After over a year of speculation and missed deadlines, the New York State Department of Financial Services’ BitLicense is now in full effect. The deadline to comply with the new regulations for Bitcoin businesses located in New York or serving NY customers was this past Saturday, August 8th. The result was no surprise to those watching the developments closely, many Bitcoin businesses chose to cut service to NY customers rather than comply with the regulations. The regulations are burdensome, expensive, and too vague to provide stability for companies that do choose to comply, resulting in only the largest Bitcoin companies able to take on the task. Smaller companies not willing to pay the $5000 non-refundable application fee and future compliance costs, are now filtering users by location and rejecting those who are located in New York. While there are ways around their filters, it provides plausible deniability for these companies to say that they are not knowingly serving New York customers and are therefore exempt from the BitLicense.
$5,000 for a new startup is a deep expense. When you're talking about many companies who are in pre-seed stages, they don't even stand a chance to try, - BitQuick.co Founder Jad Mubaslat
Attempting to access Bitcoin services BitQuick, Shapeshift, GoCoin, and HolyTransaction from a New York based computer automatically redirects the user to http://pleaseprotectconsumers.org
For those businesses with offices located in New York, it is not so easy, they are forced to choose compliance or moving to a friendlier jurisdiction. Most will move out of New York, hurting the local economy and tax base, jeopardizing New York’s place in the world as a key financial center, and discouraging future Bitcoin business from opening in the state. Bitcoin is a worldwide internet based phenomenon, if New York continues down this path, then regulatory arbitrage will result in Bitcoin businesses moving to other states or countries. This should not be a surprise to anyone that this is what is currently happening, we’ve been telling regulators along with many others in the industry that this would be the result.
Many in the bitcoin community have railed that BitLicense will cause the city to lose bitcoin startups to the looser regulatory pastures of Europe or states like North Carolina, which has been praised for its friendliness toward digital currency businesses. There is an effort underway in the New Jersey legislature to propose tax cuts for bitcoin businesses. Such a move would incentivize digital currency startups to move their headquarters to New Jersey. (Indeed, some companies, like the digital wallet provider Xapo, have already fled New York—Xapo moved its global headquarters to Zurich last month.) Matt Odell, co-founder of a bitcoin informational site, Coinprices.io, said in an email blast that BitLicense, as it stands now, “will stifle innovation in New York as bitcoin businesses move to friendlier locales.” He called parts of it “draconian” and said, “much of it is too vague to give bitcoin companies the certainty that they are indeed complying with the law.” - Fortune June 6th, 2015
As a New Yorker, one of the most frustrating aspects of this situation is that the BitLicense is unenforceable as it currently stands. The result is regulation that hurts New York with few noticeable benefits to consumers. Indeed there are major exchanges that are choosing to comply with the regulations such as Coinbase, BitStamp, itBit , Coinsetter, and Gemini (when it is launched), and those exchanges will be welcomed by institutional clients that demand regulatory compliance, but the majority of Bitcoin industry will remain in noncompliance. The issue with enforceability is directly related to how the internet functions. Anybody worldwide can launch a service that reaches customers in the far corners of the world, relatively easily, as long as there is access to the internet.
A service launched outside of New York has a significant cost advantage over one that is based in New York due to the compliance requirements and costs associated with the BitLicense. For example, a company in Singapore can simply reject New York customers and serve everyone else, and there is nothing the NYDFS can do about it. Furthermore, using Tor or a VPN allows New York customers to bypass the filtering done by such a site, giving the site owner plausible deniability, while still allowing educated New Yorkers the ability to access the service. Tor and VPNs are services that allow a user to spoof their location, defeating filtering techniques used by sites that are actively rejecting users from a certain location.
In places with heavy censorship, such as China and Turkey, citizens have learned to use privacy tools to enable access to uncensored internet outside of their governments’ control, and New York will be the same. New Yorkers will still be restricted from using the traditional financial system (bank transfers, card payments) with any of the sites in noncompliance, but once a user owns bitcoin, there is no way for New York to enforce the BitLicense. As long as there are compliant exchanges, New Yorkers can purchase bitcoin from them, and then use a VPN or Tor with noncompliant services since bitcoin cannot be seized or blocked by governments.
In Summary - Six Key Points
The BitLicense does not make the Bitcoin Industry safer for consumers.
The BitLicense will not kill or significantly hurt Bitcoin.
The BitLicense is mostly unenforceable.
The BitLicense hurts New Yorkers.
The BitLicense forces compliant services to collect personal information that is otherwise not needed, adding additional risk that hacks will result in identify theft.
The BitLicense only helps to benefit big banks and major companies that can afford to comply, since it reduces their competition in New York.
Additional Disclaimer: Follow all your local laws. This post is not advocating New Yorkers to bypass the BitLicense, but rather is simply stating how easy it is for them to theoretically do so.