New York's proposed bitcoin regulations have been the subject of increasing criticism in recent weeks, with a wide variety of industry leaders coming forward to criticize the laws for their lack of clarity and for putting up unnecessary obstacles to the ecosysem's future growth.
For example, the draft rules published by the NYDFS stipulate that the regulations apply to all individuals and companies who engage in 'virtual currency business activity', a definition that includes the act of 'controlling, administering or issuing a virtual currency'.
While the proposal and its implications are still being evaluated in an extended comment period, the rapidly expanding altcoin ecosystem believes it could face future pressures should it be made to comply with the regulatory framework.
With this in mind, CoinDesk reached out to a number of leading altcoin developers and communities for comment on how they view the proposal and how they believe they would be affected by the laws.
While many developers had their own insights into the scope of the regulatory framework, nearly all agreed on two points – that the cost pressures that could arise from the BitLicense would be magnified for alt projects, and that it will be nearly impossible for New York to regulate an open-source process.
One developer, who wished to remain unnamed, explained to CoinDesk that developers by nature only have so much control of the coins they introduce, stating:
Notably, all the altcoin developers CoinDesk spoke with said that regulators would be unable to stop altcoin projects from operating within New York regardless of whether they applied for a BitLicense.
Anonymous transaction technologies and projects that utilize solutions like the Tor network, many argued, would make it difficult for regulators to stop such activity.
Application to alts unwise
Altcoin developers suggested that if the BitLicense is applied to altcoin projects, it would reflect what feathercoin developer 'mnstrcck' called "a misunderstanding of what the technology is at its roots, and what it means".
This argument has been expressed by industry leaders and professionals who have weighed in on the BitLicense debate, and as mnstrcck explained, is indicative of the broader flaws in the NYDFS proposal.
Adam from the vertcoin development team remarked that the process of interpreting the BitLicense in the context of the altcoin industry could be complicated from a regulatory perspective. He said that developers aren’t running a business – and like mnstrcck, Adam argued that developers are more technological managers than business owners in the traditional sense.
Should this definition be applied to alts, he continued, the rules would impact both developers and the communities that establish themselves around a particular coin.
Bryce Weiner, altcoin developer and director of cryptoeconomy engineering for Blockchain Technology Group, said that on a broader level, the BitLicense framework ignores the potential application of block chain technology to use cases beyond finance.
As a result, he argued, altcoin developers who want to take the technology outside of finance could face significant challenges.
Addressing consumer risk
When asked if the altcoin market needs broader consumer protections – ostensibly the goal of any BitLicense or similar framework applied to that space, developers were split on the need for such rules.
Dogecoin founder Jackson Palmer told CoinDesk that in recent months, the rise of scams involving pump-and-dumps and initial coin offerings (ICO)s has created anxiety that could be addressed by regulation. On the other hand, he argued that investors and traders have an obligation to do their own research before putting any money into a project they may not fully understand.
Vertcoin’s Adam suggested that regulators should focus regulation on the bad actors in the space rather than developers who are trying to create legitimate block chain networks and build out services. Like Palmer, he noted the rise of altcoin scams and the risk to market participants, and agreed that those who decide to invest in altcoins need to do their homework.
developer BTCDrak disagreed with the idea that consumer protections for the altcoin world are needed.
Arguing that federal-level regulators have already largely weighed in on bitcoin, he questioned the need for the BitLicense at all, saying:
Pursuing self regulation
Many developers said that a more appropriate alternative to a centralized regulatory framework like the BitLicense would be for the community to come together to develop a series of standards by which project development could operate.
Weiner said that a self-regulating organization (SRO) for coin developers could play a role in creating a more positive environment for investors, project leads and everyday users.
"Such an organization could then issue exams which certify competence in not only blockchain mechanics, but in the long-term economic implications such economics have upon any given network," he added.
Grassroots initiatives to self-regulate the alt development community have sprouted up, including a project called Proof of Developer. This initiative, while not without controversy, assigns a 1-to-5 rating scale for coin developers based on the amount of personal information they make public about themselves.
Alt regulation still uncertain
It remains to be seen how the BitLicense could be, if at all, applied to altcoin projects. As many developers told CoinDesk, the diverse nature of the altcoin ecosystem makes it difficult to apply what is largely a financial services framework.
Palmer remarked that, in the end, many of the regulations put forth in the NYDFS proposal could be applied to more centralized currencies like those already deployed or soon to be launched by large e-commerce and payments platforms.
New York skyline image via Shutterstock
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.
Learn more about Consensus 2023, CoinDesk’s longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.