An Overview of BitLicense From It’s Inception
The year 2014 has turned out to be the year where almost everyone has hopped on the Bitcoin bandwagon. Bitcoin start ups have sprouted out from all corners of the world, tacking a range of crypto-currency services. But, as Bitcoin slowly seeps into the mainstream, bitcoin businesses everywhere have been demanding regulatory clarity from legislators and industry governing bodies.
Earlier this year, in July, the New York Department of Financial Services released a proposed regulation for Bitcoin companies. The proposed regulatory framework called “BitLicense” was submitted for a 45-day notice and comment period to solicit public feedback. The draft proposal was first of it’s kind as there had been no comprehensive list of regulations by another government entity. The bitcoin community has embraced this process as a milestone for Bitcoin. A consesus of opinion among the early Bitcoin adopters revealed that there was a dire need of laws along with regulatory clairty which would offer consumer protection, financial transparency of the businesses involved in order to prevent another Mt. Gox like event in the future.
Being the hub of the financial world, there were high expectations from New York. Ben Lawksy, the Superintendent of the DFS, announced the proposal on Bitcoin subreddit, which is along with BitcoinTalk forums the most active bitcoin discussion on the Internet. The Bitcoin community in general appreciated this approach and the effort to make collaboration happen. After a period of long discourse, almost everyone involved in the Bitcoin industry concluded that it would be almost impossible to comply with the regulatory framework as suggested in the draft proposal. Thus, starts the due diligence period.
Why did BitLicense face significant backlash from the Bitcoin community? Let’s look at the summarized version of the proposal submitted by redditors!
Holders of BitLicense’s will be required to:
Comply with the new regulations and register with the state within 45 days.
Background check required for all employees/founders.Fingerprints of the above submitted to FBI.
Requires a bond held with New York State.
Requires written approval of all new business activities/offerings.
Requires that you keep 10 years of records of business transactions.
Virtual currency accounts not active for 5 years must be handed over to the state.
Retained earnings and profits of the company can ONLY be invested in US dollars: Federal bonds, state bonds, or money market funds.
Mandatory reviews every 2 years: financial condition, safety/soundness of business, policies…
Quarterly financial statements required within 45 days of the closing of each quarter.
Financial statements must be audited, use GAAP.
Typical AML/KYC requirements.
Cybersecurity requirement: requires security officer, security plan, audits, backup plan.
In marketing/advertising, you must include “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.”
Must disclose a long list of material risks with dealing with virtual currency: e.g., “not legal tender, backed by any government”
What seemed to be the vital criticism regarding BitLicense by majority of Bitcoin advocates and enthusiasts was that the underlined proposals in the regulation were unpractical and in reality not enforceable. They also went further and commented that NYDFS is deliberately raising the bar to stifle innovation and eliminate the small players by raising high barriers to enter. This response from the Bitcoin community was stronger than anticipated. Eventually, NYDFS superintendent Benjamin M Lawsky due to public interest would extend the comment period for the BitLicense proposal by an additional 45 days.
On October 15, Ben Lawsky, while speaking at the Benjamin N Cardozo School of Law, New York made a public statement. He said:
“To clarify, we do not intend to regulate software or software development. For example, a software developer who creates and provides wallet software to customers for their own use will not need a license. Those who are innovating and developing the latest platforms for digital currencies will not need a license.”
On October 21st, the 90 day comment period came to an end by the final comments submitted by Circle and BitPay – arguably the most influential players in the Bitcoin industry. Both of these Bitcoin based startups shared a similar sentiment which indicated that:
“At the very least, we encourage the NYDFS to develop a regulatory framework that maintains a level playing field by establishing similar guidelines for both digital currency firms and other money transmitters. There are several areas in the proposed rule that go well beyond what is required for other money transmitters.”
On October 28th, participants involved in the crytpo 2.0 technologies like Counterparty and Mastercoin denied false claims regarding their crackdown by the US Securities and Exchange Commission (SEC). Following this event, Ben Lawsky was asked if the second generation of non-currency applications utilizing the blockchain would come under the regulations proposed in the Bitlicense. The response was straightforward – BitLicense was not designed to cover these new generation projects.
Just about three days ago, NYDFS had publicly release 3,700 comments that it had receive regarding it’s BitLicense proposal. Some of the largest organizations in the US have been proactively involved with this process. Amazon, Walmart and Western Union being prime examples among others. This move from these giants indicated that there’s a dire need for regulatory clarity regarding Bitcoin.
Thanks to the increasing resistance by the bitcoin community against the initial BitLicense proposal, the last five months of painstaking efforts serves as evidence that lawmakers are willing to work together if there is enough pressure by it’s supporters. BitLicense still hasn’t gone through anywhere near it’s last draft and yet so much has already happened. We’ll follow on the updates as they are revealed to us.