Bitcoin's Regulatory Nightmare Is About to Get More Frightening

New York's BitLicense will further complicate an already byzantine regulatory regime.

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Let's say you want to start a Bitcoin company in the U.S., chances are you're going to need a Money Transmitter License, or rather 51 of them, because 47 states three territories and the District of Columbia each have their own permitting process for any business that handles money on behalf of its customers.

This regulatory maze is thwarting the plans of many Bitcoin startups.

"Some [of our] applications have been in for over a year, and we're not able to determine the path forward because it's not a clear process," says Megan Burton, CEO of the Bitcoin exchange firm CoinX, at a May 16, 2014 public hearing of the Conference of State Bank Supervisors' Emerging Payments Task Force.

Fred Ehrsam, cofounder of the Bitcoin Wallet firm Coinbase, said at a public event in New York City last month that becoming compliant in just half the states has so far taken his company "two years and cost $2 million."

But dealing with the states is just the beginning. Bitcoin firms also have to abide by the rules of the Federal Consumer Financial Protection Bureau and the U.S. Treasury's Financial Crimes Enforcement Network, which just sent a chill through the industry by fining the the cryptocurrency startup Ripple Labs $700,000 for allegedly violating its rules.

"It takes lawyers in each state, criminal background checks in each state, bonds in each state," says Jerry Brito, who's the executive director of Coin Center, an industry advocacy group. "It's a huge barrier to entry."

Instead of working to sort out this regulatory mess, government officials are piling on even more red tape. Benjamin Lawsky, New York State's top financial regulator, has spent the last year hammering out the details of the so-called BitLicense, a new regulatory regime that will apply to virtual currency companies that serve customers in New York.

"Right now the regulation of the virtual currency industry is still akin to a virtual wild west," Lawsky said at a public hearing on the BitLicense that was held on January 29, 2014 in New York City.

Lawsky points to a slew of recent headlines about drug sales, alleged money laundering, and theft in the Bitcoin world. But these activities are already illegal under existing laws and regulations, and New York already requires that companies obtain a Money Transmitter License. The latest draft of the BitLicense doesn't say whether companies will be required to obtain both.

"It doesn't acheive any purpose to require two licenses," says Brito. "When you do the background check for one license, what's the point of doing a background check for another license?"

While the final details of the BitLicense won't be released until later this month, the most recent draft duplicate federal regulations that already on the books. "It has an anti-money laundering provision, which is something that's unprecedented," says Brito. "Anti-money laundering is something…handled at by the Financial Crimes Enforcement Network at the Treasury Department. So now if you are a business, not only do you have to file Suspicious Activity Reports and Know Your Customer forms for the federal government, but now you also have to do it for a state as well."

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We already have rules against fraud and hacking, so really what we're left with is something that's really onerous and burdensome not just for American companies but for companies all over the world," says Bruce Fenton, who's the executive director of the Bitcoin Foundation.

What the Bitcoin industry really needs is for regulators to simplify the rules and processes that are already on the books. Not only would that clear the path for small innovative startups that can't afford a legal team, it would also leave consumers better protected because companies would be accountable to one agency.

"Ideally a small startup could go to one place, wherever that is, and follow clear and simple rules to get licensing," says Brito.

"We don't know when the next Facebook is going to come along started by a guy in his dorm," says Fenton. "What if he had to spend $4 million to start that? We never would have seen it. We may not even know what kind of innovations are around the corner if we stifle them before they have a chance to start."

3 minutes and 23 seconds.

Written and produced by Jim Epstein.

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