In 2015, New York’s Department of Financial Services Superintendent Ben Lawsky implemented the nation’s strictest and most convoluted regulations against cryptocurrency exchanges. He then immediately left state service to start his own private consulting outfit (The Lawsky Group) to advise crypto companies on the very arcane and convoluted regulations he created. The set of Lawsky cryptocurrency regulations are now often referred to as the “BitLicence.”
Within the 44 pages of regulations set forth without any legislative authority or input, perhaps the most discriminatory requirement is related to the need for surety bonds. Section 200.9 (a) states: “Each Licensee shall maintain a surety bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to the superintendent for the protection of the Licensee’s customers.”
For minority, women, and immigrant-owned startups, these bond requirements and the need for unilateral approval by one person in the state is the ultimate deterrent to starting a business in New York. There is no bond market that specializes in underwriting for cryptocurrency exchanges, and all bond companies rely on credit histories and credit scores to warrant surety bonds — otherwise, they require ridiculously large cash collaterals upfront. In a nutshell, any surety requirement that relies heavily upon credit histories or scores redlines ethnic and racial minorities, women, immigrants and other groups of people who have historically been shut out of mainstream credit and financing.
New York’s top financial regulator creates new byzantine rules for an emerging industry and then leaves to start a company that profits from navigating those regulations, which happen to ensure only the wealthiest and best-connected companies can enter the NY market. This is the ultimate CryptoCon.
Fortunately, the “BitLicense” requirements are creations of unilateral agency action. The state Legislature could act, and with the Governor’s signature, override these onerous, convoluted regulations which effectively block out scores of entrepreneurs from the New York market. New York State has the opportunity to create a productive regulatory framework, not just window dressing, which not only protects investors and consumers, but fosters entrepreneurs from all walks of life without burdening or favoring certain groups.
My bill, the New York Crypto Currency Exchange Act (A9899), would eliminate the BitLicense and set new monitoring and auditing mechanisms modeled after the EU’s Alternative Investment Fund Managers Directive, which requires hedge fund-type institutions to appoint a private depository to monitor and audit the assets in the fund. Instead of requiring a surety bond, the legislation would explore insurance mechanisms modeled after SIPC standards to indemnify individual investments.
The “BitLicense” is an upfront barrier to entry that gives too much power to a state agency incapable of auditing or monitoring this industry by itself. As the financial capital of the world, New York needs to embrace innovation and entrepreneurs while protecting consumers and investors. Though cloaked in the guise of needed regulation, the current “BitLicense” enriches a handful of people while sidelining those already marginalized and less connected from entering the New York market.
Ron Kim (D-Queens) is a member of the New York Assembly.