There are a number of states within the US that have taken independent measures to regulate the cryptocurrency industry. Some of these measures have made their respective states more attractive to crypto startup companies; others have made it clear that the crypto industry is not welcome within them.
However, New York has its own separate set of rules. So far, the regulations that have been established there are friendly to cryptocurrency companies, but only those that have a considerable amount of resources at hand.
Indeed, New York was the first US state to create its own license for cryptocurrency-related companies, called the ‘.’ While some have lauded the program as a model that other states should aspire to create, others have criticized the BitLicense as being too expensive and too logistically difficult for young companies to obtain.
Recently, we spoke with Patrick Burke, the former head of the BitLicense, about the program and about cryptocurrency regulations within the US at large.
New York is Not a “Sandbox”
Most industry insiders will agree that the criticisms against the BitLicense do have some validity in terms of the difficulties that startups may have in meeting its requirements. However, Burke explained said that “it’s not a ‘sandbox’ environment in New York.”
is a perfect example of using regulation to destroy competition, only allowing wealthy actors to participate. The argument of protecting the little man is just a diversion.
— Ratel Crypto (@BlockchainKai)
In other words, it is difficult for young crypto startups to establish themselves in the state–but that’s not an accident.
“There are other jurisdictions where they really want to attract these kinds of businesses [startups], simply for the financial resources they would bring to a state–a state like Arizona or , where they’re really glad to attract those kind of folks,” he continued, adding that Arizona is a ‘sandbox.’
This means that states like Arizona are open to regulatory experimentation. “Essentially, [Arizona] will say, ‘we want you to try things out here. We’re gonna make it legal for you–we’ll give you official sanctions to run your cryptocurrency operation here with a minimum of requirements or restrictions, because we’d like you to try it out here. So, play in our sandbox–we’re gonna keep an eye on things, but it’s going to be very light-touch.”
“Even in England, they have a light touch,” he added. “They really want to give people a change to experiment. But New York is the ‘big-time.’ It’s not a sandbox.”
”There’s a Place for Experimentation”
However, Burke isn’t totally against the idea of intentional regulatory ambivalence. “I believed in what we were doing, but at the same time, I realize that , and I think there can always be jurisdictions that are experimental.”
On the other hand, Burke acknowledged that light-touch regulation can have disastrous consequences. “Take Canada,” he said, referring to that left hundreds of thousands of users without access to funds they had stored in a cryptocurrency exchange.
“Canada wasn’t regulating these exchanges at all, and still isn’t. Things happen, like Quadriga…and there have been other coins that have turned out to be big rip-offs in Canada. So, I think Canada–I haven’t talked to Canada lately, but I’m sure Canada’s looking at that and saying, ‘wow, shouldn’t we be doing something about that?’”
Interesting to see the evolution of interaction between companies and government – the industry has come a long way since .
— IOStoken (@IOStoken)
(Burke is correct–two financial regulators asking for input on possible regulations from crypto industry participants earlier this month.)
Malta is a “tax haven”, but “New York doesn’t need that to the extent that we’re willing to give up all consumer protections”
“Malta is a jurisdiction over in the mediterranean that is around the world, and it’s a much lighter touch than New York…but I think it’s sort of like a tax haven.”
“It’s pretty clear why they do it the way they do it,” he said. “They don’t really have that many people to protect, and they are glad to get any bit of revenue. If someone opens an office there, it’s a big deal. It opens up a new generation of technology-oriented citizens there.”
“So there’s a lot to gain from having a light touch and attracting that kind of business. So, you know, God bless them–but New York doesn’t need that to the extent that we’re willing to give up all consumer protections.”
Burke added that a progression toward heavier regulation may be a natural progression in a company where the cryptocurrency industry has started to mature. “A place like South Korea has a very serious financial regulatory approach, and they’ve been upping their game as they go along,” he said.
“But there have been a number of, and I’m sure that they’re very focused on that and I’m sure that they’re upping the strenuousness of their cyber investigations and examinations of the exchanges, which is going to increase how [many] resources cryptocurrency companies are going to have to put into cyberdefense and compliance.”
So, eventually, “it’s going to cost more to do business there.”
“It’ the trade off: as a government, are you going to be responsive to the pain that citizens feel when they get ripped off?”
”There’s a lot of reason to want to be [in New York]”, But for Most Companies, It’s Not the End of the World
So who is doing business with a BitLicense? “If you look at who [New York has] recently given licenses to, they recently gave a license to . Robin Hood is very big–has millions and millions of customers. They’re a very well-known company, and they wanted to make sure they could have customers in New York.”
“It’s a pretty big market, and if you don’t have a license in New York, and you want to be able to do crypto trading, then you have the geo-sense New Yorkers out. You have to have screening that prevents New Yorkers from signing up for an account.”
New York Forms Study Task Force, Hints at Update. California to follow.
— Blockchain for Europe (@BlockchainforEU)
“So, that’s an impediment. It’s not half the business in the United States, and certainly for some of the biggest crypto exchanges, like Binance, New York is not a huge part of the market for them. So they can afford not to go for the BitLicense–it doesn’t hurt them that much.”
On the other hand, “there are institutional players here, in New York,” he said. “There’s a lot of reason to want to be here.”
“You can have trust in code, but you have to look at the people behind the code.”
Burke believes that both better regulations and improved technology will contribute to the future of cybersecurity.
On the technology side of things, “if there was a consumer report that could really look deep into the code that’s operating different currency exchanges’ operations, then it might be self-governing enough [to keep users safe],” he said. “In a sense, there is that–there are bug-bounty programs that are pretty successful.”
On the other hand, however, “I’m not sure a bug bounty program would have found that the QuadrigaCX guy was ,” he said. This is where regulations are necessary: “you need someone to go in under the hood and look.”
“You can have trust in code, but you have to look at the people behind the code,” Burke continued, adding that it’s important not to fall into the trap of “getting excited by a [cool] interface.”
“You don’t know what’s behind it,” he said.
“It’s great to give people who are new, who are young, who are trying something out the chance to try something out. But there’s something about having people who are experienced veterans in dealing with other people’s money. Those kind of people understand how things can go wrong, and they avoid those early rookie mistakes.”
“When you’re technological and you’re excited about your technology, you tend not to put out the risks. So, to have some regulator–or it could be anyone else who goes, ‘hey, I wanna see your risk assessment,’ that’s really serious.”
“If you can have an independent audit by some kind of a consulting agency that’s really good at this stuff, and comes in and looks at things, then I’d say, ‘hey, you know, maybe it doesn’t need to be the government.’ But who’s going to require that you get a serious risk assessment when you’re a startup and you don’t have a lot of extra money to throw $100,000 at a risk assessment. Who’s gonna make you do that?”
The government, of course.
This is an excerpt. To hear Finance Magnates’ full interview with Patrick Burke, former head of BitLicense, click the SoundCloud or YouTube links
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