Thoughts on Bitlicense: An Interview with Davis Polk Attorney Reuben Grinberg

Earlier this summer, the New York Department of Financial Services, led by Superintendent Benjamin Lawsky, introduced to the public their plan for one of the first Bitcoin specific regulations in America. The proposal called for a Bitlicense to be held by all companies that interact with the Bitcoin protocol and a public comment period was initiated. Since then, various players throughout the industry have submitted their responses to Lawsky and the NYDFS. As the comment period deadline of October 21st, 2014 approaches, those in the Bitcoin industry are increasingly anxious to see how the NYDFS will choose to proceed. If the regulations are too strict, they risk stifling Bitcoin innovation in New York.

We sat down with Reuben Grinberg, an attorney with Davis Polk law firm, to hear his thoughts on the potential impact of Bitlicense on the industry, and how those involved in Bitcoin should proceed. Grinberg is perhaps best known for releasing the first widely read and cited academic paper on Bitcoin, and has been following these regulations very closely through the lens of Davis Polk’s Financial Institutions practice.

CoinPrices: What impact do you think Bitlicense will have on Bitcoin innovation?

Grinberg: Very difficult to say at this point. If the rules are finalized as they are proposed, it would certainly have a dampening effect on innovation by startups in New York. The process to apply to get a license will likely be expensive, and the ongoing compliance costs are expensive as well. The proposed rules have no de minimis exception or onramp, and for many startups these costs would be prohibitive. However, many startups could simply move outside of New York, and would have to be diligent about avoiding New York customers. At the same time, not only startups participate in innovation. The BitLicense regime could help lift a regulatory cloud from Bitcoin and virtual currencies, make it easier for Bitcoin and virtual currency businesses to get banking relationships, and thereby spur more investment in new and established companies. More investment would lead to more innovation. The final rules are likely to change, and hopefully they will make it easier for startups to innovate as compared to the proposed rules.

CoinPrices: What do you expect the significance to be of the Bitlicense guidelines regionally compared to nationally?

Grinberg: Again, difficult to say until we see the final regulations. If they end up striking the right balance, they could help establish New York as the institutional center for Bitcoin and virtual currency business while also supporting a healthy startup scene. If not, startups will avoid New York. There have been certain well-known Bitcoin companies that have funding say that they would avoid the New York market altogether, like Circle. However, the regulations are also likely to affect what other jurisdictions – both states and other countries -- will do to regulate Bitcoin and virtual currencies.

CoinPrices: What should business owners do in order to prepare with the Bitlicense regulations? How should a business in Texas or New Hampshire prepare differently than one in New York?

Grinberg: Under the proposed rules, it will be very difficult for a Bitcoin or virtual currency business in New York to avoid the BitLicense regime. So it’s important for them to figure out whether their businesses would be covered by the proposed regime. We have put out a helpful visual summary here, but there is no substitute for talking with counsel. Once they figure out if they are covered, they should also figure out how difficult it would be for them to comply with the proposed rule’s various requirements. They should strongly consider participating in the comment letter process. Ben Lawsky has indicated that the NYDFS is reading these comments very closely, and despite some of the vitriol being thrown at them, they have relatively inclusive and transparent in the process so far. New York businesses should also begin thinking about their plan of attack once the rules are finalized – some of the options include submitting an application to the NYDFS, leaving the state, shutting down, or being acquired by a larger business that is willing to go through the application process. Businesses outside the state (including foreign businesses) will have to go through a similar analysis, although it will be easier for them to avoid New York jurisdiction. Note that in many cases simply failing to take affirmative steps to obtain New York customers may not be enough to avoid New York jurisdiction – businesses may have to diligently ensure that they avoid New York customers and otherwise have no connection to New York.

CoinPrices: Given the restrictions placed on New York users due to the Bitlicense regulations, do you think businesses will choose to block New York users rather than spend the increased time and money to comply?

Note: According to Jason Tyra, of, the estimated total cost to apply for a New York BitLicense would be $12,000 to $15,000.

Grinberg: This is very business specific. It depends on the business model, including how hard it is for a business to comply and how easy or hard it is for a business to block New York users. For those businesses that are still in their startup/development phase, and for whom it is easy to block New York customers, they may choose to do so to focus more capital and attention on building good products. For other businesses, they may are already doing most of what the regime requires, and getting a license as quickly as possible will help them establish stronger relationships with institutional counterparties (including banks) and gain more trust from the lay public. The cost of obtaining a license will vary. Businesses that have already prepared money transmitter license applications, for example, will be able to adapt portions of those applications, saving time and money. Using legal counsel that has experience with Bitcoin, with financial services applications and with the NYDFS will help cut down on costs. Just as important as cost will be how quickly businesses can obtain licenses. These applications are likely to have follow up questions from the NYDFS, and a hastily prepared initial application could end up causing unceasing rounds of back and forth which ultimately balloons costs (and loss of revenue and managerial focus). Additionally, if a business doesn’t have policies and procedures in place, doesn’t have a compliance program in place, etc., that is going to be a significant cost, but one that I wouldn’t fairly include with the price of the application. For some simple businesses, the number that Tyra quoted may be about right; for more complicated businesses it may end up being more expensive -- up to an order of magnitude more, depending on how much work the business needs to do to be able to comply, how extensive the NYDFS’s investigation is of each business in connection with an application, and other factors.

CoinPrices: Since Bitcoin transactions are simply a transfer of 1’s and 0’s, how should they be classified?

Grinberg: Bitcoin transactions are much more than a transfer of 1s and 0s, just like a great work of art is more than oil droplets on a canvas. The law, at least in the U.S., is more concerned with the substance of what is happening than with the formalities. So if people tend to treat Bitcoin like money, under most types of laws it will be treated like money. And in fact, several judges in the U.S. have ruled in various contexts that Bitcoin is money (including Judge Rakoff, who I interned for many years ago, who recently ruled against Robert Faiella and his argument that his actions fell outside the criminal money laundering statutes, in part, because Bitcoin isn’t money). Bitcoin and virtual currencies can obviously be used to facilitate illegal transactions and money laundering (everybody knows about SilkRoad), so legislators and regulators are going to be concerned about those potential uses, and will try to prevent those uses, like the proposed BitLicense attempts to do.

CoinPrices: Do you have any further advice to entrepreneurs looking to start new Bitcoin businesses?

Grinberg: The financial services market has always been heavily regulated, and the recent trend has been towards more rather than less regulation. Entrepreneurs have to be thinking strategically about the regulatory landscape from day 1, and how it will affect their product design, technology, hiring, marketing, capital use, etc. This includes thinking about what is coming down the pike. Although New York is the only state that has proposed a comprehensive virtual currency regime, we know that the Conference of State Bank Supervisors has been thinking about Bitcoin and virtual currency regulation as well. And there is always the possibility of more federal action besides FinCEN’s guidance – for example, by a different regulator. The CFPB recently put out a consumer advisory on the risks of virtual currencies, and could decide to issue regulations. Congress could decide to enact Federal legislation. As soon as they can, entrepreneurs should get professional counsel.

Reuben Grinberg

Attorney, Davis Polk

Reuben Grinberg

Mr. Grinberg is an associate in Davis Polk’s Financial Institutions Group. His practice focuses on bank regulatory advice, including Dodd-Frank Act regulatory implementation, the preparation of the first and second generations of living wills, and financial institution capital markets and MA transactions.

In addition, Mr. Grinberg wrote the first widely read and cited academic paper on Bitcoin, and is often cited in the media as an expert on digital currencies. He advises clients on the novel regulatory issues relating to Bitcoin and digital currency-based businesses.

Before joining Davis Polk, Mr. Grinberg programmed trading server software for Bridgewater Associates, one of the world’s largest hedge funds.

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Disclaimer: This post is intended solely to provide information. As I have no knowledge of individual circumstances and technical level, readers are expected to complete their own due diligence before proceeding with anything mentioned in this article. The topics discussed in this post are advanced and readers proceed at their own risk. Readers are expected to complete their own due diligence before purchasing or selling anything mentioned or recommended.