The New York Department of Financial Services gets to inspect your garage. That’s the upshot of a provision in its proposed “BitLicense” regulation requiring all licensees to provide the DFS “immediate access to all facilities, books, records, documents, or other information maintained by the Licensee or its Affiliates, wherever located.”
Will the DFS ever use its power to access “facilities” and burst into a Bitcoin entrepreneur’s home? Of course not. But the language illustrates very well that the proposal is written with Manhattan office buildings in mind, not Silicon Valley garages.
That’s one of the points we make in a Bitcoin Foundation comment filed today on the DFS’s “BitLicense” proposal. There is a vast cultural divide between what’s going on with Bitcoin and what the DFS is envisioning. Pre-approval of business model changes, for example, would prevent Bitcoin businesses from experimenting and iterating from week to week and month to month.
Now, it’s not a given that financial services providers should have utterly free reign to experiment. Business failures can do a lot of damage to consumers and markets. In our comment, we assume that properly formulated and implemented regulation can protect against business failure, for example, paving the way for wider consumer adoption.
But not just any regulation fits that bill. We need to know what risks the DFS sees from Bitcoin, so we and others in the Bitcoin community can independently assess them. We and others want to help the DFS match means to ends.
That’s very hard to do that without the “[e]xtensive research and analysis” that the DFS cited in the New York Register when it introduced the “BitLicense” proposal. We asked for it in August and the DFS originally promised timely access, but we learned in early September that the DFS may not release its research until December, well past the close of the current comment period. Given strong signals that the DFS will issue a second draft, perhaps we will have access to its research in the next round, but it would be better to have it sooner rather than later.
The DFS’s research may validate the choice to produce a technology-specific regulation, rather than functional regulation aimed at protecting consumers of all financial services, no matter how they’re provided. The “BitLicense” proposal may require a firm providing services in both Bitcoin and fiat currencies to maintain two compliance regimes, one for the Bitcoin service and another for the dollar-based service.
If new technologies are regulated separately and distinctly, this Balkanizes the marketplace, hampering head-to-head competition among providers of the same service and reducing the consumer benefits of competition. We illustrate that point with an analogy to today’s new-fangled all-electric vehicles:
Should there be a new regulatory regime for each vehicle powered by new motor technology? Most people probably agree that there should not. The vehicles themselves should meet the same standards conventional vehicles do in terms of braking, impact absorption, and occupant protection, for example. They should have the same lights and signals as conventional vehicles. They should obey the same traffic laws and speed limits as all other vehicles, and they should travel on the same roads. Operating them should not require a new kind of license.
Functional regulation helps make businesses interchangeable for consumers. The resulting competition lowers costs and improves quality for all consumers, not just the ones using Bitcoin.
There is more interesting stuff in the comment. You won’t be surprised that I recommend reading the whole thing.
Back in August, a New York Times Dealbook post quoted New York Department of Financial Services Superintendent Benjamin Lawsky speaking of “the collision of banking regulations with new technology.” Spontaneous quotes don’t always capture the essence of a person’s thinking, but if this one did, it reveals that New York’s financial regulator has yet to solve the problem that he faces. Rather than overseeing a “collision” between technologies like Bitcoin and conventional regulation of financial services, the DFS should bring these worlds together. “[W]e want to make sure we get it right,” he said. Hear, hear.
If he does, New York will lock in and extend its status as a financial capital, getting the benefits of Bitcoin while mitigating the risks. New York needs Bitcoin for what it offers to consumers, for re-energized markets, economic growth, and jobs.