual currency institutions while not unnecessarily crippling them. *Capital Reserve Requirements: Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.
- Eliminating the redundant need for state level monitoring (if FinCEN rules were good enough for Financial Institutions, they are good enough for Bitcoin exchanges).
Many of these points have been repeated across the internet, and I hope that adding my voice to the masses will help influence this momentous development in the Virtual Currency realm. BitLicense is here, let’s get to work!