The Ramifications of BitLicence

Posted by: Zubair Muadh October 3, 2014

Introduction

The New York Department of Financial Services (NYDFS) released its long-anticipated list of proposed rules and regulations that will be required for New York-based bitcoin businesses. As the first state to pass regulations on Bitcoin the ‘BitLicence’ could potentially be used as a draft template for other states/ nations if they decide to regulate Bitcoin.

Who need’s a BitLicence?

The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses:

• Receiving or transmitting virtual currency on behalf of consumers;
• Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;
• Performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency;
• Buying and selling Virtual Currency as a customer business (as distinct from personal use); or
• Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.)

This means that the Bitlicence would affect a large range of Bitcoin-related businesses ranging from Retail shops to Bitcoin Payment processors and it could potentially include the Bitcoin core developers for ‘Administering’ Bitcoin.

According to Section 100.12 with BitLicence Companies have to keep all their records for 10 Years from the time of creation.

What do business that have a BitLicence have to record and keep for 10 years?

1. The amount, precise time and date, account numbers, payment information of every transaction;
2. A ledger containing all assets, liabilities, capital, income, expense accounts, and profit and loss accounts;
3. bank statements and bank reconciliation records;
4. any statements or valuations sent or provided to customers and counterparties;
5. records or minutes of meetings of the board of directors or an equivalent governing body;
6. records demonstrating compliance with applicable state and federal AML laws, rules, including customer identification and verification documents, records linking customers to their respective accounts and balances, and a record of all compliance breaches;
7. communications and documentation related to investigations of customer complaints and transaction error resolution or concerning facts giving rise to possible violations of laws, rules, or regulations;
8. Any other records the superintendent may require

What this stipulates is that any companies that require a BitLicence, must record everything from the content and duration of Board of Directors meetings to precise details of client transactions for a period of 10 Years.

For large companies such as CoinBase keeping such detailed records would only alienate them from providing their service to clients in the New York area stagnating Bitcoin-related growth in New York State.

This could potentially cause New York Bitcoin startups from moving out of New York into other more Bitcoin friendly states.

Impact of BitLicence.

BitLicence in it’s current form would alienate companies from providing services to clients in New York. As the amount of paperwork required to comply with regulation when compared to the revenue that companies could get from New York could be seen by companies as not being viable. This would lead to companies taking measures to prevent New York customers from using their site, by IP Blocking, denying verification from New York addresses etc.

Current Bitcoin related businesses would have 45 days to apply for a Bitlicence once the final proposal is issued, businesses who haven’t applied within the 45 days could be prosecuted on charges of running an unlicensed digital currency company.

An unintended consequence of the BitLicence could be a Bitcoins trading on New York based exchanges would be trading for cheaper due to the loss of the fungibility of BitLicence coins.

Arthur Hayes, CEO and co-founder of BitMEX (Bitcoin Mercantile Exchange), explains it well:

“These regulations are going to make some savvy traders a lot of money. Because there is a premium placed on privacy, the ‘clean’ coins trading on exchanges with BitLicenses will trade at a discount to coins trading on exchanges that operate in more laissez-faire jurisdictions. Traders with the ability and risk appetite will be able to arbitrage the price differential.”

This would result in a Jurisdictional differential, meaning Bitcoins will be trading at slightly different prices depending on the location of the traders.

This view could nonetheless be argued as people don’t value privacy much enough that they’re willing to pay a premium for it. Customers tend to be willing to hand over large amounts of personal information in order to receive services or gain access to something they want. This would mean that Bitcoins in New York would trade at normal market rate.

Updated: 2014-10-03