BitLicense Fallout

Eobot is a cloud mining company that entered the market in late 2013. The company recently announced that it will discontinue business within the State of New York. Their services allowed users to earn a range of digital currencies, by running a modified version of CGMiner.

Their website stated that anyone accessing Eobot within the State of New York must withdraw all their funds and cease mining by the 1st July.

“We regret that we must cease Eobot business within New York State, however the new BitLicense requirements in this state place compliance and cost burdens upon Eobot that we believe are excessive.”
— – Eobot

BTCGuild is an online mining pool that has been less fortunate, and are closing their doors permanently. The announcement, on Bitcointalk.org, outlined two key factors contributing to their decision. The first was due to the centralization of mining. The second lay with the controversial BitLicense, and a lack of funds to defend any extended legal battle. “Whether or not BTC Guild could win in defense of such an attempt is irrelevant, since the cost of defending the pool would be greater than any income the pool is expected to generate going forward,” the owner of BTCGuild stated.

“The fact that BTC Guild is not in New York does not matter, since it would be doing business with New York residents while they are physically in New York.”
— – BTCGuild

Shapeshift.io provides a service that allows trade between a range of digital currencies and tokens. Shapeshift.io announced their discontinuation of business in the State of New York earlier this month. The Creator and Founder of Shapeshift, Erik Voorhees, told BraveNewCoin “blocking New York means we lose one or two percent of our users, which is unfortunate, but not devastating.”

Voorhees pulled their services in revolt against the controversial BitLicense. Although Shapeshift.io customers are dismayed, Voorhees stated that they’re supporting the Shapeshift stand.

“Ultimately, we want to make money while furthering the cause of Bitcoin and the principles on which it was devised. This means sometimes that we have to take an ethical stand even if there might be a hit to the bottom line.”
— – Voorhees

The impact of the BitLicense is clearly further reaching than the state of New York. Any company that has clients in the state, and falls under the new regulations of the license, could be liable for failing to comply with it. A company could be operating in a range of jurisdictions, and countries, outside of NY, and still be liable.

This concept of global enforcement is particularly prevalent under the titles of law enforcement and counterterrorism cooperation. Know Your Customer and Anti Money Laundering legislation is already applied to money transmission services, as regulated by the BitLicense.

Underpinned by international laws and conventions, global enforcement regimes are designed to criminalise certain behaviours at the international level, and to facilitate the free movement of investigations and prosecutions across the world.

Global enforcement regimes have been enacted in several areas; to suppress the production and trafficking of narcotic drugs, as seen in the three main UN Drugs Conventions; to prevent and prosecute terrorist acts, as seen in the dozen UN terrorism-related Conventions; to combat organised crime and illegal immigration, as seen in the UN Convention and three protocols on Transnational Organised Crime; and to tackle ‘cybercrime’, as seen in the CoE Cybercrime Convention, which is open for worldwide signature.

These regimes function through the obligations on signatory states to criminalise certain acts, to facilitate cross-border investigations, to provide mutual legal assistance, and to assist in the prosecution of offences – by providing evidence and/or extraditing suspects.

Voorhees thinks that regulation should be provided by free markets, economics, and mathematics. “Consumer protection should come from competition and innovation between entities, not through the coercion of the state.”

“The fact that the State has heavily regulated the traditional financial industry doesn’t mean it should continue to do so (indeed, look how impotent such regulations have been in the face of Bernie Madoffs, Enrons, and financial crises over the years). Innovators working through voluntary exchange tend to make the world better, while government-coercion tends to make the world more rigid and violent.”
— – Voorhees

On a more local level, the BitLicense has already had an impact on companies that previously conducted business in the state. Voorhees thinks that the regulation will do more than stunt the state’s economic growth in FinTech. While million dollar VC-backed companies will be able to comply, and perhaps thrive, despite the regulatory shackles, “it protects bigger players from competition at the expense of smaller.”

Voorhees explained that he is aligned with the stated objectives of the BitLicense, to reduce crime and protect consumers, but he disagrees with the means. “Unfortunately, every regulator gets paid to regulate, and they see no alternative than to do so. Regulators suffer from the same flaws as all other individuals – greed, naivety, and hubris, but unlike other individuals they wield the coercive power of the state when exercising these flaws upon society.”

As it stands today, the effect of BitLicense has been felt on a micro economic level. The regulation also has potential ramifications on the macro, international, level. Aside from this, the closure of  BTCGuild has had a direct impact upon the Bitcoin network.

The mining company contributed just under 3% of Bitcoin’s hash rate, and removing this network securing hashing power will have had a negative impact on the security of Bitcoins blockchain. It appears that the intentions of the BitLicense to protect consumers is already falling short.