Bitcoin Investors Seek 'Safe Harbor' Exceptions In Proposed 'BitLicense' Regulations

Posted: Jan 28 2014, 10:55pm CST | by , Updated: Jan 28 2014, 11:01pm CST, in Technology News


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Bitcoin Investors Seek 'Safe Harbor' Exceptions In Proposed 'BitLicense' Regulat

Bitcoin’s reputation may have been bruised by its connection to the Silk Road black market and Monday’s indictment of Bitcoin Foundation vice chairman Charlie Shrem. But a panel of Bitcoin-focused investors argued to New York financial regulators Tuesday that Bitcoin’s criminal use is the exception rather than the norm, and that it’s still possible to regulate the digital currency deftly enough to avoid suffocating its potential as a new means of seamless online transactions.

“The vice phase is in the rearview mirror,” Union Square ventures principal partner Fred Wilson told the New York Department of Financial Services panel. “Are people still doing bad things with Bitcoin? Sure. Is the majority of activity with Bitcoin vice? Not a chance.”

Wilson went on to suggest a kind of “safe harbor” in proposed Bitcoin regulations, which New York regulators had previously floated in the form of “bitlicense” for business that deal in the virtual currency. That safe harbor might be an exception to regulations on Bitcoin for young startups to avoid burdening them with regulatory compliance and dissuading early backers from investing. Wilson suggests that only forcing startups to register their existence with regulators to be eligible for that safe harbor would weed out many of the potential bad actors. “There’d be no reason not to report,” Wilson said. “Anyone who chose not to report would clearly be probably not on the up and up.”

NYDFS superintendent Ben Lawsky responded asking how Wilson would feel about a safe harbor that required compliance with existing laws such as the Bank Secrecy Act and anti-money-laundering regulations. “I think the question is how burdensome are those things for a three to four person operation,” Wilson said. “The lighter they are and the more they can be implemented in code in stead of labor, [the better.]”

Also attending the hearing were Tyler and Cameron Winklevoss, Bitcoin investors who own as much as 1% of the virtual currency. Cameron Winklevoss expressed his support for the safe harbor idea, noting that “
the culture of investors isn’t to put millions of dollars into startups to make sure they’re compliant.”

One NYDFS staffer to Lawsky’s left pushed back against the safe harbor suggestion, however, contrasting the idea of a anti-money-laundering safe harbor with existing safe harbors like the one in digital copyright law. “It’s one thing when you’re dealing with copyright violation, but another thing when someone could be sending terrorist funding.”

Lawsky, despite his consideration of the safe harbor idea, seemed to echo that limited tolerance for any level of non-compliance with money laundering regulations. “The choice for the regulator is to permit money laundering on the one hand, and to permit innovation on other. We’re always going to choose squelching money laundering first,” he said. “It’s not worth to society to allow to allow money laundering and all things it facilitates to persist to permit a thousand flowers to bloom on the innovation side. I think the question is whether we can get somewhere in between where we can prevent money laundering and permit innovation.”

The debate over new regulations for Bitcoin startups comes at a sensitive time for the budding industry. Just a day before the panel, the Department of Justice unsealed an indictment against Charlie Shrem, CEO of the Winklevoss-funded Bitcoin startup BitInstant and vice chairman of the Bitcoin Foundation. Shrem is accused of participating in a $1 million money laundering scheme with an illegal Bitcoin exchange service on the Silk Road. The Winklevoss twins expressed their surprise at the arrest in a public statement Monday and pledged to assist law enforcement in its investigation.

At the hearing, Tyler Winklevosses repeated that commitment to regulation. “A wild west attracts cowboys,” he said. “I don’t think anyone here would disagree that a sheriff is a good idea.”

His brother noted that compliance measures for Bitcoin companies could in fact lead to new startup opportunities. “Right now there are startups that are geared towards helping other companies become compliant,” Winklevoss noted. “The problem right now is that there’s no clear regulation.”

That notion of fostering an industry of compliance for Bitcoin seemed to appeal to NYDFS’s Lawsky. “There’s certainly a whole industry helping banks try to stay compliant right now for better or worse,” he said.

But Union Square’s Wilson strongly resisted the idea. “That sounds like a terrible idea to me,” Wilson said. “You’re talking about reintroducing all the costs back into the system that we’re taking out of the system.”

Wilson, the Winklevosses and the other investors on the panel took pains to emphasize that the Bitcoin black market has been crippled by recent law enforcement crackdowns, including the seizure of the Silk Road website and the arrest of Ross Ulbricht, the alleged administrator of that highly lucrative, Bitcoin-based anonymous black market for drugs and other contraband. Jeremy Liew of Lightspeed Venture Partners noted that only .5% of bitcoin transactions had taken place on the Silk Road. “This is not an out-of-control problem, and it’s only getting better,” Liew said.

In fact, several new black markets have appeared in the wake of the Silk Road, including a new Silk Road site that already has near 10,000 product listings. But none of the new markets have yet achieved the stability or profit of the original Silk Road, and several of the new Silk Road’s forum moderators were arrested late last month.

At the hearing, Wilson compared Bitcoin to the early Internet, and his fellow panelists argued that it could enable new types of automated transactions with far lower transaction costs than existing payment systems, potentially enabling microtransactions that aren’t currently profitable for credit card companies, banks or PayPal. But they urged regulators not to hamper that next-generation payment system in their attempts to squelch its black market uses. “The question is whether you want to live in a society that embraces free speech or not,” Wilson said. ” I’m glad to live in a country that does that.”

“ Bitcoin is freedom,” added one of the Winklevoss twins, noting that it challenges the current incumbents in the banking and payment industry. “It’s very healthy, very American and I think that’s what we should all be striving for.”

Follow me on Twitter, email me, anonymously send me sensitive documents or tips, and check out my book, This Machine Kills Secrets: Julian Assange, the Cypherpunks, and Their Fight to Empower Whistleblowers.

Source: Forbes

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