Poloniex, one of the largest cryptocurrency exchanges in the industry, officially announced the suspension of its services in the state of Washington due to impractical policies and regulatory frameworks.
Users of Poloniex residing in Washington are given a two-week period by the Poloniex team to close existing orders and withdraw funds from their accounts. If users fail to withdraw their funds by April 21, 2017, users will be required to submit support tickets directly to Poloniex customer support to move their funds elsewhere.
In a statement issued to users, Poloniex stated:
“After careful consideration of the Washington State Department of Financial Institutions’ interpretation of its financial services regulations, we regret to inform you that Poloniex will be suspending operations for our customers residing in Washington until further notice.”
Potential Issues With Washington’s Bitcoin Policy
A few years ago, financial regulators of the state of Washington classified bitcoin as a medium of exchange. Additionally, in the Uniform Money Services Act (UMSA), chapter 19.230 RCW, regulators of Washington explicitly described a medium of exchange like bitcoin as “money.”
“Money means a medium of exchange that is authorized or adopted by the United States or a foreign government or other recognized medium of exchange. ‘Money’ includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments,” the Washington State Legislature read.
Essentially, Washington’s categorization of Bitcoin as money means that digital currency exchanges like Poloniex are subjected to the same policies applied to conventional money transmitters. However, it is impractical and irrational to implement identical policies applied to money transmitters or financial companies solely dealing with fiat money to digital currency companies and exchanges.
Similar Situation as Coinbase With Hawaii
Previously, Coinbase announced the termination of its services in Hawaii due to a similar problem. Regulators of Hawaii required Coinbase to comply with existing regulations on money transmitters and financial service providers. One of the requirements Coinbase was asked by the regulators to comply with was the maintenance of a cash reserve identical to their bitcoin reserves. In other words, local regulators of Hawaii demanded Coinbase, the second largest bitcoin wallet platform with over 6.4 million users, to obtain hundreds of millions, potentially billions of dollars worth of cash reserves just to serve Hawaiian residents.
In a response statement, Juan Suarez from the Coinbase legal team wrote:
“This policy is obviously untenable. No digital currency business — and frankly, no commercially viable business anywhere — has the capital to supplement every customer bitcoin with redundant dollar collateral. Even if Coinbase could manage the extraordinary capital strain and massive exchange rate exposure inherent to this policy, it would do nothing to further our customers’ paramount interest: that Coinbase absolutely secures digital currency held on their behalf and makes their funds available, in full, anytime they wish to spend or liquidate. To repeat: DFI’s dollar-collateral policy does nothing to protect customer funds.”
For multi-billion dollar fintech companies like TransferWise that only deal with fiat payments, it would not be a challenging task to maintain a cash reserve for their customers. However, for a bitcoin wallet platform, the policy is simply not practical and applicable.
Regulators and Practical Policies
If regulators truly want to standardize the industry and market of Bitcoin as they say, mostly for their interest of preventing bitcoin or other digital currencies from being traded in unregulated over-the-counter markets, it is important to introduce or apply regulations that will help both customers and businesses. So far, the state of Washington and other regions in the US including Hawaii have demonstrated a high level of incompetence and shallow understanding of bitcoin and cryptocurrencies in general.
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