Opinion: The NYDFS’ Proposed Regulations May Get Better, But It Won’t Be Enough

In a speech a few nights ago at Cardozo law school, Benjamin Lawsky, superintendent of the NYDFS and official most directly responsible for the proposed “BitLicense” regulation that we’ve written about previously, did his best to dispel concerns about the upcoming regulations. For a more thorough reading of his speech, you can read our article on the subject by my colleague, Katherine Fletcher.

In this article, we’re going to be taking a look at the message behind the speech, which I feel can be summed up, not too unfairly, as follows – “We aren’t trying to hinder the development of Bitcoin – we’re simply trying to protect consumers from this dangerous new technology, and make new businesses play by the same rules as everyone else.”

Consider a few quotes from Mr. Lawsky himself:

“When it comes to safeguarding customer money at a financial company – an unregulated world of caveat emptor has never been a sufficient answer […] We do not, for instance, let someone run a bank out of their garage”

The key point to remember here is that, in some fundamental and commonsense ways, Bitcoin is simply cash. Bitcoin is cash, but faster, cheaper, and more convenient. It does not pose fundamentally new regulatory challenges, except insofar as it represents a threat to the old way of doing business.

For a long time, now, if you wanted to move money quickly from one place to another over electronic infrastructure, you had to deal with the entrenched, anti-competitive cess pool of regulatory capture that is the existing finance industry. Bitcoin offers an easy way to end-run established players, and it’s silly to imagine that there aren’t elements of rent-seeking, on the parts of those players, when you see regulation of this kind.

Put another way, when Mr. Lawsky says that the BitLicense regulations will not price startups out of the market, you can bet, confidently, that that is exactly what it will do, because that is what it is intended to do. This regulation has nothing to do with protecting consumers, and everything to do with protecting Western Union and Bank of America.

In the same speech, Lawsky expressed that this sort of regulation was needed to prevent operations like the Silk Road from flourishing. That kind of thing sounds reasonable until you ask: why is the Silk Road the problem of the currency people spend on it? Is Mr. Lawsky under the impression that you can’t buy drugs, guns and people with US dollars? Imagine the kind of invasive, restrictive regulation that would be required to prevent you from being able to buy drugs with cash. It would destroy the currency. There is no possible way to totally prohibit crime, regulating on the level of the currency itself, that does not also eliminate every other form of commerce entirely. The Silk Road is already illegal, and invoking it in this discussion is merely an attempt to tar cryptocurrencies with a broad brush.

As far as Mt. Gox goes, something that Lawsky was also sure to bring up, these sorts of large-scale frauds are concerning, but the idea, again, that they’re the responsibility of the currency used for them is nonsense. So is regulation that forces something like ChangeTip, a tool for moving Bitcoin over Reddit, to comply with the same regulations as a multi-million-dollar Bitcoin bank like Coinbase. It’s also worth noting that collapses like Gox are uncommon and have been getting more so as people learn to apply the same scrutiny to Bitcoin as they do to the rest of their lives. Right now, there’s a strong case to be made that the benefit to the consumer from fresh regulation outweighs the amount of petty fraud that will go on, particularly given that that fraud is already illegal.

It’s also worth noting that we do, in fact, allow people to run banks out of their garages. They’re called payday lenders, and they’re barely regulated in most states. They also cost finance-industry consumers billions of dollars a year, and represent a much clearer and more present threat to the livelihoods of people who can least afford the cost than the entire cryptocurrency industry put together. If you intend to protect consumers from financial malfeasance, there’s plenty of that going on in good old fashioned cash.

The next version of the proposed BitLicense regulation will likely be a good deal less onerous than the one we originally saw. Wired, for one, is sold that the improvements are enough. I’m not convinced. The regulation on Bitcoin comes from a fundamentally broken regulatory attitude, and one rooted in a fundamentally anticompetitive spirit. The NYDFS laws will price startups out of the market, and that won’t change until it becomes clear that the burgeoning neo-financial industry is passing the state (and possibly, as a consequence, the rest of the nation) by.

To wrap up, let’s take a refreshing look at what responsible regulator’s approach to the question of cryptocurrencies looks like.

https://www.youtube.com/watch?v=8A4zmFxXqUo

You’ll notice a certain cautiousness and carefulness about it, which stands apart from what I might characterize as the ‘kid-in-candy-store’ attitude of Benjamin Lawsky.