The recent BitLicense carve-outs for software developers and bitcoin miners seem to allow for a level of innovation free from regulation. So far, so good. At a glance, the New York Department of Financial Services seems to be on the right track. Providing a regulatory framework in which bitcoin exchanges, online wallets and merchant processing services can operate is an important step forward in the evolution of virtual currencies and legitimizes their use.

Read MorePolice forced to pay bitcoin ransom

However, when one digs deeper into the NFS BitLicense proposal, what we actually see is a regulatory framework that imposes unrealistic requirements on bitcoin users and merchants. You see, a very large part of the regulation deals with trying to remove one of the biggest benefits to society that bitcoin provides: anonymity. BitLicense, as written, forces merchants to collect names and addresses for the simplest of transactions. Can you imagine having to give your name and address at the drive through checkout just to buy a cup of coffee with Bitcoin? That's what the proposal is trying to enforce.

So just why is the anonymity aspect such a benefit to society? Since 2013, hackers have stolen over 1 billion consumer records. The estimated cost of this data theft is a staggering $5 billion dollars a year, which inevitably gets passed down to consumers and merchants in the form of higher prices and fees.

There is a global data-security crisis. Indeed, a war is being waged — and that's making it harder and harder for the good guys to win. The hackers only have to succeed a small percentage of the time to make a very big dent on our society. As a result, we are in an era where securing personal information requires more and more complex security and surveillance, by merchants, banks and the government agencies.

Read MoreIs Apple Pay a bitcoin killer?

The system of credit-card processing introduced in the 1940s and 1950s, perfected in the 1970s and 1980s, was never designed for the 21st century, a century in which the Internet and the open-source community and the dark web accelerate technology innovation at a pace far more rapid than slow moving merchant and banking infrastructure can keep up with. To address this global data security crisis requires us to fundamentally re-think what it means for a consumer to spend money. As it stands today, a simple trip to the grocery store or buying gifts online at Christmas, subjects hundreds of millions of people to potential fraud, identity and credit-card theft. Crimes that may affect their credit record, their finances, indeed even their ability to work. Moreover, the current approach to addressing these problems, ring fencing, surveillance, detection and tracking is leading us as a society down a very slippery road. It's an approach that means everything we do, every dollar we spend, our location, everyone we talk to, it all needs to be monitored and tracked, relationships mapped, algorithms applied just to catch a very small number of bad actors causing a very large amount of damage.

Bitcoin solves these problems, because it does not require us to expose personal information just to go out to dinner or shop online. Every transaction is done with a bearer instrument that does not give the receiver any information that might be used or stolen to exact future payments, or perform any fraud. It's just like cash, only designed for the 21st century, designed for the world we live in now. It protects consumers from identity theft, fraud, and reduces the massive costs associated with processing transactions, opening up global economies and bringing massive new consumer markets into an integrated 21st century economy.

Read MoreWebcam hackers may be watching you

Unfortunately, the NFS BitLicense proposal explicitly strips consumers of these benefits, reducing consumer protection, since, as written, it requires bitcoin merchant-payment-processing companies to collect personal identifying information on every transaction, forcing merchants to collect it, thus destroying the huge opportunity that bitcoin presents to solve the global data-security crisis. Requiring this information on every transaction also makes transactions in bitcoin at your local retailer more complex than spending dollars or using a credit card, thus significantly impeding adoption and innovation.

Now, according to the NFS, these rules are introduced to protect us from terrorism and money laundering. But, in the world of fiat currencies these draconian AML and KYC regulations are normally reserved for large transactions in excess of $10,000. Not enforced on local shop owners selling pizzas and coffee. So unfortunately, the NFS BitLicense, as written, will greatly stunt bitcoin adoption by applying these rules broadly across all types of bitcoin transactions. It's an incorrect approach, very flawed, bad for business in New York, bad for Innovation in New York.

We are living in an exciting time. The pace of technology innovation and the globalization of our economies have huge potential to lift millions out of poverty and create new and exciting businesses. As a society we should foster that innovation and guide it so that it improves everyone's lives. Bitcoin and virtual currencies are here to stay. Much like electricity, this technology cannot be un-invented; the genie cannot be put back in the bottle. Bitcoin presents us with a huge opportunity as a society to change direction and move away from large centralized repositories of data and indeed control, to a more decentralized, lower impact approach. We should embrace this opportunity, because the current path of surveillance and tracking leads us to an Orwellian future that few would consciously choose.

Commentary by Trevor Murphy, the CTO of BitStash, a company that securely stores bitcoin and other cryptocurrencies. Murphy was a co-founder of TradingEdge in 1997. He was responsible for the design and development of the first electronic fixed-income trading platform, BondLink, which ultimately processed billions of dollars in daily transactions, and was acquired by Market Axess (MKTX) in 2001. Murphy has been involved in numerous other start-up companies and provides consulting services to venture capitalists, financial services and Fortune 500 companies. Follow him on Twitter @bitstashCTO.

WATCH: CNBC's 'Bitcoin Uprising'