Lawskys’ Farewell

Ben Lawsky, Superintendent of the New York Department of Financial Services, recently gave his final speech at the BITS Emerging Payments Forum on the regulation of Bitcoin and other crypto currencies.

“I’ll be honest, I hadn’t even heard the word Bitcoin until 2013, when our chief economist of the DFS one day in a meeting started  to tell me about it in the context of the banking crisis that was occurring in Cyprus.”
— – Lawsky

Lawsky describes the current state of affairs between regulated finance and technology as a collision.  “That collision of course between that unregulated [technology] sector with that very conservatively carefully regulated bank sector, that collision isn’t always going to be pretty. At least at first. But we both as regulators and technologists have a responsibility to find common ground and work together in good faith.”

Lawsky stated in his speech, that developing the new rules of the road for the BitLicense was extraordinarily difficult.  “As you can probably imagine, people generally do not go into a career in financial regulation because they want to work on cutting edge technology issues.”

“It is important for regulators to work quickly, but carefully to learn everything they can about these new technologies as they emerge.”
— – Lawsky

Lawsky explained that  he received support, and insight, from a number of Bitcoin related companies in the finalization of the regulation. One of these companies was Circle, a consumer Internet company focused on secure and less costly technology for storing and using money.

The framework of the current regulation of virtual currency firms is the product of nearly two years work. This third and final version shows dramatically less change than the second draft. After the initial release of the first draft, a 90 day period was allocated to receive comments from the public, explained Lawsky.

In this comment period the DFS received over 4000 comments. The second draft received only 35 comments. Lawsky explained that the DFS took this as a sign they were on the right track. However, Lawsky also advised that “Regulators are not always going to get that balance exactly right and much like startups there’s occasionally going to be some false starts.”

“New York’s final BitLicense regulations are not perfect. The most worrisome aspect is the lack of a clear on-ramp for digital currency startups and small businesses, especially in the likelihood that other states will use New York’s BitLicense as a guideline in creating their own regulations.”
— – Perriane Boring, Founder of the Digital Chamber of Commerce

In his speech Lawsky alluded to the possibilities of future changes to aspects of the regulation that do not work. “We have never claimed to have a monopoly on the truth, that’s one of my favourite expressions and regulators must always be willing to course correct when necessary.”

Fears as to whether this will come into fruition are tangible, given Lawsky will be leaving his post within several weeks of finalizing BitLicense. Online sources advise that Lawsky will be setting up a consulting firm in New York which will focus on matters of cybersecurity, technology and virtual currency. This will leave the regulations fate in what is currently an unknown persons hands, as New York Governor Andrew Cuomo has yet to appoint Lawsky’s replacement.

A company applying for BitLicence will pay a non-refundable $5000 fee, submit a mass of paperwork and supply private information such as fingerprints. However, this is merely the first hurdle. The remainder is a ‘case-by-case’ basis as to how much capital will actually be required to enter into the New York Bitcoin market.

Erik Dixon, a Lawyer in New York handling many Bitcoin companies advises “I do believe that young companies desiring to have access to and compete for business in the lucrative New York market may find it worthwhile to apply for the Bitlicense,” although this is not to be considered legal advice.

The current license takes into consideration five other key changes:

• Software application updates will not need prior approval. Only material changes to the business will require permissions. “So if you are changing what you are doing as a business that’s the kind of thing we are going to want to know about. We have no interest in micromanaging minor app updates. We recognise that we are not Apple,” said Lawsky
• The DFS have no intention regulating of software developers. Only financial intermediaries will be required to apply. “I think in a non virtual world the comparison is between ‘yes’, we regulate very carefully, a bank that is holding other people’s money. We do not  regulate the wallet that sits in your back pocket and we don’t regulate the company that makes that wallet,” Lawsky advised.
• The third attracted much attention and concern prior to the release of the final BitLicense. A duplicative set of applications or submissions for firms that want the BitLicense and the money transmitter license will not be required. “We heard a lot about this,” said Lawsky. “Firms will be able to cross-satisfy any of those license requirements and companies that work with us will be able to have a one stop shop application submission that covers all the bases they need.”
• Companies that file suspicious activity reports SARS with federal regulators such as FinCEN do not have to a duplicate this process with the DFS. “Our goal is to avoid duplication where possible and we generally already have access to that information when we need it anyway through our information sharing arrangements with Federal regulators,” Lawsky explained.F
• Companies will not need prior approval from DFS for every new round of Venture Capital funding from passive investors. “Generally a company will only need prior approval if the investor wanted to direct the management and policies of the firm. Which is known in regulatory jargon, as being a control person.”

Lawsky expresses that these new regulations will not satisfy or please everyone, ”In my opinion, when we write regulations for Wall Street, if Wall street and all of the banks are completely happy with something we’ve drafted there is a decent chance that we are not doing our job exactly right.”