May 21, 2015 1:07PM

How Much Profit Is There in Thwarting Financial Innovation?

Ben Lawsky is resigning as superintendent of financial services in New York. The New York Times says he plans to open his own firm and lecture at Stanford University. The Post reports that he will consult on digital currencies such as Bitcoin.

The move West suggests that Lawsky may want a piece of the action in Silicon Valley. If he does, it's worth noting that the action is not in New York.

Lawsky was a leading Bitcoin antagonist. Bitcoin has not particularly flourished in New York, and Lawsky's work makes it unlikely that New York will be a Bitcoin-friendly jurisdiction.

Ben Lawsky welcomed Bitcoin in August 2013 by sending out subpoenas to everyone in the Bitcoin world. He went on television talking about the "real dangers" of Bitcoin, including use by "narco-terrorists." (Asked for evidence of Bitcoin misuse, he cited a centralized digital currency called Liberty Reserve, which is not Bitcoin.)

Around the same time, Lawsky precipitously announced a plan for a special “BitLicense." Shortly after producing it, his office violated New York's Freedom of Information Law by refusing to release the research and analysis that it claimed to have done to validate the regulation. The NYDFS found that the BitLicense would have no impact on employment in the state, after which investors poured hundreds of millions of dollars into Bitcoin companies outside of New York. (See my comments to the NYDFS for more.)

Though widely panned, Lawsky's "BitLicense" framed the regulatory discussion in a way that other regulators have felt obliged to copy. Rather than examining how Bitcoin could be integrated into existing regulation (trimmed, perhaps, so that financial innovation can flourish), the Conference of State Bank Supervisors issued its own, more careful proposal for a Bitcoin-specific regulatory framework. The Uniform Law Commission seems to be getting pulled along in the same draft. Coin Center, a conspicuously moderate Bitcoin research and advocacy group, put out a framework for regulators that appears designed to help others avoid doing what New York did.

But if history is any guide, Ben Lawsky will be able to use the name he made attacking Bitcoin to wend his way into the Bitcoin business world. Because of the contacts he made as a regulator, he can hire himself out to Bitcoin companies wanting to signal to other regulators that they have the approval of the regulatory establishment. (Bitcoin companies didn't hire former SEC chairman Arthur Levitt because of his crypto chops!) In all likelihood---if this is indeed what he plans---Ben Lawsky will be able to profit from thwarting financial innovation. He'll skirt New York state's post-employment restrictions in doing so, no doubt.

History does not have to guide developments in the revolutionary Bitcoin world, of course. The Bitcoin community may find the hypocrisy of an anti-Bitcoin regulator profiting from Bitcoin too great. They would express this by refusing to do business with firms that hire Lawsky as a consultant or advisor.

If dogged watchers in the Bitcoin community report faithfully to the Bitcoin subreddit, for example, Bitcoin companies may recognize that hiring an anti-Bitcoin former regulator is a business liability. To the extent that this kind of consumer action diminishes Lawsky's profile in the Bitcoin consulting world, this would send virtuous signals to today's regulators: Do not lash out against Bitcoin expecting to make a name for yourself that you can cash in on later.

How much much profit is available to regulators who thwart financial innovation? That depends on how aggressively the Bitcoin community holds regulators to account even after they've left office.