NYSDFS has recently received detailed comments about the virtual currency ecosystem from consumer finance company, Circle. Together with Circle CTO and co-founder, Sean Neville, CEO Jeremy Allaire has expressed some less formal thoughts on the BitLicense. The BitLicense is a thorough list of proposed regulations meant for New York-based businesses who use Bitcoin.
The issue must be attentively assessed by cryptocurrency gurus, who will be compelled to offer holistic and detailed criticism, improvements, and suggestions to what will eventually become the law in the future. Jeremy Allaire, CEO for Circle comments:
"Having met with New York financial regulators, leading regulators in other key states as well as major federal and European financial regulators (and having testified at New York hearings on the BitLicense), I can say without reservation that there is a uniform belief that Bitcoin can play an important role in the advancement of our payments and financial systems and that many of the underlying promises of Bitcoin—security, privacy, efficiency, global interoperability—are innovations that policy makers are eager to see pursued."
The high-level aim of setting up a license framework for a brand new category of digital-based money services and money transmitters is reasonable. Through the use of the framework, Bitcoin fans will be able to open up commercial opportunities for other businesses by diminishing alleged risks and regulatory uncertainties that are currently hanging over companies operating on Bitcoin - helping companies find insurance partners, banking partners, and auditors.
Will the BitLicense backfire?
However, it seems like the BitLicense may have an opposite effect. Companies could have limited rights in the digital currency industry, which will most likely push many underground and offshore into shadier jurisdictions. That being said, Jeremy Allaire - CEO for Circle, mentions that they if the BitLicense rules become official, they would have no other option but to block New York customers from accessing their services. He adds:
"We remain cautiously optimistic that New York’s Superintendent will embrace industry discussion, extend the comment period, and evolve the BitLicense into a tool that actually fosters the rapid development of the digital currency ecosystem in New York and beyond."
As a response to the BitLicense rules, Circle CEO mentioned some key principles that shouldn't be modified no matter. Modifying these principles would destroy Bitcoin and everything that goes with it.
1. Regulate Financial Intermediaries, not intellectual property and software companies
Companies that operate as exchangers of cryptocurrencies for fiat money, and the intermediate between the digital currency and the existing banking system are sensible regulation targets. They've already been established by Money Transmitter rules and set forth by the US Treasury Department throughout the US. However, software companies, independent IT development, and open source projects must be exempt from the BitLicense rules.
Like the majority of the decisive infrastructure that we trust on a daily basis to handle modern society across the Internet (voice over internet, email, software operating systems, the web etc.), Bitcoin relies on a belief in decentralized and distributed systems, and crafted on open source references and open standards with an unencumbered and free intellectual property. The foundation of the World Wide Web is also based on this specific representation - "a global public good." Allaire defines Bitcoin in a very interesting and compelling way:
"It is often hard for people to understand that Bitcoin operates in many ways, much like the rest of the commercial Internet—a distributed and decentralized system based on open protocols that no government or corporation controls. And it’s that architecture and ethos that is critical to maintain for Bitcoin to fulfill its promise in transforming the financial system, much as other layers of software have transformed other industries."
2. The role of Bitcoin as a new digital bearer must be kept intact
Allaire points out that Bitcoin is the definition of "good money" for the current digital age. One of its main potential as a long-term store of value is its purpose as a bearer instrument. Just like diamonds and gold, bearer bonds and fiat notes, owning Bitcoin (or any other digital currency) as an asset makes it extremely valuable and attractive.
An attempt to taint Bitcoin by giving it identity will instantly crush valuable aspects of its innate value. Although financial intermediaries who are exchangers and custodians of digital money will be susceptible to unstable levels of customer identification and record-keeping procedures, it's paramount for Bitcoin to stay unencumbered; otherwise, it will become useless to society.
3. New financial rules for cryptocurrency operators should take a tiered, risk-based approach
Considering the incredibly dynamic, startup, and technology driven ecosystem that backs up digital currency, it's important that whatever dogmatic regime surfaces provides young business the chance to first understand the crypto industry to the best of their abilities. Just like financial institutions and banks take risk-based approaches - compliance risk, credit risks, counter-party risks - regulators should take a risk-based approach to cryptocurrency license and obedience requirements.
- Mr. Allaire
Concerns regarding the BitLicense proposal
Circle has emphasized some of the most important comments and concerns with regards to the BitLicense proposal. First, the company pointed that there's literally no defensible motive why software companies or any other type of open-source digital currency project should be susceptible to government oversight. Second, ATM demands go beyond Federal law and are over-reaching.
"We don’t dispute the need for financial intermediaries to meet their Federal AML requirements as money transmitters, and that is exactly how Circle operates today. But as written, the BitLicense establishes a new state-specific AML regime that is both broader than Federal requirements (at least those established by US Treasury FinCEN) and duplicative, requiring firms to maintain separate, parallel paths for reporting large CTRs and SARs. Is New York building a financial crimes enforcement function that is competing with the Treasury Dept’s own function? If not, the BitLicense should be amended to reflect what existing FinCEN guidance reflects, including implementation of the Travel Rule for large transactions between financial intermediaries.
Circle is a very promising consumer finance company with an important role in the global digital currency industry. Undoubtedly, more rules and regulations around cryptocurrencies will emerge in the near future with the BitLicense being merely the first proposed set.
And many companies, experts and Bitcoin community members agree that the rules would be devastating for Bitcoin and will stonewall the whole digital currency industry. Which is why many in the community including the Bitcoin Foundation have called for an extension of the 40 day comment period to 365 days. It remains to be seen whether that request will be granted as the NYDFS has promised to release more information on the proposed measures, but an extended comment period would certainly help get the proposed draft improved to reflect the concerns of the Bitcoin community.
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