Academic journal article The Journal of High Technology Law

Eight-Years-Young: How the New York Bitlicense Stifles Bitcoin Innovation and Expansion with Its Premature Attempt to Regulate the Virtual Currency Industry

Academic journal article The Journal of High Technology Law

Eight-Years-Young: How the New York Bitlicense Stifles Bitcoin Innovation and Expansion with Its Premature Attempt to Regulate the Virtual Currency Industry

Article excerpt

"The insolence of authority is endeavoring to substitute money for ideas." (1) 

I. Introduction

Technological advancements and regulatory short-sightedness are a dream come true for criminals seeking to exploit virtual currencies. (2) The recent development of Bitcoin--a form of virtual currency that operates separately from a centralized bank--in conjunction with authorities' ineffective attempts to regulate the virtual currency industry, allow criminals to exploit the market and conduct illegal activities, such as launder money and illicit the financing of drug trade and terrorism. (3) According to recent cases, transactions involving Bitcoin resulted in the laundering of hundreds of millions of dollars from illegal transactions. (4)

Bitcoin is the first virtual currency formed on a decentralized banking system with guaranteed anonymity for users. (5) Bitcoin users can exchange virtual currency for real money without detection, quickly and easily around the world. (6) The fast-paced nature and complex infrastructure of virtual currency-exchanges poses a challenge for anti-money laundering ("AML") and compliance regulators as the responsibility of supervision and enforcement remains unclear for this emerging market. (7)

The New York Department of Financial Services ("NYDFS") responded to growing concerns relating to Bitcoin and virtual-currency industries with a first attempt at regulation. (8) The NYDFS issued a rule proposal for "BitLicense" in 2014 and finalized the virtual currency rule in June 2015. (9) Although BitLicense addresses many of these concerns, the rule lacks reach, as it is only applicable to exchanges based in New York. (10) The inadequacies of BitLicense call into question whether this rule adequately regulates the industry to ward off illicit activity, or if the rule merely hinders the expansion of the technology, preventing growth in U.S. financial markets. (11)

This Note analyzes New York's Final BitLicense Rule and evaluates the effectiveness of this regulatory regime as a potential example for other state governments, the federal government, and even foreign countries. (12) Part II provides a brief history of Bitcoin, including how the technology works, benefits and issues with the virtual currency, and a glimpse at the current regulatory environment. (13) Part III examines BitLicense and its application to the New York Bitcoin economy. (14) Part IV discusses whether BitLicense effectively regulates Bitcoin, and argues that it ultimately does not. (15) More specifically, Part IV identifies specific inadequacies with BitLicense that pose more of a threat to the technology than assist with its regulation. (16) In Part V, this Note concludes BitLicense is not an ideal model for other state and federal governments to follow, and instead recommends New York reconsider its current regulation before damaging the United States cryptocurrency economy. (17)

II. History

On October 31, 2008, members of the cryptography community received an email from an unfamiliar sender, by the name of Satoshi Nakamoto ("Nakamoto"). (18) Nakamoto introduced "a new electronic cash system that's fully peer-to-peer, with no trusted third party." (19) He subsequently attached a white paper which outlined the currency system he created: Bitcoin. (20) Nakamoto acknowledged Bitcoin as a non-traditional currency and cautioned that it would likely not be understood by mainstream financial markets or market players. (21) In fact, Bitcoin was so innovative that even the cryptography community dismissed Nakamoto's first attempt. (22) Nakamoto remained persistent with his invention because he knew Bitcoin contained two major breakthroughs that differentiated the system from previous cryptocurrency attempts: the universal ledger and a unique monetary incentive to maintain the ledger. (23)

A. Bitcoin

In 2009, the first Bitcoin industry transaction took place by a cryptographic activist and the first real-world transaction took place in 2010 when a programmer paid 10,000 bitcoins for a pizza. …

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