On Monday, New York’s Attorney General Letitia James announced an order that two crypto lending platforms unregistered with the state cease operations in the state. The companies – their names redacted in a letter published by the James’ office – were ordered to cease all business activities in the state within 10 days.
The announcement calls attention to an austere regulatory framework that has made New York one of the most crypto-hostile states in the nation.
Alex Adelman is CEO and Aubrey Strobel is director of communications of New York-based bitcoin rewards app Lolli. This op-ed is part of CoinDesk’s Policy Week, a forum for discussing how regulators are reckoning with crypto (and vice versa).
As crypto becomes an increasingly profitable and innovative sector, disrupting industries from payments to the arts, states across the U.S. like Wyoming and Florida have moved to entice crypto companies to their borders. Meanwhile, New York, generally regarded as the financial capital of the world, has clung to regulations that make it immensely difficult for crypto companies, especially smaller startups, to operate in the state.
The state has doubled down on a regulatory framework that stifles innovation and prevents crypto startups from growing their operations in one of the world’s premier financial hubs. While New York City has become a buzzing center for the crypto community, the state’s regulatory framework is lethal for most crypto startups.
The pillar of New York’s regulatory approach to crypto is its BitLicense. New York’s BitLicense applies to a wide range of crypto organizations, including those transmitting crypto, buying and selling cryptocurrency as a customer business, providing exchange services to customers and issuing cryptocurrency. The license has staved off grassroots innovation in the city by ensuring that only companies with abundant disposable capital can shoulder its notoriously time and capital-intensive application and compliance measures.
The BitLicense negatively affects both companies and consumers in New York. New York state residents have dramatically limited trading options in crypto. They can only buy and sell coins from money transmitters registered in the state – of the hundreds of organizations offering services in the sector, only 20 have been issued BitLicenses in the last six years. No other state similarly curtails consumer trading options in crypto.
The stated purpose of the BitLicense upon its approval in 2015 by the state’s Department of Financial Services (NYDFS) was to protect consumers and guard against illicit activities like money laundering. However, the BitLicense has gone well beyond ensnaring ne’er-do-wells in crypto. By pouring pesticide on the industry, the BitLicense also zaps new shoots, indiscriminately stemming life in the sector such that only giants such as Square and Coinbase, both of which hold BitLicenses, can survive.
BitLicense holders and applicants have reported that the time allocation, legal fees and other costs drive the total cost of pursuing a BitLicense to more than $100,000, surpassing the means of most early stage startups. These include a 30-page application, $5,000 application fee, thousands of man-hours and the presentation of accounting and records from the last seven years. Of the 20 companies that have been issued BitLicenses, most are multi-billion dollar firms.
Notably, companies applying for a BitLicense are already beholden to both the stringent regulatory oversight and reporting requirements of federal agencies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the IRS and the Department of Justice (DOJ).
In 2015, the NYDFS proudly assured the public that other states would soon follow suit in emulating New York’s regulatory standards. Yet, in the six years since, no other state has issued requirements nearly as severe or extensive as those of the BitLicense.
The BitLicense is a failed experiment, widely criticized for crippling New York’s capacity to participate in the crypto sector’s boom and giving rise to more stalemates than solutions.
In 2020, the state revamped some of the license requirements, making it easier for some companies to receive conditional licenses. However, the most arduous parts of the application and adherence processes were largely left untouched.
The crypto industry is still in its relative youth and will undoubtedly experience tremendous growth in the years to come. As crypto continues to be at the nexus of innovation and profit in tech, states hostile to crypto like New York will lose out on revenue, talent and an opportunity to lead the way in effective, innovation-friendly regulatory frameworks.
The BitLicense’s roadblock to growth also places a firm ceiling on the potential of New York’s regional and local economies to grow in the coming years, as economic and technological trends drive us toward a future where information is increasingly decentralized and dependent on blockchain technology for the most secure digital infrastructure. New York’s BitLicense makes it probable that these products and companies, when they are built, will be built elsewhere.
Why, then, does New York continue its commitment to the BitLicense? It certainly helps that the primary source of NYDFS funding comes from institutional banks. Bitcoin and cryptocurrency exchanges threaten to disrupt the hegemony of the traditional banking system; therefore, one can easily see why the department would beat back companies disrupting traditional finance.
Beyond that, clinging to the BitLicense is irrational. The license is a relic, representing the NYDFS’ failed hopes that it would serve as a model for other states with its “regulation by strangulation” approach.
It’s not too late for New York to wise up. New York City is in a position to become a global leader in crypto by implementing smart regulation that gives companies room and resources to grow. Despite the arcane policies of the BitLicense, the city is home to a vibrant crypto scene powered by constant professional and social events.
The rise of non-fungible tokens (NFTs) and a booming market for cryptocurrencies have brought together artists, entrepreneurs and financiers in the city to create never-before-seen kinds of products using blockchain technology. The growth of the sector needs to be cultivated thoughtfully, with policies aimed at helping well-intentioned startups already struggling in a competitive industry to grow – the BitLicense isn’t helping.
As other cities and states vie to become the crypto capitals of the world, New York could easily capture this flag, but only if it acts to cultivate innovation rather than destroy it. It’s time for New York to end the BitLicense before it’s too late.