June 4, 2015
After having been under review since August 2013, the final draft of New York’s BitLicense was released last night, as reported by CoinDesk. The BitLicense outlines New York’s regulatory oversight for virtual currencies, expecting other states follow suit. The proposal highlights weaknesses in virtual currencies and their interaction with existing financial services. The BitLicense proposes measures aimed at reducing fraud and malpractice. But critiques have pointed out flaws in the proposal, citing that if approved, could leave New York as the Backwater of Bitcoin in the US. Let’s review the final draft and discuss a few key points.
Licenses will not be required to write computer code for virtual currencies
This is an excellent addition to the proposal; previously there were no distinguishments between a ‘virtual currency business’ and ‘virtual currency software developers’, meaning any developers of virtual currency software would need a $5,000 license to operate legally. Obviously, this would have negatively impacted virtual currency development in New York. This amendment is a step in the right direction.
Transmission of virtual currency for non-financial purposes
The overall sentiment of the proposal was to refine regulation based upon the use case of the virtual currency protocol. Refining the definitions of virtual currency transactions to differentiate between their intended function greatly benefits Bitcoin business and prevents draconic regulatory requirements stifling startups.
Regulations which do not hinder virtual currencies need to recognize the different use cases for this protocol; it’s not just about currency. The decision to define a transaction which has no monetary value or “for non-financial purposes” to not need a license as it does not classify as “Virtual Currency Business Activity” is an amendment which will greatly help New York’s Bitcoin ecosystem.
No smart contract-based regulation
Smart contracts represent computer protocols which facilitate, verify, or enforce the negotiations of a contract. This type of concept can be newly applied to existing services thanks to ‘virtual currency technology’, creating automated contracts which require no central authority for enforcement. These contracts can include financial or non-financial attestation based cases. This type of system is an entirely new concept which the proposed BitLicense does not recognize.
Raising the entry point for startups
The cost and requirement of the license at such an early stage of development negatively impacts startups. The license should be amended to exempt small companies. There is little to no threat that financial malpractice or money laundering would increase from the exclusion of small businesses from needing to hold a license. By amending the proposal to only be required for companies operating over a certain transaction volume annually, you would allow new companies to remain competitive and innovative whilst securing the methods of practice used in general practice.
New York could be shooting itself in the foot by raising the barrier to entry for startups. The tradeoffs between security and freedom need to not stifle innovation or you will prevent competition. It’s already easy to see how these types of decisions would allow players with more capital to have advantages over players with better technology. It is important that regulation not stifle the innovative potential of this technology because it is truly global; strict regulation will only make you less competitive, it will not affect the entire virtual currency ecosystem.
New updates or security features require approval
An area under great discussion is the decision to prevent companies from being able to add updates or security features (to the residents of New York) until it has NYDFS approval. This was amended in the latest update so that businesses ‘won’t require approval for standard software updates—only material changes to technology’ which leaves some ambiguities but is a step in the right direction. It’s hard to believe, however, that companies would implement ‘material changes to technology’ which would require oversight; I think the security professionals behind bitcoin businesses are more knowledgeable than the regulators.
The final draft of the BitLicense has been met with mixed reviews; the consensus is that the New York will not become the most favorable state for Bitcoin business. The BitLicense will impact the startup community the most, raising the barrier to entry and increasing friction for Bitcoin integration. It will be interesting to see if other states follow suit or develop regulation aimed at growing Bitcoin FinTech in the long-term.
If you would like to further read into the License and reviews check out the following:
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