You've probably heard some version of the joke about the chemist, the physicist, and the economist stranded on a desert island. With a can of food but nothing to open it, the first two set to work on ingenious technical methods of accessing nutrition. The economist declares his solution: "Assume the existence of a can opener!"...
There are parallels to this in some U.S. state regulators' approaches to Bitcoin. Beginning with the New York Department of Financial Services six months ago, regulators have put proposals forward without articulating how their ideas would protect Bitcoin users. "Assume the existence of public interest benefits!" they seem to be saying.
When it issued its "BitLicense" proposal last August, the New York DFS claimed “[e]xtensive research and analysis” that it said “made clear the need for a new and comprehensive set of regulations that address the novel aspects and risks of virtual currency.” Yet, six months later, despite promises to do so under New York's Freedom of Information Law, the NYDFS has not released that analysis, even while it has published a new "BitLicense" draft.
Yesterday, I filed comments with the Conference of State Bank Supervisors (CSBS) regarding their draft regulatory framework for digital currencies such as Bitcoin. CSBS is to be congratulated for taking a more methodical approach than New York. They've issued an outline and have called for discussion before coming up with regulatory language. But the CSBS proposal lacks an articulation of how it addresses unique challenges in the digital currency space. It simply contains a large batch of regulations similar to what is already found in the financial services world.
The European Banking Authority took a welcome tack in its report on Bitcoin last July, submitting itself to the rigor of risk management. The EBA sought to identify the risks that digital currency poses to consumers, merchants, and a small variety of other interests. The EBA report did not apply risk management as well as it could have, and it came to unduly conservative results in terms of integrating Bitcoin into the European financial services system, but the small number of genuine risks it identified can form the basis of discussion about solutions.
It is very hard to assess a batch of solutions put forward without an articulation of the problems they are intended to solve, as the draft model regulatory framework unfortunately does. Hopefully, future iterations of CSBS's work will include needed articulation.
My comment spends some time on the assumption that state-by-state licensing for financial services providers has benefits that justify its large costs. "The public interest benefits of licensing obviously do not increase arithmetically with each additional license," I wrote, assuming correctly, I hope, how the world works. CSBS is in a unique position to streamline the licensing regime.
I also caution CSBS about the assumption that making our finances "transparent to law enforcement" is an appropriate regulator's role. The Supreme Court has been moving away from the Fourth Amendment doctrine under which some 1970s cases appeared to take constitutional protection away from our financial activities. Financial services regulators should take the side of law-abiding consumers on the question of financial privacy.
Sincerely, the CSBS effort is a fair one, and I think the organization is in a good position to steer its members away from technology-specific regulation like we saw from New York. I look forward to continued, deeper discussion with CSBS and to more work that integrates Bitcoin into the U.S. financial services system.