State of New York planning a BitLicense to regulate Bitcoin

1 February, 2014

After the 2008 sub-prime mortgage crisis, the investor confidence in any of the government-involved financial instruments was at its lowest. Questions were being raised about the government's role in bailing out only a few banks driven by the crisis. Investment forums were being flocked by questions like how the government's one move could led to a worldwide recession spanning for about five years now.

As most of the major stock market indexes fell about 25% in a single day, the investors had to pay the price for the greed of the big banks. Ever since then, investors started looking for more independent financial instruments, ones that would rely heavily on demand on supply only.

Then came the bitcoin!

The year 2013 saw an astronomical rise in the price of bitcoins. While there are many reasons behind this price rise, their decentralized nature is one of the most prominent ones. Coming from the cryptocurrencies league, the bitcoins are not controlled by a government or any financial authority. Although this may seem as a tremendous opportunity for money laundering schemes and other fraudulent financial activities, this also leaves little room for any macroeconomic factor effecting the price of bitcoins.

Towards the end of 2013, one such major fraudulent activity was noticed in Silk Road, the online black market website. Ross William Ulbricht, the alleged founder of Silk Road was arrested on charges of facilitating forgeries, drug trafficking and even hacking through Silk Road. The Federal Bureau of Investigation (FBI) seized roughly 29,000 bitcoins from the website and another 145,000 bitcoins from William's computers. As of January 2014, the total value of that is about $135 million! This led to an instant drop in the price of bitcoins which later recovered. Some believe a lot of the market is shorting bitcoins expecting a huge price drop when the government plans to sell the seized bitcoins. This is adding up to the troubles of a rather erratic bitcoin market.

Silk Road and many other financial frauds questioned the decentralized nature of the bitcoins. Many argued that some sort of financial regulation must be formed to ensure the right use of bitcoins. But, the large number of investors who moved from safer investments, such as the famous Facebook litigants, the Winkelwoss twins would refuse any sort of bitcoin regulation.

Following this, recently the state of New York has planned to create regulations guiding bitcoin firms to hold a bitcoin trading license called the BitLicense. Furthermore, New York's Superintendent of Financial Services, Benjamin Lawsky said that such regulations would hinder fraudulent activities and would make the use of bitcoins safer for everyone. According to MarketWatch, he quoted, "Ultimately, it's our expectation that the information we've gathered in this fact-finding effort will allow us to put forward, during the course of 2014, a proposed regulatory framework for virtual currency firms operating in New York."

Furthermore, some regulators argue that the rise of bitcoins is similar to the rise of the internet back in the 90s. They speculate a similar market bubble and a scope for fraudulent activities. But, the Winkelwoss twins who plan on opening an exchange traded bitcoin fund state that such a regulation would adversely affect their fund. A government regulation would defy the sole purpose of decentralized financial instruments.

Although this regulation is still in its planning stages, it has already started creating waves in the investor market. If such a regulation were to be released in New York, the financial hub of the world, soon it would be followed in emerging markets where there is a lot of demand for bitcoins. This would ultimately flee short term investors and bitcoin loyalists out of the erratic bitcoin market. This on the other side can also be beneficial to the bitcoins. A more regulated market means a more systematic way of doing things. This would attract institutional investors and would pave a way to Wall Street acceptance as a strong financial instrument.

Only time would tell if the NY state government would let the bitcoin market die or if it would come up with an innovative way to hinder financial frauds.


i) Ben Lawsky asks bitcoin investors for their two cents at virtual-currency hearing.