So, now we have it. After several attempts and, to the credit of the New York State Department of Financial Services (NYDFS), much consultation with the nascent Bitcoin industry and its advocates the final version of the regulations for that industry were released last week. Those who have read my ramblings on virtual currency in the past may be aware that I tentatively welcomed the idea of the BitLicense, as it is known, and don’t generally share the morbid fear of regulation that many supporters of digital currencies displayed when the idea of a license was first floated.
In fact, back in September, when the first draft of the proposed regulations were revealed I wrote that, given the inevitability of regulations of some sort, the fact that NYDFS was asking for industry and Bitcoin community input was a good thing. It suggested that the end product had at least a chance of being reasonable. Being from the world of financial markets, though, I was under no illusion that the finished draft would be perfect. Unfortunately the final document, while probably as good as could be expected, is closer to the fears of others in many ways than to my initial optimism.
Some of the regulations are sensible and, by increasing public confidence in the currency, could give the growing industry a serious boost. Most of the early sections that deal with background checks for company officers and the like make sense. There is no reason that Bitcoin related businesses should be exempt from requirements that apply to other financial concerns, although it should be noted that they don’t stop criminal behavior. Bernie Madoff et al have proven that over the years. What they do, however, is increase consumer confidence, an important development if Bitcoin is to gain widespread acceptance. Similarly, capital and reserve requirements don’t prevent bankruptcy or losses; they just make them slightly less likely. Including virtual currency as an acceptable form of reserve though is a big step towards more general acceptance. Things like requiring companies to have a cyber security policy and to keep records are, again, more about conforming to people’s perceptions of a respectable business than actually preventing any wrongdoing.
Unfortunately the document also contains the kind of ridiculous requirements that are all too familiar to anyone who has worked in the financial services sector, most notably in its section 200.19 (a) which deals with consumer protection. Most of the required warnings that will end up as unread fine print on any document, web page or promotional products emanating from companies involved with Bitcoin are simply pointless and ridiculously obvious. It should go without saying that, as with any currency, Bitcoin’s relative value can fluctuate and depends on people’s willingness to accept it in exchange for goods and services. Making businesses state so explicitly, though, makes it sound as if that is some unique risk of a digital currency. Similarly, the warning in section 200.19 (a) (8) that “The nature of virtual currency may lead to an increased risk of fraud or cyber attack” ignores the fact that virtually all financial transactions between institutions around the globe are conducted virtually, so are just as vulnerable.
Even this might not be as bad as it first seems. I guess the reality is that in the litigious world in which we live, warning people that coffee is hot or that power tools can cause injury is what businesses have to do. Requiring Bitcoin related businesses to do so may serve to protect them at some point in the future. To some extent, such nonsense has become so ubiquitous that most of us simply ignore these warnings and make our own informed assessment of real risk. I hope that will be the case with Bitcoin.
The real problem, however, is more to do with missed opportunity. Not including a “safe harbor” clause for startup ventures risks leaving innovation and development in the space to existing financial institutions who can afford the licensing process at an early stage; institutions that have an inbuilt interest in maintaining the status quo. In addition, not addressing issues that are unique to Bitcoin, such as key security, is a mistake that will probably have to be rectified. I suspect that both of these omissions will have to be addressed at a later date, but history tells us that adding to regulations once they are in place is not just likely, it is almost inevitable. The community will have to remain vigilant if those additions are to be helpful rather than just increasingly burdensome.
Despite these reservations, though, I believe that ultimately this is momentous news that will be good for the Bitcoin community. There will still be those that see having to provide ID to open an account with a New York based company as an infringement of their rights, or that simply object to any regulation whatsoever on principle. At least for now they will be at liberty to deal only with companies outside the NYDFS’s jurisdiction. Eventually, however, it is likely that areas of the world that don’t have regulated Bitcoin businesses will be like those with unregulated banking now, distrusted dinosaurs. When that day comes, though, it will be as a result of the widespread global acceptance of Bitcoin, something which those of us motivated by utility rather than ideology see as a desirable end. Last week, NYDFS took the first, if somewhat wobbly, step towards that goal.