Friday, August 1, 2014

High Powered Law Firm on Proposed Bitcoin Regulations: They Will Crush the Little Guy

The white shoe law firm DavisPolk is out with an extended memorandum on the new proposed Bitcoin regulations published by the New York Department of Financial Services.

From the memorandum introduction (my highlight):
On July 17, 2014, the New York Department of
Financial Services (“NYDFS”) published proposed
“BitLicense” regulations

 Most virtual currency (e.g., Bitcoin) businesses
would have to be licensed to engage in business
with New York customers (retail or institutional) or
otherwise operate in New York

 BitLicense is the first comprehensive virtual
currency regulatory regime proposed in the United
States and would have a profound impact on the

Costly compliance likely to cause high barriers to
entry, inconsistent with New York becoming a
virtual currency hub that promotes innovation

 BitLicense-regulated companies would likely find it
easier to establish banking relationships. Final
regulations would begin to lift the cloud of
regulatory uncertainty, facilitating the flow of
institutional money into the virtual currency space.

More from DP on the barriers to entry:
 High barriers to entry. BitLicense regime has no onramp
or de minimis exception but its impact is great: (1) detailed,
time-consuming and likely costly application process, (2)
requirement for audited financials, (3) requirements for
hiring or designating qualified compliance personnel, and
(4) AML requirements for certain businesses not covered by
federal AML requirements.
 Creates high barriers to entry for new or financially
unsupported players.
 Startups may need to exclude New York customers
and otherwise avoid New York jurisdiction to focus on
developing their products before subjecting themselves
to BitLicense until they receive significant funding.
 Problematic from standpoint of NYDFS’s goals of
establishing New York as an important virtual currency
hub and promoting beneficial innovation.
 Business benefits. Banks and other traditional financial
services companies may be more willing to open accounts
for and provide services to businesses licensed under the
BitLicense regime.

Bottom Line: As I expected the regulations are going to crush the little guy trying to enter the sector. To the extent Bitcoin survives, it is going to be for well-connected big boys only, who will have no problem seeing to it that every Bitcoin user will be identified and tracked.

Have I mentioned that Bitcoin is NOT a libertarian alternative currency?


(ht Felix Bronstein)

1 comment:

  1. “The people causing the crisis are the ones who stand to gain the most from it”

    By Lars Schall

    Lars Schall: What are the most crucial weak spots in our financial system? And why is it that the financial sector is so powerful vis-à-vis politics?

    Marc Friedrich: The most crucial weak spots in our financial system are:

    Japan’s gigantic debt;
    China’s shadow banking system;
    The completely opaque derivatives market;
    The immense and rapidly growing global debt;
    The global banking sector as a whole.

    The financial sector is so powerful vis-à-vis politics because a very unhealthy one-sided relationship exists between the political system and the financial industry. Let’s take a closer look: How does a government fund itself? It collects taxes, and it sells government bonds. Who buys these government bonds for the most part? Banks and insurance companies! So who holds the reins here? It’s the creditor, of course, who gives the commands and who says which laws can and cannot be passed against him. This is also the reason why nothing has changed since the crisis in 2008. The hand that gives is always above the hand that takes. Moreover, the financial industry has succeeded in establishing structures outside of the law and saturating itself with cheap money from the central banks. This has made them even bigger, more powerful and, most importantly, more systemically important, which has only increased their ability to coerce governments and citizens when the next crisis comes.

    LS: Why do you think the financial system won’t survive?