March 24, 2015 1:40PM

“BitLicense” Foolishness

When New York's Superintendent of Financial Services first encountered Bitcoin, he evidently thought it was a way to build his reputation as a hangin' superintendent of financial services. (Doesn't quite roll off the tongue like "hangin' judge," does it...) He sent subpoenas to everyone in the Bitcoin world and went on TV talking about "narcoterrorists." That was foolishness.

Unfortunately, he also hatched the idea of creating a thing called a "BitLicense" for firms wanting to provide Bitcoin-based financial services in New York. That program is now hanging like an albatross around his neck.

I know nothing of the details, but a couple of decades in public policy make the probable outlines of what happened pretty clear. The press seized on the "BitLicense" idea. Lobbyists and business people came around to fawn over the "BitLicense" idea with Superintendent Lawsky, each hoping not to get cut too deeply by its inartful sharp edges. And Lawsky, having come around to favoring Bitcoin (it's fairly evident from his speeches) found himself committed to coming up with this "BitLicense" thing.

When the first draft came out in July of last year, it was pretty universally panned. The Bitcoin community savaged it. Bitcoin businesses said they would not do business in New York. The idea of a second round of proposal and comment was quickly on offer.

But the second draft isn't that much better. When comments close at the end of this week (how to comment), the "BitLicense" will again have received strong criticism. There's always that contingent whose stock in trade is always---always---to play ball. And to others the "BitLicense" saga has gotten boring...

But the outcome is very probably set. In order to avoid backtracking, which would look foolish, the Department of Financial Services will probably continue forward on the errant path of creating a peculiar special license for Bitcoin-based financial services providers in New York.

Today I filed comments with the New York Deparment of Financial Services (NYDFS) focusing mostly on the procedural failures of the rule-writing process. The department claimed that the "BitLicense" is backed by "[e]xtensive research and analysis," but has for six months declined to release that research.

New York's regulatory process requires an assessment of impacts on employment in the state. The NYDFS found there would be none. Since then more than $200 million has been invested in Bitcoin companies outside of New York.

On the merits, the "BitLicense" fails because it is a technology-specific regulation rather than function-based. Two firms supplying identical services from the consumer's perspective will be regulated differently. If finalized, the "BitLicense" would Balkanize New York's financial services marketplace, suppressing head-to-head competition between new entrants and existing financial services providers. That's the typical role of regulation---raising barriers to entry and protecting incumbent firms---and it's almost certainly not what Superintendent Lawsky wants.

The "BitLicense" requires intolerable financial surveillance, forcing firms to collect detailed information on every last transaction in which their customers engage. This is at odds with the responsibility of consumer protection agencies to protect privacy, and it's out of step with the direction of Fourth Amendment jurisprudence, which will soon revitalize the idea that people maintain a Fourth Amendment interest in data they share with service providers such as ISPs, phone companies, and Bitcoin companies.

I would delight to be proven wrong in my assumption that New York's financial regulator will push through a bad regulation in order to avoid the negative impression that woud be created by backtracking. Suspending this proceeding would be the better course, though, than carrying on with this "BitLicense" foolishness.