The foul smell of state cryptocurrency legislation
Back in January 2017 I was contacted by one of the members of the Bitcoin Foundation, Theo Chino. Theo needed help. It turned out that Theo was the only person that was contesting the validity of the BitLicense in New York state. Theo had a small bitcoin business operating in New York that suddenly had the impossible task of complying with legislation that put an unfair burden on small Bitcoin businesses in that state. And Bitcoin businesses elsewhere in the US or globally didn’t seem to care. This wasn’t their fight. If New York didn’t want Bitcoin there, then only New York would stand to lose out as the rest of the world moved on.
Except that it IS your fight.
It’s an invalid assumption that no other state or country legislature elsewhere would be foolish enough to enact cryptocurrency legislation as out-of-touch with reality as the BitLicense in New York. Legislators don’t know very much about cryptocurrencies. Coin Center recently had to go so far as demonstrating the technology to the people in Congress deciding its future in the US. Legislators also tend to have outsized public responses to fear-mongering about the potential for Bitcoin and other cryptocurrencies to enable terrorist financing and money laundering. A recent report by the European Commission found little actual usage of cryptocurrency for these illegal activities due to the relatively high barriers to usage, including that:
“… the technology is quite recent and in any case requires some knowledge and technical expertise which has a dissuasive effect on terrorist groups. The reliance on virtual currencies to fund terrorist activities has some costs and is not necessarily attractive.”
Further, the same report found that:
“… virtual currencies present some commonalities with e-money but the IT expertise at stake for virtual currencies means that organized crime would have lower capability to use them than e-money which is more widely accepted.”
Bitcoin and other cryptocurrencies are not being widely used for either terrorist financing or money laundering. Why are legislators pushing so hard to enact KYC & AML requirements for transacting with Bitcoin? How is it useful to anyone to enact legislation that comes with massive regulatory compliance costs for small businesses, reduces consumer adoption of innovative technology and is actually not expected to reduce the incidence or scale of either terrorist financing or money laundering?
You might say that it’s still not your problem if New York wants to pass silly laws? Well, if you think that’s true, then I have bad news for you. Let’s talk a little about the Uniform Law Commission (ULC) in the US and a piece of draft legislation called the Uniform Regulation of Virtual Currency Businesses Act that is expected to be approved at the annual meeting of the ULC starting on July 14 in San Diego.
The ULC is a state-supported organization that “provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law” and “providing services that most states could not otherwise afford or duplicate”. Its purpose is thus to recommend legislation that is non-controversial and ready to be enacted by state legislatures. At least 45 US states are expected to adopt the ULC recommendation on how to regulate cryptocurrencies.
The ULC’s draft legislation used the final copy of the BitLicense legislation from New York as it’s foundation (Update: I’m told by a participant at the session, that while the ULC reviewed BitLicense at its first drafting session, it was not the basis for the final model act draft). Despite rounds of public participation and comment that have resulted in some changes, the draft legislation is still fundamentally flawed as to the scope of its intended regulation. It seeks to treat “virtual currency businesses” as equivalent to money transmission businesses (Update: no need in model act to register as a state virtual currency business if already registered as a state money transmission business), despite stating that virtual currency is not in fact money, and consequently:
“… the act would require licensure of and impose prudential regulations and customer protection requirements on businesses whose products and services include
(1) the exchange of virtual currencies for cash, bank deposits, or other virtual currencies;
(2) the transfer from one customer to another person of virtual currencies; or
(3) certain custodial or fiduciary services in which the property or assets under the custodian’s control or under management include property or assets recognized as ‘virtual currency’.”
In other words, operators of all cryptocurrency exchanges, payment switches, wallets or custodian services must be licensed, even if they’re never in possession of private keys (Update: final draft of the model act excludes facilitation of transactions where control over private keys is not exercised). These businesses would be required to gather, store, report on and otherwise comply with extensive KYC and AML information requirements common in the financial services industry, irrespective of their size and level of capitalization.
The ULC seems to appreciate that it may be introducing this legislation too soon when it says:
“It is not common for the Uniform Law Commission to sponsor drafting projects for industries as young as the virtual currency business industry is…(but) there are two (more) important reasons for regulating virtual currency businesses now. The first of these (additional) reasons for this project, and a reason for states to enact this act, is that for innovators to succeed they need customers. Customers want to know how new products and services work, and are likely in the financial services “space” to know whether the business has been vetted by a financial services regulator. This act addresses the needs of these future customers. The second reason is that virtual currency businesses need banking relationships and credit opportunities as well as early-round investors to succeed. This act is intended to foster clarity in the minds of banks, bank regulators and investors that the businesses will be able to succeed as businesses, with banking services and greater regulatory certainty behind them.”
The Bitcoin Foundation and I contend that the draft ULC legislation is not achieving either of the stated objectives and is indeed regulating a nascent industry prematurely. This is not how you regulate cryptocurrency, unless you want to live in the financial backwaters and encourage fintech innovation to move elsewhere. Contrast this with the approach being taken by Swiss regulator FINMA which has no specific cryptocurrency legislation enacted and has already licensed one asset manager to offer Bitcoin products to consumers. This hands-off approach is creating a light-touch regulatory environment that is encouraging fintech startups to move their businesses to Switzerland where a Cryptovalley of fintech innovation is being created. US venture capitalists are already fishing in that pond for startup investments.
And just because you’re not in the US doesn’t mean that this doesn’t apply to you. You might think your legislators are more progressive or informed and can see the value in not inhibiting cryptocurrency adoption. Think again. Legislators elsewhere in the world need to be made aware that bad examples like BitLicense or the ULC draft are not international best practice for regulating cryptocurrencies.
So what are you supposed to do about it?
I’m glad you asked.
First, we’re sending complementary letters from Theo Chino’s attorneys and The Bitcoin Foundation to ULC meeting delegates to discourage them from voting to approve the Uniform Regulation of Virtual Currency Businesses Act at their annual meeting starting on July 14. You should raise awareness of our efforts to discourage the ULC to approve the draft legislation. Send your messages of support on social media using the hashtag #ULCvsBitcoin and tag your favourite cryptocurrency news outlets on Twitter including @coindesk, @cointelegraph, @bitcoincom and @bravenewcoin.
Secondly, donate to the legal fees fund which the Bitcoin Foundation has set up for Theo Chino vs NYDFS, the case seeking to have the BitLicense overturned in New York. If Bitcoin Sign Guy can raise more than $15,000 from photobombing Janet Yellen, then you can donate at least $100 to the legal fund right now. We’ve already raised and distributed $8,000 to Theo’s attorney for time & attendances relating to this matter, but we’re going to need a lot more. Bitcoin needs your financial support now more than ever.
Here’s the only valid Bitcoin address for donating to the Theo Chino vs NYDFS legal fund:
To the moon!