Digital currency is “one of the most promising emerging technologies for the next 10 years,” according to Joi Ito, director of the MIT Media Lab. More than $600 million has been invested by venture capitalists in startups building on bitcoin and related digital currencies. Additionally, companies like UBS, IBM, and Intel have established labs to identify opportunities to leverage digital currency.
Bitcoin, and the underlying technology, blockchain, let people transfer money without a bank. It also allows them to write simple, enforceable contracts without a lawyer, or, turn physical items like real estate or tickets to the ball game or concert into digital assets that can be sold with low to no transaction fees.
Many are projecting that the impact of digital currencies will be similar to that of the Internet–disrupting traditional industries, challenging existing regulations, and significantly increasing the volume of commerce by dramatically lowering the cost to transact and establishing trust between two previously unknown parties.
Like any emerging technology, it is still unclear exactly how Bitcoin and other crytpocurrencies should be regulated.
If regulation is done right, it will increase investment in digital currency startups, create jobs and allow consumers to receive cutting-edge financial services of the future, faster and safer.
This month, the superintendent of the New York Department of Financial Services (NYDFS), Benjamin Lawsky, is expected to issue a new regulation called BitLicense. The goals for issuing the BitLicense include protecting consumers from fraud and preventing money laundering and other illicit uses of cryptocurrencies.
However, because the NYDFS is the bellwether for financial regulation, the rules it creates, good or bad, could be replicated by the majority of states in America. If replicated, Bitcoin companies will face substantial regulatory burdens and only a handful of the most well-funded companies will survive— not because of the best product or service, but because they have access to the most money.
My goal in writing this post is to share with Superintendent Lawsky, his hardworking staff, and the public, what I believe to be the four critical flaws of the BitLicense and the unintended consequences the regulation will likely create.
Updates to apps can be exciting and useful. They offer new capabilities and security features, and they happen rather frequently. Facebook, for example, updates its app every two weeks. As proposed, the NYDFS would like to review and approve new software features before it’s sent to your phone — slowing down your access to the latest features or fixes.
Companies may not be allowed to ship new updates or security features to the residents of New York until NYDFS approves it, making their state the Bitcoin backwater of the U.S.
It’s hard enough for entrepreneurs to meet with hundreds of potential investors to raise a round of funding for their startup. The proposed BitLicense will make the task even harder by requiring NYDFS approval to raise a round of financing if any new investor provides an investment for more than 10 percent of the company.
This will force companies to raise money with at least 12 months of runway as they wait for 50 state approvals, if all states adopt this requirement.
When I share my queso fundido, house rules say that you don’t take two dips with the same chip. Unfortunately, the NYDFS house rules REQUIRE a regulatory double dip. The BitLicense proposal requires companies to get both a money transmitter license and a BitLicense — even though they have substantial overlapping requirements.
While getting two licenses doesn’t seem onerous, if this is replicated in all 50 states, entrepreneurs would be required to get 100 licenses to start their company.
Some private company wallets control assets in the wallet, whereas open-source wallets, generally, do not. When students or developers build open-source wallets for the community but do not have access to the assets in the wallet of their users, they should not be regulated. If this happens they’ll limit development and innovation to private companies who have the capital to support the regulatory oversight. When law enforcement agencies want to identify the person behind criminal activity, they don’t go to the open source community behind the web browser; they go to where the exchange of data takes place — the Internet Service Provider (with a court order). As proposed in the BitLicense, they would like to regulate the wallet software. That’s the wrong leverage point.
Similar to an ISP, the controller of assets is where the transfer of money happens, and they can provide the information needed to address potential money laundering or illicit uses.
Getting regulation right is hard, and I’m excited that Superintendent Lawsky and his team are taking the lead in providing regulatory clarity for an emerging technology.
If done right, along the lines of what has been proposed by Coin Center, it will increase investment in digital currency startups, create jobs and allow consumers to receive cutting-edge financial services of the future, faster and safer.
And it’s challenging to balance consumer protection, competition and prevent money laundering while also enabling innovative new industries to grow and prosper.
However, if changes to the proposed BitLicense are not made, only a handful of the most well-funded companies will survive — not because they are providing the best product or service, but because they have access to the most money.
And that’s not the competitive environment that creates the world-changing startups for which America is known.
As always, feel free to tweet your thoughts about this post @BrianForde
Brian Forde is the Director of Digital Currency at the MIT Media Lab and was most recently the Senior Advisor for Mobile and Data Innovation at the White House Office of Science and Technology Policy.
The views expressed in this post are those of the author and do not necessarily represent the views of the MIT Media Lab.