The New York BitLicense and California’s Digital Currency Bill – A Comparison
Both approaches have their strengths but neither is perfect.
Last Monday, I testified before the California Assembly’s Banking and Finance Committee about the innovative potential of cryptocurrencies. And this coming Friday, we will be filing comments on the revised draft of New York’s proposed BitLicense. States are playing a central role in the regulation of digital currency businesses, and they’re taking slightly different approaches.
In California, Chairman Matt Dababneh recently introduced a bill that would license digital currency businesses. This bill is preliminary and certainly subject to change as we and others suggest ways to improve it. It’s interesting to see, though, that it has some of the same issues as the original BitLicense proposal.
For example, while the California bill defines digital currency, it does not define what constitutes the kind of digital currency business activity that would be subject to licensing. As a result, all business uses of digital currencies would seem to be licensed, including non-financial uses, and perhaps even software development. While the original BitLicense would have had a similar effect, the revised proposal avoids these pitfalls by limiting licensing for activities like holding or transmitting currency on behalf of a customer, as well as explicitly exempting non-financial uses and software development.
Another area where the BitLicense seems to have already blazed a trail is in permissible investments. Like the original BitLicense, the California bill would require licensees to have “an aggregate amount equal to the value of the virtual currency that the licensee has on deposit for its customers” in specified permissible investments that do not include the very same currencies on deposit. This would make it virtually impossible for digital currency businesses to scale. The revised BitLicense addressed this by adding digital currency to their list of permissible investments.
Where California’s bill absolutely outshines the New York BitLicense is in its money laundering provision. Notably, it does not have one. California seems to recognize quite sensibly that digital currency businesses must already comply with the federal Bank Secrecy Act administered by the Treasury Department. This means “know your customer” record keeping and suspicious activity reporting to the federal authorities who for decades have had jurisdiction over money laundering. New York’s BitLicense not only duplicates these record keeping and reporting requirements, it actually eliminates the threshold for reporting. Incredibly, even one dollar transactions that look suspicious must be reported to the Department of Financial Services under the revised BitLicense. A much better approach for states would be to focus on consumer protection and leave AML enforcement to the federal government as has traditionally been the case.
Finally, there are two areas where both the BitLicense and the California bill could improve.
First is making it clear that a digital currency business will not need to acquire both a money transmission license and a digital currency license. It’s completely understandable why states may want to create new technology-specific licenses: because their existing money transmission rules don’t easily lend themselves to cover this new technology. That said, both kinds of licenses aim to accomplish the same thing. They are meant to ensure that companies are well-run, well-capitalized, and adequately serve consumers. Once a business has acquired one license, it makes no sense to require that they go through the expense and trouble of acquiring a second license, engage in duplicate reporting and record keeping, and be subject to a second set of examinations, just because they are offering an ancillary product. There should be a way for digital currency licensees to engage in traditional money transmission activities without the need for a new license, and vice versa.
Second, and perhaps more importantly, neither the BitLicense nor the California bill includes an on-ramp for startups. The beauty of cryptocurrencies like Bitcoin is that they are open platforms on which anyone can build. This is a boon for innovation, since it allows even a small team of four, working in their dorm room or garage, to set up shop to take on the biggest of incumbents. That goes away, however, if they must first acquire an expensive and burdensome license. There should be a way for new companies to be exempted until they grow to a position where their failure could seriously affect consumers. The revised BitLicense tries to get at this by granting the Superintendent discretion over the requirements he imposes on licensees, but as we’ve notedseveral times, discretion is a recipe for more regulatory uncertainty, not less.
All in all, I’m optimistic that we’ll see progress in both New York and California. Each wants to be a leader in the exploding new FinTech space, they face increasing competition from the UK and other international jurisdictions, and they have each been quite receptive to input from those of us the cryptocurrency ecosystem. If we can get this right, everybody wins.