One of the biggest advantages to Bitcoin is the unregulated nature of the virtual currency. Bitcoins do not rely on the government action or oversight to change in value. Unfortunately, that is no longer true in the state of New York. On August 8th, 2015, The New York State Department of Finance passed the BitLicense, a regulatory framework that prohibits businesses from dealing and operating in New York unless they applied for the BitLicense. The legislation has resulted in the departure of at least 10 Bitcoin exchanges, including the world’s largest peer-to-peer marketplace, Local Bitcoins.The goal of the license is to protect the consumer, and safeguard them from fraud. The arrest of two operators of a Florida bitcoin brokerage, Coin.MX, for money-laundering proves the vulnerability of a completely decentralized currency. Additionally the BitLicense requires the exchanges to file quarterly reports and report suspicious activity. Major exchanges such as Coinbase and Circle Internet Financial Ltd have filed applications, and agree with the cybersecurity framework of the license.
However, BitLicense is not without controversy, and has resulted in the flight of many New York Bitcoin startups due to the high cost of the license. Critics point out the price and difficulty of obtaining a BitLicense, which carries an average cost of $40,000 per license. Costs are also incurred by sellers. Local Bitcoins, a website that allows local buyers to connect to local sellers, would require each seller to pay a $5,000 application fee.
Others point out the restrictive oversight to the innovation that drives the currency. Startups, and individual bitcoin miners are required to undergo background checks, and submit fingerprints to state and federal law enforcement. The surveillance of transactions is another concern for customers interested in anonymity and consumer protections. Businesses under the BitLicense agreement collect personal data on customers.
Overall, the BitLicense vows to protect both the Bitcoin seller and user, despite the fervent criticism of the legislation; and numerous Bitcoin providers continue to operate in New York despite the legislation. Coinbase, one of the world’s largest Bitcoin service and wallet providers, has continued to work with the New York Department of Financial Services to adjust and improve regulations. It is yet unclear whether the cost of driving away small businesses and innovation is worth the added protections, but we feel that increased consumer protection is needed to further legitimize Bitcoin as a currency.