Lawsky Says New York Will Adapt Money Transfer Rules for Bitcoin

[acoindr]

From Bloomberg:

http://www.bloomberg.com/news/2014-02-11/lawsky-says-new-york-will-adapt-money-transfer-rules-for-bitcoin.html

“We do not have to throw out all of our existing rules for money transmitters or banks, which have generally served consumers well when vigorously enforced,” Lawsky said in a statement delivered to a New America Foundation forum on Bitcoin. “Indeed, certain aspects of virtual currency could dovetail with existing regulations.”

New York will “likely have to proceed with issuing some form of specially tailored BitLicense that adapts those rules to the world of virtual currency,” Lawsky said.

This doesn't say much to me. What kind of firms will have "BitLicenses"? We know exchanges are likely to be regulated. However, it makes no sense for a pizzeria, shoe store, etc. to need a BitLicense just to conduct customer purchases.

These politicians are tricky. Let's stay on top of them to ensure they don't go too far.

EDIT: remember you don't need to make Bitcoin illegal if you can control who can accept it.

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[cbeast]

Because bitcoin is so easy to use and setup, it will be hard to enforce strict licensing. It will just be a fee to make up for the fees the banks don't get anymore. Eventually, market forces will drive down the fee into oblivion.

[franky1]

the positive of a bitlience:
it will kill off teenage basement dwellers from making inferior exchanges.
because it requires full ID checks on the owners, running off with the funds would be near impossible, but atleast harder then present

the negatives:
time delay of innovation
redtape bottlenecking transaction flows

the major thing that should change:
regulators should actually regulate, and not just be admin assistants for registration forms and cashiers for the fee price

[Jeezy911]

The great thing is the fee will ALWAYS have to be on the Fiat side. They can't figure out how to regulate it because it is impossible.

[DeathAndTaxes]

the positive of a bitlience:
it will kill off teenage basement dwellers from making inferior exchanges.
because it requires full ID checks on the owners, running off with the funds would be near impossible, but atleast harder then present

the negatives:
time delay of innovation
redtape bottlenecking transaction flows

the major thing that should change:
regulators should actually regulate, and not just be admin assistants for registration forms and cashiers for the fee price

The real con is that it that the end game is you end up with a handful of US companies that now face high costs but which are protected by huge barriers to entry.  This mean they can increase prices and margins, and without that fear of the next startup stealing their marketshare innovation dies off.  The companies which get licensed now have the govt working for them and it is in there best interest to make licensing more and more difficult until nobody else joins the "good ole boy club".  Even better they also have local law enforcement forcing consumers to use their product by shutting down alternatives like peer to peer portals.  The best part is they don't have to pay a penny for that local "protection" as long as the laws remain punitive and regulation costly.

What NY et al forgets is, NY MT bond requirement is "only" $300,000, but there are 50 states in the country.  $300K bond * 50 states = $15M in surety bonds.  Usually a surety bond company will not cover the bond unless the company has tangible net work in excess of the bond amount.  This means if/when all the states follow NY lead the minimum to "play" is in the $25M to $50M range.  Now the surety bond company is going to want 3% to 10% a year, and each state wants $10K or so in licensing fee so you are looking at up to $2M annually in overhead before accepting a single sale.   Who pays that $2M?  Why you of course in the form of higher fees.

But wait you take your business to that low cost startup .... which no longer exists.  Ever notice how after the states decided to regulate entities like PayPal there was no PayPal competitor no matter how bad PayPal got?  PayPal's fees just went up and up and up, and the service just got worse and worse and worse yet not better competitor ever came along.   Did you think that was a coincidence, or maybe nobody in the country thought "hey we could make a PayPal competitor"?  Maybe, just maybe it was that the "pay to play" economics of regulation priced startups right out of the game.

Of course a handful of companies isn't bad right?  You still got competition.  I mean WU and Money Gram compete real hard to drive down the cost of sending money overseas. When you have a high barrier to entry the market becomes more profitable the less players there are.  You don't have to out compete your competitors to make more money, you just have to buy them or merge with them.  So if eight US startups grow big enough to afford 50 state compliance before the "pay to play" walls go up, eventually there will be 6 then 5 then 3 as the merge and acquire each other.  If Bitcoin does become the next big thing, the banks and credit card companies and PayPals will end up buying or merging with the few remaining players and we all know they will do an awesome job in keeping costs down and the innovation flowing.  They might not be interested in an open free market with low barriers to entry and lots of competition, but a stagnant market with high regulatory overhead and little competition, they wrote the book on that.

The good news is this won't affect the rest of the world.  There has been talk for decades to streamline the money transmitter licensing, and create a national license.  It hasn't happened because ... nobody wants it to happen.  Well at least nobody with money and power.  The state regulators don't want it to happen (they would be out of a job overnight) and the Western Unions, PayPals, and GreenDots of the world surely don't want that to happen.  Lower barriers to entry mean more competition, especially young innovative startups and that means lower margins.  It is far cheaper to "donate" to the campaigns of the right people and ensure the high cost, patchwork of laws we current have stay on the books.  Kinda like how national banks, securities exchanges, commodity dealers, and forex markets are exempt from state money transmitter requirements.

Full disclosure: we don't do business in NY even prior to the hearings due to the regulatory uncertainty.  Then again if we can grow big enough, fast enough, who knows we might be on the other side of those barriers.  Still that doesn't mean high regulatory compliance costs are good for the consumer.  If history is any guide, the barriers will make a few winners and a lot of losers.  

[notig]

the positive of a bitlience:
it will kill off teenage basement dwellers from making inferior exchanges.
because it requires full ID checks on the owners, running off with the funds would be near impossible, but atleast harder then present

the negatives:
time delay of innovation
redtape bottlenecking transaction flows

the major thing that should change:
regulators should actually regulate, and not just be admin assistants for registration forms and cashiers for the fee price

The real con is that it that the end game is there is a handful of US companies which have huge barriers to entry.  This means no startups can compete, and the remaining companies can raise fees.  They also have the long arm the government helping them by shutting down entities like p2p sales portals.

What NY et al forget is that they "only" want a $300,000 bond but there are 50 states in the country.  $300K bond * 50 states (some are higher some are lower but lets pretend they all follow NY lead) = $15M in surety bonds.   Usually a surety bond company will only cover a bond if a company has at least that in net worth so the min entry becomes a $25M to $50M investment.   Now the surety bond company is going to want 3% to 10% a year so the company now has up to $1.5M in overhead before accepting a single sale.   Who pays that $1.5M ... the consumer of course.

But wait you will go to the low price startup .... which doesn't exist.   Ever notice after the states decided to regulate entities like PayPal there was no PayPal competitor?  Do you think it was because nobody thought they could do it better or was it because the economic of regulation suddenly made it impossible for startups to "pay to play".

Of course a handful of companies isn't bad right?  You still got competition (kinda like WU and Money Gram compete so hard to drive the price of money transmission down).  When you have a high barrier to entry the market becomes more profitable the less players there are.  So if eight US companies grow big enough before the "pay to play" walls go up eventually there will be 6 then 5 then 3 as the merge and drive prices higher.

If Bitcoin does become big, the banks will end up buying or merging with a few of the remaining companies and we all know they will do a great job in keeping costs down and profit margins low.  They also will open the floodgates of innovation.

The good news is this won't affect the rest of the world.  There has been talk for decades to streamline the money transmitter licensing, and create a national license.  It hasn't happened because ... nobody wants it to happen.  Well at least nobody with money and power.  The state regulators don't want it to happen and the Western Unions, PayPals, and GreenDots of the world SURELY don't want that to happen.  Lower barriers to entry mean more competition, especially young innovative startups and that means lower margins. 

Full disclosure: we don't do business in NY due to regulatory uncertainty.  If we can grow big enough fast enough who knows we might be on the other side of those barriers but that doesn't mean high regulatory compliance costs are good for the consumer.  If history is any guide, the barriers will make a few winners and a lot of losers. 

And with a healthy competition (lots of exchanges) you don't need insurance bonds or anything like that because consumers can choose the safest exchanges. For instance in recent days it has become clear that there are some standout exchanges in regards to the fact that they handle the recent issues just fine....... Kracken, Coinjar, Vault of satoshi all appear to be up and coming superior exchanges

[acoindr]

The real con is that it that the end game is you end up with a handful of US companies that now face high costs but which are protected by huge barriers to entry.  This mean they can increase prices and margins, and without that fear of the next startup stealing their marketshare innovation dies off.  The companies which get licensed now have the govt working for them and it is in there best interest to make licensing more and more difficult until nobody else joins the "good ole boy club".  Even better they also have local law enforcement forcing consumers to use their product by shutting down alternatives like peer to peer portals.  The best part is they don't have to pay a penny for that local "protection" as long as the laws remain punitive and regulation costly.

What NY et al forgets is, NY MT bond requirement is "only" $300,000, but there are 50 states in the country.  $300K bond * 50 states = $15M in surety bonds.  Usually a surety bond company will not cover the bond unless the company has tangible net work in excess of the bond amount.  This means if/when all the states follow NY lead the minimum to "play" is in the $25M to $50M range.  Now the surety bond company is going to want 3% to 10% a year, and each state wants $10K or so in licensing fee so you are looking at up to $2M annually in overhead before accepting a single sale.   Who pays that $2M?  Why you of course in the form of higher fees.

...

Nice explanation D&T. This is certainly how the traditional financial system works. I'm realistic, though. I understand NY may not be able to completely say hands off, at least when it comes to exchanges. I won't worry about that so much as long as US virtual currency users have other options like off shore exchanges. In fact if a single state out of 50 decides not to regulate that could be enough. All the exchanges would set up there, kind of like how many companies incorporate in Delaware because it's highly favorable. Now that I think of it there are two states, I think Wyoming and another, which don't have additional money transmitter requirements other than what exists at federal level. Ideally that extends to virtual currency.

What I'm concerned about is anyone looking to extend regulation to anything other than exchanges which makes no sense.

[DeathAndTaxes]

In fact if a single state out of 50 decides not to regulate that could be enough.

Sadly it isn't.  BitSimple for example is incorporated in SC however prior legal battles have been fought over the fact that many states statutes indicate that even if your company is NOT in the state (or even in these United States) that if you offer your services to residents of that state you are required to be licensed.  One could certainly argue this interferes with interstate commerce but so far the states have won this battle.  Are you willing to risk your freedom and net worth on winning that battle?  If the state wins, your life is over, if you win the state says "ok" and you are still stuck with the massive legal bill.  

This is why the current system is so burdensome.  It isn't getting regulated in one state, it is getting regulated by 50+ regulators in all the states, each of which may change the laws, regulations, and procedures on any particular day.   Keeping track of the forms, procedures, requirements, and current statutes of one state is a challenge, now multiply that by fifty.

But it doesn't stop there.  The biggest issue is the "unknown".  There is a lot of regulatory uncertainty right now.  No bitcoin exchange has a money transmitter license in NY, are they breaking the law?  On advice of counsel, we have voluntarily chosen to not do business with residents of NY due to the fact that NY could say we are operating an unlicensed money transmission business "in" NY although the company, all its servers, asseets, and employees are hundreds of miles away.   However at least NY has spoken out, that provides us some information.  Most states are an opaque unknown having not said a single word on the applicability of existing statutes to virtual currency exchangers.  Hell the basic definitions of money, currency, and transmission aren't even the same from states to states.  Some states don't even define the words.  Kinda hard to believe you can have a law about "money transmission" and not define "money" or "transmission".  I guess that means the law can be whatever the state wants it to be, whenever they want it to be.   Of course you could always fight them in court.  A legal team will tell you the costs will run into the six figures pretty quick.  So if your company just raised a million dollars you ready to potentially flush a quarter of it down the drain to fight one state in court.  Even if you win, what about the other 49?

The following hyperbolic example is to illustrate a point which don't necessarily reflect reality and shouldn't be taken as legal advice.  NY may says explicitly you need to be licensed, FL has made no such statements but has arrested suspects for running an unlicensed MSB (even after the arrest there have been no statements), the law in PA might not ever apply to virtual currency even if regulators want it to due to the way it is worded, the same thing could be true in MO, but your company is unaware that right now they have an bill being voted on which will change the regulatory scope, CA issues a cease and desist against the Bitcoin foundation a year ago and then there is no followup (were they right or wrong?  I guess you can spend another quarter million and sue them to find out), etc, etc, etc, <insert another 40+ etcs here>.

Starting to see the issue?

The "meta-problem" is regulators often write regulations for large cap companies.  Companies which can spend $10M a year on legal and compliance and it amounts to 1% of revenue.  In the Senate hearing the regulator even shared a story about a small upstate local town bank which complained they had MORE EMPLOYEES WORKING ON COMPLIANCE than all other employees combined.   The shocking thing is although he seemed to share sympathy the regulatory burden hasn't gotten any lighter.  So it is almost like the attitude is "wow, that is bad.  I have no idea how they can even stay in business.  ok lets see what other regulations we can pass today".   I mean it is a head asplode disconnect between the needs of small business and the burden being imposed on them.


On edit: Reading this now makes me sound like I think the world is over, it isn't.  I am optimistic this will eventually be resolved, or the US will simply fall behind other nations where regulation is at least coherent, and compliance is possible for a company with less than a twenty man compliance & legal team.  Bitcoin is the honey badger of money, it doesn't care.  If the system is broken it will find a way to route around the damaged parts.

What I'm concerned about is anyone looking to extend regulation to anything other than exchanges which makes no sense.

The good news is AFAIK no regulator anywhere at any level is talking about regulating entities which don't exchange virtual currency for real currency.   So far they all seem to see a company accepting Bitcoins is no more a regulated activity than a company accepting credit cards.

[TitanBTC]

What I'm concerned about is anyone looking to extend regulation to anything other than exchanges which makes no sense.

From our experience, most states are focused on two things:

1.) Making sure they comply with federal guidelines for MSB regulation.  

2.) Collecting sales and income tax.

The state's don't really seem hungry to start labeling traditional businesses as money transmitters, just because they accept bitcoin.  We (Titan Mint) are in a grey area so our case is a bit unique, but I don't think you need to worry about states regulating pizza shops unless they are running secondary bitcoin exchanges on the side (that clearly operate outside the normal activities of their primary business).

New York is a bit of an anomaly in their regulatory interest.  Perhaps the fact that the state is the home-base for much of the financial industry might have something to do with that?

[acoindr]

In fact if a single state out of 50 decides not to regulate that could be enough.

Sadly it isn't.  ...

Of course you're right. Everything you said I already know.

I guess I'm trying to imagine some acceptable, peaceful co-existence with regulators. What I was thinking more of when I said that is something like Las Vegas/Nevada. Gambling is largely illegal in the US, including Internet gambling. However, all of that is okay in Nevada because as a sovereign state they decided to allow it. That's all it took for an opening. Now you can find legal gambling in other states too, just more low key. Same with prostitution. There are fairly open brothels in Nevada, and massage parlors etc. in other states. They just keep it low key. When online poker playing took off the gambling companies that located off shore to service US customers were choked off not by legal mandate, but by the financial system. Credit card companies denied transactions. Bank accounts were frozen. Of course, Bitcoin solves that.

It's hard for law enforcement and prosecutors to remain tenacious when some activity, while technically regulated/illegal, is basically normalized, especially when those they might prosecute are not even in their country.

New York is a bit of an anomaly in their regulatory interest.  Perhaps the fact that the state is the home-base for much of the financial industry might have something to do with that?

Yes, it's believed that's why.

[smith88]

Because bitcoin is so easy to use and setup, it will be hard to enforce strict licensing. It will just be a fee to make up for the fees the banks don't get anymore. Eventually, market forces will drive down the fee into oblivion.

Exactly my thoughts.  I don't think they are concerned with mining operations per say; more in ensuring big exchanges are playing by the rules.  This seems fair in my opinion; it does remove some more speculation; albeit introducing more at the same time...  yes confusing.

[acoindr]

Update: http://money.cnn.com/2014/02/12/technology/bitcoin-regulation/index.html?iid=HP_LN

His comments here seem fairly positive actually, except for a subtle hint about regulating miners. I don't know what that's about.

[TheButterZone]

These politicians are tricky. Let's stay on top of them to ensure they don't go too far.

If a fraction of an inch is given, they always take away googolplex light years worth of liberty.