Context In the Blockchain: BitPay granted 8th ever BitLicense
My name is David and I’m new to the world of cryptocurrency. As a beginner, it can sometimes be hard to trace a story back to its roots. Whenever news breaks, I tend to miss the historical context that accompanies it.
Follow me on my journey in my series “Context In The Blockchain” where I explore the significance behind the different moving pieces in the blockchain world and share my findings with you. In this article, I delve into the importance and impact of BitLicense and why it’s newsworthy that BitPay just received one.
Cryptocurrency has been gaining mainstream traction every passing year, but U.S. regulators have been split between accepting it with open arms or cautiously prodding it with a long stick. New York has taken up the stance of the latter with the introduction of the ‘BitLicense’ in 2015. To date, only 8 have been awarded so far — most recently to the company BitPay just this month.
Without a BitLicense, companies in the state of New York aren’t allowed to conduct business involving virtual currency and customers. For a cryptocurrency exchange or financial service, this would effectively choke out any traffic in the fourth most populous state in the United States. As a payment service provider that heavily relies on transactions, BitPay is probably breathing a sigh of relief as their new license opens up a massive regional market.
Given the importance of BitLicense for anyone planning to do virtual currency commerce, one would think more than eight would have been granted after three years.
So I did a little bit of digging to find out why this was the case.
The issue thus far has certainly not been the lack of applicants. There’s been a backlog of candidate companies that have been waiting to get into the New York scene, but the slow pace of the New York Department of Financial Services (DFS) has held the tide back. In fact, the Bitcoin ATM operator Coinsource has been waiting for approval for three years.
The leisurely speed of license grants doesn’t seem like an accident. The DFS has been deliberately stingy about handing out BitLicenses. The strict criteria for receiving a BitLicense apparently involves an extremely comprehensive examination of the company. The DFS makes sure that candidates undergo holistic review of any policy remotely relating to security, fraud, or money laundering.
Moreover, to keep their BitLicense, the company must adhere to firm regulatory requirements as well as maintain a high level of financial transparency to the DFS. More than a handful of applicants have already been rejected by the uncompromising conditions.
This brings up a natural question: how did New York, the hub of global finance, become one of the strictest places in America for cryptocurrency regulation?
I turned up an answer when I looked back at cryptocurrency between 2013 and 2015.
(As an aside, a lot of the following information I learned from the 2016 documentary Banking on Bitcoin, which is also on Netflix. It offered me an in-depth look into the personalities and drama that surrounded Bitcoin in its early stages; for this article in particular it had relevant historical information. I’d highly recommend it for anyone curious about old Bitcoin war-stories.)
At the time, the DFS was led by Benjamin Lawsky, who had been touted as the “new sheriff of Wall Street” and was certainly no friend to New York banks. He served up stringent regulations which caused forced employee resignations, hundreds of millions in fines, and thousands of headaches for Wall Street bankers.
When Bitcoin started gaining traction, it eventually caught the attention of the DFS in 2013. In typical fashion, Lawsky and Co. immediately subpoenaed 22 digital-currency companies and began to investigate what the phenomenon was all about.
Meanwhile, there were several major events that shook up the cryptocurrency world around that time. The shutdown of the billion dollar bitcoin-enabled black market site Silk Road, Charlie Shrem’s money-laundering charges involving bitcoin and the Mt. Gox scandal where over $450 million in bitcoin were lost.
The combination of these negative events caused the DFS to put Bitcoin under a microscope. They likely viewed it as an easy vehicle for crime and so they set forth, urgently laying the framework for the BitLicense. By August 2015, it was enacted upon the state with little exception and as was standard under Lawsky’s reign, the DFS again took a hardline stance in rule-making.
Cryptocurrency companies did not take too kindly to the strict policies. For companies that were looking to get off the ground, the application itself had an associated $5,000 fee — already an prohibitive amount for a cash-strapped start-up. That doesn’t even include the time it takes to pore over the extensive legal documents and the money it costs to hire someone that can snake their way around all the legalities.
Estimates of the reported real costs for the BitLicense range from $50,000-$100,000, and this is just to get the application turned in; keep in mind that Coinsource has been waiting 3 years for their application approval. It’s no wonder that many voiced complaints over the unfairness of the situation.
Moreover, there were those that felt like the BitLicense rules themselves were unethical, causing too deep of an invasion into the privacy of the company and its customers with the level of transparency the BitLicense required. A rule requiring all employees of the company to undergo background reports and submit fingerprints to both the state Division of Criminal Justice Services and the FBI was received particularly poorly. If you’re curious about what else it entailed, the link to the actual guidelines of the regulations can be found here (warning: it is filled to the brim with legal jargon).
All of the negative sentiment surrounding BitLicense culminated in the Great Bitcoin Exodus. Companies were not willing to put up with what they deemed as unfair regulations and they ended up packing up shop. New Yorkers were told that they were going to be dropped from company services and there was nothing they could do about it. Companies like Shapeshift, Kraken, Bitfinex, and Poloniex all decided they could not comply with the new standards and exited the New York market.
Other companies did the opposite. Paxos & Gemini had already applied for a pre-BitLicense charter after the DFS made a call for regulation a year earlier in 2014. It gave the same benefits, but not only would they would have to comply to BitLicense rules when it came out, they also had to follow the laws operating as a chartered trust company in New York. Their proactivity in seeking a license early ensured that they were almost completely unaffected by the BitLicense regulations.
Besides those two, BitLicense has acted as a virtual stonewall to everyone else — unchanging over the years except to let the occasional company through its gates.
However, things might be looking up for those interested in serving New York State. Circle was the first and only company able to obtain a BitLicense in 2015. Ripple was next, but was the lone licensed company of 2016. Numbers in 2017 improved, with both Coinbase and BitFlyer joining the pack.
This year, a record four companies — Global Genesis Trading, Xapo, Square and now BitPay — are licensed. I compiled an an excel sheet to keep track of BitLicense companies.
If the positive trend is anything to go by then perhaps 2019 will bring about an even greater number of licensed companies. It seems that cryptocurrency companies have been more willing to use resources to comply with regulators, the DFS has decided to let up on the gas, or a combination of the two.
Regardless, BitPay’s acceptance is historic. The DFS itself verbalized the significance of it on their announcement page: Bitpay “is the first wholesale payments processor to be approved for a license.”
Now, New York retailers and merchants are able to legally use BitPay for cryptocurrency transactions with any customer in the world. On the flip side, customers can now use BitPay’s consumer options like loading their ‘BitPay Visa PrePaid Card’ with Bitcoin, which allows them to spend the money anywhere. This is a big step for the integration of cryptocurrency for New Yorkers.
Despite the progress, the BitLicense is still a major thorn in the side for many companies financially and morally. For better or for worse, it’s here to stay for the foreseeable future.
After doing all this research into the history of BitLicenses, my conclusion on the DFS is that they seem to be pro-cryptocurrency albeit in favor of it being under heavy regulation.
Perhaps they now have confidence that crypto is more than just a dangerous fad filled with security breaches and fraudulent ICOs. Or perhaps this is due to a change in leadership to a more lenient superintendent — Benjamin Lawsky left the DFS in 2015 to start his own legal consulting firm.
At the time of writing, Lawsky is now the CFO of Ripple.
I’ll leave commentary on irony for you to make.
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