New York Bitcoin Regulations a Boon for Other 49 States
Government is a friend of the status quo and an enemy of innovation. There have been countless examples of this recently from state and local governments fighting to keep Uber out of their cities and states to the Federal government keeping the lid on a multi-billion dollar commercial drone industry due to regulatory overreach, an ego driven power grab or sheer incompetence. In the long term technology will route around any government effort to prop up the status quo or dying businesses and industries therein but in the short term it hurts innovation, undermines competitiveness and costs jobs. The only interests it helps are those of power mad governments at every level looking to grab as much power and control as possible as well as their financial benefactors in status quo industries threatened by innovation and change. Neither major US political party is a friend to innovation and change despite frequent lip service about technology being the future and how STEM jobs are the ticket to long term employment.
Today’s example of government at work comes from New York where the New York Department of Financial Services (NYDFS) has released the first draft of proposed regulations to regulate Bitcoin and other digital currencies. Although the Empire State regulators pat themselves on the back for being “the first state to put forward specially tailored rules for virtual currency firms” should they adopt the proposed regulatory framework they won’t have to worry about dealing with ‘virtual currency firms’ since they’ll all flee the state. As currently written the rules are overly broad, arbitrary and clearly open to all sorts of interpretation from opportunistic prosecutors. It’s essentially a recipe to kill the New York tech startup scene and certainly the booming Bitcoin based segment. Like most restrictive laws and regulation the state justifies everything as being in the name of ‘consumer protection’ (which ranks just behind ‘the good of the children’ as a justification for government intervention) but in reality it’s a love letter to the status quo, political power and the traditional financial industry.
GOVERNMENT HATES DECENTRALIZATION:
You have to either be stupid or possessed with ulterior motives to mandate greater reporting requirements for an industry where one of the major selling propositions is anonymity but that’s exactly what the New York regulations do. The proposed guidelines would require businesses to keep track of not only of the physical addresses of their customers, but also of anyone who sends their customers money via Bitcoin. On top of this burdensome and borderline silly reporting requirement Bitcoin businesses would be required to file frequent reports to the NYDFS detailing ownership changes, financial forecasts and anything else the regulators can think of.
But that’s not all–the regulations would set up a licensing process for Bitcoin based businesses which would allow New York regulators to snoop around in executives personal and financial affairs. Even better–they would require the same information and due diligence on every account holder and/or customer of a Bitcoin based business. High-risk or high-volume customers–as determined by the NYDFS may be subject to additional scrutiny as would foreign account holders because terrorism. In other words, the New York regulations would do anything and everything possible to bind digital currency to the fiat banking system simultaneously giving the government control and eliminating much of the upside of cryptocurrency.
Another serious concern is the scope of the regulation–it appears to cover a laundry list of Bitcoin related businesses and some have suggested that it could cover pretty much any business that so much as uses cryptocurrency as a payment method. Under this broad interpretation–and keeping in mind that governments love to interpret things broadly–it could apply to wallet providers, tipping and money sharing apps and possibly even a merchant that accepts Bitcoin. Additionally, there has been considerable griping that Bitcoin transactions would be subject to a broader and stricter regulatory standard than other types of financial transactions. As Bitcoin lawyer Jean-Jacques Cabou put it “The corner store that does money transmission doesn’t keep 10 years of customer complaints. This is just a lot for a new industry to do and I think it would be very hard.”
PROTECT YOURSELF AT ALL TIMES:
There’s also some opinion that New York is trying to set themselves up as the de facto Federal regulator of cryptocurrency and that other states will adopt and abide by their guidelines. This is the way boxing works–all states honor suspensions issued in other states. It works reasonably well in boxing since the sport’s power is concentrated in Nevada (and to a lesser extent New Jersey and a few other states). More importantly, the athletic commissions’ primary interest is protection fighters from exploitation of having their interests otherwise compromised. It doesn’t work so well when you’re trying to balance a variety of interests in a fluid and dynamic industry. And if you’re looking to a state as a ‘regulatory model’ it shouldn’t be New York–a state that prohibits UFC shows as a union retaliation against owners Frank and Lorenzo Fertita, who operate non-union casinos in Nevada.
So far the reaction of Bitcoin industry types has been muted with a lot of talk about being ‘pleased that a regulatory framework is being set up’ and so forth. Since these are just ‘proposed’ regulations it makes sense for corporate types to keep a level head but others without a financial stake in the game have been more vociferous in their critiques. Patrick Muck, general counsel for the Bitcoin Foundation:
“Really the scope of this thing ropes in the whole industry. This proposal would set New York up as a quasi-federal regulator for the entire Bitcoin industry.”
So what is the goal of the New York Bitcoin regulation plan or, as one of my political wonk friends put it ‘What is the policy objective’? It could be as simple as a rush to be the first state in the nation to address Bitcoin in this manner. Of course rushing to implement regulations is seldom a good idea. The state of Nevada did that with their online gaming regulations. The resulting law essentially protects the legacy casino companies from competition and has all but guaranteed that Nevada will never be a major player in a legal US online betting market. It could be a garden variety power grab.
There could also be other interests at play. I’m not going to suggest that the state of New York is consciously trying to broadly prop up the status quo with their regulation. They may want to do what they can to protect the legacy financial industry from a cryptocurrency caused disruption. The industry isn’t the job catalyst it once was but there’s still a lot of wealth and power concentrated at the top. If New York politicians are willing to fight Uber tooth and nail at the behest of cab drivers they’d certainly be willing to regulate in the best interest of wealthy financial industry bigwigs.
There’s been much written about the unsuitability of 50+ year old regulations in dealing with today’s digital world. That hasn’t stopped politicians and regulators at every level from trying to keep the genie of technological progress in the bottle despite the utter futility of this task. But even their efforts are damaging–in a digital world having a corporate base in New York or anywhere else is no longer a necessity. Amazon has indicated they’ll move drone delivery R&D to Canada if they’re not allowed to do it in the US. Assuming that the final regulations are anywhere near as restrictive as the draft version you could see Bitcoin based start ups leave the state and set up shop elsewhere. Noted Bitcoin pundit Max Keiser tweeted that the New York Bitcoin regulations would ’empower regions like the Isle of Man to dominate Bitcoin’. ‘Bitcoin Jesus’ himself, Roger Ver says the same thing with a more philosophical tone:
“These men calling themselves government are not asking anybody to do anything. They are making demands, and will put us behind bars if we don’t obey. Bitcoin was specifically designed to strip away power from men who would be so presumptuous to believe that they have the right to rule over others.”