Bitcoin has the potential to drain the money and influence out of Wall Street, but increasingly it looks as if only Wall Street will have the money and influence to run companies that deal in Bitcoin.
To operate in the U.S., Bitcoin companies that handle funds on behalf of their customers need to obtain 51 different money transmitter licenses—47 states, three territories, and the District of Columbia each have their own permitting proccesses—and they need to abide by the rules of the Federal Consumer Financial Protection Bureau (CFPB) and the U.S. Treasury's Financial Crimes Enforcement Network (FinCen).
Fred Ehrsam, the cofounder of the Bitcoin wallet firm Coinbase, which has raised $106 million so far in venture capital funding, said at an event in April that so far becoming compliant in just half the states has taken his company "two years and cost $2 million."
This regulatory nightmare just got a bit more scary. Today, New York State's Superintendent of Financial Services, Benjamin Lawsky, released the final draft of the so-called BitLicense, which is yet another state-based regulatory regime that applies to companies serving clients in New York. (Several other states are developing their own version of the BitLicense.)
In a speech today timed with the release of the new regulation, Lawsky said that the final BitLicense clarifies and improves on the most recent draft in a variety of ways. Companies will only need approval when making "material changes" to their products, he said, not for minor updates; companies already complying with FinCen's anti-money laundering regulations won't need to duplicate their reporting with the state; and firms will be able to obtain both a BitLicense and a money transmitter license through "one application process."
"It's important to draw a distinction between what Lawsky said in his speech and what's actually written in the regulation," says Cato Institute Senior Fellow Jim Harper, who's the former global policy counsel for the Bitcoin Foundation. "He may not fully understand every detail written in the regulation, and it's going to be his successor who interprets the language," Harper notes. (Lawsky announced last month that he's stepping down from his post to become a consultant.)
Despite Lawsky's claim that the BitLicense won't duplicate FinCen rules, "the new language is vague and unclear about how compliance with federal regulations will exempt a BitLicensee from those state-level obligations," Coin Center Executive Director Jerry Brito noted in a blog post titled, "New York BitLicense Falls Short."
Harper notes that the anti-money laundering provision in the BitLicense hasn't substantially changed since the original draft, and it both duplicates and goes beyond the federal requirements. "It requires that companies report the physical addresses of their clients, which negates many of the benefits that Bitcoin offers," says Harper.
Even if we take Lawsky at his word that companies won't need to obtain two licenses, "[t]he final BitLicense still creates a lopsided regime between digital currency businesses and traditional money transmitters and banks," says Coin Center Director of Research Peter Van Valkenburgh, with rules that "will not and have never applied to the legacy payments industry."
It's also disappointing that the final draft of the BitLicense doesn't explicitly exclude companies that handle multi-signature transactions. This is a security and trust feature in which three cryptographic keys are used to transfer funds out of a Bitcoin wallet, and any combination of two keys releases the funds. Multi-signature wallets allow buyers and sellers to engage independent third-party providers to arbitrate disputes, but the BitLicense regulation doesn't make it clear if these providers willl need to be licensed.
"While we appreciate some additional clarity offered by the Department of Financial Services today, we remain concerned over specific components of the BitLicense that were left unchanged, including state-specific anti-money laundering rules that are inconsistent with federal guidelines," said John Collins, head of policy and government affairs at Coinbase, in a prepared statement. "Moreover, it's troubling that this nascent industry is being subjected to more onerous regulations than those typically applied to legacy financial institutions."
To get a better picture of what the BitLicense will mean for the industry, Harper suggests paying close attention to Circle, another well-funded Bitcoin company that has Wall Street's backing. (Goldman Sachs recently took a major stake in the company.)
In a blog post last August, Circle CEO Jeremy Allaire wrote that "without some material changes, Circle will have no choice but to block New York customers from accessing our services."
"Expect Circle to go back on that statement," says Harper. "They will do business in New York, they'll just spend loads of money on lobbyists and regulators."
Goldman Sachs CEO Lloyd Blankfein perfectly summed up the situation in an interview last month:
It's very hard for outside entrants to come in and disrupt our business simply because we're so regulated. We hear people in our industry talk about the regulation, and they talk about it with a sigh about the burdensome of regulation. But in fact in some cases the burdensome regulation acts as a bit of a moat around our business.
In a recent Reason TV video, I looked at the moat that's being erected to keep Bitcoin startups at bay: