Right off the bat, I want to make it completely clear that I first became attracted to Bitcoin from an entirely ideological perspective. Having worked on Wall Street for ten years, I saw first hand the immorality, destructiveness and criminality inherent in our current monetary and financial system. In fact, I became so disillusioned and disgusted with the industry I resigned from a lucrative job in January 2010. Thus began a long journey in which I looked for answers anywhere I could, in most cases finding very few. It wasn’t until I came across Bitcoin and recognized its revolutionary force for good that I became far more optimistic about our future as a species.

The power vested in Ben Lawsky as the Superintendent of Financial Services for the State of New York goes against everything I believe in. Rather than decentralized decision making, he wields an enormous amount of centralized power, which could ultimately affect billions of people. I don’t think anyone should ever wield this kind of authority. However, this isn’t his fault, it is simply the destructive paradigm under which we live. While I do not accept this paradigm and am willing to dedicate much of my time and effort toward moving us into a decentralized, globally interconnected, peer-to-peer world, we are not there yet. I think Bruce Fenton summarized my sentiments best on Twitter when he wrote:

A person no one elected is creating laws no one asked for to prevent problems which don’t exist. #Bitcoin #Bitlicense — Bruce Fenton (@brucefenton) July 18, 2014

All that being said, we all knew this proposal was coming whether we wanted it to or not. Importantly, the proposal itself is a testament to Bitcoin’s incredible success in the first place.

At this point, I think it’s useful to provide a summary of the proposal (for the entire thing, click here):

Press Release July 17, 2014 Contact: Matt Anderson, 212-709-1691 NY DFS RELEASES PROPOSED BITLICENSE REGULATORY FRAMEWORK FOR VIRTUAL CURRENCY FIRMS Framework Includes Consumer Protection, Anti-Money Laundering, and Cyber Security Rules for Virtual Currency Businesses Proposed Regulations Submitted for a 45-Day Notice and Comment Period to Solicit Public Feedback Benjamin M. Lawsky, Superintendent of Financial Services, today announced that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the Department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms. Superintendent Lawsky said: “We have sought to strike an appropriate balance that helps protect consumers and root out illegal activity – without stifling beneficial innovation. Setting up common sense rules of the road is vital to the long-term future of the virtual currency industry, as well as the safety and soundness of customer assets.” In accordance with the New York State Administrative Procedures Act (SAPA), the proposed DFS rules for virtual currency firms will be published in the New York State Register’s July 23, 2014 edition, which begins a 45-day public comment period. After that public comment period, the rules are subject to additional review and revision based on that public feedback before DFS finalizes them. Additionally, DFS is today immediately publishing a copy of the regulations on the website Reddit. Earlier this year, Superintendent Lawsky hosted an “Ask Me Anything” forum on Reddit about DFS’ work on virtual currency regulation, which generated more than 1,200 public comments. Links to the proposed rules are also being tweeted out from the DFS Twitter handle (@NYDFS) and Superintendent Lawsky’s Twitter handle (@BenLawsky). Superintendent Lawsky said: “We recognize that – as the first state to put forward specially tailored rules for virtual currency firms – continued public feedback will be an important part of finalizing this regulatory framework. We look forward to carefully and thoughtfully reviewing public comments on our proposal.” The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses: Receiving or transmitting virtual currency on behalf of consumers;

Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;

Performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency;

Buying and selling Virtual Currency as a customer business (as distinct from personal use); or

Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.) The license is not requiredfor merchants or consumers that utilize Virtual Currency solely for the purchase or sale of goods or services; or those firms chartered under the New York Banking Law to conduct exchange services and are approved by DFS to engage in Virtual Currency business activity.

Key requirements for firms holding BitLicenses include: Safeguarding Consumer Assets. Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party. Companies are also prohibited from selling, transferring, assigning, lending, pledging, or otherwise encumbering assets, including Virtual Currency, it stores on behalf of another person. Each licensee must also maintain a bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to DFS for the protection of the licensee’s customers.

Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party. Companies are also prohibited from selling, transferring, assigning, lending, pledging, or otherwise encumbering assets, including Virtual Currency, it stores on behalf of another person. Each licensee must also maintain a bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to DFS for the protection of the licensee’s customers. Virtual Currency Receipts. Upon completion of any transaction, each firm shall provide to a customer a receipt containing the following information: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee.

Upon completion of any transaction, each firm shall provide to a customer a receipt containing the following information: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee. Consumer Complaint Policies. Each firm must establish and maintain written policies and procedures to resolve consumer complaints in a fair and timely manner. The company must also provide notice to consumers, in a clear and conspicuous manner, that consumers can bring complaints to DFS’s attention for further review and investigation.

Each firm must establish and maintain written policies and procedures to resolve consumer complaints in a fair and timely manner. The company must also provide notice to consumers, in a clear and conspicuous manner, that consumers can bring complaints to DFS’s attention for further review and investigation. Consumer Disclosures. Companies must provide clear and concise disclosures to consumers about potential risks associated with virtual currencies, including the fact that: transactions in Virtual Currency are generally irreversible and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; the volatility of the price of Virtual Currency relative to Fiat Currency may result in significant loss or tax liability over a short period of time; there is an increased risk of loss of virtual currency due to cyber attacks; virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to FDIC or SIPC protections; among others.

Companies must provide clear and concise disclosures to consumers about potential risks associated with virtual currencies, including the fact that: transactions in Virtual Currency are generally irreversible and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; the volatility of the price of Virtual Currency relative to Fiat Currency may result in significant loss or tax liability over a short period of time; there is an increased risk of loss of virtual currency due to cyber attacks; virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to FDIC or SIPC protections; among others. Anti-money Laundering Compliance. As part of its anti-money laundering compliance program, each firm shall maintain the following information for all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transaction was initiated and completed, and (4) a description of the transaction. Verification of Accountholders. Firms must, at a minimum, when opening accounts for customers, verify their identity, to the extent reasonable and practicable, maintain records of the information used to verify such identity, including name, physical address, and other identifying information, and check customers against the Specially Designated Nationals (“SDNs”) list maintained by the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”). Enhanced due diligence may be required based on additional factors, such as for high-risk customers, high-volume accounts, or accounts on which a suspicious activity report has been filed. Firms are also subject to enhanced due diligence requirements for accounts involving foreign entities and a prohibition on accounts with foreign shell entities. Reporting of Suspected Fraud and Illicit Activity. Each Licensee shall monitor for transactions that might signify money laundering, tax evasion, or other illegal or criminal activity and notify the Department, in a manner prescribed by the superintendent, immediately upon detection of such a transactions. When a Licensee is involved in a transaction or series of transactions for the receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency, in an aggregate amount exceeding the United States dollar value of $10,000 in one day, by one Person, the Licensee shall also notify the Department, in a manner prescribed by the superintendent, within 24 hours. In meeting its reporting requirements Licensees must utilize an approved methodology when calculating the value of Virtual Currency in Fiat Currency.

As part of its anti-money laundering compliance program, each firm shall maintain the following information for all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transaction was initiated and completed, and (4) a description of the transaction. Cyber Security Program: Each licensee must maintain a cyber security program designed to perform a set of core functions, including: identifying internal and external cyber risks; protecting systems from unauthorized access or malicious acts; detecting systems intrusions and data breaches; and responding and recovering from any breaches, disruptions, or unauthorized use of systems. Among other safeguards, each firm shall also conduct penetration testing of its electronic systems, at least annually, and vulnerability assessment of those systems, at least quarterly.

Each licensee must maintain a cyber security program designed to perform a set of core functions, including: identifying internal and external cyber risks; protecting systems from unauthorized access or malicious acts; detecting systems intrusions and data breaches; and responding and recovering from any breaches, disruptions, or unauthorized use of systems. Among other safeguards, each firm shall also conduct penetration testing of its electronic systems, at least annually, and vulnerability assessment of those systems, at least quarterly. Chief Information Security Officer. Each Licensee shall designate a qualified employee to serve as the Licensee’s Chief Information Security Officer (“CISO”) responsible for overseeing and implementing the Licensee’s cyber security program and enforcing its cyber security policy.

Each Licensee shall designate a qualified employee to serve as the Licensee’s Chief Information Security Officer (“CISO”) responsible for overseeing and implementing the Licensee’s cyber security program and enforcing its cyber security policy. Independent DFS Examinations: Examinations of licensees will be conducted whenever the superintendent deems necessary – but no less than once every two calendar years – to determine the licensee’s financial condition, safety and soundness, management policies, and compliance with laws and regulations.

Examinations of licensees will be conducted whenever the superintendent deems necessary – but no less than once every two calendar years – to determine the licensee’s financial condition, safety and soundness, management policies, and compliance with laws and regulations. Books and Records: Licensees are required to keep certain books and records, including transaction information, bank statements, records or minutes of the board of directors or governing body, records demonstrating compliance with applicable laws including customer identification documents, and documentation related to investigations of consumer complaints.

Licensees are required to keep certain books and records, including transaction information, bank statements, records or minutes of the board of directors or governing body, records demonstrating compliance with applicable laws including customer identification documents, and documentation related to investigations of consumer complaints. Reports and Financial Disclosures, Audit Requirements. Each firm must submit to DFS quarterly financial statements within 45 days following the close of the Licensee’s fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end.

Each firm must submit to DFS quarterly financial statements within 45 days following the close of the Licensee’s fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end. Capital Requirements: Necessary capital requirements will be determined by DFS based on a variety of factors, including the composition of the licensee’s total assets and liabilities, whether the licensee is already licensed or regulated by DFS, the amount of leverage used by the firm, the liquidity position of the firm, and extent to which additional financial protection is provided for customers.

Necessary capital requirements will be determined by DFS based on a variety of factors, including the composition of the licensee’s total assets and liabilities, whether the licensee is already licensed or regulated by DFS, the amount of leverage used by the firm, the liquidity position of the firm, and extent to which additional financial protection is provided for customers. Compliance Officer. Each Licensee shall designate a qualified individual or individuals responsible for coordinating and monitoring compliance with NYDFS’ BitLicense regulatory framework and all other applicable federal and state laws, rules, and regulations.

Each Licensee shall designate a qualified individual or individuals responsible for coordinating and monitoring compliance with NYDFS’ BitLicense regulatory framework and all other applicable federal and state laws, rules, and regulations. Business Continuity and Disaster Recovery. Each Licensee shall establish and maintain a written business continuity and disaster recovery plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the event of an emergency or other disruption to the Licensee’s normal business activities.

Each Licensee shall establish and maintain a written business continuity and disaster recovery plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the event of an emergency or other disruption to the Licensee’s normal business activities. Notification of Emergencies or Disruptions. Each firm must promptly notify DFS of any emergency or other disruption to its operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect on the Licensee, its counterparties, or the market.

Each firm must promptly notify DFS of any emergency or other disruption to its operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect on the Licensee, its counterparties, or the market. Transitional Period. Applications for the license will be accepted beginning on the date the proposed regulations become effective. Those already engaged in virtual currency business activity will have a 45-day transitional period to apply for a license from the date regulations become effective. The superintendent will issue or deny the license within 90 days of a complete application submission. In August 2013, DFS announced its inquiry into the appropriate regulatory guidelines for virtual currencies. As part of an ongoing fact-finding effort informing that inquiry, the Department held public hearings in January 2014. In March 2014, the Department issued a public order announcing it will be considering formal proposals and applications for the establishment of regulated virtual currency exchanges operating in New York.

Although that is just a summary, there’s a heck of a lot in there. There are several things that seem particularly absurd to me. First, the range of companies captured within the BitLicense framework seems far too broad. As Jerry Brito noted:

The definition of who is engaged in “virtual currency business activity,” and thus subject to the licensing requirement, is quite broad. It has the potential to swallow up online wallet services, like Blockchain, who are merely providing software to their customers rather than administering custodial accounts. It might potentially also include non-financial services like Proof of Existence, which provides a notary service on top of the Bitcoin block chain. Ditto for other services, perhaps like NameCoin, that use cryptocurrency tokens to track assets like domain names.

Second, the know your customer requirements seem far too draconian and could threaten the fungibility of the Bitcoin eco-system. As Mr. Brito also notes:



Today, if you have a wallet account with Coinbase, the company collects and keeps your identity information. Under New York’s proposal, however, they would also be required to collect the identity information of anyone you send bitcoins to, and anyone that sends bitcoins to you (which might be technically impossible). That means identifying every food truck you visit, and every alpaca sock merchant you buy from online.

Third, the compliance required will be expensive and quite likely far too much for startups to handle. You are required to have a Chief Information Security Officer (CISO) and a compliance officer. If the New York DFS thinks this is necessary there should be a transaction or asset threshold that must be crossed before it becomes effective. Anyone who uses a startup Bitcoin company understands the risk inherent in that decision. We should really match up the risk (assets at stake) with the level of necessary compliance. Otherwise, yes, invocation will be killed.

Fourth, the $10,000 purchase requirement seems to put more burden on Bitcoin companies than credit card companies. This doesn’t seem fair. BitPay sounded off:

BitPay chief compliance office Tim Byun pointed specifically to a few issues he had with the framework. This included the reporting of purchases over $10,000 completed in a single day, which he said could be problematic as “purchases via credit or debit cards over $10,000 are not reported”.

Finally, the most uniform complaint seems to be a highly ironic one. This is due to the fact that you must apply for a BitLicense if you are: “controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners).

Think about that for a moment. This seems to imply that you must ask for permission in order to innovate. To create new crypto-currencies, you must ask for state approval. Satoshi never asked anyone permission. He simply did it, and that is precisely why the innovation of Bitcoin was so successfully disruptive in the first place.

Ok, so those are my thoughts. While I may know more about Bitcoin than most people, I am not an expert. Bitcoin is simply one of many topics I am interested in and write about, although I am particularly passionate toward it. For more in-depth analysis, I rely on people that have considerably more expertise. One of these is “Two-Bit-Idiot,” who put out a very good piece. Below are excerpts, but I suggest you read the whole thing here:

The BitLicense draft crafted by the NYSDFS and its superintendent, Ben Lawsky, is an important milestone for Bitcoin. The proposals represent yet another step towards widespread adoption of virtual currencies, and the standardization they promote in consumer protection, financial transparency, and technical security across various service providers should lead to greater levels of trust from consumers and the broader business community. That trust, in turn, will help the industry’s exchanges, wallet services and payment processors attract customers and partners who had previously eyed virtual currencies with skepticism. Candidly, I am frustrated and disappointed with the first draft of the BitLicense for myriad reasons, as I’m sure many of you are as well. But the reality is that we must work with the NYSDFS and need to forcefully convey the urgency of our concerns, while understanding the needs of these regulators tasked with promoting and abiding by existing laws related to money laundering, consumer protection and national security (regardless of personal opinions on the merits of those statutes). I see no upside to simply telling off Lawsky and his colleagues, rather than waging a smart battle against some of the BitLicense’s ill-conceived provisions. At the same time, I believe that our industry’s leaders should be more reserved in lauding – without qualifications – a flawed set of proposals. *Please note, I am trying to sift through that which we can live with from that which is crippling. I know crypto-anarchists would prefer that we defy the NYSDFS, but the BitLicense is real and inevitable, so I’m focusing on what absolutely needs modification. If the NYSDFS added an exemption for organizations processing less than a certain floor level of transaction volume, or at least radically streamlined the reporting processes for startups, they could capture the bulk of bitcoin exchange volume without stifling new innovations. Educated early adopters would likely test out the new, less-regulated ventures while the mainstream consumers could rely safely on their more thoroughly vetted counterparts. Aside from the lack of tiering, I believe that the true brutality of the BitLicense, can be quarantined to three primary oversights, which I have dubbed the Permission to Service, the Permission to Transact and the Permission to Innovate. We must collectively fight tooth and nail against these provisions because their existence threatens the health and viability of bitcoin as a technological revolution. The NYSDFS’s definition of “Virtual Currency Business Activity” must either narrow or additional exemptions must be made for businesses who do not provide hosted storage or exchange services. Currently, any firm providing currency exchange (Coinbase/Circle/itBit), payment processing (BitPay/Coinbase/Stripe), hosted wallets (Coinbase/Circle/Xapo), or investment management services (Pantera, BIT, Winklevii) must register for a BitLicense. No surprise or problem there.

But then the department overreaches by including under its purview many services that never actually access user funds. These include wallets like Blockchain.info, tipping apps like Changetip, and mixing services like CoinJoin. The inclusion of non-hosted wallets is especially troubling as it essentially outlaws the personal possession of bitcoins for these users. By imposing impossible reporting requirements on companies that in some cases literally cannot track user identity, the only solution for these services may be to restrict the IP addresses of users from certain locations. This shouldn’t be a surprise given his previously expressed willingness to sacrifice innovation for militant money laundering compliance, but it remains disheartening nonetheless. The department is banning people from owning their own digital cash privately. Not only is this morally questionable, but it would make New York State the most restrictive regulatory environment in the world – and much more restrictive than even its federal counterparts. Lawsky and the NYSDFS must understand that this is unacceptable if bitcoin is to create jobs stimulate economic activity and foster much needed innovations in financial services. The leakage concern spills over into the language that specifies that all parties in any bitcoin transaction must be identified by name and physical address. This is “CoinValidation” on steroids, and would create the equivalent of a closed loop bitcoin network in which transactions would only be allowed by wallet providers if the counterpart to any one user’s transaction was also a known person. Needless to say, this restriction would destroy much of bitcoin’s utility as a payment network for those forced to comply. Fungibility of the currency would be threatened. Yet if we succeed in pressuring the NYSDFS to scrap its “Permission to Service” provision, then we also have an argument for limiting this “Permission to Transact” oversight as well. In that scenario, regulators would still maintain the ability to monitor any suspicious activities from identified users at exchanges and hosted wallets, and authorities could track all inflows and outflows from unidentified addresses over time. The BitLicense already allows for “enhanced due diligence” on suspicious transactions and could easily apply to those whose transactions appeared questionable. However unpalatable, the NYSDFS must also recognize that it is impossible to prevent individuals from using open-source software to transact freely and privately. It seems likely that the department’s crusade against anonymous bitcoin users will fail at the same time it severely damages bitcoin’s usability for honest actors. The department would be better suited monitoring those who choose to utilize the services at bitcoin’s licensed “banks” and exchanges. The most egregious restriction in the BitLicense seems to be the NYSDFS’s stranglehold on permissible innovation. As a community, we should be aggressive in pushing back on the department’s claim to oversee and regulate new alt-currencies and similar decentralized tokens, as well as its insistence on reviewing new business plan proposals before they are ever even tested in the market. Under the BitLicense proposals, any party “controlling, administering or issuing a virtual currency” will require licensing. This provision would have outlawed Satoshi Nakamoto’s original bitcoin invention, and it certainly seems to ban any new alt-currencies and tokens that might be created in the future. The detrimental effect this would have on innovation in New York and across the US cannot be understated. New currency innovators would be extremely unlikely to launch in the US, and would very likely follow the lead of Ethereum, Counterparty and other organizations in moving their legal operations overseas. Once again, New York would pay a hefty price for no clear or likely benefit. Finally, the BitLicense provisions in section 200.10 have the effect of banning all unapproved innovation, an entrepreneurial thought crime with no real legal precedent or positive effect. The NYSDFS would be asking all entrepreneurs to submit their ideas for review to a regulatory body that appears unlikely to grasp many of the much simpler elements of Bitcoin’s technology. That of course brings us to the ugly. Advanced concepts like multi-signature transactions, decentralized autonomous organizations and applications, and other Bitcoin 2.0 concepts are not truly baked into this framework. Rather, they are deemed guilty until proven innocent under the department’s broad umbrella of Virtual Currency Business Activity. Finally, it is not unreasonable to question why bitcoin businesses will be subjected to more rigorous anti-money laundering, know your customer and record-keeping standards than existing financial institutions who process many orders of magnitude more transactions (and have often been proven to fail in their charge to limit money laundering themselves).

For a more ideological rallying cry about the inadequacies of the proposal, I suggest reading the always great Erik Voorhees here. Below are some excerpts:

The proposed digital currency regulation from Benjamin Lawsky, the Superintendent of 20 million/6 billion people’s financial decisions, has been on the horizon for months. New York is known for dictating how people live, and so as more people are incorporating Bitcoin into their lives, New York bureaucrats would inevitably attempt to place it under surveillance and control (with the best intentions, naturally). According to the new mandates, you will soon be unable to lawfully purchase a Bitcoin from any company that A) has any customers in New York and B) doesn’t keep an aggregated surveillance list of all customers, including name, address, photo ID, and “other identifying information,” regardless of the amounts transacted. And if the company you’d like to buy from does satisfy New York’s rules, you will then be required to add yourself to this surveillance list, having to then trust not only the company, and not only the government, but also every other 3rd party that may obtain such information, not to abuse it. Consider now that an Italian, wishing to buy $100 of Bitcoin from BitStamp in Slovenia, will now be forced to provide all his personal details, which will go on file with the United States government (and any 3rd parties able to obtain that file) because BitStamp has some customers in New York. The American government, not satisfied with continually carving away the freedoms of its own people, now heads abroad in search of freedoms elsewhere to slay. That it may make it easier for the State to fight crime if every citizen reveals who they are and what they’re doing does not justify such intrusion. This is the impetus by which evil groups come to dominate and subvert, regardless of whether they were evil to begin with. An honest America must now change its slogan from “Land of the Free” to “Papers, citizen.” Cameron and Tyler, this is shameful. Lawsky has “embraced Bitcoin?” Really? Dozens of diktats which mandate State surveillance and censorship is the very antithesis of Bitcoin. This is not an embrace, it is the chaining of a generation’s most important invention to the failed financial infrastructure for which Bitcoin was an explicit refutation. But let’s not hastily cast the Winklevii among Bitcoin’s true enemies. After all, Occam’s Razor might suggest that the brothers simply don’t want regulatory scrutiny brought down upon them (as they’re trying to get their fund approved), and thus feel compelled to not only comply with these absurd mandates, but to advocate on behalf of them. But then what does that say about our great nation? That industry leaders cower before the Superintendent and lend their reputational support, so as not to draw ire? Does this sound American to you? What does the American ideal (and the Bitcoin ideal), stand for if not stalwart resistance to this very encroachment of the state into private industry? But it’s worse. To all Bitcoin industry entrepreneurs and advocates – this new regulation makes private ewallets illegal. Read this sentence again! If you spend your time, money, and creative energies building a platform in which users may securely deposit and store their digital assets, you must now require them to send you personally identifying information. You must take their name. You must take their address. You must get a photo ID of this person verified against government checklists. You must watch their transactions and decide whether they are suspicious. You must package all this information into a database to which State agencies are permitted unlimited oversight and privilege. Are you listening Jeremy Allaire? Are you listening Armstrong and Ersham? Are you listening Winklevii and Andreessen? You are leaders of the industry – well, where are you leading it? Don’t want to bring negative attention upon yourselves? Fine, I understand that. But why are you going out of your way to publicly endorse this anachronistic legislation? Doing so means your explicit approval of all Bitcoin users being under perpetual surveillance. By what moral perversion do you justify such advocacy? Further, it will now be mandated that any bright engineer obtain a State License before releasing his new digital currency, and may only then innovate in a State approved manner. No digital ledger system may be published for the world to view without State approval, according to the NYDFS. “Controlling, administering, or issuing a Virtual Currency” is now a government-approved, and thus government-censored, enterprise. Industry leaders, do you really support this? This would mean Satoshi Nakamoto himself would have committed a crime if his genius released Bitcoin today (unless he explicitly barred New Yorkers from using it). To do it “lawfully,” he would have been required to register, obtain approval, and make his identity known to all. You approve of a background check on Satoshi Nakamoto? You approve of him being forced to put up a bond before he’s permitted to release the genesis block? Bitcoin would not have been released if this legislation existed in 2008. Why do you support it being released in 2014? This is the “fostering of innovation” now levied by NYDFS, and you are supporting it. Cryptocurrency innovation (aka business) must first be approved and anointed by the State of New York. Is that your idea of monetary progress for a world so desperately in need of it? Alas, what conclusion can be drawn from Lawsky’s proclamation other than the following: Bitcoin shall be tossed into the same unethical regulatory mess that currently governs the legacy banking system. It shall comply with the same mandates, be governed in the same way, by the same people. It shall be censored with the same prejudices, and serve as an Orwellian tool of law enforcement in the same corrupt and deleterious manner. Its protection of privacy, illegal. Its advocacy of neutrality, ignored. Its efficiencies, minimized. Its decentralized, market-based governance forced to revert to centralized, State-based coercion. Why? Because the men with guns say so and the men with the businesses don’t really want to make a fuss about it. Let’s hope the builders of this most important technology don’t continue to embarrass themselves by forgetting what they’re building. Fortunately, a technology like Bitcoin will lead humanity in its own direction, despite the most eloquent proclamations from kings of any country, or the cowed grovelling of their entranced subjects.

While some people seem to be foolishly hoping other states use the New York proposal as a framework, I hope for the opposite. I hope other states take a much more libertarian approach to Bitcoin company regulation and in the process expose New York for the statist bankster haven it is. There is already a movement afoot to make Austin, Texas a Bitcoin mecca:

For more information, check out: 15 Reasons For Bitcoin Startups To Move From New York To Austin.

New York can and should be punished by entrepreneurs for its statist policies.

In conclusion, the proposal at this point just that, a proposal. There is a far too short 45 day comment period and you should do your best to make your opinion heard. At this point, many people are wondering whether Mr. Lawsky is using this proposal as a way to slowdown Bitcoin to the advantage of New York City’s financial services industry, or whether he is truly supportive of crypto-currencies and is acting in good faith. We’ll know a lot more once the rules are finalized.

(*As a side note, I think the fact there is a proposal at all will be very bullish for the Bitcoin price itself. The sooner these rules are finalized the sooner Wall Street money will plow in. And plow in it will).

In Liberty and Bitcoin,

Michael Krieger



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