This morning the New York Department of Financial Services released a draft proposal of how they would regulate Bitcoin businesses.
Under the draft rules, all firms will have to learn the identities of their customers, will have to maintain their own secure Bitcoin reserve fund, and undergo strict security audits.
The more well-capitalised Bitcoin players, like SecondMarket’s Barry Silbert and the Winklevoss twins, have embraced the proposal, saying it provides clarity for how they should be conducting their businesses. All three gave statements at DFS’ hearings on the new licenses in January.
But other Bitcoin evangelists hate the draft policies. Ryan Selkis, who blogs about Bitcoin at The Two-Bit Idiot, told BI in an email the proposed requirements would bring onerous new compliance costs on smaller firms. “It’s almost hard to believe that the NYSDFS sought to strike an appropriate balance with this initial proposal because these prescriptions seem neither measured or balanced,” he said in an email. The rules would also hamper transaction liquidity, and contended that they restrict businesses from investing their earnings in virtual currencies.
Others are concerned the rules will stamp out privacy and strangle innovation. Here’s what Bryce Weiner, Director of Cryptoeconomy Engineering for the Blockchain Technology Group, told us in an email:
It has been well established by a Penn State University study from 2013 that the identities of individuals using cryptocurrencies are easily compromised through metadata analysis. The combination of that published metadata analysis and the proposed regulations would lead to effectively ending the privacy of cryptocurrencies and regulate the creation of any new currencies developed in the US, which would not only cost American jobs as development firms move to more welcoming countries, it would ultimately stifle innovation and protect bitcoin from competition.
In a blog post, Jerry Brito, a senior research fellow at George Mason’s Mercatus center, said the rules are a good start, but that there is a considerable amount of ambiguity, especially over what types of firms require licenses, and that they seem to annul parts of virtual currencies’ appeal.
… The ability to trade across borders, especially with those in developing countries who don’t have access to electronic payment systems, is one of Bitcoin’s greatest advantages and it could be seriously hampered by such a requirement.
The rationale for creating a new “BitLicense” specific to virtual currencies was to design something that took the special characteristics of virtual currencies into account (something existing money transmission rules didn’t do). I hope the rule can be modified so that it can come closer to that ideal.
There is now a 45-day comment period on the rules. We’re sure DFS will be getting a few.