Hey everyone!

There’s been a lot of talk about the Bitlicense throughout the past week and I thought it would be a good time to summarize what it is / what it means, and also give some thoughts to what it will mean for consumers and for entrepreneurs entering the digital currency space.

I’ve taken the information provided here as a point of reference. It doesn’t cover every single detail, but it covers some of the main points. Feel free to add your thoughts in the comments below - I’ll be posting this on Reddit as well.

There are a lot who skeptics that argue that New York’s Bitlicense creates for entrepreneurs barriers to entry (which it naturally does) but in the same token it takes away one of the real pain points for entrepreneurs (especially in the Bitcoin community) of gaining trust as being a reputable, honest, and accountable service.

Right off the bat, it’s important to note that the Bitlicense isn’t relevant for all businesses touching Bitcoin (and it shouldn’t be). It’s focused to Bitcoin businesses that act as an Bitcoin exchange, digital currency payment processor, or Bitcoin wallet.

Anti-Money Laundering

Maintain a detailed record of each transaction that includes the parties’ identities and physical addresses, the value and dates of the transaction, the method of payment used, and a description of the transaction Verify customers’ identities when opening customer accounts and check them against the U.S. Treasury Department’s Office of Foreign Asset Control’s Specially Designated Nationals list. Enhanced diligence would be required for accounts involving foreign entities, and accounts on behalf of foreign shell entities would be prohibited. Notify NYDFS of any transactions that might signify illegal or criminal activity and when an individual engages in transactions that exceed US$10,000 in a single day.

If you’re a registered Money Service Business, all of the above is already quite standard. Knowing the physical address is not new to identity verification procedures. While it might seem infuriating, it’s been par for the course for companies for awhile.

Companies such as Bitstamp, one of the largest bitcoin exchanges, have an extremely thorough verification process. Now it’s not ideal for me as a user, but if it means that Bitstamp is going to exist and I get the same level of quality product, then it’s not a big deal from my side. I’d rather have them exist and verify my ID, knowing they’re not going to be shut down the next day, as opposed to knowing the site could go offline at any time for one reason or another.

It references having a “description” of the purchase. This is a little interesting. I know that Coinbase has started doing this in their procedures and there was a little bit of kick back from the community. This isn’t Coinbase wanting to know where you’re shopping and what you’re buying for their own reasons; this is Coinbase maintaining their level of regulatory compliance.

With all this being said, these are measures that worked for previous technologies. It could be time with Bitcoin to change that process, make it more efficient, and give users the privacy they seek while still maintaining some form of customer understanding.



Consumer Protection

To the extent a Licensee stores virtual currency on behalf of a third party, the Licensee would have to hold virtual currency of the same type and amount as that which is owed or obligated to a third party. Maintain a bond or trust account (in U.S. dollars) for the benefit of its customers in a form and amount acceptable to NYDFS. Provide customers with a receipt for each transaction with information about the firm’s name and address, specifics of the transaction, and statements about the Licensee’s liability for non-delivery and refund policy. Disclose to consumers the material risks associated with virtual currencies, in writing, both in English “and in any other predominant language spoken by the customers of the Licensee.” Each Licensee shall be permitted to invest its retained earnings and profits in only the following high-quality, investment-grade permissible investments with maturities of up to one year and denominated in United States dollars: (1) certificates of deposit issued by financial institutions that are regulated by a United States federal or state regulatory agency; (2) money market funds; (3) state or municipal bonds; (4) United States government securities; (5) United States government agency securities BitLicense businesses cannot invest or hold their ANY of their profit in Bitcoin, ONLY in US Dollars.

It was stated that companies must only and always have USD, and are not allowed to keep profits in Bitcoin, etc.

First, this means that a company based in Europe must now utilize USD at all times. This seems like it’s worded very poorly from the regulators part because then the investments they’re referring to must be ridiculously low risk.

One part of me says they’re trying to really take the life out of Bitcoin by not giving companies a chance at utilizing it completely for their operations. Another part thinks that it’s more comcerned about companies that are day-trading with Bitcoin (either profits or customer funds) and moving the market.

The latter gives me some optimism that the regulators are aware of how big this will become. So when institutional level banks are really entrenched in the Bitcoin economy, it will take away their ability to move the market. Regardless, this does need a lot of clarification. It feels very rushed from the regulators standpoint.

Cyber Security

Designate a qualified employee to serve as a Chief Information Security Officer responsible for implementing a cyber security program to identify cyber risks, protect systems from unauthorized access, detect data breaches, and respond to system breaches and unauthorized use. Conduct system penetration testing at least annually and vulnerability assessments at least quarterly.

This fair enough.

Companies use this as a way to also promote their operations as being efficient and secure. Giving the company a somewhat “seal of approval” to add confidence to the consumers. Examples of this have already happened. I know for me personally, Andreas is someone who’s opinion I take extremely seriously. He’s a rockstar in the Bitcoin world! So when he gives something the tick of approval, it certainly goes very far for Entrepreneurs in the community.

Perhaps we should introduce an Andreas Icon! It gets put onto websites that have been verified, do away with the Bitlicense, and consider that the tick of approval? Mentioned as a joke, but for me as a community member, that would actually mean more than a “Bitlicense” label at the moment :)

But seriously, for entrepreneurs this is a good way to provide legitimacy for our users and potential users. The closest thing I’ve seen to this is CrowdCurity, who is doing great things for entrepreneurs to secure their sites in a more budget friendly way. You’ll see they’ve got a big focus on Bitcoin companies in their client list.

Capital Requirements

Maintain at all times such amount of capital as NYDFS determines. The proposed rules do not set forth any specific minimum levels of capital or methods for computing required capital. Rather, the proposal would permit NYDFS to determine the required amount of capital on a case-by-case basis, after considering such factors as the Licensee’s assets and liabilities, 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.

This is very similar to money transmission regulations… (Which are ridiculously messy for entrepreneurs to be honest. They vary from state to state and just provide headache after headache after headache.) For example, if I’m a money transmitter and have $150M in transactions going through my service everyday, but our cash at bank is $10,000, it provides zero margin for error in our operations and thus places more risk on consumers. It would give me a lot more confidence to give them my money as opposed to a company that doesn’t have any sort of capital reserve in the event of a problem. That’s an oversimplified example of course, but as a user, I know wallet providers/exchanges/payment processors should have this (but it should be much more clear and concise to remove the ambiguity which requires paying legal teams to help decipher it). Money Transmission Wiki

Financial Reporting and Audit

Submit quarterly and annual financial statements to NYDFS. Annual statements are to be audited and submitted with an opinion of an independent certified public accountant and an evaluation by the accountant of the firm’s accounting procedures and internal controls.

This is necessary if you’re a wallet provider/exchange in my opinion. Companies are already doing independent audits to promote their legitimacy. It’s good for business. As a user, as a company, everyone wins. Example. Now, does this cost money for entrepreneurs? Yes. But what would I gain from it?

Well, I know that a user is going to be much more inclined to go with a well audited business, so for me, this is a business expense but it’s worth it’s weight in gold to show that we didn’t just whip up an exchange overnight, we’ve got proven legitimacy from reputable (reputable is a key word) 3rd parties.

If you’re familiar with the Online Poker space, there was a day called “Black Friday” which was basically the day when Full Tilt Poker was found to actually be using their players funds for company operations/spending/employee salaries etc.. This essentially means they were depending on user deposits (or as the saying goes Robbing Peter to pay Paul) - The result of this is that US players can no longer make deposits to major online poker sites (like Pokerstars) and thus the whole online poker industry took a huge decline as the USA is so influential in it. Essentially it was like a Mt. Gox, but for poker. What that means is that if Mt. Gox were to happen in the USA, the consumer protection ramifications could really damage the potential opportunity for the mainstream adoption of Bitcoin.

I know that no matter what, Bitcoin will still exist. However, if credit card processors and all banks never allow any form of deposits into Coinbase/Circle etc., the adoption of Bitcoin will be slowed down in the US. Adoption in the US isn’t where the real benefit for this currency is, but it still provides a lot of influence for the development of infrastructure. Meaning if it’s a new hot property in the US, then you increase investor interest. If investor interest increases, then the entrepreneur interest increases. If entrepreneurial interest increases, more products hit the market. This leads to awesome people building awesome things that can be used globally and helps create an infrastructure for it to grow faster and faster.

I feel like I’ve been rambling, and if you got this far, thanks for reading my thoughts!

In summary, I think the NYC Bitlicense offers legitimacy for everyday users and help hold companies accountable. It also can be looked at as a business investment for entrepreneurs, not just a drain on resources. It shouldn’t be relevant to all Bitcoin businesses.

The proposed regulations seem very rushed and require a lot more thought in order to help Bitcoin keep the things that are awesome about it. Regulators gonna regulate.

Thanks for reading!

Michael.