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Can the Bitcoin World Adapt to the Regulatory World?

In July the New York Department of Financial Services (DFS) proposed comprehensive regulations for virtual currencies including Bitcoin.  Under this 40 page proposal, DFS would issue BitLicenses to companies that meet certain criteria.   Although BitLicenses would not be required for most merchants or consumers, for most others, a BitLicense will be required for any virtual currency business activity. 

How will these regulations impact the Bitcoin industry, and can the industry adapt to these new requirements?

Let's take a look at the major elements of the regulation.

First, to even apply for a BitLicense the regulation includes a list of 14 requirements, including:

  • Detailed biographical information for each applicant and each director and others, including personal history, experience, and qualifications.
  • A background check, fingerprints, and personal financial statements for the Principals.
  • Org charts, banking relationship, written policies and procedures, affidavits, and more.
  • And the catch-all "additional information" that DFS may require.

Next are the actual regulations for holders of BitLicenses, including:

  • Capitalization requirements.
  • A requirement to invest the firm's retained earnings and profits only in US dollar denominated investments.
  • A bond or trust account to protect the firm's customers, which also must be in US dollars.
  • Rules related to mergers and acquisitions.
  • Ten years of recordkeeping, including details on each transaction, including names, account numbers, and physical addresses of the parties involved.
  • Access to all facilities, books, records, documents, wherever located.
  • Abandoned property rules.
  • Additional rules for examinations, quarterly financial filings, anti-money laundering programs, reporting of suspicious activities, a customer identification program, and OFAC rules.
  • Identification requirement for transactions over $3,000.

Interestingly, the regulations also have 3 pages of cyber security requirements, including:

  • Maintain a cyber security program.
  • Use defensive infrastructure to protect systems.
  • Implement a written cyber security policy.
  • Have a CISO.
  • Perform annual penetration testing and quarterly vulnerability assessments.

The comment period for these proposed regulations is open until September 7.  While many in the industry will welcome these regulations as a means of weeding out small players and making their businesses more legitimate, others will push back hard.  Cameron Winklevoss, who with his brother Tyler are working to create a Bitcoin ETF, has this to say:

"We are pleased that Superintendent Lawsky and the Department of Financial Services have embraced Bitcoin and digital assets and created a regulatory framework that protects consumers. We look forward to New York State becoming the hub of this exciting new technology."

But other Bitcoin advocates with a more utopian-like view of Bitcoin have a very different opinion.  Erik Voorhees had this to say:

"If you don't want to speak out against this nonsense for fear of retribution, fine, that is understandable. But if you speak out in advocacy of the very injustices from which Bitcoin is trying to lead society, I'd advise you to check whether you're veering dangerously close to incompatibility with a free and open financial system, and consider whether you will end up on the right side of history."

Whatever the outcome, the regulators are definitely coming to the Bitcoin world, and Bitcoin will adapt.

As Forbes aptly stated in a recent article, "Bitcoin befuddles regulators".  The question is, will regulators befuddle Bitcoin?

Rich Bolstridge is the Chief Strategist of Financial Services at Akamai Technologies

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