The New York Department of Financial Services (NYDFS) published their proposal for a BitLicense a little over a week ago, and it has already led to a storm of critique. The proposal is a 40-page document, but most cryptocurrency community members already stumble over the definition of “Virtual Currency Business Activity.” As covered previously, this definition includes:
- Receiving Virtual Currencies for transmission or transmitting the same;
- Securing, storing, holding, or maintaining custody or control of Victual Currency on behalf of others;
- Buying and selling Virtual Currency as a customer business;
- Performing retail conversion services;
- Controlling, administering or issuing a Virtual Currency.
The only exemptions is made for merchants or consumers for the sole purpose of buying and selling goods. This has angered the community, as many believe this will hurt small businesses and innovation in general. What is sparking even more outrage is that the NYDFS did not provide a job impact statement, as “it is evident from the subject matter of the regulation that it will not have an adverse impact on jobs and employment opportunities in New York State.” Also, the NYDFS believes “that it will be economically and technologically feasible for small businesses to comply with the requirements of the proposed regulation” according to its regulatory flexibility analysis.
Given the weight and extend of the proposed regulation, these statements can at least be considered remarkable. As mining pools would also be subject to the regulation, American Eleutrhria has already announced it is planning to shut down following the proposal. Eleutrhria hosts both mining pools BTC Guild and Scrypt Guild. But it is certainly not the only one preparing for the worst. Other small startups are even planning to leave New York. It therefore seems evident that only the opposite of the NYDFS’s statement can be true, leaving many wondering whether the NYDFS understands the matter at hand and whether it has a full scope of the cryptocurrency landscape.
To get a better understanding of the potential impact of BitLicenses and the current definition of Virtual Currency Business activity, the following will discuss several services or activities on the cryptocurrency landscape that will be egregiously impacted by the proposal.
Mining pools were already mentioned with Eleutrhria’s plans to shut down one of the oldest and still one of the biggest Bitcoin mining pools, BTC Guild. Even though Eleutrhria operates in Nevada, it could be affected by the New York regulation if its users reside there. Even if this is not the case, other states could copy the regulations. The cost of complying would well exceed the income of any pool, which generally consist only of a small mining fee. Significantly raising these fees is not an option in the highly competitive mining environment.
It is expected that not even Reddit or Twitter tip bots will be able to escape a BitLicense in its current form, as they allow users to transfer small amounts of money. As tips can be made to anyone with an account on Reddit or Twitter, tipping services would for instance not be able to comply with the requirement have to collect extensive information from all parties in a transaction. This would include a physical address, which is not even required information platform these tip bots operate on. If it was, tip bot creators would still not get access to this personal information.
Resellers such as Coin.mx or WeSellDoges would not be exempted from a BitLicense, as the proposal explicitly mentions “buying and selling Virtual Currency as a customer business.” This could make resellers uncompetitive versus regular exchanges. Resellers are often more expensive than exchanges, and as they have less controls already in place they could see their fees increase more relatively. At this point, the proposal fails at which it was designed to do: protecting consumers. Cryptocurrency exchanges will always be a more risky place to get cryptocurrencies from than established resellers, as the latter has no access to the customer’s wallet at any point in time.
Crowdfunding and peer-to-peer lending
Cryptocurrency crowdfunding platforms, as an intermediary, would require a BitLicense as well. Likewise, anyone participating in a project would be subject to the same requirement. The benefit of adding cryptocurrency payments to such a platform might not outweigh the additional compliance costs, compared to offering only fiat currency support. As cryptocurrencies make crowdfunding more accessible for anyone in the world, a good amount of employment opportunities could be at risk.
Adjusting the definition of Virtual Currency Business activity is not a matter of addressing the previous items. It is hard to predict how future innovative solutions will fit in the regulatory framework. At the moment, the current definition makes it likely that these would require a BiLicense as well. This has the potential to stop any project in its tracks before it even gets started. The previous should clarify why the proposal has already led to the Chamber of Digital Commerce requesting an extension of the 45-day comment period. The difficulty of the matter at hand makes producing a balanced definition likely to take a serious amount of time, after that there are still 34 pages to go.