In June 2015, the New York State Department of Financial Services (NYDFS) established a new regulatory process for firms working in the cryptocurrency space. Applying for a so-called BitLicense involved submitting reams of paperwork, hiring expensive attorneys, and onerous reporting requirements. Critics said the process would put an enormous burden on small startups, and indeed many firms responded to the new regulation by announcing that they were no longer serving customers in the Empire State.

As CoinDesk reported this week, the fears of critics have been further realized:

The NYDFS has only issued one BitLicense under the regulatory framework, which it provided to bitcoin services firm Circle in September 2015.

According to figures provided to CoinDesk by the NYDFS, this means as many as 21 industry startups are now operating under the BitLicense's safe harbor provision, but waiting for a formal confirmation that they are licensed bitcoin services providers in New York.

Even some of the industry's more well-funded applicants, such as bitcoin exchange Coinbase and bitcoin storage specialist Xapo, indicated that their applications are still being processed.

CoinDesk reached out to former NYDFS attorney Dana Syracuse, who defended the BitLicense on the grounds that "the process so far does not differ from traditional Money Service Business (MSB) licenses" and that firms waiting on approval can continue operating under the law's safe harbor provision.

OK, but the process of applying for an MSB in New York State is also expensive, slow, and favors large politically connected firms over small startups. It has long hindered competition in the money transmission sector. If the BitLicense process "doesn't differ" that's an indictment of the new regulation right there.

Syracuse also doesn't acknowledge that cryptocurrency firms operating under the BitLicense's safe harbor provision are still in limbo. What if their applications are turned down, or approved on the condition of some alteration of their business model? Raising venture capital is more difficult when your right to operate in one of the nation's biggest markets isn't secure.

For more on the BitLicense, watch the video below: