Does the NYDFS BitLicense Proposal Go Too Far?

Last week, the New York Department of Financial Services released a proposal aiming to set licensing, AML, and KYC requirements on certain types of bitcoin businesses.

We spoke with Carol van Cleef, who testified at the NYDF’s public digital currency hearings in January, regarding BitLicensing and its potential influence (positive or negative) on the New York and global marketplace,

Kevin: Well I just wanted to ask, one really general question… what are the implications?

Carol: (laughs) Well I think the most significant implication is that the companies that are able to get BitLicenses will have to be financial companies, they’re going to have to be appropriately capitalized and well we don’t know exactly what that capital level is. Its clear that a startup company, that a couple of people in the garage are going to be very hard pressed to - or in the basement - are going to be hard pressed to qualify for a license. They’re going to have to have an infrastructure in place including appropriate security, data security protection systems, tighter security, whatever it is… types of professional as well as compliance, appropriate compliance measures. And, as well as having in place appropriate systems for providing receipts which I’m still scratching my head over that one. You know how that’s going to be done with an all-electronic system? I think one of the more interesting pieces of the proposal is that they have to provide all of the information, enclosures, receipts, and etcetera, in the language of the user.

I was actually watching the Bitcoin hearings in January I think, and I saw you speak about some of these topics actually. One of the major concerns is that these regulations or proposed regulations mirror the traditional financial services industry, but is bitcoin something entirely different?

I think people are getting a much better at being able to distinguish between bitcoin the currency and Bitcoin the protocol. And the question is what really is Bitcoin? Is it a mechanism to transfer value? Whether you’re dealing with the payment system itself or with the currency. I think the proposal is attempting to deal with both kinds of issues and in particular focusing on where the Bitcoin is. Whether it’s dealt with as a currency or just a mechanism for transferring value but that’s what it goes to. And I really don’t think, despite what a lot of people say that at the end of the day, the infrastructures that are being built into or are being put into place. There are certain elements of it that are different from the way we conduct our transactions right now but there’s still some fundamental, core concepts that are there, in terms of value transfer. And I think that this is what this regulation is attempting to get at. It’s trying to adapt to a new way of doing business. But it’s still the same business that’s being done.

Which is the transfer of money. At a simple level.

Yes, transfer of money, transfer of value.

Can we circle back to what you said about startups? Do you think that these regulations, if they don’t change or are modified, would it kill startup innovation? Especially in New York, where it applies?

I think that it’s going to cause people to have to be more inventive in the way they go about their innovation in the space. It may be that established licensed companies are going to have to be more innovative so it’s very interesting and I haven’t really had a chance to fully think through. There is a provision in there that I believe says that you can’t have as an agent, anyone who’s not separately licensed. I don’t know if you saw that language in there. But it would seem to cut down on the ability of one… Player A goes out and gets the license and brings Player B in, and allows Player B to act as its agent but really run its own business.

That’s interesting…

It’s definitely emerged in the prepaid space and with some other money transmitting businesses. This seems to cut that off and says that if you’re going to bring somebody in to act as your agent. So if you think about it, it may be more appropriate thinking about it in the context of a central administrated/administered system, where you have somebody who is issuing the digital currency, virtual currency. And then has a series of exchangers who are handling that function for them. And what New York’s saying is that those exchangers have to be… the administrators have to be licensed and then the exchangers have to separately be licensed. They can’t operate as agent of the administrator.