Coinbase has now completed its formal response to the New York Department of Financial Services on their recently proposed BitLicense Draft.
To summarize the main points of our response:
We feel the BitLicense is duplicative of the current money transmitter regulations which are a more appropriate form of regulation for the future of digital currency.
Certain aspects of the proposed recordkeeping and anti-money laundering requirements would eliminate the core utility of Bitcoin and cryptocurrencies, substantially hindering the innovation which all of us including, purportedly the NYDFS, find so promising.
Any regulation of virtual currencies at this stage should take care to exclude non-financial use cases and companies who are not storing Bitcoin on behalf of customers.
While we applaud the NYDFS for being forward thinking on virtual currencies, we feel the proposed BitLicense falls short of its stated goal of balancing customer protection and rooting out illegal activity while encouraging innovation. We remain cautiously optimistic that the NYDFS will work to reach a more appropriate balance that recognizes Bitcoin as a rapidly evolving technology.
We dive into each point in a bit more detail below.
The BitLicense Would Be Redundant Given Current Money Transmitter Regulation
A separate BitLicense would create unnecessary inefficiency and expense for both the NYDFS and licensees without reducing risk to consumers or risk of illegal activity.
There is a surprising amount of overlap between the proposed BitLicense and Money Transmitter Licenses. The current money transmitter licensing system already has a great deal of overlap between each state, requiring companies to go through the same processes up to 48 times, including fingerprinting, surety bonds, capital requirements, costly on-site examinations, and reporting obligations. Adding a BitLicense would further duplicate this effort. This is especially true for Bitcoin business that wish to engage in other forms of money transmission (i.e. stored value).
Furthermore, we believe FinCEN put a clear and strong AML policy stake in the ground with their Bitcoin guidance in March of last year. We believe it would be in the best interest of New York residents, the NYDFS, the law enforcement community, and the Bitcoin community if we were all working with a uniform set of AML obligations.
We believe the Department could broaden its interpretation of “money” to include virtual currencies and regulate virtual currency businesses under current money transmitter rules.
The BitLicense As Proposed Could Eliminate The Core Utility Of Bitcoin: An Open Payment Network
Perhaps the greatest feature of Bitcoin, as well as other cryptocurrencies, is the fact that it is an open protocol that anyone can use.
As such, it is possible for a wide range of individuals to develop and utilize different solutions—such as near instantaneous and free remittances, micro-transactions, or other distributed ledger uses—that are capable of worldwide interoperability so long as they are based on the same open protocol.
However, by requiring the collection of information not supported by the protocol (such as the names, account numbers, and physical address of all parties to a transaction), the proposed rule would force licensees to operate closed, proprietary payment networks (similar to Visa or PayPal), effectively eliminating the utility of this feature and stifling innovation.
Regulation Should Apply Only To Companies Holding Customers’ Bitcoin
Finally, the scope of activity captured by the definition of “Virtual Currency Business Activity” in the proposed regulation could include a host of non-financial services businesses. The distributed ledger at the core of many virtual currencies allows for inexpensive, reliable, and public recordkeeping which can be utilized in myriad of innovative ways that are unrelated to money. These uses should not be governed by statutes established to regulate money transmission.
In addition, we feel that only companies who store Bitcoin on behalf of customers should be considered for regulation now or in the future. Coinbase is an example of such a company, and luckily has the resources to work diligently with regulators. But many Bitcoin companies do not store Bitcoin on behalf of their customers or are startups incapable of bearing the cost at their current stage. Regulation that is more targeted would go a long way to benefiting innovation while accomplishing the same goals of consumer protection and rooting out illegal activity. Specifically, it would be highly beneficial to allow companies to operate below certain thresholds before needing a license, with a reasonable onramp to licensure should the business grow. This would greatly reduce the barrier to innovation while maintaining safety for the average consumer.
In closing, we understand the difficulty faced by the Department in developing a framework for the regulation of Virtual Currencies in a manner which takes into account the various participants, complexities and concerns involved, and respectfully request that the Department consider the points discussed above in its development of its final rule. Coinbase remains firmly committed to collaborating with the Department and other regulatory bodies, as we have since inception.
For more details, our full response to the NYDFS can be downloaded here. [PDF]