Crypto innovators and entrepreneurs are plotting a path toward mass adoption by continuing to work with regulators.
Today, Menlo Park-based Robinhood has been granted a cryptocurrency license and a money transmitter license by the New York State Department of Financial Services (DFS). Over the coming months, Robinhood Crypto, which is currently available in over 30 states, will allow account holders in New York to buy, sell and store seven cryptocurrencies, including Bitcoin, Ether, Bitcoin Cash and Litecoin.
Financial Services Superintendent Maria T. Vullo says,
“DFS continues to lead the way in responsibly supervising and advancing innovation in New York’s flourishing financial technology sector through a strong state-based regulatory regime.
Today’s approvals add to the growing list of responsible virtual currency providers who recognize and appreciate how a comprehensive regulatory framework fosters a competitive marketplace that benefits both consumers and industry.”
While the road to mass adoption for cryptocurrency has hit a number of snags and delays, efforts by US lawmakers and crypto innovators remain steady, with regulators and crypto entrepreneurs working together to lay critical pipelines and major on-ramps for a new digital economy.
The state of New York has created a cryptocurrency task force following the signing of a digital currency study bill by Governor Andrew Cuomo.
This was announced by New York State Assemblyman and the chair of the subcommittee on internet and new technologies, Clyde Vanel, who commented that the task force would benefit both the blockchain industry and investors:
The task force of experts will help us strike the balance between having a robust blockchain industry and cryptocurrency economic environment while at the same time protecting New York investors and consumers.
Members of the cryptocurrency task force who will be appointed by the New York State Assembly, Senate and the Governor will be drawn from the tech sector, the investor community, academia and blockchain firms. The task force is expected to have turned in a report by December 15 next year.
New York’s Crypto Task Force a First in US
According to New York City’s tech nonprofit, Tech:NYC, the crypto task force will be the first in the United States and this will assist in solidifying the state’s status as a “global hub for smart innovation.”
The idea of a cryptocurrency task force in New York was initially proposed mid last year following an inquiry into exchanges that had been launched by the Office of the Attorney General in the state.
At the time, the New York AG’s Office indicated that the inquiry had been started following an increase in public interest in cryptocurrencies and a spate of cryptocurrency heists.
Tyler Winklevoss, the chief executive of Gemini Exchange, which was one of the exchanges that had received questionnaires from the AG’s office, welcomed the move, arguing that the market was in need of prudent regulation and enhanced transparency:
These technologies can’t flourish and grow without thoughtful regulation that connects them to finance. As long as jurisdictions strike the right balance, we think it’s going to be a huge boon and win for cryptocurrencies.
At the time, not all crypto exchanges welcomed the inquiry by the AG’s office with open arms, however. The founder and CEO of Kraken, Jesse Powell, declined to respond to the inquiry, saying on social media that the 34 questions would require a diversion of company resources and would thus hinder the firm from fulfilling its mission:
When I saw this 34-point demand, with a deadline 2 weeks out, I immediately thought ‘The audacity of these guys – the entitlement, the disrespect for our business, out time! The resource diversion for this production is massive. This is going to completely blow up our roadmap!
New York financial regulators have approved Stellar Lumens, a cryptocurrency created by the founder of rival blockchain company Ripple, to trade on the itBit exchange—the first time the state’s authorities have given Lumens the green light.
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ItBit, a cryptocurrency trading platform designed for institutional investors that previously only offered Bitcoin trading, also received approval from New York’s Department of Financial Services Thursday to add Bitcoin Cash, Ethereum, and Litecoin to its exchange. The virtual currency company was also the first in the industry to be granted a banking law charter from NYDFS three years ago—an authorization similar to, but broader than, New York’s famed BitLicense, required for companies wishing to offer trading of, or hold on to, cryptocurrencies for customers in the state.
NYDFS simultaneously announced that it had awarded a BitLicense to Xapo, a Bitcoin storage company with an underground vault in the Swiss Alps—only the sixth BitLicense granted since the certification was invented three years ago.
The approval of Stellar Lumens—now the seventh or eighth most valuable cryptocurrency with a market capitalization of more than $4.3 billion—is significant, because it signals that regulators don’t view the virtual currency as a security (akin to a stock or bond), a dreaded designation which would require registration as a broker-dealer with the U.S. Securities and Exchange Commission.
“That’s why we’ve added them to the exchange,” Chad Cascarilla, co-founder and CEO of itBit’s parent company Paxos, [said]. “If they were a security, you’d have to go through a different process.”
The move potentially clears the way for more exchanges to list Lumens, a factor that could help boost the cryptocurrency’s price. Coinbase, the leading U.S. cryptocurrency exchange, which currently offers trading in Bitcoin, Bitcoin Cash, Ethereum and Litecoin, announced this week it would add Ethereum Classic to its offerings, sending the price of that digital currency soaring 20%.
Lumens were created by a company called Stellar, founded in 2014 by Jed McCaleb, who also started Ripple and the now-defunct Bitcoin exchange Mt. Gox. With funding from payments company Stripe, Stellar’s blockchain (or distributed ledger) technology is now used by companies from messaging startup Kik to IBM, which uses Lumens to send payments between countries in the South Pacific region.
The Stellar Lumens price rose more than 5% ahead of itBit’s news to about 24 cents, amid a bounce-back rally in the wider cryptocurrency market after a selloff earlier this week.
ItBit sought approval for the additional four cryptocurrencies because “these were the ones we heard from our customers they wanted the most,” Cascarilla said. It has not yet applied to trade any other virtual currencies, but plans to add more in the future, including possibly the cryptocurrency created by Ripple, XRP, he said.
“We clearly want to get to the top 10, top 20 assets over time,” Cascarilla added.
The announcement follows a $65 million Series B funding round Paxos, itBit’s parent company, closed earlier this month, bringing its total venture capital raised to $95 million. itBit claims to be the nation’s No. 2 player for U.S. dollar-Bitcoin trades, behind the leader Coinbase.
While other cryptocurrency exchanges licensed to operate in New York, including Coinbase and Circle, have sought to attract individual retail investors, itBit plans to stay in the higher-end institutional market, focusing mostly on hedge funds, private equity firms, and other Wall Street players, as well as wealthy individuals.
The company plans to expand its role as a custodian—a service to securely hold on to large sums of cryptocurrency assets for institutional clients—and also introduce new features, including collateral services, allowing customers to pledge their cryptocurrency holdings as a sort of guarantee when trading other risky assets, such as derivatives.
Cryptocurrency custodianship has been in demand recently from Wall Street investors looking for a way to enter the digital asset market that meets their strict compliance standards. Coinbase, for one, is rolling out its own such custody service for heavyweight investors.
That interest gives Cascarilla confidence, despite the plunge in cryptocurrency prices of late, with Bitcoin down nearly 70% from its December high.
“The interest and the adoption from institutions and large firms that have a lot of credibility is very real,” he said. “That might not be reflected in the price today, but from what I see, will certainly be changing the landscape over the next six to 12 months.”
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Author: Jen Wieczner Image Credit
The recent approval of Genesis Global Trading’s BitLicense application has shone fresh light on New York State’s relationship with the cryptocurrency industry.
Although New York is historically a business-friendly center and international financial hub, many industry players have criticized the regulatory requirements enforced by the New York State Department of Financial Services (DFS) through the BitLicense since its release date in 2015.
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Most of these criticisms were confirmed in a round table held earlier this year by New York State senators Jesse Hamilton and David Carlucci, who invited cryptocurrency companies to raise their concerns about the BitLicense.
Stakeholders reiterated that the regulatory requirements set by the DFS are too burdensome for small companies to bear, that it’s a one-size-fits-all regulation and ultimately that it stifles innovation
Even before the initial release of BitLicense back in 2015, the Editor of MIT Media Lab Digital Currency Initiative, Brian Forde, alluded to the fact that this is what will happen, with only the largest companies possessing ample resources able to comply with the strict regulations.
“If changes to the proposed BitLicense are not made, only a handful of the most well-funded companies will survive — not because they are providing the best product or service, but because they have access to the most money.”
The BitLicense is issued by the DFS to those able to meet regulatory requirements and engaging in one of the following activities:
Virtual currency transmission
Storing, holding, or maintaining custody or control of virtual currency on behalf of others
Buying and selling virtual currency as a customer business
Performing exchange services as a customer business
Controlling, administering, or issuing a virtual currency.
The DFS has also indicated that cryptocurrency mining will not form part of the regulation.
Some of the regulatory requirements include:
Background checks performed on all employees and fingerprints submitted to the FBI.
Companies must invest in New York bonds.
Records of transactions must be kept for 10 years.
Quarterly financial statements must be submitted within 45 days of the close of a quarter.
Company earnings can only be invested in US dollar markets, including US money market funds, and federal and state bonds.
The BitLicense became effective in New York on June 24, 2015 but in the three years since then, only five crypto-related companies have been approved for a BitLicense in the state.
This is perhaps a testament to strict regulatory burden it imposes on companies, but also to the demanding 31-page application form that has to be completed as a very first step.
Out of the very few companies who have been granted a BitLicense, is XRP II LLC, an affiliate of Ripple, with none other than Ben Lawsky, former DFS Superintendent and chief architect of the BitLicense, on the board of directors.
Not everyone thinks the BitLicense is bad for business though. The current DFS Superintendent, Maria Vullo has stated in her Spring Meeting Remarks that “The regulatory structure that we created for virtual currency has helped our licensed companies attract greater interest from customers, investors, and potential financial services partners seeking to pursue further innovation, while protecting market integrity by stringent standards applicable to all law-abiding business enterprises.”
Since its release, the strenuous requirements of the BitLicense have forced many crypto startups to leave New York, in a movement that’s been dubbed the Bit-exodus.
Jesse Powell, founder and CEO of Kraken, a Bitcoin exchange, explained why his company decided to leave New York.
“There were some things about it that were just untenable … having to disclose all the information about your global client base to the state of New York – we just couldn’t live with.”
CEO and Founder of ShapeShift, another cryptocurrency exchange that left New York, also cited restrictive innovation as their reason for leaving the area.
“I went from loving the city and seeing it as a symbol of progress … to seeing it as an enemy of innovation. The regulators here want to treat every financial entity like a bank … we aren’t banks, we don’t want to be banks … everything we build is to do something in opposition to what banks have done,”
Other crypto companies that followed suit in the wake of the BitLicense storm include LocalBitCoins, Rebit, Genesis Mining, BitFinex, to name a few, with others, like Eobot, having to shut down operations entirely.
How is it affecting New York’s cryptocurrency opportunities?
The Consensus 2018 panel agreed that New York is the financial capital of the world but the blockchain community is international, and ultimately that the enforcement of the BitLicense is more harmful to the state than it is for the international cryptocurrency community.
The BitLicense is in stark contrast to New York’s welcoming attitude towards cryptocurrency opportunities and blockchain as a whole in the state.
Earlier in May, the President and CEO of the New York City Economic Development Corporation (NYCEDC), stated that there’s no city in the world that’s better positioned to lead the way in blockchain innovation, as he announced a number of blockchain-related initiatives for the city, including an NYC blockchain Resource Center and a public competition for blockchain-based apps.
New York has also embraced cryptocurrency innovation in the past by being one of the first cities where property could be bought using Bitcoin, to install Bitcoin ATM’s and where diamond retailers accepted payment in Bitcoin. Support for crypto even showed up in the NY fashion week and at one point New York was named as the second most Bitcoin-friendly city in America.
In the absence of any real federal regulation dictating cryptocurrency-based operations in the US, state regulators have a real opportunity to entice these organizations to move their business into their jurisdiction.
Even the Securities and Exchange Commission (SEC) hasn’t introduced any specific crypto related governance, other than whether or not tokens launched through an initial coin offering (ICO) should be considered as a utility or a security, and as such, might be subject to regulation.
An unlikely state like Wyoming has taken advantage of this and shown that even though regulations are necessary to protect consumers, it can be done in such a way to promote cryptocurrency and blockchain operations, rather than chasing innovation away. In the space of several weeks, the state passed five separate bills for the advancement of cryptocurrency and blockchain technology.
Given New York’s reputation as a global financial hub that has attracted businesses from all over the world and supported innovation across many industries – including in the blockchain and crypto space – it is curious, to say the least, why regulators have chosen to go fundamentally against the grain with overbearing regulations. Especially if we consider that, at the moment, any cryptocurrency regulation in the US is more state driven rather than federal.
Although Genesis’s BitLicense application approval is a step in the right direction, the consensus is that the BitLicence process has all but destroyed the New York-crypto relationship and has been bad for innovation and business as a whole.
There might, however, be relief on the horizon for cryptocurrency startups in New York, including for those looking to move back into the state lines. Earlier this year, New York State Assembly legislator, Ron Kim, proposed a bill to effectively replace the BitLicense process, relaxing regulatory requirements and entice crypto investors back into the Empire State.
The current bill status is “In Committee” and still a few steps away from being passed but, if enough support is garnered, could signal the end for the BitLicense and perhaps a fresh start for cryptocurrency investors and businesses in New York.
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