Not what the NYDFS had in mind.

New York’s BitLicense is a failure

Are you a policymaker eager to kill innovation? Do I have a plan for you!

When a policy achieves the opposite of its intended result, it has failed. By that standard, the BitLicense, a regulatory framework for cryptocurrency championed by former New York Department of Financial Services (NYDFS) Superintendent Benjamin M. Lawsky, is an utter debacle.

When the department revealed its draft cryptocurrency-specific regulatory framework last year, Lawsky said he aimed to “strike an appropriate balance that helps protect consumers … without stifling beneficial innovation.” But as the final BitLicense rules took effect this month, Bitcoin businesses large and small have fled the state in droves, leaving New Yorkers with few legitimate ways to get involved in this white-hot industry.

The “abominable BitLicense” sparks exodus

Cryptocurrency firms speak plainly about their decision to escape New York. ShapeShift, a cryptocurrency exchange whose business model prioritizes user control and data privacy, was one of the first firms to bolt. “We’re not going to spy on thousands of people purely to make [the NYDFS’s] job a little bit easier,” said CEO Erik Voorhees as he pulled ShapeShift out of New York in June.

The San Francisco-based Bitcoin exchange Kraken also recently bid farewell to New York with flair, writing that the “abominable BitLicense” is “so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth.” And LocalBitcoins.com, a Craigslist-style directory listing in-person Bitcoin sellers in cities around the world, decided to shut down operations in the state out of an abundance of caution.

At least 13 cryptocurrency firms have fled the state of New York so far. Bitcoin users in New York are now redirected a webpage called PleaseProtectConsumers.org when they attempt to access these companies’ websites. “This service is censored in New York State due to regulations which mandate the extraction of your personal, private information,” the website reads, “This jeopardizes your safety, so we refuse to do it.”

Artistic depiction by the CoinTelegraph cartoonist.

BitLicense limits consumer protection and innovation

Consumer protection, notably, informs the core backlash against the new BitLicense rules. Bitcoin returns financial control to users themselves. Because the BitLicense requires cryptocurrency firms to collect and maintain large databases of sensitive personal information, it goes against the wishes of Bitcoin’s privacy-conscious user base. And how protected will consumers feel if those databases are ever hacked?

Other concerns with the BitLicense are the barriers it creates to entry and innovation. The promise of Bitcoin is that it allows small startups to enter into the global payments industry. But if, as Bitstamp executive George Frost estimates, the total application cost of the BitLicense is $100,000, it is difficult to see that promise coming to fruition. After all, that cost covers only one state out of 50, in only one country out of more than 200. We cannot expect startups to spend millions of dollars in compliance costs before they even earn their first Bitcoin.

To be sure, some firms, Bitstamp included, are complying with New York’s rules. New Yorkers are not entirely out of options. But the BitLicense will surely temper the industry’s dynamism within the state. It would be a shame if the ultimate cryptocurrency landscape in New York did not differ substantially from the traditional financial services long available to consumers — provided by big firms with enough resources to comply with heavy regulation.

It doesn’t have to be this way!

A better approach: permissionless innovation

Rather than applying last century’s regulatory oversight to 21st century innovation, we should take a lesson from the Internet. Much of the dynamism that we enjoy today would not have been possible without the Clinton Administration’s forward-looking embrace of what technologists call “permissionless innovation” online.

Instead of rushing to prohibit Internet activities before the technology had a chance to grow, U.S. leaders intentionally encouraged “industry self-regulation and private sector leadership” while discouraging “undue [government] restrictions on electronic commerce.” The result that we enjoy today is a thriving federation of Internet services and commerce supported by a flexible and responsive policy regime.

Imagine, instead, if policymakers required that all early Internet pioneers secure an expensive “IntLicense” before allowing them to innovate online. Amid the legal fees, reporting requirements, and general uncertainty imposed, something as groundbreaking as Google’s search algorithm or Facebook’s news feed might have never seen the light of day.

Other states should learn from New York’s mistake. Onerous one-size-fits-all regulations like the BitLicense smother the most dynamic industries, to everyone’s detriment. An environment of permissionless innovation, on the other hand, will afford cryptocurrency entrepreneurs the space they need to create solutions that protect consumers and innovation alike.