The 45-day window for public comments on the New York Department of Financial Services' (NYDFS) recent BitLicense framework continues to shrink, but the barrage of reactions from those with an interest in the industry has yet to lose its momentum.
Most recently, two research fellows from George Mason University's Mercatus Center co-authored a 14-page response to the BitLicense proposal, highlighting some of its most critical shortcomings.
Jerry Brito and Eli Dourado made a point to laud NYDFS Superintendent Ben Lawsky for his department's "forward thinking" in outlining rules and regulations specific to virtual currencies, but criticized many of the stipulations found in the BitLicense proposal.
Bitcoin's 'unique characteristics'
Lawsky has stated that the fundamental goal for the BitLicense framework is to "strike an appropriate balance that helps protect consumers and root out illegal activity ... without stifling beneficial innovation". Brito and Dourado commend this goal in their proposal, but argue that the BitLicense framework as proposed fails to strike such a balance.
Their response notes that through BitLicenses, the NYDFS aims to develop rules and regulations "tailored specifically for the unique characteristics of virtual currencies".
To this effect, BitLicenses mirror similar rules and regulations already in place for traditional money transmitting businesses, but Brito and Dourado say that the BitLicense regulations are often more strict than incumbent money transmitting licenses, defeating the purpose of accommodating to the "unique characteristics" of bitcoin and other virtual currencies.
Brito and Dourado argue:
"The obligations faced by BitLicensees should not be any more burdensome than those faced by traditional money transmitters. Otherwise, the new regulatory framework will have the opposite effect of the one intended [...] If it is more costly and difficult to acquire a BitLicense than a money transmission license, we should expect less innovation."
Before highlighting specific instances where the BitLicense framework is particularly onerous, the authors praise Lawsky's acknowledgement that the rules of BitLicenses should not be "so burdensome or unwieldy that the technology can't develop".
A need for more clarity
Part of the problem with the BitLicense framework as proposed, the authors argue, is that some of the definitions included are so broad that non-financial services like Namecoin would be unnecessarily subject to regulation.
They also highlight the distinction between a web wallet like Coinbase and a software wallet like Electrum; since a software wallet provider like Electrum never holds either the public or private key for its users' bitcoin wallets, they should not be subject to the same regulations as a wallet provider like Coinbase.
Citing the lack of clarity in the current BitLicense proposal, the paper suggests a revision to section 200.2(n)(2) to read:
securing, storing, holding, ormaintaining full custody or control of Virtual Currency on behalf
Brito and Dourado also point to further clarifications that are needed in regard to mining pools and operations, notably the ambiguous language classifying individual miners versus mining pool operations.
A major problem with the BitLicense framework as proposed is the inclusion of regulations that puts BitLicensees at a disadvantage compared to traditional money transmitting licensees, the authors argue.
Pointing to examples like the requirement for all employees to submit fingerprints to the NYDFS (for traditional money transmitting licenses, only the applicant must submit fingerprints) and the requirement to collect physical addresses of all parties involved in any transaction, Brito and Dourado criticize the BitLicense proposal as "impractical and counterproductive".
"As one commentator put it, requiring that Virtual Currency businesses identify all parties to a transaction would be much like requiring Gmail or Yahoo! Mail to identify and gather the physical address of the recipients of the emails their customers send."
These stipulations neglect to consider the uniquely open nature of a decentralized currency like bitcoin, and as the authors mention, may very well result in stifling innovators who wish to explore the bitcoin market further.
An on-ramp for startups
Brito and Dourado continue to argue that many of the tedious and burdensome regulations that must be met by BitLicensees are more apt for traditional financial firms, not software-focused startup companies.
The authors point to the requirement that changes to business must be approved by the superintendent as particularly troublesome, as constant iteration is essential for startups and business model pivots are not rare for young companies:
"Indeed, it is unlikely that Silicon Valley would even exist today if entrepreneurs had to receive written approval from regulators every time they wanted to make a material change to their business model [...] The industry has thrived on permissionless innovation."
Brito and Dourado point out that traditional money transmitter licensees do not face the same requirements for changing their businesses, and that the NYDFS needs to take a more balanced approach in working with startups so that they "do not have the same compliance expenses that the world’s largest financial firms have on day one of their existence".
In conclusion, they explicilty commend Lawsky and the NYDFS for proactively approaching bitcoin regulation, but call for further revisions to be made to the BitLicense framework.
The authors suggest an additional 45-day comment window to be instated for final comments to be made on the new draft of the BitLicense regulations, in hopes of finding the right balance between preventing money laundering and fostering innovation in New York state.
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