Apple recently introduced Apple Pay throwing a proverbial wrench into the Bitcoin community. But is it really? See my post on my other blog to read more about it.

 

 

September 8, 2014

dana.syracuse@dfs.ny.gov
DFS Office of General Counsel – Dana V. Syracuse
New York State Department of Financial Services
One State Street, New York, NY 10004

Dear Mr. Syracuse,

I am submitting this comment in response to the proposed “BitLicense” regulatory framework proffered by the NYSDFS on July 17, 2014. Thank you for the additional time allowance granted for feedback.

For reference, I am a licensed attorney in the state of Florida (FL Bar #90009), a certified information privacy professional (CIPP/US) and certified information privacy manager (CIPM) with the International Association of Privacy Professionals (IAPP). I am on the IAPP Faculty. I am currently employed by a Fortune 500 firm working in the Global Information Security department under the Chief Information Security Officer. I have been a member of the International Financial Cryptography Association on and off since 1997 (Financial Cryptography is a term that predates the widely used crypto-currency). I have had knowledge of Bitcoin since late 2010 and acquired my first bitcoin in March 2012. In June 2013 I started a Bitcoin based blog with a preference for discussing legal issues. My consulting company recently launched at App that accepts bitcoin. The App provides one time use email aliases that consumers can use to protect themselves from merchants selling purchasing histories to data brokers.  I am also involved in a startup in the financial technology/Bitcoin space focusing on offline and micropayments. Finally, I’m working on putting together a conference focused on consumer use of bitcoin in Atlanta for the spring of 2015.

I am not going to focus on specific proposals within the BitLicense framework. I will leave that to others. I want to focus on a few core themes that I would suggest should govern your action going forward.

The proposed regulation is too much too early

While many have welcomed regulatory certainty in the Bitcoin space, the proposed regulations are far too early and too restrictive. Many have compared Bitcoin not as money for the internet but the internet of money. Bitcoin and its spark of innovation in the financial technology space has the potential to do for the financial sector what the Internet has done for publishing, content distribution, and communications. It is fundamentally disruptive.  It is also extremely nascent. Bitcoin transactions represent less than 1/100,000 of a percent of the world economy.  Currently, it isn’t even a rounding error compared to US GDP.  Instilling regulations now will is akin to creating a regulatory framework for the Internet back in the 1970’s. Legislators and regulators STILL have a hard time today writing regulation today that isn’t too technology specific and doesn’t disrupt innovation. There are plenty of existing laws on the books and resources to prevent existing illegal activity, whether it happens with Bitcoins or without. Adding additional regulatory burdens only strangles growth in this early industry without commensurate benefit.

The proposed regulation places a high barrier to entry to start-ups

Regulatory burdens increase barriers to entry to new businesses. While this may be acceptable in mature industries like banking, imposing such onerous and specific regulations in a fast growing area like Bitcoin could be detrimental. Imagine the fate of Apple or Microsoft, or the thousands of other early computer firms that grew from the heydays of the 70’s and 80s had early regulations for software developers been instilled. The fact is most start-ups in the Bitcoin space are garage operations, several software developers who see a problem (security of Bitcoin wallets) and develop an innovative solution. Without access to significant capital and legal support, they either risk non-compliance or will focus their attention on other industries, depriving this industry of their innovations and problem solving skills.

The proposed regulations will not benefit consumers

Consumers benefit from choices in the market. Ultimately, Bitcoin and related innovative financial technologies benefit consumers by giving them other options to the traditional financial market. One of the touted benefits of Bitcoin is reduced transaction fees but this ignores an entire spectrum of benefits. It also belies the potential benefits that financial technology not yet conceived of will bring, spurred on by the innovation driven atmosphere which has accompanied Bitcoin. A perennial problem for low income consumers has been a lack of access to the traditional banking sector. They are often at the mercy of alternative financial services, which often extract exorbitant fees because of the lack of options those consumers have. An estimated 13 percent of all households in NY City lack bank or credit union accounts. This is compared to 7.7 percent nationwide (2010 numbers). Bitcoin and associated technology does not discriminate between poor and rich, between credit-worthy and uncredit-worthy.

Many regulators worry about the high profile thefts and loss of funds, where people’s computers were hack or businesses disappeared with customer funds. Bitcoin adoption will clearly never grow with such problems. When talking with potential users, security over their funds is often the first source of concern. However, the market, not regulation, will best address these issues. As a regulator, you have only one solution, the hammer of the law. The market has thousands of solutions, and the best solutions will ultimately win. Already, firms are creating new technologies, such as multi-signature wallets, trustless exchanges, and publically auditable systems which address each of the problems Bitcoin has experienced as it has grown from cutting technology to consumer ready.  Many of the new startups have focused on making Bitcoin both consumer friendly and more secure, but by imposing single required solutions based on a limited view of what Bitcoin does you rob consumers of potential better solutions the market may offer down the road.

The proposed regulations will stall productivity and job growth in New York and, more broadly, in the United States

The image below shows the distribution of Bitcoin related jobs in the US. After California, you will see that NY has the highest concentration. While in the past, NY has enjoyed the reputation as a financial hub for the United States and the world, the proposed regulation could spur the flight of innovative forward thinking firms to more welcoming jurisdictions. Many of the proposals, such as the identification of all users, don’t make sense given the technological design of Bitcoin and similar technologies. Imagine, if private firms were allowed to print cash but told they had to keep track of every person who touched the cash. That would be untenable and essentially put those companies out of business. How is a software company in NY supposed to track a Kenyan goat herder who uses Bitcoin to buy and sell goats? How would you handle an individual, who may not have a defined address, may not have government issued identification or other information that may be required to comply with the proposed regulation? My start-up for instance, is focused on micro-transactions, sub $20 transactions. Identification of all users is simply not an economically viable option.

 

Ultimately, the result of such economically inefficient regulations means companies won’t start in NY, won’t be based out of NY and won’t operate in NY, depriving NY citizens of the services and options offered by those companies. Small startups will avoid NY. Individuals in NY who aren’t bankrolled by venture capitalists won’t start businesses, depriving all of us of their innovations. Lest you think the global nature of the Internet and money make it such that non-NY based companies must comply with the NY regulations, there are numerous ways companies can avoid operating in NY. Blocking NY based IP-addresses, not signing up NY based merchant and many other options are available. Since my start up focuses on brick-and-mortar merchants, we can easily avoid operating in NY, by not allowing NY based merchants to use our service.

Even if the NY regulations are successful at getting some businesses in the United States under their control, this is a worldwide phenomenon and firms will either move overseas or the innovation will happen overseas, depriving the US not only of their services but of its leadership role in new technology.

The proposed regulations will not deter criminal activity

One of the other alleged benefits of the regulation is to forestall use of Bitcoin and other financial technology in the aid of criminal activity. Crime has existed long before Bitcoin and it will exist long after Bitcoin. We don’t criminalize cars because bank robbers flee using them or because people steal them. There are plenty of activities that are already criminalized and law enforcement has tools at its disposal for rooting out that activity. The alleged operator of the Silk Road and many of the drug dealers on that system have been identified, despite their use of Bitcoin and anonymous communications methods. In fact, this too has spurred innovation with forensic analysis firms popping up to track the flow of funds on the very public Bitcoin blockchain.  Putting a tight grip on Bitcoin won’t deter criminal activity, it will only spur innovation by criminals to develop tools to even further hide their activity. The only ones deterred will be young innovative firms who don’t have the resources to comply with onerous regulations or where such regulation is fundamentally in opposition to their business model.

 

In conclusion, I’ll hope you’ll see that your proposed regulations are antithetical to the results which you desire. They will harm consumers by limiting their options, harm business and innovation, and will not deter criminal activity. I hope you will reconsider and develop a much thinner, lighter and more workable framework which invites businesses to work with you to meet

your goals rather than driving business and innovation away from New York and the United States.