The New York Department of Financial Services has released the long-awaited BitLicense, 44-page document which amounts to a framework for "virtual currency" businesses to operate in the State of New York.
The issue of regulation has long been a major issue in the digital currency world, as when things first kicked off, and people first started paying fiat money for bitcoins, there was essentially no guidance. Many people were arrested for operating as unlicensed money transmission businesses. Still others who believed they were operating within the bounds of the law managed to go afoul of it, such as in the case of Charlie Shrem.
The ease and power of Bitcoin has long drawn both the ire and confusion of regulators, and New York Department of Financial Services director Ben Lawsky has been a leading figure in the charge to regulate Bitcoin. Ironically, the very same Lawsky has announced that he will be leaving the Department of Financial Services, an agency created in 2011, two years after Bitcoin, to create a consulting firm which will help companies deal within the regulations now in place.
Also read: Lawsky: BitLicense Finalized by End of May
Why is New York Important?
Some have repeatedly asked over the course of the regulation's development why the State of New York is so important, and the answer is simple: New York is home to a great deal of the financial-facing capital in the world. It is home to Wall Street, for instance, which houses more money on its own than many small countries combined. Thus whatever stance or regulations that New York adopts in regard to Bitcoin will have an impact on firms that will later invest in Bitcoin. Similarly, states tend to look to others for guidance when deciding how things should be done in their own jurisdiction.
While California has expressly decided to leave Bitcoin business unregulated for the time being, many others will look to the BitLicense as a model for how things will be done there. Companies who are looking to become compliant in all 50 of the US States will eventually have to deal with separate regulations in each state. If most of the states have by then decided to implement some similar or lesser version of the BitLicense, it will actually become easier for such companies to operate.
One interesting element of the final BitLicense is the "Capital Requirements" section, which outlines how much money a virtual currency company must have in order to operate. It is not chump change, that is for sure, and this section has contributed in some ways to the concerns of many that small businesses will now be locked out of the game, left behind in favor of larger, venture-capital funded organizations.
To quote the regulation directly:
Each Licensee shall maintain at all times such capital in an amount and form as the superintendent determines is sufficient to ensure the financial integrity of the Licensee and its ongoing operations based on an assessment of the specific risks applicable to each Licensee.
It then outlines some properties that will be involved in the decision as to how much money the company must have, but it does not list specific amounts. The minimum fee a company will pay just fill out the application fee will be $5,000, which is not very much money for most who are serious about doing business. The one thing this provision will certainly do is prevent exchanges from running unreported deficits, at least exchanges that operate within its jurisdiction. Presumably, this will mean no more Mt. Gox-style issues. What companies will do in the case of hacking, in which they suffer Bitcoin licenses, one assumes, is their problem.