Byzantine regulations stifle innovation and entrepreneurship
In 2015 New York’s Department of Financial Services superintendent, Benjamin Lawsky, implemented the nation’s strictest and most convoluted regulations against cryptocurrency exchanges. He then left state service to start his own private consulting outfit—The Lawsky Group—which among other services advises cryptocurrency companies on the arcane and convoluted regulations he created. The set of Lawsky cryptocurrency regulations are now often referred to as the BitLicense.
Within the 44 pages of regulations set forth without any legislative authority or input, perhaps the most discriminatory requirement is related to the need for surety bonds. Section 200.9 (a) states: “Each licensee shall maintain a surety bond or trust account in U.S. dollars for the benefit of its customers in such form and amount as is acceptable to the superintendent for the protection of the licensee’s customers.”
For startups owned by minorities, women and immigrants, these bond requirements and the need for unilateral approval by one person in the state is a major deterrent to getting their business going here. There is no bond market that specializes in underwriting for cryptocurrency exchanges, and all bond companies rely on credit histories and credit scores to warrant surety bonds—otherwise they require ridiculously large cash collaterals up front. In a nutshell, any surety requirement that relies heavily upon credit histories essentially redlines ethnic and racial minorities, women, immigrants and other groups who have historically been shut out of mainstream credit and financing.
Lawmakers must act
To summarize: New York’s top financial regulator created byzantine rules for an emerging industry and then left to start a company that profits from navigating those regulations, which happen to ensure only the wealthiest and best-connected companies can enter the market. This is bad for innovation, entrepreneurship and the state’s economy as a whole.
The BitLicense requirements are creations of unilateral agency action, but the state Legislature could—with the governor’s signature—override these onerous, convoluted regulations, which effectively block out scores of entrepreneurs from the market. The state has the opportunity to create a productive regulatory framework, not just window dressing, that not only protects investors and consumers but fosters entrepreneurs from all walks of life without burdening or favoring certain groups.
I and three other state Assembly members have introduced the New York Cryptocurrency Exchange Act (A.9899), which would eliminate the BitLicense and set new monitoring and auditing mechanisms modeled after the European Union’s Alternative Investment Fund Managers Directive. That EU law requires hedge fund–type institutions to appoint a private depository to monitor and audit the assets in the fund. Instead of requiring a surety bond, the legislation would explore insurance mechanisms modeled after Securities Investor Protection Corp. standards to indemnify individual investments.
The BitLicense is a barrier to entry that gives too much power to a state agency incapable of auditing or monitoring this industry by itself. As the financial capital of the world, New York needs to embrace innovation and entrepreneurs while protecting consumers and investors. Though cloaked in the guise of needed regulation, the BitLicense enriches a handful of people while sidelining those who are already marginalized and less connected.