Benjamin Lawsky announced yesterday that his office would ease some of the requirements for holding a BitLicense, a proposed license designed specifically for businesses working with Bitcoin and other digital currencies. "Those changes," Lawsky declared in a speech in Washington, D.C., "are primarily focused on providing additional flexibility for virtual currency startups to innovate – while at the same time maintaining our commitment to protecting consumers and rooting out illicit activity."
The move is the latest adjustment made by the Superintendent of New York's Department of Financial Services to a technology that has befuddled both state and federal regulators.
Back in January, Lawsky set himself apart from his peers by disclosing plans to forge rules addressing Bitcoin's unique characteristics. Coming from one of Bitcoin's loudest critics, Lawsky's announcement energized the currency's backers. Finally, a regulator was willing to embrace a technology that was both threatening to the financial industry and law enforcement yet often summarily dismissed as an esoteric fad.
Lawsky's initial proposal in July disappointed many in the Bitcoin community. Instead of the hands-off approach they were calling for, the proposed rules included many of the consumer protection and compliance requirements considered outdated and suffocating by the technology's proponents. Erik Voorhees, a major voice in the Bitcoin world, was one of Lawsky's loudest critics. "This is not consumer protection," he wrote at the time. "This is explicit surveillance of private citizens who are not accused – nor even under suspicion – of committing a crime."
The state money transmitter laws Voorhees and others found so cumbersome were designed to protect consumers from fraud, prevent money laundering, and offer other oversight. Yet, they were also outdated - a concern Lawsky recognized. "As you may imagine," he said," our statutory and regulatory schemes for money transmitters were written long before there was an Internet – let alone virtual currencies – and were in need of updating."
Plus, each state had its own licensing process, costing start-ups more than a year in time and a million dollars in legal costs just to obtain the licenses to operate. For start-ups low on manpower and financing, these regulatory measures were too burdensome.
These hurdles also undermined the nation's competitiveness according to critics. Foreign companies who don't have to abide to these rules, explained Jesse Powell, the CEO of Kraken, a leading Bitcoin trading platform based in the U.S., are at a competitive advantage over their American counterparts.
Lawsky has been cognizant of these complaints for months now and, unlike other state regulators, has at least given lip service to responding to these concerns. His primary mission to shield consumers and prevent fraud has made it difficult to meet these demands, however. "We have to determine the appropriate licensing, examination, and collateral requirements for the virtual currency industry," he said back in February. "In doing so, our objective is to provide appropriate guardrails to protect consumers and root out money laundering – without stifling beneficial innovation."
The changes he announced yesterday reflected yet another attempt to strike the best balance between encouraging innovation and fulfilling his office's mission. Virtual currency miners and individual investors using Bitcoins would not be obligated to obtain a BitLicense, Lawsky said. Another change from the rules proposed over the summer was the formation of a "transitional BitLicense" that would allow start-ups to gradually meet the state's regulatory demands.
Despite these latest changes, Lawsky acknowledged that financial regulators will continue to struggle to keep up with every new technology. But they cannot surrender to them either. "If we cannot adapt and adjust in a timely fashion," he said, "that is simply no way to run a rail road."
