Behind the “exodus” of bitcoin startups from New York

Daniel Roberts

Last weekend the deadline to apply for a BitLicense came and went, and a slew of bitcoin startups went too—right out of New York State.<div class="paywall-selector"></div><div class="paywall">
The BitLicense is New York&#8217;s regulatory badge of approval, required of all digital-currency businesses that are deemed &#8220;money transmitters&#8221; (companies that hold customer funds, most of them exchanges). And it has been <a href="https://fortune.com/2015/04/28/bitcoin-businesses-fear-regulation-bitlicense/">highly controversial</a> in bitcoin circles since it was first unveiled over year ago, after <a href="https://fortune.com/2015/06/05/new-york-bitcoin-business-policy/">multiple revisions</a>.
Bitcoin executives—even those who chose to apply for a license for their company—have gripes about the final set of rules, and are still hoping to see it change. This weekend, many of them decided to make a statement: rather than apply for the license, they left New York. For some with physical headquarters in the state, that meant literal moving trucks. For others it meant cutting off service to New York-based customers.
To leave New York entirely may seem like a drastic step, but much of the most fevered activity around trading of the digital currency is happening outside the U.S. anyway. The new defectors are all following ShapeShift, a startup led by outspoken bitcoin entrepreneur Erik Voorhees, which was the first to go, <a href="https://fortune.com/2015/06/11/bitcoin-shapeshift-new-york-bitlicense/">cutting off service to New York</a> just days after the BitLicense came out.
Why are they upset?
Critics of the BitLicense see limitations in the specific rules, such as the requirement of new licenses for every new service offered. But the application process, too, has left some companies wringing their hands.
The application costs $5,000, which alone does not necessarily seem excessive. But executives say that the paperwork was extensive and required legal help, which carries additional fees. Jaron Lukasiewicz, CEO of Coinsetter, tells Fortune his company spent nearly $50,000 to apply for the BitLicense. George Frost, chief legal officer at Bitstamp, <a href="http://www.coindesk.com/real-cost-applying-new-york-bitlicense/" target="_blank" rel="noopener noreferrer">told Coindesk</a> it was more like $100,000 for his company. If either of those figures is remotely accurate, that cost would certainly be prohibitive for smaller companies.
&#8220;You&#8217;d hope that the costs are outweighed by the value, but for some, maybe not,&#8221; says Lukasiewicz. He says that Coinsetter seriously considered not applying, but, &#8220;I definitely don&#8217;t need the legal risk.&#8221; Lukasiewicz is not a fan of the BitLicense, or of regulation in general for the space, but he says, &#8220;I don&#8217;t want to have to hide in New York. And I viewed it as something that could have marketing upside in terms of helping people feel safer using us.&#8221;
Those who leave and those who stay
This is not a comprehensive list, but here are some of the companies that packed up and left New York: Bitfinex, BitQuick, BTCGuild, Eobot, Genesis Mining, GoCoin, Kraken, LocalBitcoins, Paxful, and Poloniex.
Almost all of them published statements about their reasons for refusing to apply, and most of them read similarly. &#8220;This particular piece of legislation is unnecessary and is an obstacle to free market innovation,&#8221; wrote <a href="http://blog.genesis-mining.com/bitlicense-red-flag-acts-of-our-era" target="_blank" rel="noopener noreferrer">Genesis Mining</a> on its blog. Kraken, an exchange headquartered in San Francisco, <a href="http://blog.kraken.com/post/126244351097/farewell-new-york" target="_blank" rel="noopener noreferrer">said</a> that the license, &#8220;comes at a price that exceeds the market opportunity of servicing New York residents. Therefore, we have no option but to withdraw our service from the state.&#8221;
Even some digital currency companies that are not money-transmitters, and thus do not need to obtain a BitLicense, voiced their criticism of the regulations and support for companies that exited. Paul Puey, CEO of Airbitz, <a href="https://airbitz.co/go/were-sorry-new-york/" target="_blank" rel="noopener noreferrer">wrote</a>, &#8220;Luckily at Airbitz, we aren&#8217;t affected&#8230; With all the companies announcing these restrictions today, it should remind the community of the importance to be, and to support, decentralization. Bitcoin was intended to give people true control and access to their money and every time we use a centralized service, we aren’t truly using Bitcoin.&#8221;
Bitcoin blogs like <a href="http://www.coinfox.info/news/company/2719-local-bitcoins-and-bitquick-join-the-new-york-exodus" target="_blank" rel="noopener noreferrer">CoinFox</a> and <a href="http://cointelegraph.com/news/115089/escape-from-new-york-kraken-paxful-join-bit-exodus" target="_blank" rel="noopener noreferrer">Coin Telegraph</a> are calling this a &#8220;mass exodus&#8221; while <a href="http://www.bizjournals.com/newyork/news/2015/08/12/the-great-bitcoin-exodus-has-totally-changed-new.html" target="_blank" rel="noopener noreferrer">New York Business Journal</a> christens it &#8220;The Great Bitcoin Exodus.&#8221; But before the weight of these exits gets overstated, it is important to note that most of the hottest, best-funded bitcoin companies—for example, <a href="https://fortune.com/company/coinbase/" target="_blank">Coinbase</a>, Circle, 21 Inc., and itBit—are staying. Of the companies that left New York this week, Bitfinex was the most significant and surprising.
Bitreserve, which is headquartered in South Carolina but has New York clients, is staying. CEO Anthony Watson, a <a href="https://fortune.com/2015/06/22/anthony-watson-nike-bitcoin-bitreserve-ceo/">former Nike CIO</a> and alum of Fortune&#8216;s <a href="https://fortune.com/40-under-40/anthony-watson-19/">40 Under 40</a> list, tells Fortune that being regulated is a priority: &#8220;Bitreserve has an extensive and comprehensive licensing strategy for all 50 states in the U.S., including New York.&#8221; Coinsetter, which does much of its business in Canada thanks to <a href="https://fortune.com/2015/04/08/bitcoin-buyout-coinsetter-cavirtex/">acquiring Cavirtex</a> last year, is staying. Gemini, a planned exchange from Cameron and Tyler Winklevoss, who already run <a href="https://fortune.com/2014/07/22/on-winklevoss-bitcoin-index-its-open-season-for-developers/">a bitcoin pricing index</a> and have invested in a slew of bitcoin companies, is staying; the twins have made it clear they are in no hurry to launch their exchange until it is fully licensed. (Coinbase, a leading exchange that has investment from the NYSE, launched without a BitLicense.)
In total, 22 companies have applied for a BitLicense thus far. As for the blowback from the companies that refused, a spokesperson for the NYDFS told Fortune, &#8220;There are always going to be those who argue for little-to-no regulation, but we think that ultimately the BitLicense is going to a be a positive for the long-term health of this industry. If digital currency is going to gain wider adoption, strong consumer protections and oversight (to help ensure that customer money doesn&#8217;t fall into a black hole) will be critical.&#8221;
What to expect next
For now, no one knows quite what level of action—how quickly or how severe—the NY Department of Financial Services will take against companies that continue to operate in New York without a BitLicense. That means it is possible we may see a bitcoin startup that did not apply nonetheless attempt to maintain service in the state.
Having a BitLicense may even end up being seen as a &#8220;nice to have,&#8221; but not crucial. Think of it as a building being LEED-certified, bearing the seal that shows it is eco-friendly. Lukasiewicz likes that analogy. But he believes that any company with customers in New York that didn&#8217;t apply is taking a big risk. After all, the industry watched closely the <a href="https://fortune.com/2015/05/29/ulbricht-sentenced-silk-road-crimes/">prosecution</a>, in Manhattan, of Silk Road mastermind Ross Ulbricht.
&#8220;I do think the biggest story in bitcoin in the next year,&#8221; Lukasiewicz says, &#8220;will be watching the NYDFS and seeing what develops next.&#8221;
This story was updated to include a comment from the NY Department of Financial Services; it also originally stated, in error, that Xapo was one of the companies leaving New York.
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