Startup owners don't typically say nice things about the seemingly endless number of state and federal regulatory hurdles they need to jump through to run a business in the U.S.
And the new “BitLicense” is no exception. It's been promulgated by the New York State Department of Financial Services as a way to rein in abuses in the nascent digital currency industry, which includes the cryptocurrency bitcoin. Yet even Circle Internet Financial, the first recipient of the license announced by the DFS on Tuesday, questions the complexity of getting certified.
“It is not a simple process, and we voiced concerns about earlier versions of the BitLicense which we felt placed a heavy burden on innovation in the ecosystem,” Circle’s president Sean Neville said by email.
Nevertheless, startups and regulators say something like it is necessary to inspire mass consumer adoption of the emerging digital payment technology, even though some business owners plan to give New York a wide berth until they know for certain the license will help them build business.
Circle, which allows customers to hold and electronically transmit bitcoin and U.S. dollars using a single account, beat out 24 other companies currently working their way through the approval process. The 31-page application, which is essentially an audit, is hardly a cake walk, and responses can run into the hundreds of pages.
The license, for which Circle paid a $5,000 one-time fee, certifies that the financial services company is operating in good faith, with adequate cash reserves to cover its client accounts, and that it is not being used to launder money, among other things. Additionally, it verifies that the company has installed important protocols for record-keeping about its digital transactions.
The goal of the BitLicense, which represents the culmination of multi-year efforts of state regulators, is to put enough brakes on a growing and nascent digital currency and payments industry to prevent criminal activity, without applying so much pressure that it would suffocate innovation.
“Our view is that ultimately it is beneficial for the long-term health of the industry to have a licensing and examination framework that will build customer trust,” Matthew Anderson, a DFS spokesman said. He adds that the agency hopes the BitLicense becomes a model for other states around the country. “Ultimately we think it will be helpful to spark wider adoption.”
However, startup GoCoin, based in Santa Monica, California, said it opted to stop doing in business in New York--a tactic called “geo-fencing”--rather than go through the licensing process, or risking the possibility of an enforcement action from New York's DFS. GoCoin provides payment and settlement services to merchants who want to accept bitcoin. Steve Beauregard, chief executive of GoCoin, said he decided to opt out, because the New York market represents only about two percent to three percent of his company’s total revenues.
“We looked at the amount of transactions from the New York market, and because this is an early industry, we realized it would take a few years to break even on [the licensing],” Beauregard said, referring not only to the licensing fee, but also to the efforts of going through the self-audit, which he said would have amounted to 500 pages of documentation.
And the application process is indeed complex. Among its many questions and requirements for payments startups:
- A description of the proposed, current, and historical business of the applicant and all affiliates
- Detailed biographical information for each applicant, director, principal officer, principal stockholder, and beneficiary, including social security numbers and mailing addresses
- Audited financial statements
- Fingerprints of the applicants
Ideas for the BitLicense had their genesis in 2014, during hearings in New York presided over by then DFS superintendent Benjamin Lawsky, who currently runs his own legal consulting firm. At issue for regulators was the attraction crypto-currency held to criminals, who can use it to launder money for a wide range of illicit purposes. The shining example of that was the online bazaar Silk Road, which was shuttered in 2013 when authorities learned that Bitcoin transactions through the site were being used to finance a drug trade and other illegal activity.
And there were other famous crashes and burns, such as the sudden bankruptcy and closure of MtGox, the bitcoin exchange, in 2014, which resulted in the loss of up to $400 million for consumers.
Certainly consumers need protections, but the proper balance must be struck to ensure continued innovation, Neville said.
"Custodians of customer funds and institutions that execute payments on behalf of consumers should be subject to some level of oversight to ensure consumer protection and trust," said Neville of Circle. "However, it is also important that an open ecosystem develop, that creation is encouraged, and that bootstrapping innovation in this domain is not hindered by controls inappropriate for small teams with low levels of risk."