New York became the first state to issue comprehensive regulations for Bitcoin and other digital currencies last week, bringing to a conclusion a 22-month process that saw regulators and the industry’s leading voices embrace and bicker like a family at Thanksgiving.
As the first of its kind, the BitLicense reflects the difficulty in trying to balance the competing goals of preserving the government’s traditional duties to protect consumers and prevent crime with an industry’s repeated calls for a laissez-faire approach to government oversight. Even for a state that made great efforts to engage with industry leaders to find a mutually acceptable solution – something other states have been loathe to undertake – New York’s regulations fell short of satisfying Bitcoin’s backers.
Benjamin Lawsky, the Superintendent of the state’s Department of Financial Services (DFS), announced the regulations at the BITS Emerging Payments Forum in Washington DC. “We want to promote and support companies that use new, emerging technologies to build better financial companies,” he said during a speech at the event. “We just need to make sure that we put appropriate regulatory guardrails in place.”
As a protean technology that can serve as a digital currency, commodity or ledger system with unlimited potential, Bitcoin has befuddled, terrified and entranced regulators and law enforcement officials since its inception in 2008. The technology’s potential and quixotic nature left it with no precedent.
Lawsky’s first steps reflected the challenge Bitcoin posed to government regulators. He jumped into the mix in August 2013 by publicly characterizing Bitcoin as a “virtual Wild West for narcotraffickers and other criminals.” His stance softened over time as Lawsky began to publicly espouse the technology’s benefits and repeat the industry’s criticisms of the financial sector.
Compared to other state regulators, who had largely remained silent, the move propelled Lawsky to the forefront of regulation of the new technology. In many ways, the BitLicence he came to propose – the first of its kind in the nation – came to define Lawsky’s tenure as New York’s leading financial regulator: he plans to resign from the post at the end of the month.
Despite Lawsky’s embrace of Bitcoin’s potential, the first version of the Department’s proposed BitLicense released last July upset many in the Bitcoin community. Erik Voorhees, a leading Bitcoin advocate, accused the DFS of rendering consumers as serfs “upon a farm of information production – used for purposes both benevolent and vile, without any say in the matter.”
Unlike other regulators, however, the DFS was willing to hear feedback from naysayers. Six months after the initial proposal, it incorporated many of the changes proposed by the industry. Once again, Lawsky tried to strike an effective balance between encouraging innovation by not saddling Bitcoin start-ups with overbearing regulations with a need to shield consumers from fraud and prevent money laundering. From the point of view of the technology’s backers, that was certainly more welcoming than the SEC, which warned investors of Bitcoin’s dangers.
The final version of the BitLicense released last week made five concessions to the industry, ranging from exemptions for software developers to reduced compliance requirements.
Despite these changes, many Bitcoin advocates complained that the Department fell short of expectations. Jerry Brito, the executive director Coin Center, the leading Bitcoin research and advocacy center, reflected this sentiment in characterizing the BitLicense as a “mixed bag.”
While the advocacy group commended Lawsky for welcoming the industry’s input, it lamented the Department’s decision to place businesses working with virtual currencies to higher standards than traditional financial institutions.
Expecting this criticism, Lawsky believes that his office has taken a worthy first step. “What we are currently seeing is the collision of a very tightly regulated financial sector and a much more lightly regulated technology sector,” he said last week. “That collision isn’t always going to be pretty at first. But we – both regulators and technologists – have a responsibility to find common ground and work together in good faith.”
Whether these competing groups will find common ground is the question hanging over Bitcoin’s potential as a mainstream currency and a force for technological innovation.