Fear, uncertainty and doubt (FUD) is a term often used in bitcoin circles to describe feelings about the prospect of regulation concerning virtual currencies, and there may be no better phrase to convey the mood at the start of the New York Department of Financial Services’ (NYDFS) first day of public hearings on virtual currencies.
Following a prolonged and palpable excitement in the boardroom, an uneasy quiet took hold following the arrival of Cameron and Tyler Winklevoss, principals of Winklevoss Capital Management and major investors in BitInstant – the company whose CEO was arrested not 24 hours before for his association with Silk Road, the biggest online bazaar of illegal goods and services devised to date and a veritable worst nightmare for regulators.
But if fear and uncertainty were high at the onset on both sides of the aisle, what gave way after four hours of questions, answers and debates was a feeling that the immense energy and intellectual capital driving the space will persevere at the expense of virtual currency’s more fringe ideological elements.
Mark T. Williams, a professor at Boston University School of Management and upcoming panel speaker, described the comments by Barry Silbert, founder and CEO of SecondMarket; Jeremy Liew, partner at Lightspeed Venture Partners; Fred Wilson, partner at Union Square Ventures; and the Winklevoss brothers as being undeniably pro-regulation.
“The vice chairman of the Bitcoin Foundation [Shrem] made them realize that they’ve lost leverage, and if they want to regain that, they better be more accommodative, instead of being more adversarial. Up until now, the strategy of bitcoiners has been anti-establishment, anti-regulation, but if they want to make Bitcoin payment system to be used globally, they will need to work with regulators”
Regulation in 2014
If the assembled investors were more willing to bring controls to the ecosystem, regulators also seemed to open up to the new financial technologies, as well as the possibility of a future of banking where the speed of money transfers no longer lags behind the speed of information.
Creator of Litecoin, Charlie Lee, indicated that he was excited at how both parties were able to find this common ground over the course of the day’s panels:
“I feel they’re coming in with a very open mind and they seem pretty receptive of our ideas, so I feel pretty positive about the outcome.”
Of course, while regulators as well as industry investors seem united in this common goal of continuing bitcoin’s great economic experiment, discussion later turned to the admittedly massive challenge of adapting 50 to 100 year-old statutes to the needs of entrepreneurs who need to compete in a fast-moving market.
However, the NYDFS seems optimistic events like this will lead toward finding a solution, and soon. Benjamin M. Lawsky, superintendent of financial services for the State of New York, said:
“Ultimately, it’s our expectation that the information we’ve gathered in this fact-finding effort will allow us to put forward, during the course of 2014, a proposed regulatory framework for virtual currency firms operating in New York.”
A thawing of the ice
While Lawsky began the conversation by noting that the event was “not a congressional hearing”, an early drawing of the lines was evidenced by the hearing’s first question, which directly addressed the “cloud hanging over the industry” following the arrest of BitInstant’s Charlie Shrem. But Liew and the other witnesses moved quickly to distance themselves from Shrem and illustrate how the case could be seen positively.
“This speaks to the satisfactory nature of existing regulatory framework,” Liew said.
Cameron Winklevoss went further, suggesting bitcoin investors would even be welcoming to clear regulation that could prevent similar setbacks to the community.
“The Wild West attracts cowboys. A sheriff would be good thing.”
Models of regulation emerge
Regulators spent much of both discussions focusing on how the witnesses believed bitcoin could be best regulated. Wilson took the lead on this question, noting that New York should be cognizant of how its actions could stifle innovation and push young companies to distance themselves from making themselves known to regulators:
“Many of these new companies, are two, three, four-person companies. It will be very difficult for them to do what JP Morgan Chase does.”
Wilson went on to suggest that New York implement a permissive environment that allows entrepreneurs to test their ideas before bearing the heavy cost of compliance. This “safe harbor” period would allow entrepreneurs time to move through the licensing processes, but without the fear they could be shut down.
However, Daniel Alter, Lawsky’s General Counsel, expressed reservations about such a permissive climate, noting that when a service involves “sending money to terrorists,” more serious considerations needed to be made. Lawsky said:
“If the choice is permit money laundering on one hand, but permit innovation on the other, we’re always going to choose squelching the money laundering. It’s not worth it to society to allow money laundering to exist to allow 1,000 flowers to bloom from innovation.”
Speaking in the second panel on virtual currencies and regulation, Judie Rinearson, partner at Bryan Cave, suggested she too supported a safe harbor plan, drawing a comparison between bitcoin and the prepaid card industry, which in its early stages had issues limiting fraud. She added:
“I think that’s a fabulous idea, that it’s worth thinking about, as long as it’s not owned by fraudsters.”
Exchanges, wallets most likely targets
Panelists differed on where regulation should be enacted, but certain consensuses did emerge. For example, Lee and Rinearson both indicated that miners should not be constricted.
The best option available to regulators, the witnesses indicated, was to put a special emphasis on businesses that facilitated the transfer of virtual currency to fiat. Rinearson stated:
“I know that I mentioned that I kind of look at virtual, digital cryptocurrencies as something that are under the water. I don’t see that as the regulated part. The risk comes when you’re getting out of the water, then it’s time. Because as soon as you can take these currencies and exchange them for a fiat currency, the risk changes considerably.”
“Any regulation should help to secure cryptocurrencies and the wallets used to hold them.” – Charles Lee at the New York bitcoin hearings
— CoinDesk (@coindesk) January 28, 2014
Investor protection was another big point of emphasis for regulators, who sought guidance on how to protect consumers from the risk of the notoriously volatile financial instruments, and whether insurance pools should be used to protect consumers from loss. Rinearson continued:
“There are other things that these exchanges need to be investing in, and setting up this insurance pool for consumers who are investing in a volatile product, I guess I don’t see that as a use of this fund.”
A united business front
Despite the bitcoin world’s anti-centralization stance, what emerged at the hearing was a clear commonality in how bitcoin’s primary investors are looking to move the technology forward, and indications are this will mean embracing regulation at the cost of the early ideology that propelled the market to where it is today. Liew said:
“The market of radical libertarians is not very big, the market for criminals is not very big.”
Liew also talked about what he called “a change in character of the people being involved in bitcoin”, noting that bitcoin is “moving in the direction of greater legitimacy” and today’s bitcoin businesses, like the Bitcoin Foundation, are attracting very different types of users.
Perhaps most vocal was Wilson, who laid out his five stages of bitcoin adoption. The first phase being defined by an “open source, geek, nerdy, crypto-libertarian kind of thing”; second being the vice phase; and the third and current phase defined by price speculation.
The promise of bitcoin
The coming stages, of bitcoin mass adoption, were also given ample play, as the gathered investors attempted to get regulators to see the larger benefits that could come from a financial system built on top of bitcoin’s infrastructure.
In comments, witnesses were keen to put the emphasis on the unknown advances that may be waiting around the corner, while stoking fears that too much action could inhibit job growth and push innovation overseas at a time when the US is still fighting high unemployment.
“We’re trying to create a world where transactions can move globally for free. We need to put the compliance into the code.” – @fredwilson
— CoinDesk (@coindesk) January 28, 2014
He also hinted at what the benefits of this change would bring to New York, saying that the next stock exchange and the next Ticketmaster will be built on top of bitcoin, and that a large bitcoin exchange could even find its home in New York given the right actions from regulators.
NYDFS hearing image by Pete Rizzo