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Mass Exodus of Bitcoin Exchanges from New York State Triggered by BitLicense Deadline

Mass Exodus of Bitcoin Exchanges from New York State Triggered by BitLicense Deadline

At least ten bitcoin exchanges, including the exchanges with the highest volumes of USD and EUR trading, are pulling out of New York State as the Bitlicense deadline arrives.

At least 10 Bitcoin exchanges around the world have recently announced that they are cutting off services to New York state residents – leaving those customers trying to figure out how to choose a new crypto exchange. The exchanges closing services to New Yorkers includes Bitfinex, the largest bitcoin exchange by USD volume, which announced on Friday that it is going to start excluding New York state customers in response to the New York State Department of Financial Services (NYDFS) Bitlicense.

“Bitfinex is not applying for a BitLicense at this time. Accordingly, Bitfinex is modifying account privileges for New York Residents, effective August 10th, 2015.”
— – Bitfinex

In the Hong Kong-based company’s press release, Bitfinex announced that New York state has given them until today to comply with the Bitlicense, and they have chosen not to apply for it at all, for a variety of reasons. As a result, New York residents will no longer be able to access a number of its services.

“We understand that this is an inconvenience, but users who do not remove their cryptocurrency holdings from their Bitfinex accounts by midnight UTC on August 15th, 2015 will have their cryptocurrency balances exchanged to USD at market rates. The resulting USD balance will be available in customer accounts for customers to access at any time.”
— – Bitfinex

NY residents will have their account privileges modified to remove the ability to use digital currencies in any way on the Bitfinex website. The only remaining function left to New Yorkers will be lending US dollars to other users on the platform.

The specific reasons Bitfinex has given for making this change are a combination of high costs and worries over the unnecessary lack of user privacy it would create.

“There are many factors to our decision, however we hold our users’ privacy in very high regard, and seeing how we are an international exchange with a high percentage of users coming from outside of NY, Adhering to the bitlicense would put these users’ privacy at risk and it would compromise the privacy of our employees (having to send finger prints to the NYDFS). There is a slew of other reasons behind our decision like how much time it takes to go through the application as well as changing our system to comply with their regulations. In sum, we didn’t view it as worth our time or the best for our users’ interests.”
— – Zane Tackett, Director of Product & Community Development at Bitfinex

While Bitstamp, the second largest exchange by USD volume, has recently said that they are applying for the Bitlicense, at least two more of the largest exchanges, Kraken and Poloniex, have joined Bitfinex. Kraken is the largest exchange by volume for Euro transactions. British exchange Coinfloor has gone even further and blocked all US customers.

Shapeshift, GoCoin, and BitQuick had previously bowed out, redirecting their New York traffic to Erik Voorhees’ Please Protect Consumers website, which informs users that they are being denied services due to the BitLicense and what they can do about it.

Voorhees, the creator of the innovative Shapeshift exchange, was the first to pull out of New York due to the BitLicense. Not afraid to tell anyone that he believes the state’s digital currency regulation is unethical, Voorhees’ main point is that complying with it needlessly exposes personal user information, making his customers far more vulnerable to monetary or identity theft than they would be without it.

Chinese exchanges BTC China, Huobi, and OKCoin have not made formal statements yet. It is generally believed that they will not be complying with the Bitlicense because they don’t deal in US Dollars and their user base in New York would likely be a very small number of people.

The August 10 deadline marks the end of a 45-day grace period following the publication of the BitLicense in June. At the end of that period, any person or business, anywhere in the world that engages in “virtual currency business activity” with New York residents is in breach of the law and is considered a person conducting an unlicensed business.

"We are excited about the potential digital currency holds for helping drive long-overdue changes in our ossified payments system. We simply want to make sure that we put in place guardrails that protect consumers and root out illicit activity – without stifling beneficial innovation."
— – Ben Lawsky, Former NYDFS Superintendent

The price of obtaining a BitLicense is commonly criticized for unfairly stopping small businesses competing in New York. To begin the process companies must have already registered with FinCEN, and go through an Anti-Money Laundering (AML) and Know Your Customer (KYC) paperwork process, which all dollar-trading businesses around the world have to do already. A common complaint of the BitLicense is that it isn’t designed to add any protections that existing AML and KYC laws don’t already cover.

Once that paperwork is completed, the NYDFS requires submission of a 31-page application form, that must be accompanied with a $5,000 application fee. Part of the paperwork is to include audited financial statements prepared by an independent certified public accountant.

“Another potential source of costs for a potential bitlicense applicant is under ‘Information Regarding Financial Statements.’ This subheading calls the applicant to provide DFS with audited financial statements prepared by an independent certified public accountant. These documents can be potentially costly.”
— – Epaylaw

All employees of the business must then submit fingerprints to the NYDFS. If approved, another set of paperwork comes after that, one that some sources have is reportedly over 500 pages in length. Finally, a case must be made for how large the businesses’ surety bond must be, with documented justification for a business of that size and type. Once NYDFS accepts that the size of the bond is sufficient, they must pay the bond in order to start doing business with New York customers.

“The decision on the amount of surety bond or trust account is left to the applicant. However the bitlicense application calls for an applicant to justify how the proposed sum will be sufficient for the protection of the customer. Implicit in that language is the notion that if DFS deems the amount insufficient, the application can and will be denied.”
— – Epaylaw

It is easy to see that such a process would make it hard on small businesses to compete in New York state. There are also 49 other states that may follow New York’s lead, which could potentially create 50 times the costs and 50 times the paperwork in the future.

Apparently even such a bleak prospect wasn’t effective at scaring away everyone. Coinbase, Bitstamp, and five others so far have chosen to comply with the BitLicense. Two of the largest exchanges didn’t even need to apply, as they were already involved in a larger process for the NYDFS. Wall Street exchange ItBit and the upcoming Gemini exchange from the Winklevoss brothers have both filed trust charters with the NYDFS already, so there is no need to submit the BitLicense applications.

“The trust charter application process is far more rigorous than that for obtaining the BitLicense or money transmitter licenses. In fact, itBit is exempted from getting a BitLicense under the proposed framework because of our trust charter under New York Banking Law.”
— – ItBit

Together six exchanges, including BitStamp, Coinbase, Coinsetter, ItBit, Gemini, and MonetaGo, and the The Digital Currency Group’s Bitcoin Investment Trust, make a total of seven different companies that have decided to keep their New York customers, despite the cost.

These seven alone remain legally available to New York residents for trading digital currencies and selling  digital asset based securities. New York residents may still have a few options to purchase and trade bitcoins, but it has yet to be seen if the New York market will suffer from a lack of liquidity that the rest of the world enjoys with all of the other exchanges available to them.


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