An unavoidable moment for FinTech has come with the New York BitLicense last year. What has been a dream for regulators for a while brought FinTech startups’ nightmares into reality.
Proposed in 2014, the New York Department of Financial Services (NYDFS) published its final BitLicense regulations for virtual currency businesses in June 2015. As the regulation was accepted, companies engaged in “virtual currency business activity” in New York are required to apply for a BitLicense. Since the regulation passed, companies had 45 days to apply for the license. Applicants for a license are required to have – among other things – AML, KYC, consumer protection and cybersecurity programs.
At the moment of proposal, back in 2014, the idea received a passionate commentary. Until now, it stays a controversial decision significantly affecting bitcoin businesses. It has been a long-standing dream of the regulators to take bitcoin under legal control and BitLicense is a great opportunity for a regulatory body to tame previously free bitcoin businesses.
However, there is another side to the coin. Any legal regulation for startups brings the burden of following certain requirements. The license itself is a burden as startups (often lean) have to pour financial and human resources into understanding and applying for a license. There is even an initiative called Stop the BitLicense.
Oppositions’ perspective to BitLicense
Let's look at BitLicense from the startups perspective. First, as we mentioned, a startup that is looking to get a license, needs to go through a cumbersome process as with any other licensing. To get one, bitcoin evangelists would need to undergo a background check and even submit fingerprints to state and federal law enforcement.
The end-user – an average person who buys bitcoins – could also be affected. As stated by groups opposing BitLicense, all the companies who obtain a BitLicense may be forced to collect personal data on consumers – including full name and physical address – and keep that data for 10 years, no matter how small the transaction. Basically, it may force companies to spy on users and keep identity data for a decade, just in case the government wants to look at the information later.
All the beauty of cryptocurrency and its potential to be privacy-protective and censorship-resistant has been abolished by the New York BitLicense, as the opposition believes.
One of the worst outcomes seen by businesses and everyday users is related to privacy. While FinTech is trying to enhance privacy protection, BitLicense is throwing their efforts back into the 20th century.
How does it look from the regulatory perspective?
While the situation may look dramatic for startups, for the regulator, BitLicense, this is "revenge" and a tool to fight money laundering and criminal transactions. Everyday users and businesses that haven’t done anything wrong should not have negative backlash towards New York BitLicense.
From the regulator’s position, the rapid development of financial information, technology and communication allowed money to move anywhere in the world with speed and ease. This makes the task of combating money laundering more urgent than ever. According to the United Nations Office of Drugs and Crime, the estimated amount of money laundered globally in one year is 2-5% of global GDP, or $800 billion – $2 trillion in current US dollars. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address.
Money launderers are such a tough nut to crack for the government that an opportunity to shut down a bitcoin loophole looks justified and reasonable even at a cost of a certain negative outcome for small businesses. Even though regular innovative startups operating with bitcoin are not aware of the criminal statistics, it is a significant hardship for the government. According to IRS data, last year, only half of all money laundering cases in 2015 ended up being prosecuted.
One may ask: how is that bitcoin’s fault? There is an answer to that as well as bitcoin is quite an often "face" showing up at crime scenes. In October 2015, a total of six people have been arrested during police raids in the Netherlands and beyond. These police raids were a result of an ongoing investigation regarding money laundering with bitcoin, a service offered by several individuals residing in the Rotterdam area.
In January this year, Dutch police arrested 10 people in the Netherlands as part of an international investigation into money-laundering through the sale of bitcoin. Fifteen places were raided in eight Dutch towns as part of the investigation during which luxury cars, cash and the ingredients to make ecstasy were seized.
Australia has provided the most vivid example of the hardships awaiting bitcoin and small businesses built around it. According to Reuters, last year, Australian banks closed accounts of 13 bitcoin exchanges. As a matter of fact, Australia is estimated to hold 7% of bitcoin's global value ($3.5 billion global value). Concerns about bitcoin's potential crime links mean that many businesses have stopped accepting it, a trend accelerated by Australian banks' major shutdown when 13 of the country's 17 bitcoin exchanges had to close.
According to Reuters, in the UK and the US, most large banks have already cut ties with bitcoin account holders, but the lack of industry coordination had left room for individual lenders to support the currency, including Germany's Fidor Bank AG, which operates in Britain, and tech-focused Californian lender Silicon Valley Bank. BitLicense is seen to be a step towards coordination and cooperation in the name of national security.
While money laundering involving bitcoin is flourishing overseas, the New York regulatory body will not be waiting for the situation to take over the state.
Even though international cases of criminal activities with bitcoin emerge an uncertainty and lack of trust towards the cryptocurrency, HM Treasury has recently released contradicting data stating that digital currencies actually pose the lowest money laundering risk.
As stated in the paper, "There are a limited number of case studies upon which any solid conclusions could be drawn that digital currencies are used for money laundering. There are concerns around anonymity, faster payments, and ability to provide cross-border remittances and facilitate international trade. These issues are similar to issues identified with many other financial instruments, such as cash and e-money."
Who is getting through the New York BitLicense?
While the endless debates go on, companies looking to take the challenge are filing for the license.
In the short history of BitLicense, September 22, 2015 became a notable day as Circle was the first company to receive an approval.
Not everyone, however, met the challenge with dollars. ShapeShift, Kraken and Bitfinex decided to cease operating in New York after the requirement passed through. The move is reasonable for small companies as applications for the BitLicense cost $5,000, which doesn't include additional charges for document preparation and personnel allocation.
As Kraken shared on the official website regarding the closure in New York, “Regrettably, the abominable BitLicense has awakened. It is a creature so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth. It’s, at least, a 40-man, bro.”
Cryptocurrency exchange Poloniex has also decided to stop serving New York residents. The founder of the company explained it with the absence of guarantee to get a license for a non-refundable fee of $5,000 and a possibility that each state, following New York, will implement the requirement. In that case, unbearable expenses on licensing everywhere will push companies to the edge.
Among other companies who left the state were Korbit, Genesis Mining, LocalBitcoins, GoCoin, BitMex, LakeBTC, Backpage, BitQuick, ShapeShift, Eobot and BTC Guild.
There is a range of companies on their way to licensing. Jaron Lukasiewicz, CEO and founder of Coinsetter, has shared with CoinDesk, that the company had spent approximately $50,000 on BitLicense-related expenses over the past two years. "I think it’s (the) bigger cost, though, (that) has been in the uncertainty it created for investors looking to invest in our space – hopefully, that will begin to reverse itself now."
Bittrex, a cryptocurrency exchange, is also reported to have submitted an application for BitLicense. As the founder, Bill Shihara, told CoinDesk, he estimated the process to have cost his company between $18,000 and $20,000, whilst employees spent approximately 80 hours compiling and reviewing the paperwork.
Although Bittrex's founder has admitted significant complications related to the license, he expressed support to the idea, saying, "Ultimately, I think customers should be happy about the BitLicense. While it is burdensome for us, the core of the paperwork involved consumer protection. The BitLicense requires background checks on the principals who handle your funds; detailed information of how the funds are stored and credited to our users; proof that the company is profitable; as well as security and incident response plans."
"If the BitLicense reviewers do their jobs right, passing the application process means the company holding your funds is a legitimate business that you should want to work with," he concluded.
Bitcoin exchange MonetaGo that operates in 40 countries has applied for the license as well. BTCC, Xapo and Coinsource have also filed applications.
As of October last year, three Bitcoin companies received licenses – Gemini, Circle and itBit.