As leaders in the Chinese virtual currency industry, we watch international regulatory developments very carefully. We are also well aware of the historical role New York State has played in creating and regulating financial markets. Therefore, the “BitLicense” proposal submitted by the New York State Department of Financial Services (NYDFS) requires special attention. On careful examination, we believe that the BitLicense is a well-intentioned regulatory effort, and certainly, we agree that digital virtual currency businesses need regulation, insofar as every legitimate business is regulated. However, there are some fundamental problems with the proposal that will be damaging to our entire industry and must be changed prior to enactment.
As written, the proposed regulation is overly broad in its application outside the United States, imposes a disproportionate compliance burden on virtual currency businesses, and misapplies normal compliance procedures. Specifically, as written, the proposal is problematic in three areas: (i) the BitLicense regime applies to businesses without any meaningful connection to New York State, (ii) a BitLicense requires comprehensive disclosure of business information, even for affiliates that are completely unrelated the licensee’s virtual currency business, and (iii) the criteria set for “enhanced due diligence” is unduly burdensome, inappropriate and without precedent in comparable industries.
At the heart of the issue are the criteria used for the applications of the BitLicense. By defining a “virtual currency business activity” as doing business with a “New York resident,” the BitLicense regulation would apply to any business that has single New York customer. While the vast majority of our users are Chinese, it is inevitable that each of our businesses may have a client that falls under this definition, and therefore, force our businesses to comply with the entire BitLicense proposal.
Were this regulation already enacted, the effect on our ability to operate and innovate would be measurably diminished. BTC China could not have rolled out its mobile exchange, Huobi could not have acquired a Chinese virtual storage provider, and OKCoin could not have launched its international trading platform. Moreover, under the BitLicense regulatory framework, each of our businesses would be required to submit the fingerprints of all of our employees to the FBI. As Chinese companies, it is difficult for us to understand why such sweeping regulations should apply when we have little meaningful business in New York State. By comparison, the state’s money transmitter licensing requirements determine the appropriateness of its regulatory power over money transmitters, and a similar mechanism should apply to virtual currency businesses.
In addition to the licensing criteria, the state also sets excessive disclosure requirements on businesses that fall into the proposed framework. Under BitLicense, the NYDFS would essentially be granted power to comprehensively examine our business operations, even if they are completely unrelated to virtual currency. The provision would grant the NYDFS the right to descend upon the premises of a US subsidiary and examine its operations, or conversely, scrutinize a large international holding company’s books and records simply because the holding company controls a tiny virtual currency subsidiary. From our point of view, this is unreasonable, disproportionate, and lacks precedence in New York’s money transmitter licensing regime. The NYDFS has no need for a carte blanche to go “treasure hunt” through the internal records of a licensee’s entire corporate family to carryout its mission.
Finally, the requirement for “enhanced due diligence” (EDD) is exceedingly US-centric, and is triggered by the wrong criteria, making it both ineffective and burdensome. By requiring EDD when a virtual currency business deals with a non-US person, the BitLicense forces us to always perform expensive, time-consuming EDD instead of ordinary due diligence, yet it fails to mandate EDD when it may be appropriate. For example, under the current BitLicense proposal, an Australian Bitcoin exchange, despite likely being more familiar with risks associated with money laundering in Australia than in the US, would nonetheless be required to perform expensive EDD on its domestic clients and while not having to perform such due diligence on its foreign, US customers.
Rather than triggering on the basis of whether or not the customer is a US person, it makes more sense that EDD should apply when the virtual currency business and the prospective client are from different jurisdictions. Whether or not our client is a “US person” is not a particularly relevant criterion for the application of compliance measures. Rather, ordinary due diligence should suffice if both the company and prospective client are from a country that adhere to international norms for anti-money laundering and counterterrorist financing.
The virtual currency industry is highly internationalized, and to date, little regulated—much less governed by the international agreements that guide the banking sector. Therefore, we support the intention of the NYDFS to provide the virtual currency industry with a clear regulatory framework in which to operate. However, the unprecedented breadth and scope of the regulation, spanning jurisdictions entirely unrelated to New York State, will place undue burden on young, fast growing companies with only negligible operations in New York.
In many ways, virtual currencies’ development mirrors the development of another of the world’s most disruptive technologies, the Internet. At the outset, many found the Internet strange, unfamiliar, and of limited use to the average consumer. However, in the developed world, the Internet is now as pervasive as electricity and plumbing. It is therefore presumptuous and damaging to impose heavy-handed regulations to solve a narrow set of problems, while broadly stifling innovation and wealth creation in its promising early stages.
We agree that the virtual currency industry needs regulatory guidance to give it mainstream legitimacy. To that end, we call attention to Superintendent Lawsky’s own words that “continued public feedback will be an important part of finalizing this regulatory framework,” as a clear sign of regulators’ desire to craft meaningful and efficient regulation, protecting consumers, while leaving room for growth and innovation in the industry. Unfortunately, the proposal as it is currently written fails to meet these goals, and for the future of our industry, it is important that it be modified.
source:
https://vip.btcchina.com/page/notice/?id=17enpdf:
https://com.btcchinacdn.com/docs/China%20Comments%20on%20Bitlicense.pdf
