Yesterday, the New York Department of Financial Services (NYDFS) issued the second draft of its "BitLicense" proposal, a special, technology-specific regulation for digital currencies like Bitcoin. For a second time, the NYDFS claims to have a strong rationale for such regulation, but it has not revealed its rationale to the public, even though it is required to do so by New York's Freedom of Information Law.
If you're just joining the "BitLicense" saga, the NYDFS welcomed Bitcoin in August 2013 by subpoenaing every important person in the Bitcoin world. A few months later, New York's Superintendent of Financial Services announced his plan for a special "BitLicense," which would be required of anyone wanting to provide Bitcoin-based services in New York.
About a year later, Superintendent Lawsky released the first draft of the "BitLicense" proposal, to strongly negative reviews from the Bitcoin community. It didn't help that after a year's work the NYDFS offered the statutory minimum of 45 days to comment. Relenting to public demand, the NYDFS extended the comment period.
In announcing the regulation, the NYDFS cited "extensive research and analysis" that it said justifies placing unique regulatory burdens on Bitcoin businesses. On behalf of the Bitcoin Foundation, yours truly asked to see that “extensive research and analysis” under New York's Freedom of Information Law. The agency quickly promised timely access, but in early September last year it reversed itself and said that it may not release its research until December.
December has come and gone, of course. It is now late February 2015, and the department's "extensive research and analysis" has yet to see the light of day.
The NYDFS has produced a new draft of its regulation, though. The document announcing the new draft says, "The Department has extensively considered the need to regulate virtual currency business activity and the appropriate way to do so, and it has concluded that a new regulation under the Financial Services Law is necessary to protect New York consumers and users of virtual currency-related services."
It may be true that the department has considered the need for special regulation of this financial technology. It is obviously true that it has concluded in favor of regulating. But New York's Freedom of Information Law---and sound regulatory practice---require the NYDFS to share the analysis it has produced in support of its regulatory proposal. Having access to this material will allow the Bitcoin community and others to see how well the NYDFS is applying regulatory means to consumer protection ends.
It's clear from his speeches that Superintendent Lawsky "gets" Bitcoin and sees its potential to revolutionize financial services for the benefit of consumers and the economies of New York, the United States, and the world. What his department has yet to make clear is how special regulation of Bitcoin advances universal goals like financial innovation and consumer protection. We should be able to see why Superintendent Lawsky wants to single out this financial technology for treatment that is different from conventional financial services.
The NYDFS should release the "extensive research and analysis" behind the "BitLicense" immediately---certainly well before the close of comments on the current "BitLicense" draft. And it should prepare to issue a new draft based on comments that are enlightened by public analysis of the department's rationale for this technology-specific regulation.