Comments On The Proposed Bitlicense Regulations
Over the past year, the New York State Department of Financial Services (DFS), led by Superintendent Benjamin Lawsky, has been attempting to create a set of regulations for virtual currency services. They called this set of regulations the “Bitlicense.”
I have been following this issue closely and participated in public testimony before the DFS back in January 2014 that was a precursor to creating these new regulations.
While these regulations will only apply to businesses operating in New York State, they will naturally be a precedent for many other states who seek to regulate virtual currency services and as such, we should consider them a potential framework for all state regulation of virtual currency.
The initial proposed Bitlicense regulations were published last year and were subject to a comment period which produced more than 3,700 total comments. The DFS did an excellent job of working through those comments and came back with a revised Bitlicense draft early this year. The comment period for the revised Bitlicense started in late February and will end this friday, March 27th.
This blog post is being submitted as a public comment on the revised Bitlicense regulations and should be read as such.
While the DFS has taken great care to simplify the Bitlicense regulations and reduce the scope of them, there remain two fundamental and important problems with them, both relating to duplication of existing regulatory requirements.
Before I get into the specific issues around unnecessary duplication in the proposed Bitlicense regulations, I would like to speak about the issue of regulation and startups and high growth companies in general.
I believe startups and high growth companies are important to the US economy and US citizens for many reasons, but primarily because they bring important new technologies into our lives and improve them, and because they are engines of economic growth and jobs.
Startups and high growth companies should be required to comply with all existing laws and regulations. They should not be excluded from the laws that apply to all other businesses. However the arrival of new technologies should always be seen as an opportunity to review and update our laws and regulations in accordance with the benefits and challenges brought by these new technologies.
It is also true that startups and high growth businesses often start with a very small base of employees and capital and they cannot afford the compliance and regulatory affairs teams of much larger companies. Because of this, startups and high growth companies are more heavily “taxed” in their efforts to comply with regulations and we should be mindful of this “tax on innovation” that regulations place on the startup sector and high growth companies in general.
Duplicative regulatory requirements are a particularly harmful form of this regulatory burden. If one regulatory body is responsible for making sure that businesses comply with the rules, we should not force companies to comply with a redundant and duplicative set of rules and compliance requirements. This is particularly true of state regulations as duplicative compliance requirements could, at the extreme, require companies to do the same thing 50 times (once for every state). And small high growth companies are the ones who will feel the pain of this duplicative and redundant regulatory burden the most.
So, it is with that backdrop that I wish to highlight two such duplicative and redundant regulatory requirements in the Bitlicense. The first are the anti money laundering (AML) requirements in the Bitlicense regulations. Virtual currency exchangers and administrators are already required to comply with federal AML regulations. In many ways this is a good thing. FinCEN (the federal money laundering regulator) set a clear federal standard for all bitcoin companies in March 2013. New York State and all other states should require these virtual currency businesses operating in their jurisdiction to comply with the federal AML regulations but they should not require duplicative and redundant AML compliance on a state by state basis.
The second duplicative and redundant provision in the Bitlicense is related to state money transmission regulations, which are already in place and are applicable to all virtual currency businesses. The Bitlicense requires similar provisions to what is already in place for money transmitters under state regulations, thus creating duplicative and redundant compliance obligations, which, again, could end up being replicated in all fifty states around the country. A better construct would be to exempt licensed money transmitters authorized by the DFS to engage in virtual currency business activity, just as the BitLicense has done for entities chartered under NY Banking Law.
The New York State Department of Financial Services has made a commendable effort to understand the risks posed by virtual currency and to construct regulations to protect society from them. There has been a lot of great work done in this effort. And it is particularly helpful to the startups and high growth companies operating in the virtual currency sector to know what is expected of them to operate legally and safely. I believe if the DFS addresses these two duplicative and redundant provisions, we will have a much better and more efficient regulatory structure for virtual currency providers and that will be a very good thing for all involved.
“so nice, they said it twice”??? What’s up with that? Regulators get wordy. Are they paid by the page?
No, but it pads their legal/lobbying bills
Right.In other news, did you see NY Times article about Chicago trading pits closing this summer?
I wrote about the closing here, http://pointsandfigures.com… and a homily on the pits here: http://pointsandfigures.com…
Funny/sad stuff. Regulating a currency that was supposed to get around the regulators. It takes a true genius to know the value of something that is having a big part of its value destroyed.
all innovation brings good and bad. There is no utopia. You have to stare at the bad and understand it and you will realize why some rules make good sense
I do not think there is a utopia but as you point out existing law can handle every problem presented by bitcoin. More regulation is for consolidating power only. That is evident by the fact this regulatory agency even felt the need to have duplicate law. Or maybe you can point out an example where existing laws are not sufficient?
Headline re-write: Bitregulators Bitredundant on Bitlicense
Your two objections make a lot of sense, of course. I haven’t read the whole report, but I’m interested in learning “Why” does the DFS think that these 2 duplicative provisions are necessary? What’s the benefit of that?
Cynically it allows for the growth of bureaucracy.
Sadly partly true.
Most regulations are there to protect incumbent business models from disruption and/or so politicians can play CYA and say they did something in the wake of a major incident. Sarbanes-Oxley, for example, was passed in the wake of Enron, and a number of other large frauds perpetrated by corporations. Enforcing the existing laws would have solved the problem, had regulators not been asleep at the wheel, but now we have a whole new layer of useless, burdensome and expensive regulations created so politicos could say “look what I did”.
.This is a very interesting post on a number of different planes.Those who said that the regulation of bitcoin would take a bit of the wind out of its sails can smile just a little. It will be regulated just like making a $5,000 cash deposit from any business — an absurdly low threshold but where the money laundering begins.The state of regulation is, in fact, a huge tax on innovation, growth and job creation. As in any balancing act, one must weigh the costs of less regulation v the costs of more regulation. As you correctly note, it is a cost.The SEC, the ultimate securities regulator, makes huge concessions to the reality of small businesses — very reluctantly but also very real. SBs were allowed to implement SOx on a very slow schedule and at lower pain thresholds.New York, as the world’s most important financial marketplace, is in an interesting position.In much the same way that most public companies are chartered in Delaware — which has as a result the best and clearest general corporation law for all parties being fair to both companies and shareholders — New York may take the lead in regulating a financial commodity which will travel through the Internet. The significance being that it is really not like a bank chartered in a physical location but is stateless and without geography to determine its level of state regulation.The big opportunity is to create a “blue sky” regulatory environment in which the New York laws, if you like them, become adopted as a national standard and are blue skied — just like public offerings are blue skied if they comply with Federal underwriting standards.There are many states which do this on an ad hoc basis — gambling, energy, transportation, concealed handguns, etc.As an example of how well something like this can work, look at the CHL (concealed handgun license) laws across the US and the level of reciprocity that exists in which each state takes the CHL of its neighbors as meeting its own requirements. This happened almost over night.Today almost the entire US has CHL reciprocity and the Feds are the last to the dance only now talking about a Federal standard.This is actually an example of bitcoin growing up and being able to trumpet a “safe harbor” of adult regulation — though I hate the idea of regulation as a general principle — which evaporates much uncertainty.JLMwww.themusingsofthebigredca…
Fred, I totally agree with what you have to say on regulation and startups. We ought to update rules when new technology/innovation prevails. The tax on startups is huge, and it’s abstract because it’s not a line item on an income statement-but regulatory taxes change operations increasing costs. They provide different economic incentives than hard and fast taxes, and in many cases cause pay to play to result.The other problem I worry about regarding Bitcoin and NY State is that one state is regulating and will set the agenda for the rest of the states-and possibly other parts of the world. One of the great things about the US is the constant experiment we have with localized laws and regulations. It is one of the reasons I am against the continued expansion of the national bureaucratic monolith.Taking a very light hand to bitcoin regulation is smart. It is a technology and ecosystem in its infancy and we don’t know where it will go.
.There is much validity in the “lemonade stand” theory of regulation — which postulates that at some level, the lemonade stand level, regulation should be identified but not observed.The JOBS Act — which was actually passed by accident — embodied a bit of this thinking but it was bastardized by the SEC’s glacial rulemaking.There are a level of life style businesses — not just high tech but all businesses — which should not be regulated beyond paying taxes and protecting the environment.JLMwww.themusingsofthebigredca…
Yup, I blogged about that today. In Chicago, it takes over 32 days to get a business license. In NYC it’s 8. In other cities, it’s same day. What makes a city great is the small independent businesses that get started-just like the business @GothamGal blogged about yesterday from NYC. Bitcoin is going to have a lot to say about the profitability and operations of those SMB companies.
I am not saying that they can’t or shouldn’t improve on that type of thing, but Immediate compliance, prior to opening, depends on whether you are operating the type of business that having that actually matters at the start. And what happens if you don’t “wait the 32 days”. Pretty much, I am guessing from my experience, nothing.  In many places you are required to have a CO prior to tenant occupancy. In practice of course you can get the CO after the fact. And the city/township does nothing. Same with the fact that you need building permits for any little change to the interior. Many times they aren’t even secured. And nothing happens.My point is simply if you are going to be an entrepreneur and you are starting out you better get a firm handle on actual practices vs. requirements. Dejure may say “do this” but “de facto” says “when in Rome”. At least in any place that I have ever operated a business, including Philadelphia (as only one place) which is probably about as slow as Chicago.
.In many jurisdictions, you cannot get utilities without a CO.Many insurance policies won’t be effective unless the space has a CO.JLMwww.themusingsofthebigredca…
I have never run into a case where getting utilities requires a CO.Obviously it’s a big country so anything is possible. Also I’m not talking about new construction either or a large office complex or office tower obviously. I’m talking to the point of “taking 32 days to get a business license” and specifically for the small entrepreneur. Small scale and large scale often have different rules or what is considered “risk”. A large company starting a business has time to plan and people to handle things like that and they work typically at a slower pace anyway.Many insurance policies won’t be effective unless the space has a CO.We are not talking about not getting the CO we are talking about in some cases getting the CO after occupancy. Once again, scale matters. We are not talking about the Revel Casino in AC or something large enough to be on the radar of the township or city. That’s a different set of rules and I know the difference.Separately, impossible for me to believe, as a common practice and not an outlier occurrence, that an insurance company would deny a claim for lack of a CO being issued unless there was something that could be proven that they wouldn’t insure without a CO. (Non allowed used). Edit: For the type of size projects that I am talking about obviously…My point is if the local pizza shop has a fire or the local dentist office has a large storm claim I can’t imagine the insurance company saying “oh where is your CO, no CO? we aren’t paying your claim!”. Now if the local pizza shop was brewing meth which wasn’t on the CO that’s a different story. But even if they are also making pottery in the back (as a side business) and something catches fire (and that wasn’t allowed in the lease or detailed on the policy) the claim gets paid.
.Fair play to you. Points well made.In the case of ATX, the city of Austin owns the utility company so there is that.As to insurance, the insurance company has the legitimate consideration that the nature of the negligence might have been avoided if the CO had been properly granted as a CO is only granted after final inspection for structure, electrical, mechanical and fire protection.I have actually seen insurance coverage denied for liability because of a missing CO more than once.Coverage, as a part of the policy, would always be denied for a non-conforming use. That is not even a close call because the non-conforming use is a “rate clause” issue–more expensive to insure a pottery furnace than a pizza joint.I had some apartments burn down killing a man and the insurance company inspected all the smoke detectors and the battery maintenance schedule before undertaking my defense.The victim had been smoking — forbidden by the lease — and had negligently removed the battery (found in the rubble) and we had fortunately changed batteries the previous day.I researched this matter extensively and learned that in an instance like this the insurance company would likely come after me for contributory negligence and try to get me to pay part of the claim — liability only not property — for my contributory negligence. Never came to that.JLMwww.themusingsofthebigredca…
Coverage, as a part of the policy, would always be denied for a non-conforming use. That is not even a close call because the non-conforming use is a “rate clause” issue–more expensive to insure a pottery furnace than a pizza joint.”Your honor, I’m prepared to show the jury that the pizza shop in fact baked their pizza’s in a pottery kiln and further that the insurer never specifically stated that they would only insure a pizza shop with an oven specifically manufactured to bake only pizzas.”On a serious note, and to the point of “rate clause” my experience and understanding is that (once again on a small scale) insurance companies don’t reject for that. On a large scale of course they will look for any way to limit their payout.I had some apartments burn down killing a man and the insurance company inspected all the smoke detectors and the battery maintenance schedule before undertaking my defense.Sure, because that’s a major liability and a claim and they need to look for any angle and all angles to limit their payout.But to an insurance company $400k isn’t a big claim and I’m guessing you will agree that they don’t not pay a homeowner if they find the smoke detectors don’t work.
.Lot of states an insurance beef goes to the state regulator who is industry friendly. On matters of coverage, it is a legal dispute not a fact dispute. You rarely get a chance to get in front of a jury on a coverage issue as it is usually a matter of law.Think about the wind driven water v rising water flood insurance claims. Coverage is coverage.As to residential, many insurance companies trap you by giving you a rate reduction for installing smoke detectors. When it turns out they weren’t operative, then they deny coverage completely. You likely win in a fight but the insurance company knows how to fight better than the individual homeowner does. They usually settle.Not my company, USAA, which is a dream to deal with, mind you.Fire losses are fairly rare on a singular basis and insurance companies are quick to employ independent appraisers in order not to get in the fray.I had so damn much insurance, I became quite expert on it. Insurance companies exist NOT to pay claims.JLMwww.themusingsofthebigredca…
I deal with Hartford and Liberty Mutual.For Liberty Mutual I never put in a claim for Sandy on a Shore property that had some damage. At the time they told me I could make the claim later if I wanted. I spoke to them a few weeks ago (about another issue at another property) and asked them if I could still make a claim for Sandy. They said “sure no problem”. I’m not sure I will because the damage is not great so being old school I’d rather not have it on my “record” and so on. Haven’t decided yet what I will do.My car got hit by hail twice and I had no issue putting in a claim for that two times (was a nice sized claim). My neighbor got hit by hail and didn’t want to put in a claim. I said “this type of things doesn’t “count” it’s not an auto accident. Well I mean it does count but it’s a different part of the policy that doesn’t matter “as much” let’s call it.
.It would be funnier if it weren’t so true.JLMwww.themusingsofthebigredca…
I worry about regarding Bitcoin and NY State is that one state is regulating and will set the agenda for the rest of the states-and possibly other parts of the world.California emission standards come to mind. And on other things, easier to copy what other states are doing then to take the time and the effort to fully research the issue and rule differently.
Those NYS laws are that experiment of localized laws you speak of. Other jurisdictions can follow or ignore them as they please. Often companies prefer a national regulatory scheme (i.e. Amazon and sales tax) because once the federal government occupies the field the company can operate across 50 states with one set of rules and it reduces compliance costs.
The phrase you choose to describe the companies that are affected by this regulation, “startups and high growth companies,” reminds me of Andy Weissman’s recent post on the Chaos Theory of Startups, at the beginning of which he attempts to define “startups” to a stranger on a plane. Andy doesn’t use the phrase “high growth companies,” and I guess nobody who is anybody does these days, because when you google the term, few recent articles come up. “The 7 Essentials of High-Growth Companies” from Bloomberg Business October 2009 might be a little dated but it’s still useful when drilling down into what is a startup and what’s not, contemplating companies’ life stages as we do around here.
Very well written.
Thanks. I wrote this last week and sent it around to my partners and a few people who are deep into this and got a lot of good edits. It was a group effort in some ways. I hope it feels like it was written by one person though
It flows as one person wrote it
I thought it was a bitredundant….badaboom!!
The comedy lobby.
Same stuff happened with wire transmitters. MSB licenses, AML, FINCEN, oh my. The bureaucracy levied on the well-intentioned while albeit a pain was meant to protect the bad people from spreading their cancer too quickly. Gotta get a Chief Regulatory Officer, get them embedded in the regulatory process as a trusted advisor, all this will create a power barrier to entry, and you’ll be fine. Play the cards your dealt, don’t try to fight the inevitable heavy regulation of an MSB.
By the way, would HATE to be one of the online vulture lenders that are getting so much VC money today. Regulators about to crush em…and at 400% APR, they deserve it!
Good suggestions Fred. I think the biggest issue with the revised BitLicense is stated in Section 200.10. It requires already licensed businesses to submit written proposals, which must be approved by the superintendent, anytime they plan to release a new/changed product/service/activity to the market. This requirement will considerably stunt the growth of individual Bitcoin companies and the industry as a whole. The Bitcoin ecosystem is advancing at an incredible rate. New products are being invented and deployed all the time. We simply don’t know how this technology will evolve, and this type of regulation will limit its potential.
remember NSMIA? the national securities markets improvement act of 1996. it’s what makes a Reg D, Rule 506 offering to all accredited investors the norm for private offerings. the reason that vast majority of private offerings rely on this safe harbor is b/c it preempts conflicting state law registration and prospectus requirements. otherwise, every startup in a convertible note seed round in NY (and most other states) would have to be registered and provide a full information prospectus including audited financials, etc.on a related note, not sure what seed investors did before 1996… i was busy playing Doom II with my high school friends in a computer lab in upstate New York.