Critics worry that new state regs for bitcoin firms could impede market
WASHINGTON – If you live in New York and trade in the digital currency known as bitcoin, here’s something you should know: Your choices on service providers may be severely limited due to the state’s new licensing regulations, which some companies say could force some bitcoin exchanges out of the market.
Bitcoin, a system created in 2009, can be exchanged where accepted via an electronic device such as a smartphone. The most important characteristic of bitcoin, and one that makes it different from conventional currency, is that it’s decentralized — no institutions control the money network.
Users can get bitcoin through bitcoin exchanges — platforms similar to stock markets where the digital units can be bought with conventional currencies. Virtual “wallets,” such as Coinbase and Bitpay, also help convert dollars into bitcoin.
About bitcoin
Bitcoin, created in 2009, is a global payment network, allowing its currency to be transmitted electronically. It is decentralized – no institutions control the money network. Therefore, compared to conventional currency, bitcoin transactions are faster, non-repudiable and come with low or even zero transaction fees. But bitcoin is still a niche choice due to its volatile value and recent bankruptcy cases of some bitcoin exchanges.
According to bitcoin payment processor BitPay, more than 100,000 businesses globally are accepting bitcoin as a payment method. Consumers can make purchases via virtual bitcoin wallets, which are linked to their bank accounts.
In August 2015, one bitcoin was worth more than $200, and all bitcoin in existence is worth about $3 billion.
Merchants that may accept bitcoins as payment:
Target, Kmart, Subway, Overstock.com, Amazon, CVS, Paypal / Ebay, Expedia.com. You’ll likely have to buy a gift card through a middleman such as Gyft to shop, however. 1-800-FLOWERS.com.
Several unregulated bitcoin exchanges have collapsed under questionable circumstances. In one of the most high-profile crashes, the Japanese bitcoin exchange Mt. Gox reportedly lost $400 million worth of bitcoin. Blame initially fell on hackers, but some suspect an inside job.
Since 2013, regulations specific to virtual currency have been proposed in seven states such as California, New Jersey and Connecticut.
In New York, the Department of Financial Services has since 2013 been crafting a new regulatory framework it calls BitLicense. It took effect this month.
Benjamin Lawsky, the DFS chief who left for the private sector earlier this summer, said in June that “the genie is already out of the bottle” when it comes to digital currencies.
Instead of banning bitcoin, coming up with regulations like BitLicense “is important to the long-term health of the virtual currency industry. Building trust and confidence among consumers is crucial for wider adoption,” Lawsky said in a speech at the BITS Emerging Payments Forum in Washington. “It also helps attract additional investment.”
Gregory Simon, president of Bitcoin Association, a New-York-based nonprofit that focuses on bitcoin advocacy and education, said the potential effects of the new technology on the financial industry are still unknown.
“No business will say they like regulations,” Simon said. “But some regulations are necessary to protect consumers by requiring certain minimum industry operating standards.”
Under the new state regulations, a BitLicense is required for companies in the virtual currency industry that want to operate in the New York market. Without it, they cannot serve New York residents or New York-based companies.
To apply for a license, companies must pay a $5,000 nonrefundable application fee. The actual cost, however, can be much higher.
Coinsetter, a New York City-based bitcoin exchange that applied for a BitLicense, spent about $50,000 in the past two years to finish the application process, CEO Jaron Lukasiewicz said.
“It’s important you work with reputable legal counsel on something like this, but unfortunately, that carries huge expenses,” Lukasiewicz said. “And this is just the monetary cost; it also took a lot of time internally.”
The substantial application cost, which may be seen as a financial hurdle to businesses, provides consumers protection. Simon said that, “Without it, consumers would be exposed to risk of loss, and might be discouraged from using the services in the first place.”
However, the high entrance fee scared many companies away, especially small startups.
“For a startup with little operational wiggle room, this can make the difference between success or failure,” Simon said.
Kraken Bitcoin Exchange, based in San Francisco, is one of the exchanges that have pulled out of the New York market after the company decided not to apply for a BitLicense.
Jesse Powell, CEO of Kraken, said the opportunities in New York are not worth the cost. Even as a center of financial services, the New York market is small compared to Asia in terms of bitcoin trading volume.
“New York is one of the top five markets for us in U.S., but it’s only 1 percent of our business,” Powell said. “Our client base outside of the country is much bigger. We did the math and decided not to apply.”
Although having a BitLicense sends a positive message about trustworthiness and reliability, Lukasiewicz said it also brings challenges to the firms. But as a New York-based company, Coinsetter had no choice.
“You cannot get new products to the market easily (under this regulation),” he said. “It would be a problem for startups because what they really need to focus on is their products, not on regulatory licensing issues.”
Asked if the BitLicense would bring more business to his company, Lukasiewicz said it’s too early to tell.
“We have had some customers in New York come to us … but it will take a long time to see a big increase in trading volume,” he said. “Some customers do not care about regulation. They just want to use the product they like to use. Those who want to use exchanges with the license, it takes a long time for them to transition.”
People who don’t want to shift to new platforms will find ways to avoid compliance with the regulation, said entrepreneur David Mondrus, a former member of Bitcoin Association. They might include using a TOR browser, which helps hide users’ physical locations, or using a virtual private network to get a non-New-York IP address.
Due to privacy protection, many Bitcoin traders are hard to be found for an interview, but they are active in the Reddit community.
A New York resident who uses the Reddit handle @slowmoon, who has been trading bitcoin for several years, recently relocated his virtual private server to Hong Kong with a monthly payment of several dollars. It allows him to continue using some bitcoin exchanges without securing a BitLicense.
Kraken chief Powell said, “It’s up to the exchanges and wallets to turn away services and make a reasonable effort to determine if the users are from New York. If the user signs up the account when they are out of state, or gives us fake information, we cannot do anything about that.”
Proposed regulations in other states could make it harder for bitcoin startups and traders to find a regulation-free-zone, Simon said.
Shamoon Siddiqui, a bitcoin trader in New Jersey, said he sees the regulation spreading.
“Other cities may use it as a template for their own rules,” he said. “I may get affected very soon.”
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