New York State's Bitcoin Laws Could Ruin Everything Good About Bitcoin

Bitcoin was supposed to mean private, safe transactions. "The BitLicense proposal threatens all of that," the EFF says.

(Photo via Getty)

(Photo via Getty)

Bitcoin advocates have spent the past few years trying to sell cryptocurrency to the skeptical mainstream, who tend to be scared that bitcoin is an untrustworthy mirage fit only for drug dealers and criminals. But now that there laws are in the works to help bitcoin become a part of the legit world of financial tech, activists are saying that those laws undo everything bitcoin stands to offer in the first place.

New York State’s attempt to help bitcoin go legit has been the proposal of a “BitLicense,” a license from the Department of Financial Services (DFS) for cryptocurrency businesses that would allow bitcoin startups to operate legally. The license would force companies to comply with a list of legislative demands, including keeping currency receipts, having compliance officers and telling the DFS every time a potential emergency arises.

All eyes have been on New York State, since this is the first license of its kind and could set a precedent for how bitcoin exchanges and startups are dealt with across the country. When the proposal was made by the DFS earlier this year, there was a mix of excitement and skepticism about the opportunity for bitcoin to go mainstream, but now the Electronic Frontier Foundation, an international non-profit that serves as a sort of ACLU for digital rights, is coming out full-swing against the BitLicense. They say that the proposed laws are overreaching and violates the privacy of bitcoin users and vendors.

In a post last week called “Beware the BitLicense,” the EFF elaborately laid out the reasons why the BitLicense goes against every benefit and innovation bitcoin provides as a technology, which includes that businesses could be required to disclose private information about transactions:

Bitcoin and other digital currencies are attempting to recreate some of the censorship-resistant and privacy-protecting attributes of cash. And that’s good; it’s an innovative way of preserving some of those offline protections in a digital world. It could mean digital payments without terms of service or privacy violations.

The BitLicense proposal threatens all of that.

DFS superintendent Benjamin Lawsky ran defense last week against the claim that BitLicenses were invasive, and said the new laws would keep transactions safe and accountable without letting someone “run a bank out of their garage.” According to Coinbase, Mr. Lawksy said this while speaking at the Benjamin N Cardozo School of Law last week:

Our hope is that companies recognize, or at least some of them do, that appropriate, effective regulation will help create a race, not to the bottom, but to the top; that it will foster greater confidence and trust from both customers and investors who want to do businesses committed to customer protection. That will spur a cycle of greater adoption of virtual currencies.

The EFF wrote that they were glad to hear Mr. Lawsky doubling down on privacy promises, but that “the devil was in the details” and that we’d have to wait and see if the DFS made good on those claims.

“While NY DFS may make promises in press releases and public statements, the real measure of its commitment to innovation and privacy is in the actual text of the regulatory framework,” EFF activism director Rainey Reitman wrote. “As currently written, the proposed regulations have vague, confusing provisions that could easily be interpreted as affecting developers and other entrepreneurs beyond money services.”

The EFF set up a landing page for submitting public comment to “Help [the EFF] stop the BitLicense.” The comment period ended yesterday with statements from BitPay and Circle, who said the upcoming regulations are “nearly impossible to comply with.” But ultimately, the legislation is top-down — the DFS will make the decisions, and the dozens of startups trying to run safe, trustworthy bitcoin businesses will have to try to fall in line.

“All we can do as companies is try to voice our concerns as much as possible,” Jaron Lukasiewicz, CEO of NYC-based bitcoin exchange Coinsetter, told Betabeat. “In the end, the DFS will make whatever decision they’ll make, and we’ll comply with the requirements.”